Metals Notes

Why is HSBC Long Term Bullish on Gold?

The US economy hasn’t fully recovered from the last recession, what many have referred to as the worst since the Great Depression, but another economic downturn could be looming in the not too distant future, according to one prominent economist.

In a recent article from the Financial Times, HSBC Chief Economist Stephen King commented on the historical trends of recessions and depressions. Mr. King stated that most recessions historically occur every eight to nine years and the last US recession ended about six years ago. If history does indeed repeat itself the US could be facing another recession in the not too distant future. What’s worse, Mr. King noted, is that US policy makers don’t appear to have the ammunition to fight off the next significant economic slump.

Mr. King suggested several potential triggers for the next recession; a collapse in overvalued equity markets, a sizeable slowdown in the Chinese economy, systemic failures across the pension fund and insurance industries and a possible premature tightening of interest rates by the Federal Reserve.

Mr. King did note that the government had several options to minimize the impact of a future recession although none seemed very appealing.

He stated the Federal Reserve would have to restart its quantitative easing program, historically beneficial to the price of gold.

The government could also allow for even more significant budget deficits and pass stimulus measures similar to Franklin Roosevelt’s Depression era social programs. Unfortunately it’s not the 1930’s and increasing government spending nowadays could create a pension and healthcare fuelled debt spiral. Such measures historically weaken the US Dollar versus foreign currencies and are bullish for gold and silver.

Finally, another option would be to raise the age of retirement. However, that might be political suicide considering the increasingly larger bloc of senior voters.

In reaction to Mr. King’s comments, HSBC precious metals analysts issued their own statement saying that any of the aforementioned scenarios offered by Mr. King would be very positive for the gold market. History tends to support that line of thought.