• With almost $1 trillion in debt due this year, commercial real estate is being called a ‘ticking time bomb’
• The primary holders of CRE debt, more than 200 regional banks are in danger of collapse
• Physical precious metals, especially those held in a Gold IRA, can protect the value of your savings from the impact of a commercial real estate meltdown

Commercial Real Estate Risk Skyrockets

Commercial real estate, once seen as the bedrock of the American economy, is now being called a “ticking time bomb” as almost $1 trillion in loans come due this year. The collapse of the CRE sector would send shockwaves through the economy that could devastate savings.

The market is still reeling from record low vacancy rates and devalued buildings. Lower valuations make it harder for landlords to borrow money. Banks and property owners are now accepting that their buildings may never recover their pre-pandemic value. Fitch Ratings said office values have dropped 35% from their peak. Capital Economics predicted prices could drop another 20%. ¹

Faced with this reality, office buildings are being sold off at staggering losses. One midtown Manhattan office building sold at a 97.5% discount in July.²

According to the Mortgage Bankers Association, about $930 billion in commercial real estate loans will come due this year. Commercial mortgages are typically set up with a balloon payment. This way, property owners only must pay the interest before the major payment comes due at the end of the loan. Typically, when rates were low, owners would just refinance and push the balloon payment down the road. But with interest rates being held higher for longer, that option is no longer feasible. Commercial real estate lending declined 47% last year. ³

At the same time, operating expenses have gone up dramatically. Owners are choosing to simply not pay back their loans instead of saving their properties with their own cash. About $95 billion of the US properties are in distress or at risk of becoming so. The office sector accounted for two-thirds of newly delinquent loans. In July, $1.9 billion in office loans became newly delinquent. ⁴

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Scott Rechler is the CEO of New York landlord RXR. He called the crisis a slow moving storm and said, “So at some point or another, the day of reckoning needs to come,” he added. “I think it’s here.”⁶

Rate Cuts Too Little, Too Late

The signal for lower interest rates may be too little, too late for the drowning commercial real estate sector. Fed Chair Powel says commercial real estate risk “will be with us for some time, probably for years.”

“Excessive exposure to commercial real estate remains a ticking time bomb within the banking system,” said Rep. Ritchie Torres (D-N.Y.). “An interest rate cut might ease the symptoms, but it will not cure the disease itself. ‘Extend and pretend’ can delay a crisis but it cannot make it magically disappear.”⁷

There is bipartisan support to make it easier to convert office buildings into housing. Solve two problems at once. However, the process is slow and expensive and not all commercial spaces can be converted.

Bond & Bank Worries

A secondary crisis is looming in the bond market. Many of the floating-rate loans were bundled into the $80 billion commercial real estate bonds and sold to investors. This may raise a systemic risk for banks issuing the bonds.

John Devaney is the CEO of the United Capital Markets hedge fund. He has the dubious distinction of being one of Time Magazine’s 25 people to blame for the 2008 mortgage crisis. He stated commercial real estate is a “slow moving train wreck” and the commercial bond market is in shambles. “The CMBS market is actually a disaster right now. Many things are unfolding right now and the bond pricing is telling us things are very, very bad,” the United Capital CEO said. He warned the collapse could ruin large downtown area that depend on tax revenue from office spaces. ⁸

The demise of the sector spells trouble for small and medium-sized commercial banks. They are being classified as “stressed.” Small banks have CRE loans values exceeding 158% of their risk-based capital. Midsize banks are at 228%. ⁹

A recent report stated that 282 of 4,000 US banks are on the verge of collapse. This is due to the double hit of maturing CRE loans and losses resulting from high interest rates. The same things that caused the catastrophic failures of Silicon Valley Bank, Signature Bank and First Republic Bank. Higher for longer interest rates have exposed the vulnerability of banks worldwide according to the International Monetary Fund.

Banking System Risks

If multiple banks try to raise capital at the same time, it could destabilize the banking system, similar to what happened in March 2023. Market volatility might lead investors to demand higher yields, driving up borrowing costs. A new recession could worsen the situation, causing widespread asset devaluation. Significant losses in commercial real estate loans could leave hundreds of small and midsize banks undercapitalized, with larger banks also at risk.

Conclusion

The growing risk factors facing commercial real estate are raising questions about how much longer the sector can go on. Insiders agree that a reckoning is on the horizon, the results of which could be catastrophic and ripple throughout the entire economy. The time to prepare is before the crisis becomes a reality. Physical precious metals, especially those held in a Gold IRA, can protect the value of your savings from the impact of a commercial real estate meltdown. Contact us today at 800-462-0071 to learn more about how to secure your funds.

Notes:

1. https://markets.businessinsider.com/news/bonds/real-estate-crash-commercial-property-prices-investing-mortgage-backed-securities-2024-8
2. https://www.politico.com/news/2024/09/02/office-property-values-fed-00174697
3. https://www.politico.com/news/2024/09/02/office-property-values-fed-00174697
4. https://www.politico.com/news/2024/09/02/office-property-values-fed-00174697
5. https://www.linkedin.com/posts/james-w-stuff_delinquency-office-loans-activity-7228905623340376064-eF_g/
6. https://www.politico.com/news/2024/09/02/office-property-values-fed-00174697
7. https://www.politico.com/news/2024/09/02/office-property-values-fed-00174697
8. https://markets.businessinsider.com/news/bonds/real-estate-crash-commercial-property-prices-investing-mortgage-backed-securities-2024-8
9. https://www.noradarealestate.com/blog/commercial-real-estate-crash-could-trigger-economic-tsunami/

• At over $35 trillion and growing, the national debt presents a clear and present danger to the United States
• An economic research report stated that the US is approaching a point where no amount of taxes or spending cuts can prevent a crisis
• Safe haven assets, like physical gold and silver, held in a Gold IRA can shield the value of your portfolio from the effects of massive national debt

National Debt, and Danger, Grow Unchecked

As the Presidential election heats up, there is one issue both parties would like to avoid – the national debt. Having reached astronomical heights, and growing, the debt presents a very real danger to the US economy. With a political system that may be structurally unable to prevent a crisis, Americans should prepare now before consequences hit.

By the Numbers

The US national debt currently sits at $35.26 trillion. That is around $104,000 per citizen. Meanwhile, US Federal tax revenue is at $5 trillion. This model obviously cannot be sustained for much longer. We’re growing the debt more than twice as fast as we’re growing the economy. To grasp the enormity of the debt, there is about $450 trillion combined in the world. Our debt accounts for 7% of all the money in existence. ¹

The interest on the debt is already more than military spending. Over the next decade, interest is expected to double to $1.7 trillion. That is roughly the equivalent of adding another Medicare program. ²

³

Prior to 2000, annual deficits were turning into surpluses. The national debt shrank over three years to around $5.6 trillion in 2000. Alan Greenspan went as far to say the debt could be paid off if current policies continued. We had a debt-to-GDP ratio of 55 percent. ⁴

Today, at $35 trillion, the debt-to-GDP ratio is 122% – and rising. Aggressive government spending is raising the debt $1 trillion every 100 days. For context, the debt-to-GDP ratio during World War 2 was 106% of GDP. ⁵

Future of the Debt

The University of Pennsylvania found both Trump and Harris proposals would increase the national debt. Trump’s would raise the national debt by 9.3%. Harris’ would add 4.4%. The debt would expand more under Trump because he would make his 2017 tax cuts permanent. He would also cut taxes on corporate income and Social Security benefits. Harris would let the cuts expire and raise taxes on businesses and high-income individuals. At the same time, those taxes would be offset by more government spending. ⁶

No matter who wins, the US is headed for $50 trillion in debt by 2034.

