Slow global growth, geopolitical tensions send gold higher

Despite the expansionary monetary policies of the major central banks of the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England there is very little evidence to show that their stimulus programs have created any economic growth.

In its latest World Economic Prospects report released recently, the World Bank states that global economic growth in 2014 is likely to be weaker than expected, with the poor weather in the US, financial market turbulence and the Ukrainian issue serving as drags.

The bank lowered its global economic growth forecast for 2014 to 2.8% from the 3.2% it estimated earlier. At the same time, the World Bank left its forecast for 2015 and 2016 broadly unchanged at 3.4% and 3.5%, respectively.

The World Bank also suggests that the acceleration in 2014 growth would come from countries such as the US and the Eurozone nations. Growth in these countries is expected to accelerate to 1.9% in 2014 from 1.3% in 2013. A further pick-up in growth to 2.4% and 2.5% is estimated for 2015 and 2016, respectively.

The World Bank expects the Eurozone countries to grow by 1.1% in 2014, while it lowered its growth forecast for the US to 2.1% from 2.8% it estimated earlier, given the contraction in GDP experienced by the world’s largest economy in the first quarter.

Developing countries are expected to grow by 4.8%, less than the 5.3% growth estimated in January. The anticipated weakness is premised on capacity constraints and an eventual tightening of financial conditions.

China’s growth is expected to slow down to 7.6% in 2014 and further to 7.5% in 2015 and 7.4% in 2016. On the other hand, the World Bank sees India growing by 5.5% in 2014, faster than the 4.7 growth in 2013.

East Asian and Pacific economies, which are growing close to potential, are expected to see a modest slowdown in growth to 7% in 2016. Though growth in Latin American countries are constrained by capacity, Argentina, Brazil and Mexico could lend support to the growth of the region. The World Bank estimates growth in Sub-Saharan Africa to firm up to 5.1% in 2016 from 4.7% in 2014. Meanwhile, Central Asian and European growth could be hurt by the skirmish between Russia and Ukraine.

At the same time, the World Bank expects a brisk pick up in the pace of growth in the Middle-East and North Africa and in the South Asia. However, Countries like Brazil, South Africa and Turkey with high inflation and current account deficits remain vulnerable, the World Bank said.

In the U.S., Fed policy makers have indicated that they expect benchmark interest rates to remain near zero till at least until next year, and this will probably be the same for the other major central banks. The Fed is also likely to continue to reduce its program of quantitative easing.

The FOMC ends a two-day meeting on Wednesday.  This will be followed by a summary of economic projections and press conference by Chair Janet Yellen.

Starting with the December meeting, policy-makers began scaling back the bond-buying program known as quantitative easing by $10 billion per meeting. It now stands at $45 billion per month after it was at $85 billion during 2013.

In the meantime, regional conflicts are spreading like wildfire. In Iraq, Sunni insurgents seized a mainly ethnic Turkmen city in the north-west on Sunday after heavy fighting. The rebel group claims it has executed 1,700 Iraqi Shiite government soldiers. Earlier reports said the rebels have captured Iraqi government military hardware (supplied by the U.S.) and hundreds of millions of U.S. dollars in cash from the Iraqi central bank.

So what was the point of US invasion of Iraq? Besides costing the US tax payer around two trillion dollars plus 4,000 US dead and 50,000 wounded, I say it has been much of a waste of time.  Perhaps John Kerry knows the answers as he seems to know everything when it comes to foreign policy, ha, ha. The Iraq fiasco already threatens to push oil prices higher and thereby putting pressure on an already weak economic recovery in the US.

Ukraine was also in the spotlight after pro-Russian separatists shot down a Ukrainian army transport plane, killing all 49 military personnel on board. And, tensions between Russia and Ukraine are still running high as Russia has cut the natural gas supply to Ukraine and said it will supply natural gas to Ukraine only if paid in advance.

“Gas supplies to Ukraine have been reduced to zero,” Ukrainian Energy Minister Yuri Prodan said.

Russia’s state-owned gas giant Gazprom said Ukraine had to pay upfront for its gas supplies, after Kiev failed to settle its huge debt.

Gazprom had asked Ukraine’s state gas firm Naftogaz to pay $1.95bn (£1.15bn) of the $4.5bn it said it was owed.

It said it would continue to supply gas to Europe, although Gazprom chief Alexei Miller warned there now were “significant” risks for gas transit to the EU via Ukraine.

Ukraine has enough reserves to last until December, according to Naftogaz.

Gold was also supported from rising crude oil prices, with Brent trading just below a nine-month high hit on Friday, on fears the of supply disruptions from the second-largest OPEC producer Iraq.

While central banks continue to debase their respective currencies, regional conflicts are likely to worsen. And, there is also the potential for crude oil prices to rise.  All these events will support gold prices.

About the author

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.