On Monday, markets got spooked by the slightly weaker-than-expected first-quarter growth in China, which came in at 7.7 percent, down from 7.9 percent growth in fourth quarter of 2012, and a sudden fall of more than 8 percent in the price of gold, which closed at $1,351 per ounce in the United States, a move of more than 6 standard deviations — an extremely rare event that we haven’t seen since 1982.
In all honesty, no, I didn’t expect such an important downward move so quickly when I wrote a week ago
that I would only start considering buying gold at prices a couple $100 lower, when on that day (April 9) spot gold closed at $1,584.
The bombing at the Boston marathon, which has been formally qualified as an “act of terror,” didn’t help either, but certainly didn’t cause the correction. Once it had happened, it caused market volumes to go up.
Now, coming back to gold for a moment. I personally have my first, but certainly not my final, “accumulation of physical gold” target at around the $1,280 to $1,300 zone. This is not an advice; this is strictly my personal opinion. Also, I don’t expect we’ll reach that range in a straight downward move from here on because the sudden “compressed” decline in the gold price was mainly caused by over-leveraged longs that were forced to liquidate their long positions.
In the near future, I wouldn’t exclude a return of volatility and some kind of a bounce. Since Monday, the Chicago Mercantile Exchange has raised margins on gold (+18.5 percent), silver (+18.4 percent), platinum (+19.1 percent) and palladium (+14.3 percent.) Of course, raising margins don’t stimulate higher prices.
On China, I think long-term investors would do well to take notice of what Chinese President Xi Jinping said on April 8 at the Boao Forum for Asia. Xi stated that the days of breakneck growth in China are over and “we don't want to grow too fast … if interim measures have to be carried out, they should not set up barriers for promoting market-oriented reform and development in the future.”
In clear English, this means sustained sizeable fiscal stimulus is, at least for some time to come, no longer in the Chinese cards. By the way, Chinese authorities aim an average growth of 7.5 percent for this year. The World Bank has just lowered its forecast for China to grow at 8.3 percent, down from 8.4 percent previously. Keep in mind that growth in China at 7 percent or below means recession-like conditions.
In Germany, over the weekend we saw the birth of the new German “anti-euro” party called the “Alternative fur Deutschland.” It’s way too early for having an idea what role this party will play in the coming elections, but it must be said that the most recent poll on the subject shows that a quarter of the Germans want to return to the German mark.
Besides, the monthly ZEW Indicator of Economic Sentiment and business expectations in Germany, as well as in the eurozone, Japan, United Kingdom and the United States, came in lower than expected. The current conditions indicator for Germany was 9.2 in April, compared with 13.6 in March, while the economic expectations indicator was 36.3, from 48.5 in March. Both reflect rising doubts about recovery in the European Union and the eurozone’s debt crisis in particular.
Notwithstanding all good intentions and a lot of wishful thinking, the European Union and the eurozone still don’t seem to know where sufficient growth for escaping the recession zone will finally have to come from.
This week, we’ll have the World Bank Group/International Monetary Fund spring meetings in Washington, D.C., where participants will try to convince the world that global currency wars are not in the making and that the ongoing Japanese currency manipulation is not a violation of the rules. The only thing I can say is that I hope they are right.
Speaking about global growth/recovery, which will also be on their agendas, the Tracking Indexes for the Global Economic Recovery (TIGER) indexes, which were developed by the Financial Times and the Brookings Institution, indicate global recovery/growth is overwhelmingly stuck in the doldrums, with the United States as one the most important exceptions — albeit weak on the positive side.
All this means that risks to global recovery/growth remain well-anchored around the stagnation zone and it’s certainly not China that will come to the rescue and cause faster global growth.
In this context, Turkey’s central bank cut its benchmark repo rate to 5 percent from 5.5 percent, another confirmation sign that emerging economies also have to fight slower growth.
Finally, the Organization for Economic Co-operation and Development (OECD) employment rate among its 34 member states stood at 65.1 percent in the fourth quarter of 2012, which was 0.1 percent higher than in the third quarter, but still 1.4 percentage points below the pre-crisis era level.
The OECD employment rate in the United States in 2012 rose 0.5 percentage point to 67.3 percent, in Canada it rose 0.6 percentage point to 72.5 percent and in Japan by 0.3 percentage point to 70.9 percent. In the eurozone, the employment rate came in at 63.6 percent, which was 0.5 percentage point lower than in 2011.
Taking all this into account and with the bulk of the economic news flows from developed economies remaining negative, I still see no reason whatsoever for looking beyond the United States and its currency for investing, even though I still expect a correction. Yes, that will change one day, but we aren’t there yet.
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