US Stagnation Threat, Policy Responses Will Boost Gold, Silver Prices
With a loose monetary policy increasingly ineffective at boosting investment and underlying growth, there will be strong pressure for a change in tack. Any monetary tightening would increase the risk of an aggressive sell-off in equities while the risks of rising inflation and weaker dollar would increase substantially if the US tried to use negative interest rates. Both scenarios would boost demand for precious metals including gold. A move to a much looser fiscal policy would risk a bond-market collapse and falling equities, also boosting precious-metal demand. A principal feature of the US economy since the financial crisis has been
Although the US economy has also gained an important competitive advantage due to the decline innatural gas prices and general availability of cheap energy, capital spending has remained disappointing. In the advance second-quarter GDP report, non-residential investment fell by 3.2%, the steepest decline since 2009.
The weakness in investment has also continued despite very strong levels of cash held on company balance sheets. There is important over-capacity in certain industrial sectors such as steel due to a large extent from huge excess capacity in China which has continued to discourage capital spending.
There have also been increasing concerns that the low interest-rate environment is a contributory factor in undermining investment. A key objective of low interest rates and the quantitative easing programme was to underpin financial asset prices with a notable focus on equities. High equity prices, however, have also encouraged equity buybacks and financial engineering rather than encouraging actual investment, especially as the returns on share buy-backs are immediate.
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