Does the Gold Drop Signal Recession?

On Friday, April 12, 2013, the gold price (in terms of dollars) took a huge hit.  It was down over 5% on the day.  It closed well below the $1,500 per ounce level.  Is this a bearish sign for gold or is it a bearish sign for the U.S. economy?

The stock market didn’t do a lot on the same day, but it was noteworthy that the 10-year yield dropped down to 1.72%.

Some of the explanations for the big drop were that wholesale prices fell and that other reports were raising concerns about the economy.  Of course, I’m not sure why the gold market doesn’t react the way the stock market does with bad news.  If the economy is bad, that means the Fed will just keep creating more money out of thin air, which should ultimately be good for gold.

This seems to be an on-going tug-of-war between a recession on the one hand and the Fed’s inflation on the other.  Of course, both sides might lose and we may all end up in the mud pit in the middle.  We could end up with recessionary conditions, including high unemployment, coupled with high price inflation.

I was thinking that the Fed’s monetary policy would win out in the short run.  (It will never win out in the long run.  We will eventually get hyperinflation or a severe correction.)  The monetary base continues to increase at unprecedented levels.  With the huge rise in the stock market, I was thinking we were seeing another artificial boom and that it could last a little while.  But with the latest big correction in gold, I am closer to 50/50 now.

With the major correction in gold in one day, coupled with a decreasing yield on treasuries, a near-term recession is looking more likely.  I know that we already have recessionary conditions in many ways, but I am referring to an official recession.

I don’t underestimate the power of the Fed to prop things up in the short term.  Huge injections of monetary stimulus has its effects.  We have seen that with the stock market.  It might be enough to overcome an official recession in the near term.

I really think that things will become more clear over the next few months.  We may see a quick bounce back in gold and see the artificial boom resume.  If, on the other hand, gold keeps going down, I think it is a sign of a deeper recession in the near term.

But even with the latter scenario, that will just mean that Bernanke and the Fed will continue to be aggressive with its monetary policy.  This will be bullish for gold ultimately.  So either way, I would look at the drop in gold as a buying opportunity.  It is just a question of how long it will take to pay off.

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