Systemic Failure on the Debt

Impediments to preventing a debt crisis may be built into the system. A study by Arnold Ventures states that the US budget process itself has broken. There has always been political brinkmanship, fighting until the very last possible minute. But now, instead of finding workable solutions, Congress simply signs off on raising the debt limit without accountability from either party. The Democrats get more spending, and the Republicans get more tax cuts. Both sticking the American people with the bill.

Vanishing Debt Safeguards

Some economists say the unique role of the US in the world economy protects it from the consequences of runaway debt. They call it ‘exorbitant privilege’. A study found the US can sustain debt around 22% of GDP. That’s because the dollar is the dominant currency for international trade and reserve currency. Other countries will continue buying US debt to avoid sinking their economies. In addition, the US gets significant leeway from seigniorage revenues – printing dollars for next to nothing, and then selling them to other nations for market value. ⁷

The de-dollarization movement could totally undermine this debt protection. China’s yuan or a new gold-back BRICS+ currency could rival the dollar. If US debt reaches extremely high levels, rival currencies may look like the safer choice. The US debt will become a greater liability when we can no longer ‘force’ other nations to finance our debt. Interest rates would skyrocket and send the country into a debt-doom spiral.

Economists Smetters and Gokhale concluded that if US debt held by the public exceeds 200 percent of GDP, no amount of tax hikes or spending cuts can prevent default. We’ll either have to say we will not pay back all our debt, or else inflate it away. Both of which would have massive negative consequences for American workers and consumers. They estimate that the US will reach this point in about 20 years.⁸

Solutions

To fix the problem, entitlements will need to be slashed, taxes will need to be raised, as will the retirement age. Paying off the debt will be a painful legacy passed to future generations.

Some economists are trying to find hopeful solutions. World Bank Group President David Malpass explained tackling the deficit will raise stocks prices, increase employment, and lift wages. To get past a broken Congress, he says begin spending cuts with “small popular one, and then another small one, and then a big popular one, and then a tough one. Build credibility.”⁹

Conclusion

Come January 25th, the debt ceiling will need to be lifted again. Whoever is President on that day is unlikely to take measures that reduce the national debt. Instead, we’ll hurtle closer to “most predictable crisis” – one that can ruin the country’s, and every American’s, financial future. That’s why protecting your portfolio now with safe haven assets like physical gold and silver is a good idea. A Gold IRA can safeguard your savings from the consequences of runaway national debt. Call us today at 800-462-0071 to learn how.

Notes:
1. https://ktrh.iheart.com/featured/houston-texas-news/content/2024-08-27-the-national-debt-now-accounts-for-seven-percent-of-all-global-money/
2. https://www.barrons.com/articles/national-debt-federal-deficit-trump-harris-6c5c6740
3. https://www.forbes.com/sites/dougcriscitello/2024/08/27/will-the-us-government-be-there-when-you-need-it-most/
4. https://ktrh.iheart.com/featured/houston-texas-news/content/2024-08-27-the-national-debt-now-accounts-for-seven-percent-of-all-global-money/
5. https://www.barrons.com/articles/national-debt-federal-deficit-trump-harris-6c5c6740
6. https://www.newsmax.com/newsfront/donald-trump-kamala-harris-trillions/2024/08/28/id/1178179/
7. https://cepr.org/voxeu/columns/exorbitant-privilege-and-sustainability-us-public-debt
8. https://www.vox.com/policy/367278/us-national-debt-gdp-government-inflation-solutions-recession
9. https://www.barrons.com/articles/national-debt-federal-deficit-trump-harris-6c5c6740

• Gold broke another all-time high, hitting $2,571 an ounce
• Demand is likely to increase due to Fed rate cuts, a weaker dollar, and geopolitical uncertainty
• Buying gold now in a tax advantaged Gold IRA can lead to long-term gains

Gold Breaks New All-Time-High

Gold has been on an impressive run since the end of 2022, and it shows no signs of slowing down. On August 20th, gold reached yet another record high. Currently, gold is outperforming stocks, bonds, and even Bitcoin. Now entering its 25th year of a bull market, analysts believe that gold’s upward trend is far from over. The continuing surge is driven by a mix of global demand and economic factors.¹

For the first time ever, the value of a single gold bar has crossed the $1 million mark. Of course, that single gold bar is the 400 troy ounce London Good Delivery bar. The bar is the standard unit of trade in major international gold markets. The price of gold is up more than 20% this year, trading at a record high above $2,500 an ounce, with a peak of $2,571.²

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Gold Demand Sources

The demand for gold is global, but the reasons for this surge vary. In India, there’s a significant increase in demand due to traditional holiday buying and a recent cut in import duties. The chief executive of the London Bullion Market Association said, “It’s really a question of how quickly they can get metal into the country, in terms of the number of flights.”⁴

De-dollarization

Meanwhile, demand also increased on an accelerating de-dollarization movement. The BRICS+ nations are increasing their gold reserves as they reduce their dollar holdings. They are also developing a gold-backed currency to challenge dollar supremacy. Central banks, especially the People’s Bank of China, continue to make record gold purchases. Soaring prices over the past two years have largely been fueled by China.

Geopolitics and Interest Rates

Americans are also contributing to demand. Dangerous geopolitical conflicts and the upcoming presidential election are increasing the desire for financial stability. Gold is considered a safe-haven asset, retaining its value during times of uncertainty. John Reade, chief market strategist at the World Gold Council, commented. He said, “What we have seen is investors and speculators in the West starting to return to the gold market. This has been fast money that has been driving gold.”⁵

Interest rates are also playing a crucial role in the gold market. Western investors largely sat on the sidelines during gold’s 20-month rally. They are now returning with the prospect of interest rate cuts. Institutional investors and bullish hedge funds are boosting gold prices. As are opaque purchases by family offices who are concerned about a devalued dollar.

Investors are betting that further interest rate cuts by the Federal Reserve will push gold prices even higher. Gold tends to rise when interest rates go down. Lower rates reduce the opportunity cost of holding non-yielding assets like gold. This makes it more attractive to investors. In addition, gold is internationally denominated in dollars. So, when the dollar goes down, gold costs more.

National Debt

However, safe haven demand isn’t just being driven by geopolitics and monetary policy. The U.S. national debt is now at $35 trillion and growing. It is eroding confidence in the dollar’s value and the creditworthiness of the United States. Investors are looking for security beyond once bedrock-solid T-bills.

Future Forecasts

Looking ahead, the gold rally appears far from over. Commerzbank expects gold prices to consolidate within the $2,500 range over the next few months. But they don’t expect them to stay static. “We expect the gold price to continue rising in the first half of 2025 due to further Fed interest rate cuts, a U.S. inflation rate that remains above target, and a weaker U.S. dollar,” said the bank’s precious metals analysts. The head of commodities at Citi Research believes that gold could reach $3,000 an ounce by mid-2025.⁶

Conclusion

The bottom line is that gold’s trend remains bullish as we move into September 2024. Even though aggressive bull markets rarely move in straight lines, the quarter-of-a-century trend in gold suggests that any dip could be a chance to add more gold to a diversified portfolio. Since 1999, buying every dip in gold has proven to be a strategy that yields positive returns. Those returns are amplified in a tax-advantaged Gold IRA. To learn more about how you can benefit from gold’s ascent, contact us today at 800-462-0071.

