The U.S. economy is on the mend, eurozone officials remain committed to "do all that it takes," and China appears to have side-stepped the hard landing feared by some last year. While the globe remains mired in a slow-growth environment, the financial markets are healing and economies are moving forward from the panic and frenzy of the 2008 financial crisis and the worst may now be behind the markets for this current cycle.
However, markets and economies most certainly do move in cycles and many challenges still lie ahead. The eurozone remains in recession. In the U.S., policymakers continue to "kick the can" on substantive fiscal policy issues. Japan is still struggling with low growth and deflation and the jury is still out on whether the new prime minister can deliver on his campaign promises for substantial economic change.
Nonetheless, Credit Suisse analysts wrote in a new research report " the 'peak of the fear trade' has now passed." Credit Suisse analysts added, "It looks increasingly likely that the 2011 high will prove to have been the peak for the USD gold price in this cycle."
For now, inflation remains tame, held down by the still-tight credit conditions in the U.S., and the stubbornly slow economic growth environment in the U.S, Europe and Japan.But, the seeds of future inflation have already been planted into our global financial system. The massive global central bank monetary policy accommodation has flipped the switches on the printing presses and kept them turned on. There will be a point that individual country economic growth levels begin to pick up, and this could be the inflection point for the next rally wave in gold.
Sorry to disappoint gold bugs, but it may still be a year or two out on the horizon.
Pierre Ellis, senior global economist at Decision Economics, explained "you can't print money forever, without eventually having inflation." However, he added that "this problem could be a year away."
Ellis pointed to the recent announcement from the Bank of Japan regarding its new quantitative easing policy set to begin in January 2014. Breaking down the program, Ellis explained "the big expansion is occurring in things [maturities] under three years." He explained how that approach "is more conservative than the Fed's. The BOJ will have an easier time getting out of this."
Looking at the U.S. Fed's quantitative easing policies, Ellis explained "the Fed is holding a large volume of Treasury securities. Ultimately, they will be in a position where they have to get rid of them. Given all this liquidity, it is not at all impossible and has to be taken into account. It may well be that interest rates get high very quickly and the Fed would need to sell securities in a falling market and take a loss if the ball [economic growth] gets rolling and snowballs faster than they thought."
Right now, however, credit conditions remain tight in the U.S. and business and individuals are increasing savings levels and sitting on cash. "Banks and people want to sit on money as opposed to spending it," Ellis said.
However, markets and cycles change. And, these reversals and shifts often sneak up on even the most astute analysts, economists and traders. Growth will eventually gain sustained and stronger traction, which will leave the U.S. Fed and other central banks in a position needing to reverse and pull back in the trillions of liquidity sloshing around in the global financial system.
Credit Suisse analysts addressed this issue. "Hedging against a future break-out in inflation remains a key reason why many investors (ranging from large institutions to individuals) have built core long positions in gold over the past five years. In essence, the argument is that the accumulation of reserves on central bank balance sheets creates a sizeable risk that the assets created will, sooner or later, lead via an increase in the velocity of money to a marked acceleration in inflation. It is important to make the distinction between that situation and a more gradual return to moderate (2.0-2.5%) inflation that policy makers in the developed world are targeting. While the exit from the current policies will be highly experimental (we simply have not tried this before), our economists remain of the view that any substantial risk to inflation remains some way off, particularly in the developed world," Credit Suisse wrote.
For now, the inflation factor and the "experimental" exit that global central banks must orchestrate remains probably at least a year off. It may take time, but the seeds, while dormant now, have been planted for another fresh wave in gold ahead.
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