On Sunday, the Bank for International Settlements published its annual report. What can we learn from the report?
On June 25, 2017, 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, macroeconomic – and, of course, gold, whose price is to a large extent shaped by macroeconomic factors. What does the recent edition of the report mean for the precious metals market?
On the one hand, the report is bearish for safe havens such as gold, as it points out that “there are clear signs that growth has gathered momentum” and “concerns about secular stagnation have receded”.
However, important risks which could undermine the sustainability of the current upswing remain in place. First of all, “a significant rise in inflation could choke the expansion by forcing central banks to tighten policy more than expected.” Although gold may gain as an inflation hedge in such a scenario, central banks more hawkish than expected would be detrimental to the yellow metal. Other risks include weaker consumption and investment, a rise in protectionism, and financial stress. Especially China is showing signs of overheating – as the credit-to-GDP gap has reached level signaling elevated risks – which could end very badly for the global economy. Moreover, there has been a shift in attention from monetary policy to geopolitical events, which could also undermine the global economic recovery.
The bottom line is that the BIS published its annual report this week. As always, it provides many interesting insights. The most important is probably that although the financial sector has improved, the environment is still challenging. It implies more of the same for the yellow metal. Gold would not start a bullish rally, unless global economy falls into the next recession. And it would not enter a significant bear market, unless risks really recede and confidence in the financial system fully returns. Hence, gold seems to remain at the crossroads for a while.
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.