It is impossible to say today whether the effects of the rolling global slowdown have all been priced into the gold market.
But it doesn’t look like it. Not even close.
There is talk in some corners that gold is headed toward the formation of a triple bottom at around $1,180, the lows that gold hit in the summer of 2013 and again at the end of that year.
But the global slowdown is like an approaching tidal wave that is still growing. It can shatter technical support levels the way the 2011 tsunami smashed fishing boats on the coast of Japan.
Nothing is more threatening today than this looming slowdown. Its presence could be noted in the sudden indifference of the gold price this summer even as the Ukraine situation was still escalating. It is seen in the oil price shrugging off the advance of ISIS even with the frightening prospect of the entire Mideast region stumbling into a new war, one that crosses many borders.
The gathering gloom has even diminished the market’s concern with Obama’s new bombing attacks this week in Syria, the beginning of a “sustained campaign” that the Pentagon says could last years. While the attacks spiked gold briefly to $1,237 (most of the increase quickly given back up), it barely registered a blip on oil prices and it wasn’t enough to overcome the gravitational force of the slowing economy.
|Even Obama’s new bombing attacks in Syria weren’t enough to push oil prices up.|
The symptoms of stagnation are evident on every continent, in the developed world and in the emerging markets. Let’s look at the four largest and most important economies …
CHINA: Slowing growth in China is only one part of the global stagnation story, but it is an important one. To a nation like our own, one plagued by decades of declining growth, a failure of China to hit its 2013 target of 7.5 percent expansion might not exactly seem like a tragedy. But less-than-expected demand has hit the prices of industrial commodities and the world’s commodity currencies.
EUROPE: Last week the OECD projected growth in the euro zone of only 0.8 percent this year and 1.1 percent next year. Those numbers represent a substantial lowering of the forecasts it made in May.
Faced with the slowing French and German economies, and a European recovery that he said is “losing momentum,” Mario Draghi, the head of the European Central Bank, has dangled before European parliamentarians the prospect of a Quantitative Easing program of government bond buying/money printing.
JAPAN: The Bank of Japan is utterly devoted to aggressive monetary expansion and is buying Japanese government bonds with both hands, paying with yen conjured out of nothing but cyberspace. Never mind that the purchasing power of the yen has tanked, along with Japan’s GDP.
U.S.: At its two-day policy meeting last week, the Fed refused to drop its promise to maintain interest rates near zero “for a considerable time.” Those who read the auguries of Fed policy statements know this is meaningful, but what is even more substantive is that the Fed once again dropped its forecast for U.S. growth from the one it made just six weeks ago.
We’re down now to 2.8 percent expected growth for next year. The Fed’s call for 2015 is even a little softer, and it is even lower still, about 2.4 percent for 2017.
Of course, few things are more common than the Fed cutting its growth forecasts, but it is a spreading trend. This month the OECD also cut its forecast for U.S. growth by a half percent.
Since 2000, the U.S. economy’s annual growth has averaged half that of the previous half century.
It’s hard to imagine that the U.S. can be economically decoupled from the stagnation spreading around the world. And yet, despite the “globalness” of the global economy, nowhere in the Fed’s forecasts does the possibility of a recession in the U.S. even merit a breath.
The ultimate depth of this downturn is not foreordained. It will be determined by decisions — wise or foolish — yet to be made by the world’s central bankers and governing classes.
We don’t generally go too far wrong expecting them to do foolish things. It is not necessarily because they are not intelligent; some of them are very bright, but it is a peculiar intelligence, borne of an intellectual detachment from reality and nourished by an academic atmosphere that rewards politically correct dogma and penalizes dissent.
The problem is that they are captives of an erroneous economic philosophy. Or as Lord Keynes, he himself now long dead, put it, they are “the slaves of some defunct economist.”
If they operate from flawed premises, their prescriptions are liable to do more harm than good. And such has been the case.
Nothing quite correlates with the secular stagnation of the global economy like the artificial expansion of credit and the consequent mountain of debt. This has been the result of the tag team work of the monetary and fiscal authorities here in the U.S. and around the world.
The monetary authorities’ top interest — always at the expense of everything else — is protecting the banks that chartered them. Accordingly, they have spent the past six years moving credit expansion heaven and money-printing earth to make sure that the banks have been protected from their bad debt and that the debt need not be liquidated.
In pursuance of this scheme, the Fed has electronically printed trillions of dollars.
For their part, the fiscal authorities have been only too happy to pile on more debt to buy their elections and secure their offices.
Along the way the U.S. has gone from being the world’s largest creditor nation to the world’s largest debtor.
As the dogma would insist, despite having failed for the last half-dozen years, Jack Lew, our own Treasury secretary, urged his fellows at the G-20 meeting in Australia last week, especially Europe and Japan, to do more to “boost demand.” That’s code for money printing and deficit spending.
Similarly, the OECD is calling for large-scale Quantitative Easing from the European Central Bank.
This is a global malady. Not long ago, I read an extensive interview with one of China’s leading central bankers. He sounded like he could have been Paul Krugman’s and Ben Bernanke’s colleague on the faculty of Princeton.
The world’s central bankers all drink from the same well. They are all slaves of a defunct economist named Keynes.
Their influence and prominence in public life explains why U.S. growth has been in decline for more than a generation.
It is why after six long years of wild monetary experimentation by the world’s governing classes and central bankers, we have secular stagnation.
The slowdown appears to be deepening.
It can take gold lower with it for a while.
Just as it did in 2008.