Institutions: Private lending could trigger a prolonged economic recession, supporting gold prices to rise

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Source: Huitong Finance

Against the backdrop of ongoing global economic uncertainties, the potential risks in the private credit market are becoming a new hidden concern for the financial system.

Laks Ganapathi, CEO of Unicus Research, clearly stated that investors should not expect a significant short-term decline in gold prices. She believes that as vulnerabilities in the private credit market continue to rise, this risk could spill over into the broader global economy, further boosting demand for gold.

She recommends that investors shift toward gold, commodities, and other hard assets to protect themselves from a slow but prolonged economic recession. She added that amid persistent inflation and rising global debt, confidence in the credit markets is waning, and gold is providing a new source of stability.

Large-scale central bank gold purchases highlight a shift in the global monetary system

Laks Ganapathi pointed out that since 2022, central banks have been buying nearly 1,000 tons of gold annually. She said, “When institutions controlling the global monetary system start accumulating large amounts of gold, it indicates the direction the world is heading.”

She warned that one of the biggest risks facing the financial system is the rapid expansion of the private credit market over the past two decades. This sector has grown from about $40 billion in 2000 to nearly $2 trillion today, largely outside traditional banking regulation and stress testing frameworks.

After the 2008 financial crisis, banks were forced to strengthen their balance sheets, but the rise of private credit (sometimes called shadow banking) has created a new risk layer that has not yet been tested by a major recession.

Lack of transparency and stress testing in private credit, potential crisis triggered by confidence collapse

Laks Ganapathi stated, “Private credit has not undergone stress testing mechanisms.”

The shadow banking system that developed after 2008 has significantly expanded, with many operations lacking the transparency common in public markets. She added that this market structure makes it difficult for investors to accurately assess risks, as many private credit portfolios contain unrated loans, and asset valuations rely on internal models rather than market prices.

She further pointed out that many private credit funds are deeply interconnected with the traditional financial system, including banks that provide credit lines to commercial development companies. She said, “These loans are priced by internal models rather than market forces, and the trigger for a crisis may not be realized losses but simply a loss of confidence.”

Risks have expanded from corporate loans to consumer finance, increasing retail investor exposure

She emphasized that risks are no longer limited to corporate loans. Private credit is rapidly entering consumer finance, including commercial real estate, auto loans, payday loans, and “buy now, pay later” plans. She stated, “Systemic vulnerabilities stem from this, as pressure on one part of the system can quickly spread through overlapping loan portfolios and borrowers.”

She also specifically mentioned the increasing participation of retail investors in this market. Products like non-traded business development companies and target-date retirement funds allow individual investors to access private credit, which often involves illiquid assets and difficult valuations.

She believes that this combination of opacity, high leverage, and retail exposure will significantly amplify instability once economic conditions deteriorate.

Recession will spread slowly, not a sudden 2008-style crash, stagflation risks re-emerge

Laks Ganapathi believes that the next recession will not collapse suddenly like in 2008.

She said, “It won’t be a simultaneous collapse like 2008. It will be slower, possibly extending from 2025 to 2027, and may be more painful in the long run.”

She added that her firm expects the global economy to face a scenario of weak growth combined with persistent inflation, similar to stagflation. She said, “We expect stagnation and inflation to reignite around 2026.”

Gold as a capital preservation tool, investors should prioritize defense over chasing high yields

Laks Ganapathi advised investors to focus on capital preservation rather than pursuing high yields from complex credit products. She stated, “Gold doesn’t generate income, but in a world of ongoing government deficits and debt monetization, it becomes a store of value.”

She revealed that Unicus Research is exploring launching hedge fund strategies focused on shorting vulnerable credit assets to hedge against rising market risks. She also warned that many investors may not fully understand their exposure in retirement products and other pooled investment vehicles. She added, “People should understand what’s in their retirement funds, ask their financial advisors, and know what assets are in their portfolios.”

Overall, Laks Ganapathi’s analysis highlights the structural risks in the private credit market, which have become a potential trigger for a global recession.

Central bank gold purchases, debt expansion, and shadow banking opacity are collectively reinforcing gold’s role as a safe haven and store of value. In the expected slow stagflation environment, short-term downside for gold is limited, and demand could even be reignited.

Investors should be cautious of spillover effects from private credit, carefully review their asset allocations, especially hidden exposures in retirement funds. Shifting toward hard assets like gold may better prepare them for upcoming economic uncertainties and systemic pressures. In the coming years, as a private credit crisis gradually emerges, gold’s strategic value as the ultimate counterparty risk-free store of value will become even more apparent.

Spot Gold Daily Chart Source: Yihui Huitong, March 12, 14:33 Beijing Time, Spot Gold at 5160.55 USD/oz