The Global Economy at a Crossroads: Surging Gold and Copper, Shaky Stock Markets, and Key Elections

Surging Gold Prices and the Factors Fueling the Rally

Gold, the ultimate safe-haven asset, is shining brighter than ever. The yellow metal recently surpassed $2,200 per ounce for the first time in history, marking a significant milestone in its multi-year bull run. 

(Figure 1.1)

A confluence of economic drivers is propelling gold's ascent. First and foremost is the unrelenting debasement of fiat currencies, particularly the US dollar. Central banks around the world have been pumping trillions of dollars into the global financial system in an effort to combat economic slowdowns. The US Federal Reserve has been leading the charge, with its balance sheet ballooning from $4 trillion in early 2020 to over $9 trillion currently. 

This extraordinary monetary expansion has investors flocking to gold as a hedge against inflation and currency depreciation. Gold is seen as a store of value that can't be printed or debased like fiat money. As the supply of dollars continues to mushroom while the amount of gold remains relatively constant, basic economics dictates that the price of gold in dollar terms will rise.

In addition to money supply growth, exploding government debt levels are also contributing to gold's rally. The US national debt has skyrocketed past $34 trillion and is on track to reach $40 trillion within a couple years. Mounting debt leads to higher government spending on interest payments, increasing the likelihood that the Fed will have to print even more money to finance the ballooning debt. This devalues the dollar further, creating a vicious inflationary cycle that benefits gold.

Interest rates play a key role in gold's fortunes as well. Although the Fed has been aggressively hiking rates over the past year to tame inflation, real interest rates (nominal rates minus inflation) remain in negative territory. With cash and bonds offering paltry or negative real returns, gold becomes more attractive by comparison. Many analysts expect the Fed to reverse course and start cutting rates later this year as the economy sputters, which would provide another boost to gold.

From a technical perspective, gold's long-term uptrend remains firmly intact. The metal has been putting in a series of higher highs and higher lows since the early 2000s, with the uptrend accelerating in recent years. Gold's decisive breakout above the key $2000-$2100 resistance zone now sets the stage for an assault on even loftier price targets. Based on the current bullish technical and fundamental setup, many analysts believe gold is poised to reach $3000 per ounce or higher in the coming years.

Copper Joins the Rally as Electrification Drives Demand

Gold isn't the only commodity catching a strong bid. Copper prices have also broken out to 11-month highs, powered by strengthening demand and concerns over inadequate supply. Often referred to as "Dr. Copper" for its alleged ability to diagnose the overall health of the global economy, the critical metal is used in a wide array of applications including construction, electrical equipment, transportation, and telecommunications.

(Figure 1.2)

The biggest factor driving copper's resurgence is the global push towards electrification and clean energy. Copper is a key component in electric vehicles, charging infrastructure, wind and solar power systems, and the electrical grid. As countries around the world set ambitious targets for cutting carbon emissions and ramping up renewable energy capacity, copper demand is expected to soar.

(Figure 1.3)

Copper supply, however, is struggling to keep pace. Years of underinvestment have left global copper inventories depleted, while the timeline to bring new mines online can stretch to a decade or more. Major copper producers like Chile and Peru have also faced production disruptions due to operational challenges, labor strife, and resource nationalism. This has led analysts to forecast a growing supply deficit in the copper market, likely leading to higher prices until enough new production can be brought online.

The combination of robust demand and constrained supply has put copper on a solid footing for further gains. Like gold, copper has also broken out of a multi-year basing pattern to the upside, clearing the way for an extended bull market. With so many structural tailwinds at its back, copper appears well-positioned to remain in a long-term uptrend.

Stock Markets Shrug Off Warning Signs

In a seemingly alternate reality, global stock markets have continued to levitate near record highs even as signs of economic trouble proliferate. In the US, the S&P 500 and Nasdaq recently notched fresh all-time highs as investors cling to hopes for a soft landing and a quick rebound in economic growth. 