Notes
1. https://seekingalpha.com/article/4715944-gld-gold-shows-no-sign-of-slowing-its-ascent
2. https://www.benzinga.com/analyst-ratings/analyst-color/24/08/40457722/gold-is-getting-its-moment-in-the-sun-and-experts-say-the-record-high-prices-could-
3. https://www.reuters.com/markets/commodities/gold-steady-near-record-high-investors-seek-more-fed-cues-2024-08-20/
4. https://www.ft.com/content/03ed761e-ccf9-4494-b1f8-1cab8313a07f
5. https://www.ft.com/content/03ed761e-ccf9-4494-b1f8-1cab8313a07f
6. https://www.kitco.com/news/article/2024-08-20/commerzbank-sees-gold-prices-consolidating-around-2500-year-end

• Gold prices have been reaching all-time-highs primarily due to purchases from BRICS+ central banks.
• In October, the BRICS+ de-dollarization agenda expands as they plan to announce information regarding the launch of their own gold-backed currency.
• Owning physical precious metals in a Gold IRA can not only protect the value of your savings over the long term, but it could also potentially grow them.

BRICS+ and the Rise of Gold

Gold’s surge to a record high of $2,480 on July 17th underscores its enduring status as a safe haven amid escalating global tensions and economic uncertainty. But the primary driver of demand isn’t coming from the investment sector. Instead, this rise is largely driven by the BRICS+ alliance. Central banks from BRICS+ nations have been on an unprecedented gold buying spree in their pursuit of de-dollarization. This October, they may be announcing the launch of a new currency to rival the dollar – setting off a global shift that could have a significant impact on the US economy and your savings.

Who Are the BRICS+?

The BRICS+ alliance was originally an economic consortium of five major emerging economies—Brazil, Russia, India, China, and South Africa. It has been steadily increasing its numbers and influence on the global stage. Founded in 2006, the group’s primary objective is to counterbalance Western-dominated financial and political institutions. With a combined population of over 3 billion people and some of the world’s largest and fastest-growing economies, BRICS represents a significant bloc in international affairs.

BRICS+ and Gold

As retail investment in gold declined, BRICS+ purchasing has been pushing the price of gold to new levels. The World Gold Council reported that BRICS+ has been the largest buyers of gold since 2022.

Data from the World Gold Council show the largest buyer was the People’s Bank of China. Except for a pause this spring, China has been expanding its gold reserves every single month since October ’22. Russia is also aggressively bulking up its gold reserves. Gold now represents 29% of their total reserves, up from 11% just six years ago.¹

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Gold and the Weaponized Dollar

Vahan Roth is executive director at Swissgrams AG. His latest analysis posits that gold’s rise is a reaction to the weaponization of the U.S. dollar.

“The world reserve currency…can and will be used as an offensive weapon in geopolitical conflicts,” he wrote. “That same weapon that has been wielded against Russia could be deployed against any other adversary.”³

In response, the BRICS+ alliance is pushing back against the U.S. They want to be able to defend against a weaponized dollar by shifting reserves to gold.

BRICS+ Currency

The BRICS+ path to de-dollarization doesn’t stop with protecting their reserves with gold. They are making significant strides in launching a new currency. The currency would be backed by gold and act as a counter to the U.S. dollar. The nine-member alliance is planning a big announcement about the currency at its October summit.

Some financial experts believe that a gold-backed currency could spell the “beginning of the end” for the US dollar. Developing countries could distance themselves from the dollar, and US influence, by embracing the currency for reserves and cross-border transactions. ⁴

A gold-backed currency would provide a stable alternative. It could reduce the reliance of BRICS+ countries on the U.S. dollar and protect their economies from dollar fluctuations.

The rise of a competing currency is coming at a time when faith is being lost in the greenback. A gold-backed currency would provide a tangible basis for value and stability. In contrast, the U.S. dollar, like most modern currencies, is a fiat currency, meaning it is not backed by any physical commodity. The U.S.’s growing national debt recently reached $34.4 trillion. Concerns are rising about the long-term stability of the dollar. These concerns are among the reasons the BRICS+ are seeking more secure alternatives.

A New Way to Pay

The BRICS+ are already creating a system to rival the SWIFT payment system. The SWIFT payments system enables financial transactions between banks and other financial institutions. Russia was excluded from the SWIFT system after it invaded Ukraine. This effectively isolated Russian financial institutions from global markets. Russia’s exclusion reinforced the need for a financial system outside of Western control.

“The financial agenda of BRICS has a main initiative for building a new economic reality…Creating our own financial messaging system for the BRICS countries, similar to SWIFT,” Alexander Babakov, Deputy Chairman of the Russian State Duma, said.⁵

Implications

The shift away from U.S. dollar dominance erodes America’s default higher standing in the world economy. Destabilizing this position could hurt foreign exchange rates and international lending practices. Reduced demand for dollars could lead to a decline in the currency’s value. The devalued dollar can lead to hyper-inflation, leading to higher prices for imported goods and everyday purchases. In addition, the shift could expose and worsen existing vulnerabilities in the U.S. banking sector, heralding a new crisis.

Conclusion

We are moving to a multipolar financial world with multiple currencies and monetary systems. The era of U.S. dominance looks to be ending. For the BRICS+ nations, these initiatives are not just about economic pragmatism; they are also about asserting greater influence on the global stage. Consequently, the falling value of the dollar would severely impact the worth of dollar-denominated investments like stocks and bonds. In comparison, the price of gold is likely to increase as it used to back a growing currency. That’s why owning physical precious metals in a Gold IRA can not only protect the value of your savings over the long term, but it could also potentially grow them. To learn more, contact American Hartford Gold at 800-462-0071.

Notes:
1. https://www.kitco.com/news/article/2024-07-24/brics-driving-new-gold-rush-china-russia-gold-backed-currency-would-mark
2. https://www.centarzlata.com/wp-content/uploads/2023/08/BRICS-zlato-graf.jpg
3. https://www.kitco.com/news/article/2024-07-24/brics-driving-new-gold-rush-china-russia-gold-backed-currency-would-mark
4. https://watcher.guru/news/brics-gold-backed-currency-is-beginning-of-the-end-for-us-dollar
5. https://www.tekedia.com/brics-announces-plan-to-ditch-swift-create-alternative-financial-system/

 

• Financial gurus are going long on gold, expecting its upward trajectory to continue
• Central bank buying, recession, record debt, and renewed Western investment all fuel the rise in gold prices
• Now may be the opportune time to add physical precious metals to your portfolio in a Gold IRA before prices rise again

Gold Predicted to Rise Even Further

As global financial markets face heightened volatility and uncertainty, many investors are turning to gold as a safe haven asset. Prominent figures like Robert Kiyosaki and experienced traders from “The Big Short” fame have made bold predictions about the future of gold, citing various economic factors that could drive its value significantly higher.

Kiyosaki Warns of a Crash

“Rich Dad Poor Dad” author Robert Kiyosaki has warned of both a massive market crash and a subsequent money-making opportunity. He recently stated, “Technical charts indicate the biggest crash in history coming. Prices of real estate, stocks, bonds, gold, silver, & bitcoin crash.” Kiyosaki suggests that a market crash could be devastating, considering the extensive exposure of investors. For comparison, Americans lost about $16 trillion in net worth during the financial crisis of the late 2000s.¹

Kiyosaki believes that after the crash, there will be an excellent time to buy assets at bargain prices. He forecasts a significant bull market cycle benefiting gold, silver, and bitcoin, driven by a lack of confidence in US currency. The country’s debt could destroy faith in the currency, drastically devaluing it.

Kiyosaki made bold price predictions for after the crash: “Gold possibly $15,000 an ounce, silver possibly $110.00 an ounce, and bitcoin easily to $10 million per coin,” he wrote. Given that gold currently trades at $2,424 per ounce, silver at $29 an ounce, and bitcoin around $66,200 per coin, this forecast implies a 519% upside in gold, a 279% upside in silver, and a staggering 15,000% upside in bitcoin.²

“Big Short” Traders Back Gold

Other traders, such as “The Big Short” investors Danny Moses, Vincent Daniel, and Porter Collins, are also going long on gold. Known for their successful bet against the housing market ahead of the 2008 crisis, these traders have expressed concern that Americans do not hold enough gold in their portfolios. Collins pointed to massive central bank buying and the US budget deficit as reasons to buy gold, leaning heavily on the dollar debasement thesis. This thesis argues that the value of the US dollar declines over time due to excessive money printing and inflation, eroding purchasing power.

