New Stimulus Packages Are On the Way – Guess What That Means For Gold

Written by Jason Simpkins
Posted September 6, 2019

When analysts warn of a recession, they’re not just talking about the inverted yield curve.

Some recent concrete data has also raised alarm bells.

For example, the Institute of Supply Management said its key manufacturing indicator — the Purchasing Managers’ Index — turned negative in August for the first time in three years.

The survey registered 49.1 for the month, with anything below 50 signaling a decline in confidence and consumption among manufacturers.

That means the United States was added to a growing list of world economies that are currently seeing manufacturing declines — joining the U.K., Germany, Japan, and South Korea.

China’s manufacturing sector, meanwhile, is on the bubble. Its factory PMI registered three straight months of contraction from May to July before rebounding to 50.4 in August.

This drop in manufacturing activity is a bright red flag, and governments around the globe are now responding with increased stimulus measures.

In the United States, that stimulus has been manifest by central bank rate cuts. But actual government action (fiscal spending in line with the $787 billion Obama stimulus package) has been lacking.

To the contrary, the Trump administration has actually made matters worse by pursuing an economically destructive trade war that shows no real signs of abating. And with the 2020 election looming, there is pretty much zero chance for a bipartisan bailout in Congress.

China, on the other hand, is preparing stimulus measures as we speak.

The State Council has called for a reduction in the amount of money banks have to hold in reserve. It also demanded faster implementation of measures deployed to reduce borrowing costs.

The People’s Bank of China last made a broad cut to the required reserve ratios in January, after a similar prompt from the State Council in December. A comparable timeline for the latest cut would be on September 16 or 25 — days on which banks will adjust their holdings to comply with the reserve regulations.

At the same time, Beijing wants local governments to accelerate the issuance of special bonds to pay for infrastructure spending.

Those measures will help fortify China’s economy as the year draws to a close.

The European Central Bank is scrambling, too.

It’s all but promised a monetary policy stimulus package, including more bond purchases. This has driven the euro to a two-and-a-half-year low against the dollar, as investors price in deeper negative interest rates for longer in the euro zone.

Money markets have now priced in an 83% probability that the ECB will cut its benchmark rate by 20 basis points when it meets next week — which would take it from -0.40% to -0.60%.

Germany, Europe's strongest economy, has also become a point of concern.

Its GDP fell 0.1% in the second quarter, as the country’s manufacturing sector shrunk nearly 5% and exports suffered their steepest drop in six years.

Germany’s economy has likely contracted further in the third quarter, putting the country in a recession.

This has prompted the country’s frugal government to consider new spending measures.

Germany’s fiscal rules only allow a government budget deficit of up to 0.35% of GDP — roughly 12 billion euros — a year. However, using off-budget vehicles could increase that amount to 35 billion euros.

Depending on whether or not there are budgetary offsets, the country could even get up to 50 billion euros.

There is currently no consensus on exactly how much will be spent, but proposals are in the works.

Incentives to buy electric cars or insulate homes, more lenient investment rules, and special-purpose investment vehicles are among them.

A package of environmental measures that the government will unveil this month could also include a few pro-growth policies.

These measures could boost GDP by about 1.5% in the short-term, but wouldn’t be enough to sustain longer-term growth.

And finally, Japan’s central bank is exploring its options, as its board is set to meet this month.

"Personally, I feel the need for additional easing is heightening,” said BOJ board member Goushi Kataoka. “On the other hand, many central banks are ramping up stimulus, which could affect the global economy."

As with most other countries, the looser monetary policy will also likely be paired with government spending initiatives to help spur growth.

All of this is to say that with central banks and governments around the world planning more monetary loosening and more spending, the outlook for gold is increasingly bright.

Deficits are sky-high and only soaring higher. Rates are already historically low (in some cases negative) and only sinking further. And currencies are weak and only getting weaker.

And while that has traditionally been good for stocks, recession fears and the trade war have handicapped market sentiment.

That leaves gold and precious metals as the last salvation for investors.

And as good as gold has been, gold miners have been even better. That’s why I’d encourage you to check out our latest profit opportunity here.

It shows investors how to maximize gold gains by leveraging small miners.

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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