Last month, the Bank for International Settlements published its annual report. What can we learn from the report?
At the end of June, the BIS, or the central bank for central banks, produced its annual report, which is a must-read for investors interested in the global economy, macroeconomics, as well as gold, whose price is to a large extent shaped by macroeconomic factors. What does the report imply for the precious metals market? Well, the main theme is rather negative for the price of gold, as authors argue that “the global economy is not doing as badly as the rhetoric sometimes suggest”. The report states that “global growth continues to disappoint expectations but is in line with pre-crisis historical averages”.
However, the report is far from being too optimistic, as it points out a risky trinity of discomforting conditions: unusually low productivity growth, historically high global debt levels and remarkably narrow room for policy maneuver. It means that the global economy is highly exposed, which is positive news for the gold market. According to the authors, “a highly visible and much-debated sign of this discomfort has been exceptionally and persistently low-interest rates”. What we need is a shift to more robust and sustainable policies, as “the global economy cannot afford to rely any longer on the debt-fuelled growth model that has brought it to the current juncture”. We have to adopt a long-run orientation and focus more on structural policies, as “monetary policy has been overburdened for far too long”.
The take-home message is that the BIS published its annual report last month. As always, it provides many interesting insights. On the one hand, it shows that the economy might not be as weak as it is often suggested, as growth rates are not far away from historical averages. Therefore, the BIS threw cold water on perma-bears and gold bugs. On the other hand, the global economy remains fragile, as it is too dependent on low interest rates, monetary policy and a debt-fuelled growth model. The lack of structural reforms and rebalancing toward a more sustainable growth model risks another global economic crisis, which, if materializes, would be supportive for the price of gold.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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