Declining Bank Lending, FOMC Meeting And Gold

The pace of loan growth has been declining recently. What does it mean for the gold market?

As the chart below shows, the annual rate of growth in commercial and industrial loans has been declining since 2015. In March, bank loans increased just 3 percent – the level not seen since the last recession.

Chart 1: The annual rate of growth in commercial and industrial loans from 1948 to March 2017.

(Click on image to enlarge)

And it’s much worse on a monthly basis. As one can see in the chart below, in March, commercial and industrial loans granted by all U.S. commercial banks declined 0.7 percent, the second drop in a row.

Chart 2: The monthly rate of growth in commercial and industrial loans from February 1947 to March 2017.

(Click on image to enlarge)

The slowdown in loan growth may be a sign that something bad is happening in the economy. Historically speaking, such dynamics was associated with recessions. Surely, it may be the case that companies are incurring debt not in banks, but in the open market. Indeed, the first quarter was solid for bond issuance, suggesting that companies are relying less on bank credit. However, the reasons to worry remain. Credit is the backbone of consumer spending and business investment. The slowdown may be caused by the weakness in auto sales.

What does it mean for the gold market? Well, the slowdown in credit should hamper economic growth and it signals an increased risk of recession. Hence, the safe-haven demand for gold could increase in the near future, if the slowdown in bank loans continues and feeds into other data. On the other hand, investors should not focus on a single indicator, but always try to analyze several different indices. Other indicators do not paint a similarly gloomy picture, but it does not mean that the slowdown in credit may be neglected.

Anyway, the price of gold should be affected in the coming days by today’s FOMC statement and Friday’s employment report. We expect that the Fed will not change its policy and introduce only limited changes to the statement. Given the current comeback of risk appetites, if the Fed downplays recent weak data and remains on track to hike interest rates and we see strong job gains on Friday, gold prices should decline. On the other hand, the lack of sufficiently hawkish signals in the statement may provide additional support for the price of gold.