econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 07 August 2016

Monetary Exhaustion Means Rising Gold Prices

by Dan Steinbock, Difference Group

As non-traditional monetary policies in advanced economies are likely to eclipse, investors will increasingly turn to gold to hedge their portfolios.

gold.on.money.380x182

Around mid-April, when the price of gold was still about $1,290, I made a contrarian projection that gold had a bright, though bumpy future. Since then, gold price has climbed to $1,365 - which translates to 6% in just one quarter.

In fact, gold has barely started its climb and is likely to exceed $1,400 by the year-end - and that's only the beginning.

Gold's reality check

Between fall 2011 and fall 2015, gold suffered the most challenging losses since 1999, plunging nearly $1,880 to $1,060. So a quarter ago, the conventional wisdom was that US rate hikes would ensure gold's further decline. However, if that's the case, why did gold prices soar during the first quarter of 2016?

At the turn of 2015, gold's plunge was still driven by the broad commodity sell-off, especially the drastic plunge of oil prices that was fueled by the stronger dollar, along with concerns over China's growth deceleration. Many observers thought that gold's decline would be sustained as the Fed's rate hikes were ahead, oil prices would linger, US dollar would strengthen, and China's growth deceleration would worsen.

In reality, the Fed's rate hikes - as I have argued since the early 2010s - will take far longer than expected, will prove significantly lower than anticipated, may be reversed and are not likely to conform to the pre-2008 patterns for years, possibly for decades. As a result, dollar will strengthen over time, but not so fast and not so much as anticipated. Moreover, as Chinese renminbi will officially join the IMF's international currency reserves on October 1, that, too, will weaken the world's dollar-dependency, though gradually and over time.

In turn, crude oil price amounted to $48 in mid-April, but it has not continued to climb. On the contrary, it has declined to $42. Moreover, China's growth deceleration does continue but, thanks to relatively strong credit expansion, not as fast and broadly as anticipated. In the first two quarters, real GDP growth was around 6.7-6.8 percent; the official figure for the third quarter is likely to be around 6.5 percent.

In the first quarter, gold enjoyed a historic rally, soaring 17 percent - the best in nearly three decades. In the process, it outperformed other major asset classes, including stocks, bonds and commodities. In the second quarter, gold continued to climb, by some 9 percent.

Why monetary injections support gold

As gold has low correlations with commodities and other asset classes, which are lingering, it has become increasingly attractive. Today, diminished global economic prospects boost risk aversion, which fuels gold prices.

Moreover, bleak forecasts have been accompanied by substantial central bank purchases, which support gold. In turn, ultra-low interest rates, coupled with large-scale quantitative easing in Europe and Japan, prevail in major advanced economies - which will support rising gold prices in the coming years.

In turn, the strengthening of the US dollar will prove flatter than predicted. Indeed, US economy is more fragile than forecasts presume, as indicated by relatively weak job-creation, and the uncontrolled expansion of the debt burden, which now exceeds $19.4 trillion (or 105% of the US GDP).

In the coming months, the central banks of advanced economies will begin to suffer from monetary exhaustion, possibly starting in Japan where the debt burden is now 250 percent of the GDP. As monetary injections will be seen as necessary but progressively ineffective, investors' confidence in fiat currencies is likely to decline as they will add their gold purchases - as evidenced by the aftermath of the Brexit referendum.

Since gold has so far been one of the best performing assets this year, analysts have rushed to increase their gold price forecasts. As investors' faith in government securities is falling, they are resorting to gold to balance portfolio risks. After the 'summer of shocks,' we are likely to see more of the same.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Metals Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Precious Metals


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Was Marx Right?
Angst in America, Part 5: The Crisis We Can’t Muddle Through
News Blog
Citizen Scientists Discover New Type Of Aurora
A Drop In The Bucket
What We Read Today 30 April 2017
Voice Recognition Elevator In Scotland
May 2017 Economic Forecast: Return to Normal Growth
Guanxi: How Business Is Done In China
Measuring Interest Rate Risk In The Very Long Term
2016 Small Business Credit Survey: A Significant Majority Relied On Personal Finances
How Economic Changes Affect Congressional Budget Office's Budget Projections
Three Public Relations Blunders And How Your Company Can Learn From Them
Infographic Of The Day: Cheat Sheet: NAFTA's Mixed Track Record Since 1994
Early Headlines: Trump Blames Dems And Constitution For Chaos, US Child Poverty, Winter Leaves North New England, Labour Gains In Polls, And More
Grading President Trump's First 100 Days: B!
Investing Blog
Market Update 29 April 2017
Technical Thoughts: Finding Contrarian Ideas
Opinion Blog
Investors: Super Size Me
How Our Addiction To Safety Could Lead To Another Financial Crisis
Precious Metals Blog
A New Age For Gold
Live Markets
28Apr2017 Market Close: Wall Street Closed Mostly Down On News The U.S. Economy Grew At Its Weakest Pace In Three Years, WTI Crude Settles In The Low 49 Handle
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government































 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved