On its part, International Monetary Fund (IMF) has revised down global growth projection for 2019 to 3 per cent – a new post Global Financial Crisis (GFC). The global economy now seems to be in a synchronised slowdown.
Manufacturing data of major economies continues to slide and is now slowly beginning to spill over to the service sector. There are chances that the global economy may enter into a recession within the next one – two years. Lowering interest rates has historically been the first line of defense for global policy makers when staring at a recession. Typically, rates have been lowered by 3 – 5 per cent in response. That said, the current rates are not high enough to drop without going negative. There is currently $17 trillion worth of negative-yielding government debt and much more on a real interest rate basis.
Given the macroeconomic backdrop, investors should be prepared for further rate cuts and quantitative easing (QE) programs by major global central banks. As these unconventional measures get exhausted, the last stage could be currency debasement. For that to happen, rates would need to be taken deeper into negative territory as economies compete for the weakest currency. A full blown currency war remains a real possibility, which would be incredibly bullish for gold.
Fundamentals remain intact
The main reason we believe that gold’s fundamentals are intact is because of the flawed (monetary) policy, which suggests economies can be made stronger via more monetary inflation, credit expansion and more government spending.
There still exist serious imbalances and problems in many countries, including excessive private and/or public debt, the unsustainable divergence between record corporate profits and steadily declining wages, rising inequality, and mispricing of asset markets at best. It is futile to think that easy money and higher asset prices can really be a solution to the current economic problems. We are in a phase of experimental central banking, which is likely to end badly due to the dislocations of capital it has caused through prolonged periods of easy money. Long-term trends in gold prices are driven by changes in the overall level of confidence in the monetary system and the economy. Make a strategic allocation to gold as it is the counterweight to paper money, which continues to lose credibility as a store of value. We suggest an allocation of between 10-15 per cent of one’s portfolio and using corrections to add in a systematic manner.
(Chirag Mehta is a senior fund manager for alternative investments at Quantum Mutual Fund. Views are his own)
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.