Tags: QE | gold | IMF | GDP

Gold Could Go Much Further Than Many Think It Can Today

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Tuesday, 20 Jan 2015 09:48 AM Current | Bio | Archive

After the sobering report from the McKinsey Global Institute last week titled "Global Growth: Can Productivity Save the Day in an Aging World?" wherein the Institute reported it expects global employment only to grow 0.3 percent annually during the next 50 years and global GDP growth to contract 40 percent to about 2.1 percent a year, today we got confirmation of the report. The "World Employment and Social Outlook" report of the United Nations' International Labor Organization (ILO) reported that the world is still facing a 61 million job shortfall, as compared with where world employment stood at the start of the financial crisis in 2008, and globally we would have to create an extra 280 million jobs by 2019 to close that gap. If that wasn't bad enough, ILO expects unemployment to rise further by about 11 million workers during the next five years due to slower growth and turbulence (social and geopolitical). If you ask me, the job crisis isn't over yet and complacency is certainly the most effective self-destructive attitude.

Also today, the International Monetary Fund (IMF) lowered in its quarterly global GDP growth projection to 3.5 percent, down from 3.8 percent, and to 3.7 percent, down from 4.0 percent, for 2015 and 2016, respectively. This was the IMF's steepest downside revision since January 2012.

In 2010, world GDP growth stood at 5.2 percent, with emerging and developing economies as a whole delivering 7.3 percent GDP growth and of which China ranked first with a GDP growth rate of 10.4 percent. I think long-term investors would do well taking notice the IMF expects slowing growth to continue in China, where it projects its growth rates at 6.8 percent and 6.3 percent.

Of all the so-called important economies, only the U.S. gets upward revisions, as the IMF expects the U.S. to grow at 3.6 percent in 2015 and 3.4 percent in 2016, up 0.5 percent and 0.3 percent, respectively.

The eurozone is expected to grow by 1.2 percent and 1.4 percent, down 0.2 percent and 0.3 percent in 2015 and 2016, respectively. Japan is expected to grow 0.6 percent and 0.8 percent, down 0.2 percent and 0.1 percent, respectively. Latin America and the Caribbean are expected to grow 1.3 percent and 2.3 percent, down 0.9 percent and 0.5 percent, respectively.

IMF Chief Economist Olivier Blanchard gave some interesting comments: "The most obvious downside risks involve stagnation in the euro area and in Japan. In both, using the three arrows (borrowing the expression from Abenomics), monetary policy, fiscal policy and structural policies, continues to be of the essence. Risks of another episode of turmoil associated with the increase in short rates in the United States are present, but limited. Some corporates in emerging market indebted in dollars could also prove vulnerable to the additional pressures from a strong dollar and weak earnings from low commodity prices."

So, what should a long-term investor think of all this?

In my opinion, the world needs a miracle. The "goldilocks" era we have enjoyed for the past 50 years seems to be coming to its end. Unfortunately, if future growth slows dramatically, we are at great risk of rising broad-based divergences, with all the negative consequences that implies.

The European Central Bank (ECB) is expected to announce Thursday whether or not it will implement a quantitative easing (QE) program. It was on Nov. 6 when the ECB stated: "Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate. The Governing Council has tasked ECB staff and the relevant Eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed."

Since that day gold has risen 11.9 percent against the dollar, 20.7 percent against the euro, 15.5 percent against the Japanese yen and 18.5 percent against the British pound. I should add that Tuesday morning gold is up by more than 1 percent against the dollar, while the dollar itself is showing strength against the euro, the yen and the pound.

To me it's clear that the ECB's statement has been the catalyst for gold starting its apparently sustained recovery, as investors seemingly have started thinking once again about gold as one of the very few storages of real value left.

As a long-term investor, I wouldn't underestimate where gold could go from here. If history can teach us something, the general uptrend in gold that started in 2001, it was precisely in March of that year when the Bank of Japan started its QE program. We also shouldn't overlook the fact that gold started its recovery in 2008 only a week after the Federal Reserve started its QE program.

So, if you ask me if gold will continue its upward trend now that the ECB is closing in on the start of its own QE program, my answer is that gold could go much further than many think it can today. Of course, I don't have a crystal ball.

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HansParisis
As a long-term investor, I wouldn't underestimate where gold could go from here. If history can teach us something, the general uptrend in gold that started in 2001, it was precisely in March of that year when the Bank of Japan started its QE program.
QE, gold, IMF, GDP
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2015-48-20
Tuesday, 20 Jan 2015 09:48 AM
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