Gold Likes the IMF Predicting a Deeper Recession / Commodities / Gold & Silver 2020

IMF predicts deeper global recession and slower recovery, just as Iexpected. Good news for gold.

The June edition of the IMF’s WorldEconomic Outlook Report Update is out! The main message is that theIMF predicts now even a deeper recession than two months ago.

As a reminder, in April edition of the WorldEconomic Outlook Report, theIMF projected that the global economy would contract sharply by 3 percent thisyear, while the U.S. economy would plunge 5.9 percent. When it comes to2021, the IMF projected 5.8 percent growth for the global economy and 4.7percent for the U.S.

Many analysts cheered the vigorous pace of recovery expected by theIMF. I did not. I remembered that the IMF’s projections are always toooptimistic, so I remained skeptical. That's I wrote: 

If something seems too good to be true, it probably is. Tobe sure, there are many reasons for optimism. In some countries, the number ofnew cases has come down. And the unprecedented pace of work on treatments andvaccines also promises hope. However, the IMF’s base scenario assumes basicallythe V-shaped recovery, which is notlikely to happen.

As long the society does not have herd immunity, theeconomy will not simply return to normal, pre-pandemic life. And if historyof previous deep downturns is any guide, the reduced investment, employment andcommercial bankruptcies will leavelong-term scars on the economy.

It turned out that the IMF was wrong and I was right. In the newestreport, the Fund expects that the global economy will drop 4.9 percent thisyear (almost two percent below the April’s forecast!) and that it will expandonly 5.4 percent in 2021. When it comes to the U.S. economy, the IMF projectsthat it will plunge 8 percent (more than two percent below the April’sforecast!) and that it will recover just 4.5 percent in 2021.

It means that the global and the U.S. economies are likely toexperience their worst recessions since the Great Depression, far worse thanthe financial crisis of 2007-2009, andthat they will turn out to be deeper than previously expected, while the paceof recovery will be more gradual than previously forecasted.  

Indeed, as the chart below shows, the U.S. GDP will not return nextyear to the pre-pandemic level. It will happen in 2022 or maybe even in 2023.So, please forget about the V-shaped recovery, especially since that even theseprojections may be too optimistic.

Implicationsfor Gold

What does it all mean for the gold market? Well, deeper recession andslower recovery are good news for gold, which shines the most during the periodof economic crises and subduedeconomic growth, especially in the early stages of expansions.

Moreover, the grimmer IMF’s report, combined with the rising number ofdaily new cases of Covid-19 in the U.S. (see the chart below), could decreasethe risk appetite and increase the demand for safe-havens such as gold.

Indeed, the S&P 500 Index declined yesterday,while the price of gold surged to its highest in nearly eight years (as thechart below shows). The downward revision of economic projections and theresurgence of coronavirus in America clearly showthat “we are definitely not out of the woods”, as Gita Gopinath, the IMF’schief economist, put it.  

And the coronavirus crisis will also generatemedium-term challenges, as we repeated many times. In particular, the alreadyhigh indebtedness will become even higher. According to the IMF, the publicdebt will reach this year the record high level, in both developed anddeveloping countries. The global public debt is forecasted to jumpabove 101 percent, almost 20 percentage points above 2019 level. Such an abruptrise increases the odds of a sovereign debt crisis andpressure for interest rates to remain at ultra-lowlevels. Such environment looks fundamentally positive for the gold prices.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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