• 4 hours Market Euphoria Weighs On Gold
  • 22 hours Did Facebook Just Become ‘Uninvestable’?
  • 1 day Electric Vehicles Are Reshaping The Mining Industry
  • 2 days Buffett, Dimon Voice Support For Stock Buybacks
  • 2 days Newmont Goldcorp Now World's Top Miner After Sealing The Deal
  • 3 days Canopy Growth Eyes U.S. Pot Producer In $3.4B Takeover Deal
  • 3 days U.S. Slaps New Sanctions On Cuba To End ‘Glamorization Of Communism’
  • 3 days The Unstoppable Electric Bus Revolution
  • 3 days Pinterest, Zoom Launch Much Anticipated IPOs
  • 4 days Marijuana’s Bizarre Bottleneck Isn’t What You’d Expect
  • 4 days Climbing Stocks Weigh On Gold, But A Turnaround May Be Near
  • 4 days China's Economic Growth Exceeds Analyst Expectations
  • 4 days Gold Prices Fall On Record Global Production Estimates
  • 5 days Can Meditation Make A Business More Profitable?
  • 5 days America’s Biggest And Most Profitable Actually Got Tax Rebates
  • 5 days Central Bank Gold-Buying Is Chipping Away At The Dollar
  • 5 days The Three Assets That Outperformed The S&P Over 20 Years
  • 6 days Inside China’s Renewed War To Purge the Internet
  • 6 days Trump Blames Fed For 10,000-Point Stock Market Loss
  • 6 days Musk Draws SEC Attention With Another Controversial Tweet
Does Capitalism Need An Upgrade?

Does Capitalism Need An Upgrade?

If the American middle class…

China's Economic Growth Exceeds Analyst Expectations

China's Economic Growth Exceeds Analyst Expectations

China, the world’s second-largest economy…

Arkadiusz Sieron

Arkadiusz Sieron

Writer, Sunshine Profits

Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of…

Contact Author

  1. Home
  2. Markets
  3. Economy

Growing Economic Threats Could Boost Gold Prices

Cash

Thousands of political, business and cultural leaders are heading now towards Davos, Switzerland, to attend the World Economic Forum. On the eve of the world’s biggest annual gathering of the rich and powerful, the International Monetary Fund released its newest world economic outlook. What are the forecasts – and their implications for the gold market?

Global Expansion Weakens

Well, the title of the IMF’s update is telling: “A Weakening Global Expansion”. The global economy is projected to grow at 3.5 percent this year, 0.2 percentage point below last October’s projections and estimated performance in 2018. The revisions carry over from softer economic momentum in the second half of 2018, in particular in Germany, due to the problems of the automotive industry, and in Italy, due to the worries about sovereign and financial risks. Moreover, the experts acknowledge now the weakened financial sentiment and project deeper contraction in Turkey than previously anticipated.

What is the most important for the gold market, the U.S. economic growth is expected to decline to 2.5 percent in 2019 (unchanged forecast from October) because of the unwinding of fiscal stimulus and further monetary tightening. The slowdown in America may push some investors into gold’s arms, although, given the sluggish growth in Europe, US dollar-denominated assets still look attractive.

While Risks Grow

The downward revisions may seem to be modest. However, the report does not end here. The problem is that risks to more significant downward corrections are rising. What are these risks? First, a further escalation of trade tensions. Higher trade uncertainty could further dampen investment and disrupt global supply chains. Second, a further deterioration of financial conditions: stock valuations went south, while credit spreads widened. Given a high level of debt, a more serious tightening of financial conditions may be particularly dangerous. Related: Tesla Cuts Full-Time Employees To Keep A Lid On Spending

Last but not least, an important risk for the global economy is the possibility that China’s growth slowdown could be faster than expected especially if trade tensions continue. And, of course, Brexit is a big question mark (the U.S. federal government shutdown, if protracted, also poses a downside risk). Gold is a safe haven, so it welcomes rising risks.

Implication for Gold

The recent IMF’s world economic outlook projects slower economic growth amid rising risks. The report is in line with the World Bank’s report released earlier in January, which also said that “the outlook for the global economy in 2019 has darkened.” (see the chart below).

(Click to enlarge)

Chart 1: Actual and forecasted global growth for the world (bars), advanced economies (red line) and emerging markets and developing countries (orange line) from 2010 to 2021 (source: World Bank).

What do all those gloomy forecasts imply for gold? Well, a lot. You see, we had a solid expansion in the last two years. Now, the world economy is growing more slowly than expected while downside risks are accumulating. It seems to be an excellent combination for gold, which should shine in a sentiment unfriendly toward risky assets.

To be clear, the slowdown is not the end of the world. There is no global recession around the corner. But, as we argued in the January edition of the Market Overview, 2019 may still be better for gold than 2018. The risk of a sharper decline in global growth has increased, after all. In particular, China’s economy may negatively surprise us, as it transforms itself structurally amid trade tensions and high debt burden. According to the official data, the economic growth was 6.6 percent in 2018 – the slowest pace since 1990. And many economists do not trust the official figures, claiming that China’s economy is actually more anemic (we will write more about China in the February edition of the Market Overview). As it was the case in 2015-2016, concerns about the Red Dragon’s health can trigger abrupt sell-offs in financial markets. Gold should shine, then

By Arkadiusz Sieron via Sunshine Profits

More Top Reads From Safehaven.com

Back to homepage

Leave a comment

Leave a comment