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Leading strategist highlights risk of double dip recession, predicts gold to hit $2000.

On Wednesday, the Motley Fool received commentary from Saxo Capital Markets by Australian Market Strategist, Eleanor Creagh. The commentary included some grim predictions which could be particularly relevant to the share prices of ASX banks such as National Australia Bank Ltd. (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) as well as gold miners such as Newcrest Mining Limited (ASX: NCM).

The risk of a double dip recession

According to Eleanor Creagh, there are risk factors that could see Australia enter a double dip recession.

She suggested that Australian Bureau of Statistics data showed that the jobs rebound seen in June is stalling. This is consistent with a flattening of the recovery curve which means that the economy’s rebound after lock downs earlier this year may be starting to wane and that economic growth could be going sideways rather than upwards. Ms Creagh also suggested that there is a considerable degree of uncertainty surrounding the economic recovery, especially as the economic boost resulting from early superannuation withdrawals fades.

According to the commentator, consumer confidence is also stalling as Melbourne has moved back into lock downs and New South Wales is suppressing smaller coronavirus outbreaks.

The market strategist stated;

“To maintain the trajectory of the recovery and avoid the ‘double dip recession’, confidence amongst businesses and consumers is critical in upholding investment, spending, and jobs and re-asserting a self-sustaining trajectory for economic growth and the labour market.”

She also called for ongoing government stimulus, stating;

“The economy did not enter this crisis from a position of strength and amidst signs the recovery is already beginning to plateau the priority of ongoing fiscal support remains.”

A double-dip recession would mean that the current economic recovery would turn around and the economy would once again begin shrinking. This could be bad news for the big banks including NAB and the Commonwealth Bank of Australia.

NAB raised $3.5 billion from shareholders in May in order to strengthen its capital buffer, along with maintaining a modest dividend. This bank has a significant commercial loan book and could face headwinds if consumer confidence dries up and businesses see lower revenue, which could lead to loan defaults. The NAB share price rose 1.56% on Wednesday to $18.18 as APRA changed its recommendation regarding payment of dividends. APRA had previously warned banks against paying dividends but has now downgraded its advice to recommend payment of reduced dividends. The NAB share price is up 37.8% since its 52 week low of $13.20, however, it is down 36.52% since this time last year.

Commonwealth Bank of Australia also faces risks if there is a double dip recession. This bank is Australia’s biggest lender and had almost $760 billion in loans on its balance sheet at the end of the 2019 financial year. A double dip recession could hit CommBank significantly as it sees more borrowers unable to repay their business loans, consumer loans and mortgages. The CommBank share price was up 1.11% on Wednesday to $73.01. Its share price is up 36.62% from its 52 week low of $53.44, however, it has dropped 12.46% since this time last year.

The outlook for gold mining shares

Eleanor Creagh pointed out that yields on government bonds, after inflation, have collapsed. In addition, the United States dollar index has fallen, showing a weaker US dollar. She pointed out that as geopolitical uncertainties and fear around the pandemic remain elevated, gold has rallied – breaking through its 2011 high and reaching a new record high. The writer suggests that part of the reason for this is that yields after inflation on government bonds are now below zero.

According to the commentator, moves by the US federal reserve to support the US economy are putting upward pressure on the gold price, which she predicts may reach as high as $2000 in spot trading. However, she suggests it is likely that gold has reached a temporary top in the short term. She believes it is likely that long-term prices will increase after a short-term decline as central banks become more and more influential.

The commentator stated;

“Gold has a growing importance within cross-asset portfolios and although tactically, the run higher may be stretched and due for a period of consolidation, long term demand for gold remains.”

This could be good news for miners with low costs that could easily work through a short-term pullback in gold prices. It could also have long-term implications for the share prices of gold miners such as Newcrest Mining. 

Newcrest had an all inclusive statutory cost of $878 per ounce in the June quarter of 2020. This means that it can likely still make a significant profit per ounce even if gold prices temporarily fall. Additionally, if the strategist’s prediction for long-term gold prices is accurate, Newcrest could see significant benefit from a higher gold price in the future. The Newcrest share price was down 0.8% on Wednesday to $36.06. It has also fallen a further 1% so far today and is currently trading at $35.70. The Newcrest share price is up 74.5% from its 52 week low of $20.70 and is up 1.62% since this time last year. 

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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