April World Economic Outlook And Gold

Last week, the IMF released the update of its World Economic Outlook. What are the main conclusions of the report?

On April 12, 2016, the IMF published its biannual report on the world economic outlook, entitled “Too Slow for Too Long”. The report is as pessimistic as its title. The baseline projection for global growth in 2016 is a modest 3.2 percent, down 0.2 percentage points relative to January 2016 and 0.4 percentage points relative to October 2015. The U.S. GDP is projected to rise 2.4 percent in 2016, also down 0.2 percentage points relative to January 2016 and 0.4 percentage points relative to October 2015. In short, global growth is slowing down.

The worst thing is that a subdued outlook for the world economy goes hand in hand with higher risks of much weaker global growth in the future. In other words, the IMF not only reduced its central projection, but it also noted that many downside risks had become more likely. What are these risks? Well, the list is quite long and everyone will find something for themselves:

1. The threat of a disorderly pullback of capital flows and growing risks to financial   stability in emerging market economies.
2. The international ramifications of the economic transition in China.
3. Growing strains in countries that are heavily reliant on oil exports.
4. The possible impact of tighter financial conditions and bouts of financial market volatility on confidence and growth, if they persist.
5. More protracted recessions in emerging market economies that are currently experiencing distress.
6. Geopolitical risks.
7. The United Kingdom’s potential exit from the European Union.

For us, points 2-4 represent probably the largest potential risks. China’s transition to a new growth model (or a bust of the past bubble economy, depending on the view) is still a very uncertain process. Corporate profitability in China has eroded over the past few years (due to a slower pace of growth), which hinders the ability of Chinese companies to service their debt obligations. Potential further dollar appreciation, lower commodity prices, and tighter global financing conditions could additionally affect corporate balance sheet around the globe, including China.

The bottom line is that although market sentiment has improved recently, the global economy remains fragile to many downside outcomes, especially with central banks’ excessive balance sheets and zero interest rates. This is good news for gold bulls in the long run, since the yellow metal should shine during global economic slowdowns with high market uncertainty and ineffective monetary policy.

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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.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor