24K99 News Laurent Maurel, a precious metals investment analyst at Recherche Bay, stated that as the price of gold hits a historic high, bankruptcies are on the rise in the USA. He mentioned that there are clear signs of an economic slowdown in the industries most sensitive to economic recessions.

Maurel pointed out that the US dollar has been soaring over the past two years, but as August approaches its end, it seems to be weakening. The upward trend of the dollar has evidently been broken, wiping out all gains for the year 2024 in just a few trading days.

Currently, the demand driving the historic high for gold mainly comes from central banks worldwide and the demand for physical metals in Asia (China and India). In July, gold demand surged close to the highest levels in 14 years.

(Source: WGC)

Over the past three years, total gold demand has fluctuated between 1200 and 1300 tons, mainly due to two types of buyers - physical gold investors in Asia and central banks, the latter of which has never bought as much gold in the past two years.

(Source: BofA)

The recent change in the past month is the return of demand from Western investors, evident in the recovery of ETF volumes and off-exchange investments. The growth in gold demand seems to be on the right track. However, the second condition for gold to become an attractive asset again is to see the value of this classic 60/40 investment portfolio decline.

Bank of America's bond portfolio currently faces unrealized losses exceeding $100 billion, accounting for half of the bank's pre-tax tangible assets. This means that the present value of its bonds has significantly decreased compared to their original purchase value. If these losses materialize, they could have a significant impact on the bank's financial condition.

Bank of America's bond portfolio is worth $466 billion, with most of it classified as Held-to-Maturity (HTM). This means that these securities are expected to recover their nominal value over time, unless a systemic event forces the bank to liquidate these assets. However, the bank has multiple resources to avoid forced liquidation of this portfolio.

Firstly, the $301 billion Available-for-Sale (AFS) securities can serve as an important hedge against rising interest rates during an economic downturn. Additionally, the bank has approximately $1 trillion in liquid assets and a very satisfactory loan-to-deposit ratio of 55%.

The 113% liquidity coverage ratio (LCR) of the holdings is sufficient to withstand systemic events without impacting the HTM investment portfolio. LCR is a financial indicator that banks use to assess their ability to withstand liquidity outflows within 30 days during a crisis. It measures the ratio of high-quality liquid assets (HQLA) held by the bank to expected net cash outflows.

An LCR of 100% or higher indicates that the bank has enough liquidity to meet its obligations in times of financial stress, which is the case for Bank of America.

The market does not consider unrealized losses as the major risk faced by the banking industry, which may be why investors have not fled the bond market. In fact, the high interest rates have attracted many new subscribers to debt-related products. Currently, 40% of the shares in these traditional portfolios are typically allocated to stocks, which remains unquestioned. Analysts tend to assume a soft landing for the economy and do not anticipate any major market corrections. The election year in the United States is expected to bring interest rate cuts, which will put significant pressure on the Federal Reserve and the Treasury to intervene in the event of a severe index adjustment, further exacerbating this outlook.

However, there have been clear signs of a slowdown in the US economy, particularly in industries most sensitive to economic recessions.

In the second quarter of 2024, the number of new bankruptcy cases in the United States reached a record high of 6,276, the highest level since 2017. The number of corporate bankruptcies has doubled in the past two years. Chapter 7 (liquidation) filings have risen to 3,151, the highest level since the COVID-19 pandemic in 2020. Chapter 11 bankruptcies allow companies to continue operating while formulating reorganization plans and repaying some or all debts during a specific period. There were 2,462 Chapter 11 bankruptcy cases, more than any other quarter in the past decade. There has also been an increase in Chapter 13 and other bankruptcy filings. Chapter 13 allows debtors to formulate repayment plans within three to five years and make periodic payments to creditors based on available income. The increase in bankruptcy cases, particularly due to loan defaults, indicates a worrisome trend reminiscent of the Great Recession.

(Source: ZeroHedge, Bloomberg)

Small businesses seem to be particularly vulnerable to recent price increases. Since June 2022, the overall Consumer Price Index (CPI) inflation rate in the United States has risen by about 6%, but the inflation rate for many essential items is much higher. Transportation services prices have risen by 18.5%, while housing and utility costs have risen by 13.5% and 11% respectively. Water, sanitation, garbage collection, and electricity prices have risen by about 10%, and food and beverage prices have risen by 8%. When these costs cannot be passed on to selling prices, profit margins are squeezed, making it difficult to repay debt and threatening the survival of businesses. Defaulting on debt repayment would immediately lead to default and further bankruptcies.

(Source: Fed)

As the summer of 2024 comes to an end, the United States is facing an increase in bankruptcies and a significant decrease in leisure activities. The end of summer is unfavorable for demand, as evidenced by search indicators on travel agency websites.

(Source: Similarweb)

The increasing number of defaults naturally drives up the price of gold.

Lastly, Murrell mentions that the confirmation of an economic downturn triggered by rising default rates in the United States suggests that gold will surpass the classic 60/40 investment portfolio in the future. This may be the time when gold begins to significantly attract Western investors. Many analysts have been reluctant to invest in gold over the past twenty years, but now they are paying attention to the rising default rates. According to their logic, the more default rates rise, the greater the likelihood of gold appreciation, even in the face of a correction from higher prices.

"For these observers, the increasing number of defaults in the US economy will drive the next rise in gold."