Key Points
- The U.S. economy is slowing, with a current 1.1% GDP growth rate in 2023 compared to 2.6% in 2022 and 5.9% in 2021.
- The GDP is forecasted to rise by an annualized 0.5% in the second quarter, less than half of the first-quarter pace.
- The U.S. is experiencing significant inflation, rising above 7%.
- The Federal Reserve implemented nine interest rate hikes within a year to combat rising prices.
- Experts predict a high probability of a recession within the year, with an estimated 99% chance based on current economic indicators and trends.
- Silicon Valley Bank (SVB) and Silvergate, two central U.S. banks, collapsed in 48 hours due to a downturn in the economy.
- These factors have caused banks to tighten lending requirements, making it harder to borrow, which has caused the real estate market and small businesses to take a hit.
Sluggish Growth and Inflationary Pressure
The recent GDP figures indicate a slowdown in economic growth, which raises questions about the economy’s health. For instance, the U.S. economic growth declined from 2.6% from October to December 2022 to just 1.1% from January through March 2023. For comparison, the GDP growth rate in post-pandemic 2021 was 5.95%.
Concurrently, rising inflation poses challenges as it drives up prices for essential goods and services. As the world grappled with the COVID-19 pandemic, inflation rose, hitting 5.4% in the U.S., its highest level since 2008.
Again, in 2022, the U.S. saw the annual inflation rate reach over 9%, the highest since 1982. By the beginning of 2023, inflation rates decreased slightly from the 2022 averages. However, inflation rates are still nearly double the 3.28% average.
In response to rising inflation, the Federal Reserve indicated there would be another interest rate hike. Greg McBride, CFA at Bankrate, points out: “The Fed has raised interest rates at the fastest pace in 40 years, and fallout is to be expected. Bank failures are one, but a broader economic slowdown or recession is likely the ultimate price to be paid to get inflation under control.”
Recession on the Horizon and the Banking Sector Shake-up
As the storm clouds of economic uncertainty gather, experts predict an impending recession. Current indicators point to a staggering 99% probability that a recession will occur within the year. Economic slowdowns and rising inflation are the main culprits for the predicted recession. However, the financial sector also felt a profound shock as Silicon Valley Bank (SVB) and Silvergate, two major U.S. banks, collapsed within 48 hours.
SVB’s rapid downfall was sparked by rising interest rates eroding the value of its bond portfolio and a subsequent run on the bank. And Silvergate struggled with losses from large customer withdrawals and scrutiny for its role in cryptocurrency.
The tremors from these collapses have rippled across the financial landscape, prompting banks to adopt stricter lending requirements, adding to borrowers’ woes. This tightening of credit has also sent shockwaves through the real estate market, which has already begun to feel the punch. The cascading effects of these developments have led investors to find solace in other investment options.
Expert Warnings
Economic experts are ringing the alarm bells over an imminent U.S. recession in the second half of 2023. Billionaire investor Stan Druckenmiller recently stressed that “it’s naive not to be open-minded to something really, really bad happening” at the Sohn Investment Conference.
“This has been the most predicted potential recession in memory,” said Federal Reserve Bank of Richmond President Tom Barkin in January.
So what can you do to be prepared for what may potentially be one of the worst economic slowdowns in recent years?
Gold as a Safe Haven
As the U.S. economy experiences deceleration, inflation, and tightening credit markets, investors are seeking ways to weather this financial storm. One traditionally reliable solution has been gold, considered a safe haven asset during economic uncertainty.
Gold’s value has stood firm throughout history during inflationary periods. For instance, the relative value of gold often remains stable or even increases.
As of May 2023, the price of gold rose to $2,250 per ounce, a notable 15% increase from the same period last year, according to data from the World Gold Council. This reflects its role as a solid hedge, offering protection against eroding currency values.
Moreover, gold has demonstrated resilience during economic downturns and recessions. Gold prices do not move in step with traditional investment sectors.
When stock markets tumble during recessions, gold often increases in value, acting as a refuge for investors. This has been evidenced in the recent failures of Silicon Valley Bank and Silvergate, which have underlined the appeal of gold as an alternative investment option.
Lastly, gold’s liquidity remains unparalleled among tangible assets. This asset can be easily bought, sold, or traded worldwide.
In times of economic uncertainty, gold demand generally increases, thereby enhancing its liquidity. For instance, the average daily trading volume of gold in May 2023 was around $130.9 billion, indicating a healthy market and robust investor interest in this asset class.