“If you just think about that one dollar in your wallet, tomorrow it’s worth less,” Collins added. “I think that in … one, two, three, five, 10 years, you’re going to make a lot more money in gold than you will in U.S. Treasurys, and I think that’s just not changing.”³

Gold’s Performance

Gold has been a better investment than stocks, bonds, or real estate this year, according to Morningstar. Since January 1, gold has provided a 14% return compared to 12% for the S&P 500 index of large U.S. stocks and 2% for the S&P 600 index of small U.S. stocks. Meanwhile, the iShares Core U.S. Aggregate Bond index fund is down 1%, and real estate investment trusts (REITs) have lost nearly 5%.⁴

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⁵

However, the real, inflation-adjusted price of gold is almost twice the average since it began floating freely in 1975. It is close to the peak seen during 2011. Since the dollar has also been rising, gold is even higher in other currencies. In both Japanese yen and British pounds, today’s gold price is about 45% higher than the peaks seen back then, even when adjusted for inflation. ⁶

Interestingly, U.S. investors have mostly missed this latest gold boom. Despite gold proving a better investment than 10-year U.S. Treasury bonds for over 30 years. Treasuries are actually losing their status as the unquestioned “go-to” safe asset. Questions about US creditworthiness and a growing de-dollarization movement are eroding confidence in the government bonds.

U.S. investors have been net sellers of exchange-traded bullion funds so far this year, totaling $4 billion according to the World Gold Council. Analysts attribute this to investors not wanting to miss out on a booming stock market.⁷

Gold Drivers

Central banks continue to be the leading buyers of gold. When Western investors catch up, analysts foresee another significant leap in gold prices. Despite breaking all-time highs, gold is considered underpriced for several reasons. The economic landscape has shifted significantly in favor of gold, with the value of gold compared to the dollar increasing more than the markets expected since 1980 or 2011. The impact of returning Western interest could be substantial. From 2005-2011, flows into GLD (the largest gold-backed ETF) added approximately 38.1 million ounces, driving the metal price from $535 to over $1,800, more than a 300% increase.⁸

A recession, which many indicators suggest is inevitable, would cause demand for gold to surge. Evidence of a weaker economy seems to be ignored by investors looking to ride the stock market as high as the bubble will go. Some economists argue that massive government spending is the only thing propping up the economy, the same spending that jeopardizes the country’s creditworthiness and raises the risk of more inflation.

According to certain analysts, gold is in the middle of a multi-year advance. Geopolitical conflict, stock overvaluation, and volatile U.S. elections all contribute to safe haven demand for gold.

Conclusion

The consensus among numerous sources is clear: gold’s upward trajectory is likely to continue for years to come. Continued central bank buying, fears of dollar devaluation, and a hedge against stock volatility and recession are just some of the factors driving this trend. Another surge in gold prices is expected when Western investors, currently caught in the stock market bubble, match the enthusiasm of their non-Western counterparts. Now may be the opportune time to add physical precious metals to your portfolio in a Gold IRA before prices rise again. Contact American Hartford Gold at 800-462-0071 to learn more.

Notes:
1. https://moneywise.com/investing/investing/robert-kiyosaki-predicts-up-to-15000-upside-in-these-3-assets-foresees-long-term-bull-market-cycle
2. https://moneywise.com/investing/investing/robert-kiyosaki-predicts-up-to-15000-upside-in-these-3-assets-foresees-long-term-bull-market-cycle
3. https://www.cnbc.com/2024/07/27/big-short-traders-are-very-long-gold-say-moses-collins-and-daniel.html
4. https://www.morningstar.com/news/marketwatch/20240524255/yikes-golds-2400-price-tag-is-even-higher-than-you-think
5. https://www.kitco.com/opinion/2024-07-26/us-dollar-decline-and-fall
6. https://www.morningstar.com/news/marketwatch/20240524255/yikes-golds-2400-price-tag-is-even-higher-than-you-think
7. https://www.morningstar.com/news/marketwatch/20240524255/yikes-golds-2400-price-tag-is-even-higher-than-you-think
8. https://www.kitco.com/opinion/2024-07-26/us-dollar-decline-and-fall

• As traders grow optimistic for rate cuts, economists are warning investors to “be careful what they wish for”
• Historically, steep rate cuts occur only after the economy has taken a serious downturn
• Gold is positioned to rise in the case of recession and interest rate cuts

Misplaced Optimism for Rate Cuts

The Federal Reserve is marking a year since pausing rate hikes at 5.25% to 5.5%. As the Fed awaits signs of sustained cooling inflation, investors are growing optimistic for cuts. But some analysts are warning: be careful what you wish for. Historically, rate cuts come at the cost of economic downturn.

According to the CME FedWatch tool, investors are expecting one or two cuts to come in 2024. Deutsche Bank’s Jim Reid noted that this would the eighth time that traders bet on aggressive rate cuts – cuts that never materialized. Traders may again be jumping the gun betting on large interest rate cuts between now and the end of the year. They are pricing in 175 basis points cuts over the next 18 months. ¹

Going from being on hold for more than a year to such drastic cuts means something has gone terribly wrong with the economy. With one exception, the Fed has only cut that deeply when the country was in the throes of recession. Only in the wake of the dot-com bubble deflating in early 2001 and the onset of the financial crisis in September 2007 did the Fed deliver half-point reductions. ²
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³

George Goncalves is the head of US macro strategy at MUFG. He expects the economy to weaken by September, which could lead the Fed to take early action.

“This idea of slow and steady cuts makes no sense given how data is shaping up,” Goncalves said. “The longer you wait, the more you may need to do later.”⁴

Federal Chair Powell has signaled an intention to cut rates. Yet, the Fed does not want to look like they are panicking though. They point to continued growth and consumer spending to “remove the urgency” to act. Economists at LH Meyer, a policy analysis firm, said the current state of the economy does not justify rapid easing. Instead, officials are more likely to do small cuts at each Fed meeting.

Be Careful What You Wish For

“Black swan” investor Mark Spitznagel is urging caution. His firm, Universa Investments, is known for positioning itself to gain on unpredictable black swan events. The fund pulled a 4,144% return on its investments during the pandemic stock crash. He shares the belief that the Fed is only likely to cut rates when the economy is slammed with recession and the market is falling.

“Be careful what you wish for,” Spitznagel said. “People think it’s a good thing the Federal Reserve is dovish, and they’re going to cut interest rates … but they’re going to cut interest rates when it’s clear the economy is turning into a recession, and they will be cutting interest rates in a panicked fashion when this market is crashing.”⁵

The current higher-for-longer rates still threaten to spark a downturn. Spitznagel said today’s markets are a “mega-tinderbox-time bomb.” The potential for a crash is large because of the massive debt acquired when interest rates were ultra-low. He said the yearslong rally in the stock market amounted to the “greatest bubble in human history.” The impact of the bubble bursting would be extreme because the government’s $34 trillion debt would make it harder for them to intervene. ⁶

Conclusion

As traders, once again, get excited for significant interest cuts, analysts are advising caution. While a rate cut can be beneficial, it often signals deeper issues that could lead to significant market declines and earnings reductions. Historically, rate cuts occur after the country has entered recession.
Gold is positioned to benefit from both cases. Gold prices go up when interest rates are cut because lower rates reduce the opportunity cost of holding non-yielding assets like gold. And if cuts are taking place in response to recession, owning gold is advantageous because it retains its value and acts as a hedge against economic uncertainty. A Gold IRA can protect your portfolio from the impact of interest rates for the long term. Call us today to learn more at 800-462-0071.

