November 07, 2019
Quantum Alternative Investments Team
From a time, not long ago or five quarters ago to be precise, when growth of ~8% was considered a given for the Indian economy, we are now staring at growth projections of merely 6%. Everything from domestic structural changes like demonetization and GST to cyclical ones like lower consumer spend to global headwinds can be attributed to this. India's unemployment rate in October climbed to 8.5%, up from 7% levels in September according to latest CMIE data. Infrastructure output fell 5.2% in September from a year earlier, and industrial output contracted at its fastest rate in more than 6 years in August. There is no doubt India is slowing down.
And so is the world. Thanks to the almost 16 month long bitter tariff wars between the world's largest importer and the world's largest exporter, business confidence globally has eroded, contributing to the second straight quarterly contraction in business investment. With this slump expected to spill over to jobs, wages and thus consumer spending, there is a good chance that the global economy may enter into a recession within the next 1-2 years. As per the IMF, global growth for 2019 will be at 3%, its weakest since the 2008 financial crisis.
The Federal Reserve has already cut interest rates three times this year to stimulate the low-growth disinflationary environment. The world’s factory, China, is stuck in the doldrums - growing at its slowest pace in 27½ years. Japanese factory activity has sunk to a 40 month low with October Manufacturing PMI in contraction territory at 48.4. With the decision paralysis on Brexit, Britain is facing its third general election in four years aggravating the slowdown in Europe. This is in addition to the weakening of its economic powerhouse – Germany - which majorly relies on exports. The global economy is indeed in a synchronized slowdown with Hong Kong being the first to plunge into recession.
Global central bankers are thus busy trying to fend off the upcoming economic slump. After years of balance sheet reduction, US Fed has started to brace its balance sheet by way of quantitative easing and its budget deficit in 2019 has ballooned to nearly $1 trillion. With their interest rates hovering around zero, similar actions are expected from other central banks too.
What is shocking is that those in charge still believe that easy money can be a solution to current economic problems, when in fact it is partly responsible for the dire state of affairs we are in today. If you observe, world economies have been oscillating between high inflation-led growth and painful slowdowns! Historic debt levels, asset bubbles, currencies losing their worth and unprecedented market volatility are the new reality. All thanks to constant central bank manipulation of currencies and unregulated use of leverage.
If we keep falling back on this increasingly impotent monetary policy and fail to normalize the world economy, it is fair to say that central banks will be trapped in a state of perpetual policy manipulation, our financial systems will continue to walk on fiscal crutches, and the financial sector will be marred with vulnerabilities.
With the US leadership’s America First agenda & its tendency of weaponizing trade to punish the naysayers via sanctions, and China leading the global phenomenon of non-dollar trade agreements and reserves-diversification away from the dollar, it is becoming clear that a clash for supremacy is at the core of the US-China trade wars. These wars can thus be expected to intensify over the long term, near term fixes notwithstanding. Furthering his protectionist agenda, Trump has now slapped tariffs on EU. With retaliation expected from Europe, stay prepared for the global economy to destabilize further. Closer home, trade grievances with India are threatening to escalate into a trade war with the suspension of defense cooperation looking like a step in that direction. All this could possibly encourage countries to bring interest rates down further into negative territory and devalue their currencies to counter the adverse effects of trade wars that spill on to their economies.
These negative interest rates and currency wars will make holding gold a viable alternative, to a currency denominated bank account or bond that loses purchasing power, or to bubble-like financial markets bingeing on cheap liquidity that could wipe out your capital.
Adding fuel to fire, the Americans by betraying the Kurds and giving up their role as the guarantor of order in the Middle East, have potentially escalated geo-political tensions in the region. This move has seriously impaired America’s credibility around the world, thanks to its now fickle foreign and trade policy. This will also give more reason to its allies like Saudi Arabia and South Korea to acquire nuclear weapons to guard themselves from Iran or North Korea – thus fueling a regional arms race. The world sure seems to be getting more uneasy with every passing day.
No surprise then that price of the precious metal is up by 20.10% in 2019 supported by safe haven demand.
With these various forces at play, gold continues to be in the broad $1480-1520/ounce range, as no single factor seems to majorly influence the price direction in the short term, and more clarity is awaited. The month ended with gains of 1.73% at $1495.77.
Tracking a decline in global rates, gold prices in India have fallen by about Rs 2000 from September highs of Rs 40000/10 grams, but ended the month with gains of 2.30%. But over the long term, adding gold to one’s portfolio would be both risk-reducing and return-enhancing in a slowing world battling trade and geopolitical tensions. We suggest an allocation of between 10-15% of one’s portfolio. Investors will be benefited by using any price corrections, as witnessed currently, as a buying opportunity and making incremental purchases through the Gold ETF route.
Source: Bloomberg, World Gold Council
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