Under the surface, however, the rally is showing cracks. Earnings growth has slowed to a crawl as companies grapple with rising costs, softening demand, and tough year-over-year comparisons. According to Factset, S&P 500 companies are expected to report an earnings decline of 5.1% for Q1 2024, which would mark the index's first year-over-year drop in profits since Q3 2020. Revenue growth has also downshifted into the low single digits, a far cry from the heady double-digit gains seen in the post-pandemic boom.

Valuations remain extremely stretched, with the S&P 500 trading at over 20x forward earnings, well above the 10-year average of 17x. Higher interest rates are making these lofty valuations more difficult to justify, as future cash flows must be discounted at a higher rate.

(Figure 1.4)

The bond market is also flashing recession warnings, with the yield curve firmly inverted. The 10-year/3-month and 10-year/2-year Treasury spreads are deeper in negative territory than at any time since the early 1980s, signaling that bond investors are pricing in significant economic weakness ahead. In the past, yield curve inversions of this magnitude have reliably preceded recessions by 6-18 months.

Other recession indicators are piling up as well. The Conference Board's Leading Economic Index has declined for 11 straight months, with its 6-month rate of change falling to a level that has presaged every recession since 1960. Purchasing Managers' Indexes for both manufacturing and services have slipped into contraction territory, indicating that business activity is slowing. Consumer confidence has rolled over and real disposable incomes are falling as inflation continues to outpace wage growth.

Despite these mounting economic headwinds, the stock market has remained stubbornly buoyant. This resilience can be attributed to a combination of factors, including massive fiscal and monetary stimulus, a lack of attractive alternatives to equities, and "TINA" (there is no alternative) sentiment among investors. However, as the Fed continues to tighten policy and earnings come under increasing pressure, the risk is growing that reality will finally catch up to the market's lofty expectations.

Key Elections in India and Pakistan

Against the backdrop of volatile markets and a fragile global economy, two of the world's most populous nations are heading to the polls in pivotal elections. 

In India, voting has commenced for the 542 seats in the Lok Sabha, the lower house of parliament. Prime Minister Narendra Modi is seeking a third straight term, but faces a stiff challenge from the opposition Congress Party led by Rahul Gandhi. Modi's Hindu-nationalist Bharatiya Janata Party (BJP) is campaigning on a platform of economic development and national security, while the Congress has focused on issues like unemployment, inflation, and alleged corruption in the Modi government.

Opinion polls suggest a tight race, with some showing the BJP losing its outright majority in parliament. This raises the prospect of a hung parliament and the need for complex coalition-building among India's many regional parties. The outcome will have major implications not only for India's domestic policies, but also its relationships with key partners like the US, Russia, and China. 

In neighboring Pakistan, political tensions are running high in the lead-up to national elections later this year. Former Prime Minister Imran Khan, who was ousted in a no-confidence vote in 2022, has been holding large rallies across the country alleging that his removal was orchestrated by the US and current Prime Minister Shehbaz Sharif. Khan is seeking to make a comeback and pressuring the government to call early elections.

The government has so far resisted these calls, insisting that the elections will be held on schedule. However, Khan's growing popularity and ability to mobilize large crowds has raised concerns about potential unrest if the polls are delayed. Pakistan is also grappling with a severe economic crisis, with dwindling foreign reserves, soaring inflation, and a depreciating currency. The incoming government will have to navigate these challenges while also managing Pakistan's complex relationships with the US, China, and India.

As the first quarter of 2024 nears its end, the global economy stands at an inflection point, with gold and copper prices surging amid extensive money printing, rising debt, and the global shift towards electrification. Despite nearing record highs, stock markets diverge from weakening economic fundamentals. Simultaneously, India and Pakistan's elections hold the potential to reshape their political and economic trajectories. Investors face a landscape of opportunities and risks, with bullish prospects for gold and copper offset by caution against chasing volatile markets. Stocks, priced optimistically, are highly susceptible to negative surprises. Navigating these crosscurrents demands disciplined diversification and a vigilant assessment of economic and political dynamics, underscoring the need for careful observation and strategic decision-making.

One thing is clear: we are living through historic times, and the consequences of the decisions made today will reverberate for years to come. As the old adage goes, "may you live in interesting times." For better or worse, that wish has been granted in spades.