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Are We In Late Cycle? Implications For Gold

By Kurt Osterberg · On March 9, 2018

In the previous edition of the Market Overview, we explored the fascinating history of bull and bear cycles in both the U.S. dollar and gold. Since then, the idea of cyclicity doesn’t lead me to drop off, disrupting my sleep cycles. Let’s then dig into the topic. We start with the business cycles, as in the recent Gold News Monitor we wrote that “we are in the late stages of the economic cycle – as the cycle matures, volatility increases and investors start to buy more gold as a hedge.” Why do we believe so? And what are the implications for gold’s future?

As a short reminder, cycles exist throughout our lives. From the weather’s seasons to circadian rhythm. Business activity is no different here. The economy does not grow evenly, but experiences ups and downs. There are many theories of business cycles – our favorite is that formulated by the Austrian school. But now, let’s focus not on reasons, but on stages of business cycles. Knowledge is where we can improve investors’ returns.

Terminology may vary, but there are basically four phases:

Expansion – this is where economy grows healthily. Almost all measures – in particular, real GDP, real income, employment, industrial production, and wholesale-retail sales improves. Inflation stays low, while stocks are in a bull market. Gold usually struggles, but when the recovery is weak, it may revive.

Peak – things get tricky here. The economy accelerates. But inflation rises. Industrial production flattens. The stock market enters a state of irrational exuberance. It might be a good time to buy gold, as it hedges against both the inflation and a stock market crash.

Contraction – it starts to be less pleasant. The economy slows down. Bears triumph on the stock market. Gold may rise as a safe haven, but fire sales are able to sink the yellow metal. A lot depends on the U.S. dollar behavior and the broader macroeconomic context.

Trough – real apocalypse. The economy contracts. Consumer expectations are at their worst. It may be good idea to buy commodities, including gold, as they should be cheap during a recession, offering a substantial potential for gains.