There are those who view the recent action in Gold as a potential indication of a wide-ranging shock in the economic and markets shock comparable to the collapse of hedge fund Long-Term Capital Management in 1998 and even the Great Recession crisis a decade later. Interestingly enough, both events were preceded by a clear decline in gold.
The healthy global economy that was supposed to spring out of the Federal Reserve and central bank efforts to “prime the pump” have fallen somewhat flat. It appears the global economic engine has been flooded. The staggering amounts of money that have been injected into the financial system have rendered the patient comatose. It gives one pause to wonder if this was the desire to begin with.
The weakness in gold and commodities is “signaling concerns about global growth,” remarked Mohamed El-Erian, co-chief investment officer of PIMCO, which administers $2 trillion in assets. “Commodities have been sending the signal on growth for a while, and now even louder.”
“The stars are lining up” for a significant dip in U.S. growth in the second half of the year, possibly even a double-dip recession by 2014, observed Komal Sri-Kumar, president of Sri-Kumar Global Strategies and a portfolio manager of the TCW Comprehensive Asset Allocation Strategy fund. “It’s not noise. There are fundamental consequences,” said Sri-Kumar.
The International Monetary Fund on Tuesday ratcheted back its optimism on global economic growth in 2013 to 3.3 percent from its earlier forecast of 3.5 percent, which has evolved very little from the 2012 figure of 3.2 percent.
Unease about sluggish growth are reverberating inside the Federal Reserve itself. Several Fed officials indicated their concern about disinflation (the decrease in the rate of inflation), including the moderate James Bullard, St. Louis Fed president, who remarked that “if inflation continues to go down, I would be willing to increase the pace” of stimulus.
It all raises concerns about the long-term benefit of the huge cash stimulus dumped into the world economy by the Fed, the Bank of Japan, and other major central banks.
We are reminded of the wisdom on viewing the yellow metal as a long-term hold. It also suggests that throughout history no mater what the value the paper gold market is “fixed” at, in the face of dire world events when paper money is worth nothing, that has never been the case for physical gold.