In the Gold News Monitor, we often focus on the U.S. market as it is the most important economy in the world and there is a significant relationship between gold prices and the greenback. However, it is also worth analyzing the economic conditions of other countries, in order to gauge appropriately the outlook for the global economy. Today we are looking at Canada, which is falling into recession. How can this fact affect the U.S. economy and the gold market?

Now, the hot news is the U.S. Personal Income and Outlays data for February. We will analyze it later, however the Canadian GDP for the month of January is scheduled to be published today, so it is worth looking at the most important trading partner of the U.S. Economists expect that the Canada’s economy shrank by 0.1 to 0.3 percent monthly. Economic projections were downgraded after a line of weak economic data. In January, wholesale trade plummeted by 3.1 percent, the most since the height of the 2008-2009 financial crisis, and retail sales fell 1.7 percent, almost one percentage point below expectations. Stephen Poloz, the Governor of the Bank of Canada, added fuel to the fire by unexpectedly cutting interest rates in January and later admitting that we could see “quite a lot” of economic weakness in the first quarter stemming from the oil-price slide.

What are the other signals that Canada may be heading for a recession? The Huffington Post listed eight such signs, such as the shrinking of the manufacturing sector and the GDP in November, layoffs in the oil industry, the burst of the housing bubble and heavy consumer debt (the share of subprime mortgages in the Canadian market has hit a record high and Canada’s debt-to-income ratio is among highest in the world). Indeed, the New Housing Price Index fell 0.1 percent in January, which was a first decrease in a few years. This may lead to a balance sheet recession. According to Richard Koo, chief economist at Japan’s Nomura Research Institute, “as long as house prices are rising faster than your debt levels, balance sheets will still look fine for individual households. But if something should happen to house prices, if they should start falling, then suddenly some of the people who bought these houses realize their balance sheets are underwater. And if they all start paying down debt or increasing savings, Canada could fall into a balance sheet recession”.

Another indicator of the coming recession could be the inversion of the yield curve in January. Inversions unusually mean a situation when short-term interest rates are higher than long-term rates. It is extremely important, because an inverted yield curve indicates a liquidity shortage (money is desperately needed to sustain capital investments) and signals a recession. The U.S. economic history confirms this point: by March 2007 the yield curve had almost become downward sloping.

Why is this so important? Canada is one of the biggest economies in the world and the most important trade partner of the U.S. It is the U.S.’s largest customer and a few million U.S. jobs depend on trade with and investment in Canada. Therefore, the Canadian recession will weaken U.S. economic growth in the best-case scenario, or will become the black swan for the global economy. It should be positive for the gold market, since economic slowdown will defer the Fed’s hike, however if Canada’s problems trigger some capital inflows into U.S. Treasuries, the rising greenback may be a headwind for the yellow metal.

To sum up, in the contemporary interconnected worldwide economy, investors should adopt a global perspective and also analyze foreign economic news. Especially if data signals a recession in the most important trade partner with the U.S. (the U.S. and Canada have the two most intertwined economies on the globe). The impact on gold is not certain (due to the uncertain impact on the greenback), however if the Canadian economic situation deteriorates further, the Fed may postpone or soften the interest rate hike, which (together with safe-haven demand for the yellow metal) will be positive for gold prices.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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