Notes:
1. https://www.msn.com/en-us/money/markets/traders-may-be-jumping-the-gun-once-again-by-betting-on-aggressive-fed-rate-cuts/ar-BB1qP6Dv
2. https://fortune.com/2024/07/28/fed-rate-outlook-super-sized-cut-bet-bond-traders-fomc-meeting-jerome-powell/
3. https://www.france24.com/en/live-news/20240609-us-fed-likely-to-remain-on-pause-and-pare-back-rate-cut-expectations
4. https://www.france24.com/en/live-news/20240609-us-fed-likely-to-remain-on-pause-and-pare-back-rate-cut-expectations
5. https://markets.businessinsider.com/news/stocks/fed-rate-cuts-stock-market-crash-recession-outlook-economy-investing-2024-4
6. https://www.benzinga.com/markets/equities/24/07/39870083/black-swan-investor-says-greatest-bubble-in-human-history-is-on-the-verge-of-bursting-calls-stoc

 

• Despite multiple recession indicators flashing red, the actual downturn hasn’t materialized yet
• Economists think unique post-pandemic economic dynamics are disrupting traditional forecasting models
• Experts advise preparing for an inevitable downturn by considering safe haven assets like physical gold, silver, or a Gold IRA for long-term financial security

Disrupted Recession Signals

Our current economic situation presents a paradox. While numerous recession indicators are flashing red, the actual downturn has yet to materialize. This delay may be caused by the unique post-pandemic economic dynamics. Traditional forecasting models have been disrupted. However, as noted economist and Johns Hopkins professor Steve Hanke warns, “The average guy on the street corner knows that if they goose the money supply, you’re going to get inflation. And if they contract it — we’ve had four contractions in the history of the Fed since 1930 — and every one of those has led to a deflating economy and ultimately a recession.”¹

Key Recession Indicators

1. Rising Initial Jobless Claims

One of the most reliable recession predictors, initial jobless claims, has surged 20% since January 2024. Historically, such upticks have preceded every U.S. recession. That includes the financial crises of 1990, 2001, and 2008. Analysts at the Game of Trades trading platform caution, “If initial jobless claims are set to rise substantially from here, that really doesn’t bode well for the stock market.”²

Declining Temporary Employment

The Bureau of Labor Statistics has found that declines in temporary employment typically precede a recession by 6 to 12 months. This pattern is emerging once again. Which makes sense. Companies reduce the number of temporary employees to avoid laying off permanent workers.

Chicago Fed president, Austan Goolsbee challenged the temp employment indicator. He said pandemic-era labor shortages “scarred employers so much that they’re like, ‘We don’t rely on temps anymore.” ³

3. Inverted Yield Curve

The inverted yield curve is a historically accurate recession predictor. This economic condition occurs when short-term interest rates exceed long-term rates. It is a sign that investors don’t hold high hopes for future growth. It has been inverted for two years—the longest stretch since the 1929 crash. However, the curve has not yet reached the steepness typically associated with a labor market collapse. Its persistent inversion is cause for concern among economists and investors alike.

⁴

4. Disconnected Financial Markets

A growing disconnect between rising stock markets and increasing unemployment is once again evident. This pattern was observed before the recessions of 1988 and 2006. Since January 2024, the S&P 500 has climbed approximately 15%. Jobless claims have also risen, suggesting that the market may be due for a significant correction.⁵

5. The Sahm Rule: A Near-Perfect Predictor

The Sahm Rule was developed by former Fed economist Claudia Sahm. It has an impressive track record for predicting recessions. According to this rule, a recession is likely when the three-month average unemployment rate increases by 0.5 percentage points over the previous 12 months. As of June, this increase stood at 0.43 percentage points, perilously close to triggering the rule.

However, Sahm herself acknowledges the unique nature of the current economic cycle: “What the pandemic kicked off in terms of a business cycle is very unusual… What’s worked relatively well in the past to signal a recession — it should be no surprise that now they are missing something.”⁶

6. M2 Money Supply

Steve Hanke identifies the money supply as a sign that a soft landing won’t be achieved. The M2 money supply is a measure of how much cash and other liquid assets is flowing through the economy. It has contracted for most of the past two years. Compare that to the 27% surge in 2021 from the massive pandemic stimulus.

Hanke explained that interest rates will need to come down drastically to keep the economy going. But he doesn’t think the Fed will act in time to avoid a recession.

“It’s one of the worst performances of the Federal Reserve,” Hanke said. ⁷

Timing the Downturn

While precise timing remains elusive, many analysts anticipate the recession to hit in the latter half of 2024 or early 2025. This projection comes after the stock market’s recent record highs. A ‘last gasp’ steep climb in stock prices usually occurs before recession begins. Investors should brace for a potential sharp market correction.

Conclusion

Conventional wisdom held that two consecutive quarters of contracting GDP equals a recession. Despite U.S. economic growth being negative in the first and second quarters of 2022, the overall economy never qualified for the National Bureau of Economic Research’s official recession label.

So as economists try to reconcile trusted rules with new results in the post-pandemic economy, the convergence of these signals suggests that economic downturn is inevitable. If every sign points to rain and it’s still sunny out, that doesn’t mean you shouldn’t have an umbrella. The rain is coming, only now you have a chance to prepare for it. Moving funds into safe haven assets like physical gold and silver can protect their value from recession. A Gold IRA is designed to secure your finances for the long term. To learn more, contact us at 800-462-0071.

Notes:

1. https://www.businessinsider.com/recession-outlook-hard-landing-economy-inflation-fed-rates-steve-hanke-2024-7
2. https://finbold.com/buckle-up-these-4-indicators-suggest-recession-is-closing-in/
3. https://www.axios.com/2024/07/23/recession-indicators-signals-not-working-employment-trends
4. https://www.marketwatch.com/story/the-yield-curve-is-speeding-toward-inversion-heres-what-investors-need-to-know-11647977540
5. https://finbold.com/buckle-up-these-4-indicators-suggest-recession-is-closing-in/
6. https://www.axios.com/2024/07/23/recession-indicators-signals-not-working-employment-trends
7. https://www.businessinsider.com/recession-outlook-hard-landing-economy-inflation-fed-rates-steve-hanke-2024-7

• In response to political instability reaching new heights, investors are flocking to gold
• The move to gold is a “flight to safety” – preserving wealth by moving from risky securities to safe haven physical precious metals
• The U.S. Presidential election is likely to increase volatility, and in turn, raise the price of gold

Gold as Hedge Against Political Uncertainty

In a world reeling with political turmoil, gold is once again proving itself to be an unrivaled safe haven asset. Throughout history, gold has been a reliable store of value. As uncertainty increases, so will the demand for the precious metal. In today’s current unrest, gold prices are trading at new highs above $2,400 an ounce. Gold’s inherent economic traits make it a wise choice for those seeking insurance from the severe consequences of political chaos.

A “flight to safety” is at the core of gold’s demand. “Flight to safety” in investing refers to the behavior of investors moving their capital from riskier assets to safer, more stable investments during times of economic uncertainty or market volatility. This typically involves selling off stocks, high-yield bonds, or other speculative investments in favor of gold. The primary goal is to preserve wealth rather than seek high returns.

Reasons Investors Turn to Gold During Political Instability

Investors gravitate towards gold during times of political turmoil for several reasons. Primarily, gold serves as a preservation of wealth. Political instability often leads to higher inflation, devaluing assets. Currency can lose value as people lose confidence in the government, its economic policies, and future economic conditions. Inflation can result from increased government spending to address crises or maintain power. And as inflation rises, capital flight further weakens the currency, creating a vicious cycle of economic instability.

