Global Gold’s Quarterly Outlook – Has Gold Exited The Bull Market?

This article is based on the Outlook Report from Global Gold in Switzerland, written by managing director Claudio Grass. It provides a fundamental view on gold, not a short term price forecast. However, it takes into account the recent gold price decline and other major events.

Which economic recovery?

If you listen solely to the mainstream media, you would come to the conclusion that the worst is already behind us and we are seeing substantial economic growth. It is even likely that the published GDP figures in the coming months, will underline this “fact”. Why?

The answer is simple: A new calculation method for the GDP. Research and development costs and costs for creating intangible assets such as movies, books etc. will be considered as “investments” and will be added to the value of the GDP. The effect of this adjustment is that US GDP figures, which will be published at the end of July, are expected to be around 500 billion higher than if one uses the old methodology. This new and “improved” calculation method will become the international standard and will start brining “growth” to Europe starting in September 2014.

This is just one of the many tricks that policy makers are using to make you believe there is an economic recovery underway. We are afraid there is no recovery. We justify our view with the following chart. It compares the current “recovery” to previous recoveries in the US. As you can see the recovery is clearly below its’ historical mean.


There is more evidence of the absence of an economic recovery. According to Ben Bernanke’s earlier statements in the summer, the FED was looking for a ‘substantial improvement’ in the unemployment rate before making the call to reduce the stimulus. In reality, however, though Bernanke seemed overly confident on the economic outlook at the time, the unemployment rate was still relatively high, and it rose slightly to 7.6% in May. Also, inflation rate was up by only 1.1% y-o-y in April, well below the Fed’s targeted 2%, according to Bloomberg. This was then confirmed by latest data published by the Labor Department citing  an ‘unexpected’ increase in the number of Americans filing for unemployment benefits, that rose to a two-month high in the week ended July 6”, said Bloomberg.

Has Gold exited the bull market?

Though gold has started to pick up, it may take time to recover from the slump it faced this year. According to Incrementum Adivors’s ‘In Gold We Trust’ report dating end-June, gold is not in the bear market yet, but rather in a mid-cycle correction similar to the mid-cycle correction of 1974-1976, mainly caused by great pessimism over the gold price. According to Incrementum Advisors, the market has not yet witnessed the ‘euphoria’ usually seen at the end of the bull market, therefore expecting a final stage the form of a trend acceleration and hike in the gold price.

Analysts expect negative real interest rates in Europe (the opposite is expected for the US) to continue over the medium term. As we highlighted in our Global Gold outlook released in December 2012, negative real interest rates is one from of financial repression, which we expected to increase in the future. In turn, “riskless” assets such as government bonds come to yield a negative return, which we argued is in favor of debt-burdened governments as it reduces the real debt level. With such a shaky economic foundation, we argue that these negative rates create a strong supporting argument for future demand for Gold, and potentially a future driver for the gold price.

Still bullish on Gold!

We continue to be bullish on gold, supported by its fundamentals that remain intact. We highlight gold’s high marketability and liquidity – it a worldwide accepted currency and medium of exchange, with abundant demand.  But most importantly, we highlight the great plus factor of gold lies in the lack of credit or counterparty risk. As we explained in the past, in contrast to debt, gold secures your ownership. In contrast, as a depository of a bank, instead of being the owner of your asset, you become the bank’s creditor – ownership is transferred to the bank. Additionally, with debt comes interest. Although you earn interest through your bank deposit, in real terms this interest represents negative returns after accounting for inflation and taxes. With gold on the other hand, value is safeguarded (in return for a depository fee). It is thus also store of value. We continue to find gold to be an important hedging instrument, not only against inflation, but also against possible currency debasement, and possibility of economic fluctuations and increased measures of financial repression introduced by western governments.

Global Gold’s quarterly outlook

The corrections in April and June of this year have worried some short term investors. Although it is possible that in the short term we see new lows, our long term fundamental outlook remains unchanged!

Scenario 1: Status quo – probability 80%

Under our “status quo” scenario, governments will continue essentially as they have so far, delaying any real problem solving. They will continue to  “moderately” inflate currencies, bailout banks etc. Furthermore real economic growth rates will stay low.

Probability (estimate): 80%. We think that this scenario is the most likely for the coming months and years. Governments can’t and won’t tackle any real problems, they will follow their “muddle through” policy as they have done so far. Measures of financial repression like the capital controls and the confiscation taken place in Cyprus are likely to increase.

Impact on gold: As in recent years the current policies of governments positively impact gold prices. We think that the current “correction” is only a temporary phase in the long term upward trend.

Scenario 2: Back to “normal” – probability 10%

In this scenario central banks worldwide abandon their current monetary policy and return to a more prudent approach. This is coupled with higher real economic growth in the world.

Probability (estimate): 10%. Due to the very high debt levels in western economies we hardly think that central banks can return to their normal monetary policy. The lack of any real growth impulses leads us to believe that this scenario is not a very realistic one for the foreseeable future. In the beginning of this year Japan decided to join in on the money printing “party” so it seems if anything that the central banks will intensify rather than stop their “efforts”.

Impact on gold: A “back to normal” scenario would probably impact gold prices negatively. Historically gold has tended to perform negatively when real short term interest rates have exceeded 3%.

Scenario 3: Crisis – probability 10%

Crises can take on many different forms, such as a complete collapse of the financial and monetary system, a world war, civil unrest or many others.

Probability (estimate): 10%. Political developments in most parts of the western world are alarming. We think that our current financial and monetary system is not sustainable. We don’t, however, see the tipping point on the horizon quite yet. Although we are following the news from the Asian Peninsula and the Middle East we do not see the risk of a wide scale war for the time being.

Impact on gold: In a crisis scenario the price of gold would likely dramatically increase nominally. In real terms gold should be an ideal medium to store value over the long term.

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