Gold Market Key Message from IMF / Commodities / Gold & Silver 2019

The Spring Meeting of the World Bank and the IMF,during which the latter organization released its fresh World Economic Outlook, has justended. What are the takeaways for the gold market?

Stagnationor Acceleration after the Slowdown?

In Thursday’s Gold News Monitor, we pointedout that the IMF significantly cut outlook for the Eurozone’s economic growththis year from 1.6 to 1.3 percent. But what about other economies? The IMFforecasts now 2.3 percent rise in the American GDP, 0.2 percentage point slowerthan it was projected in January. Global growth is now projected to be 3.3percent, a downward revision from the 3.5 percent forecasted three monthsearlier. After such cuts in worldeconomic outlook, gold should shine, shouldn’t it?

Well, not necessarily. You see, investors have alreadyacknowledged the current economic slowdown. The key question for the markets iswhether global growth will accelerate or stagnate from this point onward. As wewrote in the latest edition of the Market Overview, we believe that the slowdown will proveshort-lived. And this is exactly what is forecasted also by the IMF: “withimprovements expected in the second half of 2019, global economic growth in2020 is projected to return to 3.6 percent.”

The reason behind our view is the recent stimulus inChina. The monetary and fiscal stimuli started in December and we see theeffects now. Credit growth exceeded all estimates in March, and themanufacturing sector unexpectedly return to growth, while service sectoractivity accelerated. Importantly, last month, Beijing announced billions ofdollars in additional tax cuts and infrastructure spending on top of measures lastyear. So, even if we do not see a return of a boom, the current global slowdownis not likely to morph into a recession. Whether gold bulls like it or not.

Another important factor here is the shift away fromtighter monetarypolicy by central banks. In particular,the Fed has changedits view that low unemploymentrate will have to spur inflation – rather,due to global competition and technological progress, low inflation rate maystay with us for longer, so there is no need for aggressive tightening. A more dovish Fed – and the resultingdownward pressure on the real interest rates and the US dollar – should supportthe gold prices.

 Moreover, tradetensions has somewhat eased – at the Spring Meeting of World Bank and the IMF,U.S. Treasury Secretary Steven Mnuchin said that he was hopeful the U.S. andChina are “close to the final round” of trade talks.

Last but not least, the EU has postponed the deadlinefor Brexit until theend of October, raising the odds of orderly divorce. And the Britishpoliticians seem to be approaching the customs union compromise, which wouldnot be as harmful as the hard Brexit. If these two big risks – i.e., full-blown trade war and chaoticexit of the UK without a deal – don’t materialize, the risk appetite among investors may increase, which could hit the safe havenssuch as gold. 

Implicationsfor Gold

The key message from the IMF’s Spring Meeting and itsrecent World Economic Outlook is that there will be a significant growthslowdown this year. However, some of the idiosyncratic factors anduncertainties weighing on growth are waning, while central banks and governmentare adopting more accommodative policies. Here, we expect the current slowdown to be temporary and followed by arebound in the second half of the year.

What does it imply for gold? Well, the slowdowncombined with a more dovish Fed are key factors which could make 2019 a betteryear for gold than 2018. The rebound ingrowth could be, conversely, negative for the gold prices.

However, although the US GDP mightaccelerate later this year, the pace of economic expansion is projected to beslower than last year when fiscal stimulus spurred growth. And the IMFforecasts it to decline further in 2020, as the chart below shows. The convergence between the US and Europe’seconomies should ease the upward pressure on greenback and support gold.

Chart 1: Half-yearly growth forecasts (annualizedsemiannual % change) for the US (green line), Eurozone (red line) and Japan(blue line) from H1 2015 to H2 2020.

Indeed, if wesee a revival in the Eurozone, the euro may strengthen against the greenback,which would also be supportive for the gold prices. After all, the currentslowdown did not make the yellow metal to rally because it was concentratedmainly in Europe.

Thank you.

Ifyou enjoyed the above analysis and would you like to know more about the linkbetween the U.S. economy and the gold market, we invite you to read the August MarketOverview report. If you're interested in the detailed price analysis andprice projections with targets, we invite you to sign up for our Gold & SilverTrading Alerts . If you're not ready to subscribe at this time, we inviteyou to sign up for our goldnewsletter and stay up-to-date with our latest free articles. It's freeand you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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