Global weaknesses point to gold rush

Climatologists tell us that the last, and most well-known, “perfect storm” occurred in 1991 off the coast of Nova Scotia in Canada. It began as cold front from the eastern United States that became a storm and coalesced with Hurricane Grace. Together they formed a unique partnership that created historic waves, winds and massive losses. Per some sources, the largest waves ever recorded off the oceanic shelves in Atlantic Canada, around 30 metres, were seen then. The global economic system has a similar pattern building up. Three different economic systems, under varying degrees of stresses have begun to come undone together. Last week on Tuesday, this column wrote about the impending Chinese difficulties with debt, refinancing and deleveraging. On Thursday, the Chinese authorities released their official figures. The world learnt that the growth rate for the 2nd quarter was 7.6 per cent compared to 9.5 per cent last year. The secular decline in growth has been evident over the past 5 years. Premier Wen Jiabao, as recently as Wednesday, warned the members of his own Communist Party, as they prepare to orchestrate a leadership transition, that it is the labour markets they should keep an eye out on. Despite the inscrutable language of the Communist Party, he expects it to be “severe” (per Reuters). Two consecutive rate cuts from the Chinese central bank are expected to help with the declining housing prices that have been in free fall for eight months. But, such financial interventions in an economy with weak modes of transmission and a global slow down means more difficult times ahead. Meanwhile, a continent away, the European Union continues to wrestle with the assorted forms of uncertainty. These come from lack of clarity about the nature of the mechanism that will be used to solve insolvency, promote crises management and monitor banking compliance. But these are short-term problems. The deeper question is how and in what form will the supra-national European State deal with its fiscal commitments. Who will pay for it? How many pounds of flesh will it cost? Who will extract what from whom? The answers are far from clear. The only thing we can be certain is that the Euro is not going to go away. At least not in the immediate future. But, so low have our expectations fallen, that this is treated as manna from the heavens. Across the Atlantic, the lumbering economy of the United States shows no sign of reviving back to life. A few hours before writing this, Ben Bernanke — the Chairman of the US Federal Reserve, its central bank — cut a sorry figure as he testified in the US Congress in front of the Senate Banking Committee about the economy. Despite massive financial infusions, through various mechanisms, the unemployment figures have barely budged. The usual litany follows: weak growth, weakening manufacturing, weakened consumer confidence. Further more, Mr Bernanke echoed what this column had written three weeks ago, about the real dangers to the US economy coming after the US Presidential elections. Then, failing a political agreement, we will see the fear premium on US Treasuries’ spike. This “fear” will be spurred by the end of tax cuts that been put in place under the previous Bush administration. Coupled with across the board spending cuts that come thanks to the “debt ceiling” debate from 18 months ago, we are in for a double whammy. This would mean, if the politicians don’t come up with a deal to extend the Bush tax cuts, the US is likely to increase taxes on every working person, irrespective of income; and force spending cuts in education, health services etc. It is, as Bernanke calls it, a “fiscal cliff”. President Obama wants to raise taxes on all those who make $250,000 (Dh918,250) or more every year, to ameliorate the budget deficit shortfalls. The opposition party, the Republicans, want taxes to be kept low for all, irrespective of consequences on the deficit. A fight is brewing. The key rule in any storm is to stack up on provisions. And when faced with the financial markets’ progressive awareness of the emergent crises — this is likely to result in increased purchases of Treasury and most importantly, gold. 10-year Treasuries are currently at 1.45 per cent and they’ll head even lower in the short run. The mythical 1 per cent 10-year is the Loch Ness monster of the financial markets. Will we see it? Implicitly, one is acknowledging that the global demand for US Treasuries is likely to rise and the actions of the monetary authorities are likely to have less than desired effect. The weaker the US market becomes, the higher the likelihood that the Federal Reserve will undertake another round of quantitative easing. This is the Fed purchasing assets from banks by “creating” money. Continued debasement of the dollar is likely to spur many investors to shift from dollar denominated assets into gold. Add to it the fact that the Chinese authorities have been undertaking policies of “financial repression”, as we wrote last week, this leaves the average Chinese no place to really invest their savings in the “barbaric relic” called gold. At present gold trades at $1580 per ounce and within the end of this year, one shouldn’t be surprised to see it head to break the $2000 barrier. The bottom line remains that the three major engines of global economy are struck in a maelstrom: the more frantically they swim, the lesser confidence they manage to arouse. To set the economic house in order requires the willingness to inflict pain, bear the consequences and a degree of coordination. Democracy coupled with a misguided faith in free market evangelism make it virtually impossible. So for now, we can do the next best thing: prepare for greater uncertainty by being prudent. From gulfnews