Crypto Contagion Makes Gold Shine

Gold was up 11% last month as crypto and the U.S. dollar faltered. Economic hardships on the horizon may trigger the yellow metal’s next meteoric rise.

Key Takeaways:

  • Will this year’s crypto scandals direct investors toward the original “anti-establishment” asset class? (That is – gold, of course.)
  • The US dollar is falling against other currencies for the first time in two years.
  • A robust labor market and strong consumer spending are fending off a U.S. recession. How long can they last?

Crypto Contagion

Cryptocurrencies are having an identity crisis. The FTX catastrophe is the latest headline in a widespread crypto contagion that has knocked the price of Bitcoin down 75% in less than a year. It will take years to reconcile all the structural weaknesses in digital currency markets, not to mention the time it will take to rebuild public trust.

It is difficult to argue that cryptos are an effective hedge against the financial system. When stocks and bonds faltered this year, they took cryptocurrencies with them. Bitcoin’s decentralization attracted the attention of anyone distrustful of big government and Wall Street (aka everyone). Cryptos borrowed this strength from precious metals, the original “anti-establishment” asset class.

Could the weakness in digital currencies revitalize interest in gold? Gold is one of the only asset classes that has remained stable through 2022’s tumultuous markets, but has yet to deliver the superior performance many investors are hoping for.

Gold Catches a Break

After two years of massive gains, the U.S. dollar is finally falling.

Many analysts see a U.S. recession on the horizon, which would force the Fed to loosen monetary policy. Such an act would trigger a perfect storm for gold’s next meteoric rise.

Consumer and Credit

The Fed will soon slow its aggressive rate hikes, but continue tightening. Policymakers seem to believe they will be able to gently guide inflation down to their 2% target without crushing the economy. There is no historical precedent for such an achievement.

They believe in the power of the Ph.D. – Do you?

In all likelihood, depressing inflation will require cranking up unemployment and breaking the housing market. In other words – look forward to a deep recession in 2023.

This year, a robust labor market and strong consumer spending have defended our economy from the inevitable downturn. However, we should take note of some red flags in both areas. According to Bloomberg, US household debt is rising at the fastest pace since 2008. In Q3, consumers stacked up credit card debt at the fastest rate in 20 years.

So yes, consumers are spending money, but the money is borrowed. When people, businesses, and governments take on debt, they pull purchasing power from the future to the present. Economic growth built on borrowed money is not sustainable.

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Additional Resources:

US Household Debt Jumps Most Since 2008 Even as Credit-Card Rates Surge (Bloomberg)

Accounting Red Flags Are Common Among Public Crypto Companies: Weak controls and related-party transactions appear in disclosures across industry (The Wall Street Journal)

Cryptoverse: Forget crypto winter, this is a bitcoin ‘bloodbath’ (Reuters)

Mortgage demand falls again even as rates sink further (CNBC)

Economists: A US housing recession has already arrived (The Hill)

Jamie Dimon says inflation eroding consumer wealth may cause recession next year (CNBC)