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Below is the Views On Monthly Gold by Mr. Chirag Mehta, Sr. Fund Manager-Alternative Investments
Gold View by Mr. Chirag Mehta, Sr. Fund Manager-Alternative Investments
The price of gold consolidated on its gains from the earlier month. Economic data is increasingly showing signs of stress globally. The fiscal stimulus given a decade earlier and tighter financial conditions which have come up is bringing economic deceleration. This is not only impacting the goods sector but is also now affecting the services sector. However, central banks are terming this situation as cyclical trying to showcase themselves as in control. The trade war and initial signs of currency war have acted as a catalyst in the dramatic rally of gold. The month ended flattish with gains of 0.3% but recent developments in ensuring better gains are yet to come.
Economies globally are facing a slow industrial demand. The recent Global Manufacturing Purchasing Manager’s Index (PMI) was at 49.4 (above 50 represents expansion). Factories have contracted for the second straight month in June. The last time we witnessed back to back expansion was in the second half of 2012. Conditions in China did not seem favorable as pressure on exporters still persists. Europe also appeared gloomy as the factory output shrank in Germany and France. U.S. is also showing visible signs of contraction. According to the New York Fed’s recession probability index, there’s a one-in-three chance that we could see a full-blown recession sometime next year as it displays a 12-year high of 32.9 percent. Since 1960, every time when the index has surpassed 30 percent, the economy has tanked within the next 12 months.
In order to show that they are in control, Central Banks are acknowledging signs of a slowdown but terming them as cyclical in nature. Mario Draghi, the president of the European Central Bank, downplayed fears of a recession in the Euro area and that the central bank hadn’t considered interest-rate cuts. Jerome Powell the current chair of Federal Reserve, after delivering the expected 0.25% rate cut, said that the rate decision was “intended to insure against downside risks”. The central banks reluctance in providing any indication of rate cut kept the gold price subdued.
There is a higher probability of continuation of trade disputes among U.S. & China as turning hawkish gives Trump a political advantage. He seems intent to keep the dollar under check by pursuing trade war politics. China attempted to negate tariffs by engineering sharp currency depreciation. The Chinese central bank was forced to act on the pace of depreciation after being labeled as a currency manipulator by the U.S. As trade wars continue to take a toll on growth, countries will seek ingenious ways to negate it and this can result in a currency devaluation race. In this scenario, people are getting interested to invest in something that is truly independent and is not within the currency war circle where every government is trying to depreciate their currencies.
The central banks are not acknowledging the global slow down. The Fed’s recent cut in policy rates and their willingness to do more indicates that a threat is more than a cyclical behavior of the market. The Bank of International Settlements has recently issued an annual report suggesting that the global Central Banks have been negligent in properly managing debt levels, QE functions, and fundamental economic policies in an attempt to continually chase growth and inflation. However, central banks don’t care and will be biased towards supporting growth and therefore will cut rates which will mean that real interest rates will be on a decline. They will undertake further unconventional policies aka money printing to stay afloat. In the U.S., it is extremely doubtful that the Fed will be able to resist the influence of a president who wants to get re-elected and hence expect such policy measures sooner than expected, more likely before the elections next year. This scenario will be extremely bullish for gold.
President Trump and congressional leaders struck a critical debt and budget agreement. This agreement suggests that the budget deficit is approaching the $1 trillion level which carries tremendous costs. It requires the government to borrow a quarter of every dollar spent. At some point these expenditures and increased debt will have the opposite effect on the U.S. dollar and could take it dramatically lower. The dollar, which is usually a headwind for gold, may depreciate or remain range bound as trade tensions, lower rates and slowing growth offset any relative economic benefits.
Indifference toward gold is starting to fade and metal has been reasserting itself as an asset of choice amidst escalating trade and geopolitical tensions. In a world where many competing assets such as government bonds are offering negative rates and the yield curve is pointing to a recession, gold is looking like a good bet. Gold will remain a good portfolio diversifier amid increasing uncertainties around global growth.
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