Unlike paper currencies or other assets, gold is a hedge against inflation. It retains its intrinsic value over time. The high liquidity of gold also adds to its appeal. It allows investors to quickly convert their holdings into cash if necessary. Additionally, gold provides diversification benefits, reducing the overall risk in an investment portfolio. Gold’s lack of credit risk and negative correlation to risk asset secures its role as a crisis hedge.

Market Dynamics

Gold and uncertainty are strongly linked. Studies have shown that during global crises, when things are most uncertain, gold prices go up. But even as these tension rise, the riskiness of gold as an investment stays stable. The flight to safety does not make gold markets more volatile. As a matter of fact, when it comes to safe havens, gold has consistently outperformed U.S. government bonds since the 1990s. ¹

Historical Examples

During the subprime mortgage crisis and Great Recession, gold prices climbed over 119% from October 2008 to August 2011.²  Similarly, gold jumped 22% after the Brexit referendum was passed. Prices also surged upward during the 2019 U.S.-China trade tensions. ^3,4

Risk Metrics

The Geopolitical Risk (GPR) index measures both actual and perceived geopolitical tension. A study by the World Gold Organization found that gold responds to elevated geopolitical risk when all other variables are removed. They discovered that an increase in the GPR index by 100 units positively impacts gold’s return by 2.5%. Gold spiked alongside the GPR following the Russia invasion of Ukraine and the conflict in the Middle East. Even as the GPR dropped back down, gold prices remained high.⁵

The Partisan Conflict Index represents the degree of political disagreement among U.S. politicians at the federal level. It is run by the Federal Reserve Bank of Philadelphia. It is significant as a measure of economic and political uncertainty. The index and gold prices often show an inverse relationship: when partisan conflict increases, gold prices tend to rise. When it decreases, gold prices often fall. The Fed explains that this relationship exists because higher partisan conflict creates political uncertainty. And this prompts investors to seek “safe haven” assets like gold, thus increasing demand and driving up its price.⁶

Gold and Elections

Presidential elections often create market volatility. Historically, U.S. election outcomes influence gold prices. After Democratic wins, gold typically rises, while Republican wins usually lead to a decline. Gold prices tend to increase following Democratic victories due to expectations of increased fiscal spending and loose monetary policy. Investors associate these with potential currency debasement. The 2020 U.S. presidential election contributed to gold prices increasing by about 25% in the year leading up to the November election. Gold hit a then all-time high of over $2,000 in August 2020. ⁷

⁸

Unstable Future Outlook

The current state of political instability looks likely to continue. A recent Reuters poll found that 80% of American voters believe the country is spiraling out of control. Eighty four percent are concerned that extremists will commit acts of violence after the election. Few people condone violence, with just 5% of respondents saying it is an acceptable means to achieve a political goal.⁹

This prevailing political and economic instability continues to drive the demand for gold as a safe haven asset. Physical precious metals, especially in a Gold IRA, can shield the value of retirement funds from the impact of social chaos. To protect your finances from an uncertain future, contact us today at 800-462-0071.

Notes:
1. https://www.economicsobservatory.com/is-gold-a-safe-haven-for-investors
2. https://www.deseret.com/2023/11/8/23952266/presidential-elections-republican-democrat-effect-price-gold/
3. https://www.theguardian.com/business/2016/jun/24/gold-jumps-22-percent-eu-referendum-vote
4. https://www.cnbc.com/2019/05/10/gold-market-us-china-trade-talks-tariff-threats-in-focus.html
5. https://www.gold.org/goldhub/gold-focus/2023/10/you-asked-we-answered-whats-impact-of-geopolitics-on-gold
6. https://www.gold.org/goldhub/gold-focus/2023/10/you-asked-we-answered-whats-impact-of-geopolitics-on-gold
7. https://www.royalmint.com/invest/discover/gold-news/us-elections/
8. https://kinesis.money/blog/gold/us-presidential-election-affect-price-gold/
9. https://www.reuters.com/world/us/four-five-americans-fear-country-is-sliding-into-chaos-reutersipsos-poll-finds-2024-07-16/

 

• The Congressional Budget Office is forecasting federal deficits to be $2.1 trillion higher over the next decade than initially predicted
• High government debt can lead to soaring inflation and dollar devaluation
• Precious metals, especially in a Gold IRA, can protect the value of your retirement savings from the consequences of America’s runaway debt

Out of Control Debt

In just six months, from January to July 2024, America’s national debt skyrocketed from $33.99 trillion to $34.86 trillion. That’s an astounding increase of $876 billion. With the budget deficit projected to hit $2 trillion, $300 billion more than last year, alarm bells are ringing across the financial and political spectrum.¹

The Congressional Budget Office (CBO) has recently updated its projections. They are forecasting federal deficits to be $2.1 trillion higher over the next decade than initially predicted. The increase is due to new government spending bills and changes in data analysis. ²

The Peter G. Peterson Foundation is a nonpartisan organization focused on America’s fiscal challenges. They warn, “The CBO’s updated projections emphasize the nation’s unsustainable fiscal outlook, as the projections show deficits continuing to rise significantly over the upcoming decade.”³

⁴

These deficit levels are historically associated with times of war or recession-driven stimulus spending. U.S. net debt is nearing 100% of GDP. Large debts like these were once manageable due to near-zero interest rates. But recent aggressive interest rate hikes have turned these debts into a significant burden.

Dangers of Debt

Mike Pompeo is a former Secretary of State and ex-CIA director. He views this debt as a national security threat. He cautions that record-high debt could lead to dollar deterioration. This could potentially allow U.S. rivals to gain influence over the global economy. The BRICS+ economies are gaining geopolitical influence and attempting to establish a rival trading and monetary system.

Pompeo states, “Persistent high debt, interest rates, and inflation can combine to weaken the value of the U.S. dollar in the long run – a disastrous outcome that would only benefit America’s adversaries in Beijing, Moscow, and Tehran as they seek to recenter the global economy away from the United States.”⁵

The consequences of ignoring this mounting debt are dire. Higher debt servicing costs mean less funding for critical public services and reduced capacity to respond to crises. Increasing bond yields would be necessary to attract investors. This translates into higher borrowing costs, and in turn, slowing economic growth.

It also leads to a “crowding effect”. Investors choose to put their money into high interest government bonds instead of private investments. As a result, the economy stalls. In addition, high debt can also lead to dollar depreciation and inflation.

The Congressional Budget Office projects that by the mid-2030s, all federal revenues will go to mandatory spending, like Social Security, and interest on debt. This scenario would force the government to either borrow more or cut discretionary spending to finance basic functions. Defense, law enforcement, infrastructure, and education would all be endangered.

Escaping the Debt

An unlikely solution to the debt crisis is good fortune – inflation is defeated, interest rates go down, and productivity surges (maybe from AI). In essence, America can outgrow its debts.

The International Monetary Fund (IMF) has reiterated its warning that the U.S. debt “needs to be urgently addressed.” They suggest that the U.S. will need to cut spending or raise taxes by 4% of GDP to stabilize the debt by 2029.⁶

However, economists point to a more worrisome solution: sticking it to creditors by devaluing the debt with inflation. Inflation reduces the real value of government debt. Creditors are made to “pay” by receiving less valuable money. Government repayments during high inflation have less purchasing power than the original loan.

This could occur through various mechanisms. All of which are hazardous to the health of the economy: The Federal Reserve prints money to buy government debt. The Fed keeps interest rates low while increasing government spending. Or Congress allows unlimited borrowing, potentially compromising the Fed’s ability to control inflation.

Some analysts argue this process is already underway in America, though it’s too early to be certain.

