In A Deflationary World How Likely Is The US Economy To Strengthen, Interest Rates Rise And Gold Prices Fall?

The Goldman Sachs’ argument about further falls in the gold price does have a fundamental flaw. The economic scenario it proposes is not very likely to happen, ergo gold prices are on the floor now and set to rise substantially in the very near future.

What the bears at this house have argued about gold is quite simple, as they say: ‘We expect gold prices to come under significant downward pressure once the US economic recovery strengthens and the US Federal Reserve begins to raise interest rates.’

Deflationary world

OK but in a deflationary global economic environment how likely is it that the US will be able to keep its fragile economic recovery going let alone raise interest rates? This might have been a good story for 2014, if we forget the GDP slump of Q1 of course. But does it really stack up as a future scenario? Not if you think about it a bit.

The one thing almost all commentators are agreed upon is that this is the weakest US economic recovery in modern history, possibly in the history of the union. The recent economic data on housing, jobs and consumer spending is not that great.

Meanwhile, look behind you and the rest of the world ex-UK is falling into a deflationary slump from Japan and China to the other emerging markets to Canada, Australia and the eurozone. The US is left as the sole engine for global economic growth and it’s firing on six out of eight cyclinders and might well be about to lose another vis-a-vis overseas profits to a strong dollar. So really how likely are interest rates to rise in this environment?

Expectations of interest rate rises may well have gotten a long way ahead of reality. We heard the same talk in 2010 and 2011 and here we are in 2014 still talking about it.

Wrong again?

Once this realization sinks into financial markets then Goldman Sachs will again be wrong in its gold price forecast, and out of major forecasters its record is pretty consistent in this respect. Given the extent to which gold prices have fallen the rally should be substantial, with the previous all-time high of $1,923 as an obvious target.

What’s even more bizarre about Goldman’s gold forecast is that they used the same argument that we are now proposing on ArabianMoney to correctly predict a gold price surge in 2010, one of the rare occasions when they actually got this right!

Why not use that same argument now? Besides, gold is now massively oversold and silver more so…

Courtesy of http://www.arabianmoney.net/