The Big Picture Backdrop for Precious Metals Outlook 2020 / Commodities / Gold & Silver 2019

The year ahead promises to be an eventful one. It will, ofcourse, be dominated by political headlines leading up to the 2020 election. Itcould also be a big breakout year for precious metals.

In the second part of Money Metals' 2020 Outlook, we’ll drilldown on the fundamental and technical setup for gold and silver…
However, in this first part, we’ll set the stage by digging intothe macro forces at play in the economy, monetary policy, politics, andgeopolitics.

Economy

Over the summer, the mainstream financial media ran hard withthe “recession” angle. A manufacturing slowdown seemed to be afoot. But themain impetus for all the recession talk was an inversion of the yield curve –putting short-term bond yields below those of longer-term bonds.

Democrats were nearly gleeful at the prospect of a recession.But such thinking proved to be premature.

The economy does not appear to be headed into recession as webegin 2020. Official employment numbers continue to come in historicallystrong. And GDP growth, though modest at 2.1% as of Q3, is still indicating anoverall expansion.

As for the yield curve inversion, the Fed got the message anddrove short-term rates back below long-term rates. The inversion still servesas a possible precursor to a recession, but it may not actually hit until 2021or later.

Continued global economic growth in 2020 could drive a late-cyclebull market in commodities, including the metals complex.

Leading up to a recession, the energy and materials sectors tendto outperform the broad market before rolling over. Gold and silver tend to peak later,with gold often rising counter-cyclically to economically sensitive assets.

Monetary Policy

In 2019, the Federal Reserve did a dramatic about-face oninterest rates. Instead of hiking, as was widely expected by mainstreamforecasters, the Fed paused… then cut rates three times.

By the fall, it was engaging in massive interventions to prop upthe repo market and launching what is effectively a new Quantitative Easingprogram.

Nobody in the financial “mainstream” saw that coming at thebeginning of the year!

The Fed is now back on pause for an unknown period. At hislatest press conference Fed Chairman Jerome Powell indicated he would like to asee a significant and sustained rise in inflation before hiking rates again.

Higher inflation coupled with accommodative monetary policywould potentially be rocket fuel for precious metals markets.

A weaker Federal Reserve Note “dollar” versus foreign currenciesisn’t necessary for hard assets to gain, but it certainly wouldn’t hurt. TheU.S. Dollar Index peaked for 2019 in late September after a modest run-up. Ithas since retraced and will finish the year nearly flat.

The dollar has fallen in the fourth quarter along with the QEsurge in the Fed’s balance sheet. The central bank’s net asset purchases are upby $400 billion already. Its balance sheet will likely rise to an all-timerecord by spring 2020, further cheapening the real value of the Federal ReserveNote in the process.

Politics

There is no shortage of opinion on who will, and who should, winthe 2020 election. But we’ll stay out of the political “horse race” debate thatfills the airtime on all of the cable news channels hour after hour, day afterday.

We note only that political predictionmarkets currently give the upper hand to President Donald Trump. As longas the economy doesn’t dip into recession, the smart money seems to be on Trumpto triumph over a weak Democrat field.

Should the economy falter or Trump get bogged down in a newcontroversy that erodes his support, the political dynamics could shift – andpotentially roil markets.

Several outspoken billionaires – from Ray Dalio to Paul TudorJones to Stanley Druckenmiller to Leon Cooperman – have each warned that aDemocrat victory over Trump could trigger a stock market meltdown (especiallyif the victorious Democrat is a Bernie Sanders or Elizabeth Warren-typeanti-capitalist firebrand).

Such an event, in turn, would enhance the safe-haven appeal ofprecious metals.

So far during the Trump presidency, “fear trade” demand forphysical precious metals has been mostly muted. The metals have made modestgains based on other factors. But before we see truly spectacular gains in gold and silver, we willlikely need some sort of economic, political, or geopolitical black swan eventto shake investors out of their complacency.

Geopolitics

The big geopolitical story of 2019 was the trade standoffbetween the United States and China. Every week, seemingly, brought us eitherone step closer or one step further behind a trade deal.

Much – perhaps too much – was made of the impact of trade warson market trends. But a favorable outcome in 2020 would certainly go towardboosting manufacturing activity and demand for industrial metals.

Other geopolitical threats loom in 2020 as well.

As the U.S. continues to ramp up economic sanctions on Russia,the Russians continue to look for ways to retaliate. One if its long-termstrategic aims is to secure international trade deals outside the FederalReserve Note dollar system. It is finding willing partners in U.S. adversarieswho have been hit or threatened with sanctions.

The U.S. has shown in the past that it is willing to go to warto defend its fiat dollar.

A possible war with Iran, North Korea, Russia, or China – or ashutdown of oil production from the Middle East – would be extremely disruptiveto markets and could send safe-haven demand for precious metals skyrocketing.

Barring an unforeseen black swan event or crisis, the bigpicture backdrop for precious metals looks constructive for another year ofsignificant but not necessarily spectacular gains.

At some point, though, whether next year or in future years,mounting risks will propel gold and silverhigher with explosive force.

Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness leader, investor, political strategist, and grassroots activist.Gleason has frequently appeared on national television networks such as CNN, FoxNews,and CNBC, and his writings have appeared in hundreds of publications such asthe Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2019 Stefan Gleason - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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