Global Impact

The global implications of this debt crisis are significant. As the world’s reserve currency, a debased dollar would devalue global reserves. Capital would become more expensive worldwide, leading to global recession. Investors might seek alternatives to the dollar, potentially leading to a chaotic transition into a new world order.

Conclusion

As we face this looming crisis, the words of Mike Pompeo serve as a stark reminder. He said, “We must wake up to the threat America’s mounting national debt poses to the future of our country before it is too late.” The path forward requires difficult decisions, fiscal responsibility, and a clear-eyed view of the challenges ahead. The alternative – a weakened dollar, diminished global influence, and economic instability – is a future we can ill afford.⁷

JP Morgan doesn’t foresee meaningful improvement in the medium term. They advised “adding non-U.S. dollar–denominated assets and ‘real assets’ such as infrastructure, gold and commodities to traditional multi-asset portfolios.” ⁸ Precious metals, especially in a Gold IRA, can protect the value of your retirement savings from the consequences of America’s runaway debt. Contact us today at 800-462-0071 to learn more.

Notes:

1. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
2. https://www.pgpf.org/blog/2024/07/the-nations-fiscal-outlook-just-got-worse-heres-why
3. https://www.pgpf.org/blog/2024/07/the-nations-fiscal-outlook-just-got-worse-heres-why
4. https://www.livemint.com/economy/americas-reckless-borrowing-is-a-danger-to-its-economy-and-the-worlds-11720510033537.html
5. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
6. https://finbold.com/imf-warns-u-s-to-immediately-address-its-chronic-fiscal-deficits/
7. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
8. https://privatebank.jpmorgan.com/eur/en/insights/markets-and-investing/tmt/how-worried-should-you-be-about-government-debt

 

• The AI stock market boom is evoking eerie memories of the dot-com bubble
• There are mixed economic metrics, some of which resemble the dot-com bubble right before it burst and wiped $5 trillion in value
• Diversifying your portfolio with physical precious metals can offer protection against potential stock market crashes

AI Hype Power Stock Market Boom

The stock market is buzzing with excitement over artificial intelligence (AI). Comparisons are being drawn to the dot-com bubble of the late 1990s. As investors pile into AI-related stocks, particularly chip manufacturer Nvidia, many are wondering if history is about to repeat itself.

Nvidia’s graphics processing units (GPUs) are the go-to solution for generative AI. They have seen their shares skyrocket by nearly 4300% over the past five years. This meteoric rise is reminiscent of Cisco’s 4500% surge before peaking in 2000. Nvidia’s success has propelled it to become the most valuable publicly traded company, mirroring the dominance of tech giants during the dot-com era.¹

The current market boom is not limited to Nvidia alone. The stock market has reached record highs this year. The S&P 500 rose over 50% from its October 2022 low. The Nasdaq is up more than 70% since the end of 2022. This surge is largely attributed to the AI boom, echoing the internet-driven enthusiasm of the late 1990s.²

Growing Concerns

One striking similarity to the dot-com bubble is the concentration of market value in a small group of tech stocks. Today, just three companies – Microsoft, Apple, and Nvidia – make up over 20% of the S&P 500 index. Information technology now accounts for 32% of the S&P’s total market value, the largest proportion since 2000.³

⁴

This concentration of value in a few companies is eerily like the “four horsemen” of the late 90s: Cisco, Dell, Microsoft, and Intel. History shows us the potential consequences of such market dynamics. Following the burst of the dot-com bubble, the Nasdaq plunged almost 80% from its March 2000 peak. More than $5 trillion in market value was wiped out by the crash.

The appeal of AI is undeniable. PricewaterhouseCoopers estimates that AI could add $15.7 trillion to the global economy by 2030. However, as with any emerging technology, there’s a gap between potential and reality. Companies are still figuring out how to effectively implement and monetize AI. This could lead to bumps in the road for even the most promising players like Nvidia.⁵

Financial metrics are sending mixed signals. Forward-year earnings and price/earnings-to-growth ratios aren’t raising immediate red flags. But some analysts are concerned about Nvidia’s trailing-12-month price-to-sales ratio. This metric compares a company’s current stock price to its sales revenue over the past year. That ratio is peaking at levels like those seen in Cisco and Amazon just before the dot-com bubble burst.

The broader market also shows signs of potential overvaluation. The Shiller CAPE ratio is designed to assess whether the stock market is overvalued or undervalued. It is near historic highs. This, combined with the concentration of gains in a small number of stocks, has led some experts to warn that the market is vulnerable to a major correction.

Lance Roberts is CIO of RIO Advisors. He points out that companies are fueling investor hopes by increasingly mentioning AI in their earnings reports. AI references have surged 70% since late 2022. Roberts warns, “We are again experiencing another of these speculative ‘booms,’ as anything related to artificial intelligence grips investors’ imaginations.”⁶

Several factors could potentially burst the AI bubble. These include a reduction in demand if AI’s utility doesn’t match the hype, increasing competition within the AI space leading to lower prices, or rising costs from suppliers cutting into profits.

The market’s future also hinges on broader economic factors. If inflation flares up and the Federal Reserve raises interest rates or doesn’t cut them as expected, investor expectations could rapidly shift. Capital Economics, a research firm, predicts that the AI-fueled stock bubble will burst in 2026. This will be due to rising interest rates and higher inflation bringing down equity valuations.

While Capital Economics expects the S&P 500 to potentially reach as high as 6,500 by 2025 off AI enthusiasm, they also forecast a subsequent correction.

“We suspect that the bubble will ultimately burst beyond the end of next year, causing a correction in valuations. After all, this dynamic played out around both the dot-com bubble of the late 1990s and early 2000s and the Great Crash of 1929,” stated economists at Capital Economics.⁷

The aftermath of such a correction could be significant. Capital Economics projects that between now and the end of 2033, US stocks will deliver average annual returns of just 4.3%. That is well below the long-term average of about 7% after inflation. This stands in stark contrast to the 13.1% average annual returns delivered by US stocks over the past decade.

Conclusion

While no one can predict exactly when a market crash may occur, it’s always better to be prepared. Even as stocks hit historic highs, the adage “what goes up must come down” often holds true in financial markets. Diversifying your portfolio with physical precious metals can offer protection against potential stock market downturns. A Gold IRA, in particular, provides a way to safeguard your retirement savings with the historically stable value of gold, helping to balance your investments against market volatility.

Notes:
1. https://www.firstpost.com/tech/repeat-of-the-dot-com-bubble-us-stock-market-may-be-looking-at-massive-crash-because-of-ai-stocks-13788430.html
2. https://www.firstpost.com/tech/repeat-of-the-dot-com-bubble-us-stock-market-may-be-looking-at-massive-crash-because-of-ai-stocks-13788430.html
3. https://www.firstpost.com/tech/repeat-of-the-dot-com-bubble-us-stock-market-may-be-looking-at-massive-crash-because-of-ai-stocks-13788430.html
4. https://www.businessinsider.com/stock-market-crash-dot-com-bubble-similarities-ai-nvidia-roberts-2024-6
5. https://www.fool.com/investing/2024/06/29/nvidia-going-to-crash-history-weighs-in-big-clue/
6. https://www.businessinsider.com/stock-market-crash-dot-com-bubble-similarities-ai-nvidia-roberts-2024-6
7. https://www.msn.com/en-in/money/markets/the-ai-fueled-stock-market-bubble-will-crash-in-2026-research-firm-says/ar-AA1nLJvx

 

 

• Disappointing progress on inflation is stifling hopes for interest rate cuts this year
• Multiple Fed Board members warn rates will stay higher for longer
• A Gold IRA offers long-term portfolio protection from losses incurred due to high interest rates

No Relief from High Interest Rates in Sight

The Federal Reserve is signaling that relief from high interest rates may not come as soon as many had hoped. Despite earlier expectations of multiple rate cuts in 2024, Fed officials are now hinting at the possibility of only one cut, or even none, as they continue to grapple with persistent inflation. This stance has significant implications for the economy and retirement funds.

