Weekly Newsletter – March 4, 2024 - Time for Gold to Shine

This past week, Canadian bank earnings were in the spotlight with a mixed bag of results. The one theme that all of the banks noted was greater provisions for loan loss reserves – essentially putting money aside to offset the growing risk that either consumers or businesses default on debt. Simultaneously, Canadian GDP numbers were published – better than expected at 1% for the quarter – woohoo! But the underlying data is not nearly as positive. The underlying data revealed final domestic demand for goods and services fell 0.7% quarter over quarter and per-capita GDP contracted again for the 6th straight quarter. Business investment was also down for the 6th time in the past 7 quarters. Also just today, The Body Shop announced that they are closing 1/3 of all stores in Canada and seeking creditor protection, even more evidence that consumer purchasing behavior has turned negative.

While Canada is slowing down fast, the US economy seems to be chugging along rather nicely - maybe not. I think the government would like people to believe that it is though. This week durable goods orders (January) came in much lighter than expected. Just this morning ISM Manufacturing came in at 47.8 versus an expectation of 49.5, and February new orders were 49.2 versus January at 52.5, clearly guiding towards lower growth. ISM is one of the best indicators of an economy’s health because it represents the level of demand for products by measuring the amount of orders in a country’s factories. With the ISM under 50, this represents contraction. This is the 16th straight month in the US where ISM has been under 50. Construction spending was negative 0.2% in January versus expectations of positive 0.2%, and Michigan Consumer Sentiment was 76.9 versus 79.6 consensus expectations. Michigan Consumer Sentiment is a measure by the University of Michigan that is completed monthly on the confidence levels of consumers throughout the US. With the number shrinking, it certainly appears as if US consumers are being squeezed just like Canadians.

We know that most of Asia is slowing rapidly too, along with Europe and the UK. But when do interest rates begin to move down and what implications will lower rates have on our dollar and the markets in general and which commodities, if any, will benefit from lower rates? It does appear as if gold prices have been consolidating for the past 2 years and if interest rates back off, then gold should finally start to shine. With this gold appreciation, Canada’s mining sector will benefit, leading to strong TSX performance and perhaps greater performance than the S&P 500 finally.