Massive Debt Threatens Global Economy - IMF

Release Date: 
Friday, October 7, 2016

Gold prices ended the week in negative territory despite Friday’s gains which were buoyed by a worse than expected job report.

“On Friday, the reaction on gold markets was swift in response to a soft US jobs report and a weaker US dollar, with the metal jumping to a high of $1,267.20 before paring some of those gains… Gold has been on the defensive since Tuesday when heavy selling saw it crash through $1,300 an ounce to a level last seen before the Brexit vote gave it a new leg up…

“A steady increase in average hourly wages and number of hours worked strengthens the hawks on the Federal Reserve's decision making committee who want to raise rates sooner rather than later this year. The Fed next meets early November with a final meeting for the year on December 14... The US dollar also has close inverse relationship to commodity prices and gold….” (“Gold price spikes after soft US jobs data,” Mining.com, 10/7/16.)

Gold ended the week down $58.30, closing at $1,258.60. Silver prices closed at $17.63, down $1.62.

Massive Debt Threatens Global Economy - IMF
The International Monetary Fund is warning that “excessive” private debt accumulated since the last Great Recession is threatening the financial stability of the global economy.

“Eight years after the financial crisis, the world is suffering from a debt hangover of unprecedented proportions. Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, and it’s still rising, the International Monetary Fund said. The figure includes debt held by governments, non-financial firms and households. Current debt levels now sit at a record 225 percent of world gross domestic product, the IMF said … noting that about two-thirds of the liabilities reside in the private sector…

“Slow global growth is making it difficult to pay off the obligations, ‘setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,’ said the Washington-based fund. ‘Excessive private debt is a major headwind against the global recovery and a risk to financial stability,’ IMF fiscal chief Vitor Gaspar said in prepared remarks. ‘History has taught us that it is very easy to underestimate the risks associated with private debt during the upswing…’

“There’s no consensus on what levels of debt-to-GDP should be the considered alarming, the IMF said. However, financial crises tend to be associated with excessive private debt in both advanced and emerging economies, the fund said. In addition, research has shown that high debt is linked with lower growth, even when a crisis is avoided. If companies postpone paying off debt, they could become ‘very sensitive to shocks, increasing the risk of an abrupt deleveraging process,’ the IMF said….” (“The IMF Is Worried About the World's $152 Trillion Debt Pile,” Bloomberg, 10/5/16.)

Asset Manager Targets $2300 Gold by June 2018
Asset and wealth manager Incrementum AG recently updated its 2016 gold outlook and reaffirmed its target of $2300 by June 2018.

“Due to structural over-indebtedness and the resulting addiction to low/negative real
interest rates, we believe that the traditional approach to financial markets and asset
management is no longer beneficial for investors. Therefore, at Incrementum we evaluate all our investments not only from the perspective of the global economy but also in the context of the current state of the global monetary regime. This analysis produces what we consider a truly holistic view of the state of financial markets…

“In 2008 (when gold traded at USD 800) we first called for a long-term price target of USD 2,300. The gold price reached a (nominal) all-time high of USD 1,920 in September 2011. Contrary to our expectations, then a correction started which evolved into a full-blown bear market in 2013. While most other gold analysts became bearish on gold, we continued to stand by our thesis that gold is still in a secular bull market. In June 2015 we set our price target of USD 2,300 for June 2018…

“Gold has to be physically mined, its global supply is exceedingly stable – holding it provides insurance against monetary interventionism and an endogenously unstable currency system… Gold‘s average annual performance since 2001: 10.71%. Gold has thus outperformed virtually every other major asset class between 2001 and 2016 – in
spite of suffering a massive correction. Since the beginning of 2016 gold is back in every currency! …

“In GOLD we TRUST 2016 in 8 Bullet Points 1. Growing uncertainty regarding economic and political developments is boosting the gold price 2. Brexit: More economic and monetary stimulus programs to counter the disintegration of the EU should be expected 3. The US economy is softening, the planned normalization of the Fed's interest rate policy is about to fail; an economic worldview is crumbling 4. If the dollar weakens further and commodity prices continue to increase, rising price inflation and stagflation threaten 5. Gold investment on the part of institutional investors is about to experience a renaissance in the uncertain low interest rate environment 6. The economic environment is not only positive for gold… 7. Gold is back, a new bull market is coming into view 8. Incrementum confirms the long-term price target of USD 2,300 by 2018.” (“Incrementum Chartbook #5 50 Slides for the Gold Bulls,” Incrementum AG, 9/29/16.)

Gold Bull Market Fundamentals Remain Intact - Day
Adrian Day, president of Adrian Day Asset Management, explained why the fundamental supporting gold’s bull market continue even with the recent pullback.

“Fund manager Adrian Day says the bull market in gold remains intact and would look to add to positions in the sector. ‘The fundamentals remain intact,’ says the chairman and chief executive officer of Adrian Day Asset Management. ‘Monetary and interest-rate policy remain very loose around the world, and that would remain true after the Fed increases the Fed funds rate another one-quarter percent. Last year, gold fell sharply into the expected rate increase, and dropped further when the cut was announced, then immediately reversed and moved up. The same could occur this year. One quarter point does not stop the gold bull market.’

“After the dramatic fall this week, gold may not immediately reverse and go back to where it was, Day says. ‘It may take a little while to settle down -- though with the U.S. election approaching, that may not be too long,’ he says… So we would buy on extreme weakness….’” (“Adrian Day: ‘Look For Good Opportunities To Buy’ On Gold Pullback,” Kitco, 10/6/16.)

Fed Rate Hike Shouldn’t Affect Faith in Gold – Klein
“A Federal Reserve interest-rate increase this year shouldn’t shake investors’ faith in gold, according to Australia’s second-largest producer… The probability of a Fed hike in December has risen to 62 percent, from 54 percent a week ago, futures data compiled by Bloomberg show. Still, any increase in U.S. borrowing costs needs to take into account that central banks have cut rates about 600 times since 2008, Evolution Mining Ltd.’s Executive Chairman Jake Klein said Thursday in an interview with Bloomberg Television’s ‘Daybreak Asia’…

“In context, conditions are still favorable for gold,’ Klein said. “I’m optimistic on the gold price, because we are in an environment where we have unprecedented low interest rates. It’s difficult to see rates rising a lot.’ Bullion’s rebound in 2016 from three annual declines and the scaling of a two-year high in July, have sparked new interest from investors in producers, according to Klein… ‘The price is still up almost 20 percent this year, so from a gold miners’ perspective, we’ve still got to be happy’ even with the decline this week, Klein said….” (“Fed Hike Shouldn’t Shake Faith in Gold, Says Mining Chief,” Bloomberg, 10/7/16.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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