The Fed has kept interest rates high, between 5.25%-5.5%, since last July. Those are the highest interest rates since 2001. The stock market had surged earlier in the year on signals for three rate cuts in 2024. Now policymakers are hinting they may only cut rates once this year – or not at all. If a cut does happen, it wouldn’t occur until December.

¹

Inflation was back on the rise in April and March, up from both February and January. The prior dip in inflation that inspired rate cut hopes has largely been attributed to a temporary drop in fuel prices.

Fed Board Members Weigh In

Mary Daly – San Francisco Federal Reserve President: Daly said that there is still “more work to do” on bringing inflation down. And that “inflation is not the only risk we face.”² Daly warned that the Federal Reserve must “exhibit care” because rising unemployment is a growing risk.

Daly said demand must be further restrained to bring down inflation. But slowing the market can result in higher unemployment.

Daly did not know how much rates needed to drop to navigate between bringing inflation under control and stalling the economy. The Fed is prepared to hold rates higher for longer if that’s what their data points them to.

Daly is against preemptive cuts to avoid a recession. “We’re going to be resolute until we finish the job. That’s why not taking preemptive action when it’s not necessary is so important.”³

Neel Kashkari – Minneapolis Federal Reserve President: Kashkari said it could take up to two years to get inflation down to the Fed’s 2% target. He indicated that wage growth was too high to reach that target right now.

Michelle Bowman – Federal Reserve Governor: Bowman stated she is open to raising rates if inflation doesn’t drop.

Bowman said, “I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse.” Bowman said she does not project any rate cuts happening this year. She has instead shifted those into future years.⁴

Reducing rates too soon could risk reigniting high inflation, she warned. That would require additional rate increases to tame price pressures within the economy.

Lisa Cook – Fed Reserve Governor: Cook is optimistic inflation will show more progress in 2025, allowing the Fed to lower rates eventually. She sees supply and demand in the labor market coming into better balance. But, to her, economic risks remain. Risks include higher credit card delinquency rates and tighter credit conditions. Along with the difficulty in assessing economic data that has come under continuous and significant revision.

Austan Goolsbee – President of the Federal Reserve Bank of Chicago – Goolsbee said if he sees “more months” of improving inflation data, then he would be open to cutting rates. Overall, the FOMC, the board that decides cuts, is waiting on hard evidence that inflation is hitting their target before they make any cuts.

Impact of High Rates

High interest rates, slowing growth and lingering inflation are a formula for stagflation. JPMorgan CEO Jamie Dimon said, “I look at the range of outcomes and again, the worst outcome for all of us is what you call stagflation, higher rates, recession. That means corporate profits will go down.”⁵

When interest rates stay high for a long time, it can negatively impact retirement funds. Higher rates cause bond values and stock prices to drop. A slower overall economy can drag down investments across the board. Money may not grow as fast as expenses, causing savings to shrink more quickly. Real estate can lose value too. It’s crucial for people to understand these effects and plan accordingly for their future.

Owning physical gold can act as a hedge against the negative effects of higher interest rates. Gold often maintains or increases its value during economic uncertainty. It can potentially offsetting losses in bonds and stocks when interest rates remain high for extended periods. A Gold IRA offers long term portfolio protection from losses incurred due to high interest rates. To learn how you can start protecting your fund today, call American Hartford Gold at 800-462-0071.

Notes:
1. https://fred.stlouisfed.org/series/DFEDTARU
2. https://www.reuters.com/markets/us/feds-daly-inflation-not-only-risk-policy-must-exhibit-care-2024-06-24/
3. https://www.cnbc.com/2024/06/25/fed-governor-bowman-says-shes-still-open-to-raising-rates-if-inflation-doesnt-improve.html
4. https://www.cnbc.com/2024/06/25/fed-governor-bowman-says-shes-still-open-to-raising-rates-if-inflation-doesnt-improve.html
5. https://www.cnbc.com/2024/05/23/jpm-jamie-dimon-us-could-see-hard-landing-stagflation-is-worst-outcome.html

 

 

 

• The CBO released a new report stating the deficit is increasing faster than just a few months ago
• Servicing the growing interest on the debt may sink the government into a doom loop that ends with a bankrupt nation
• Moving assets into physical gold and silver can preserve purchasing power as the value of the dollar collapses from debt

New CBO Warning

A new Congressional Budget Office report warns that Congress and the White House must get serious about getting the national debt under control. The federal budget deficit will reach nearly $2 trillion this year – the third largest in US history (behind pandemic era relief spending). That is 27% higher than February’s forecast due to the latest glut of government spending. The CBO warned that the rapidly rising debt is putting the nation at risk of a financial crisis. ¹

The projected deficit increase was tied to student debt cancellation, bank failure bailouts, and funding for foreign aid. The annual deficit is expected to keep growing. It is predicted to top $2.8 trillion in ten years. This increase is on top of growing mandated spending for programs like Social Security and the higher cost of paying interest on the debt. ²

The national debt as related to the size of the GDP is also growing. As of now, it stands at 99% – the debt is essentially the same size as the US economy. Interest on the debt will exceed spending on defense this fiscal year.

Debt held by the public is projected to rise from around $28.2 trillion this year to more than $50 trillion in 2034. That translates to 122% of the GDP – a historical record high for the US, beating 106% after World War 2. ³

⁴

Effect on Individual Americans

The CBO found the debt will slow the growth of American household income and economic growth. The estimated GDP per person is considered a measure of average income. Right now, it is about $84,000. The CBO projects that if the debt remains stable, that income will increase to $128,000 by 2054. But if the debt grows as the CBO projects, that income is $123,000. Meanwhile, the nonpartisan Committee for a Responsible Federal Budget estimates income would slow by about one third to $114,100. ⁵

Household income would shrink due to the “crowding out effect.” Excessive government spending to service the debt drags down the economy by crowding out more productive investments that improve American living standards.

Essentially, the government sells bonds to borrow money. Investors choose the bonds over private sector investment because the government has been forced to offer high rates of return. For example, instead of buying a corporate bond, stock, or putting money in the bank, someone buys federal bonds.

This results in less investment in the private economy. Over time, this means fewer buildings, machines, equipment, and software innovations. Consequently, wage and income growth slow down. This process happens gradually, little by little.

In addition, higher levels of government debt cause interest rates to rise. So as your income slows, your expenses accelerate, like your house and car loans. And the federal government is spending more on interest, so it cannot provide stimulus or relief.

Conclusion

Th CBO strongly advises that Congress and the White House need to act now. The problem is only going to grow exponentially worse, requiring stricter solutions the later it is addressed. However, a highly divided government seems unlikely to make the compromises necessary to curb the debt. Raising taxes and cutting services, especially in an election year, are non-starters.

Left unchecked, the debt will erase the value of the dollar. With their intrinsic value, physical precious metals can preserve purchasing power as the currencies collapse. A Gold IRA can secure your retirement funds for the long term. Contact American Hartford Gold today at 800-462-0071 to learn how.

Notes:
1. https://www.foxbusiness.com/politics/federal-budget-deficit-reach-nearly-2-trillion-year-cbo-projects
2. https://www.foxbusiness.com/politics/federal-budget-deficit-reach-nearly-2-trillion-year-cbo-projects
3. https://www.foxbusiness.com/politics/federal-budget-deficit-reach-nearly-2-trillion-year-cbo-projects
4. https://www.pgpf.org/sites/default/files/ltbo-2022-chart-1.jpg
5. https://www.foxbusiness.com/economy/rising-national-debt-reduce-americans-income-growth-report