The Big Short(age of good news)

Goldhub blog

The Big Short(age of good news)

Krishan Gopaul
Market Intelligence Group
World Gold Council

Posted:

Yesterday, the International Monetary Fund (IMF) released their updated World Economic Outlook. And, if investors were looking for any seeds of optimism, may I suggest reading The Art of Happiness by the Dalai Lama instead?

The IMF report now forecasts global growth of 3% in 2019 compared to the 3.3% it forecast in April. This is its lowest level since the global financial crisis in 2008-2009. What’s more, its forecast for next year, while higher at 3.4%, is also lower than its April prediction.

Uncertain outcomes, certain causes. So, what is the reason for this dire reassessment? The IMF states: “Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade.” Investors at the financial coalface have come to similar conclusions.

Despite efforts by governments and central banks to stimulate growth against this backdrop, several economic indicators don’t look great. The JPMorgan Global Purchasing Managers’ Index (PMI) indicates that manufacturing is already contracting (below 50), while the service sector isn’t that far behind but faring better. The Ifo Business Climate Index – close to its lowest level since the global financial crisis – suggests that the export-reliant German economy is teetering close to recession. And in China, manufacturing PMI data remains below 50.

 

In response, there has been greater demand for gold. This year, holdings in gold-backed ETFs have hit a new all-time high of over 2,800t, beating the previous high in 2012 when the gold price was near US$1,700/oz. Central banks, following a 50-year high in buying in 2018, are potentially on course to accumulate even more this year. Given how entrenched this uncertainty has become, it is likely that gold investment demand will continue to be well-supported.