Gold Rises After G-20

Monday, February 29, 2016

The annual meeting of the leaders of the world’s top economies has just ended. What does it imply for the gold market?

G-20 Disappoints

The weekend meeting of G-20 finance ministers and central bank governors disappointed the markets. Shares retreated in Europe and Asia, the U.S. dollar fell, while the yellow metal rose during Asian trading hours. The price of gold increased despite the upward correction in U.S. GDP growth in the fourth quarter and a strong report on personal income and consumer spending.

Why is the G-20 summit believed to be disappointing? Well, it failed to produce any concrete measures. Expectations for important commitments were rather low, however, some analysts hoped for some fiscal stimulus. Yes, in a joint communiqué issued at the end of the two-day conference, the group agreed that it “will use all policy tools -- monetary, fiscal and structural -- individually and collectively” to strengthen growth and financial stability. Importantly, finance ministers and central bankers also admitted that “monetary policy alone cannot lead to balanced growth”, however, they did not plan any specific coordinated stimulus spending.

Global Economy Needs Actions, Not Words

This is why the G-20 meeting disappointed investors. The global economy needs actions, not words. The Eurozone is stagnant, Japan flirts with a recession all the time, the Chinese slowdown may accelerate, emerging-market economies suffer from low commodity prices, global growth is slowing down, and the leaders from the top world’s economies blithely talk about the ineffectiveness of monetary policy. It’s very good that somebody has finally noticed that monetary policy cannot spur genuine economic growth (wealth does not come from the amount of money), however, just talking is not enough. What the global economy needs are structural reforms eliminating excessive regulation and smart fiscal policies reducing the tax burden. The monetary policy proved to be ineffective; however, fiscal spending will not spur global growth either. Government spending may only crowd out private investment and exacerbate the already excessive indebtedness. This is also why investors should not count on globally coordinated efforts to fiscally stimulate the economy. Many countries simply do not have space for higher budget deficits and some are reluctant to increase spending. Japan is planning to increase a sales tax, the UK is rather going to spend cuts, while Germany explicitly says that “the debt-financed growth model had reached its limits”, as “it is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy”.

G-20 Meeting and Gold

Gold rose on Monday in Asian markets after the end of G-20 summit. The reason is that the confidence in the global economy’s strength and in policymakers is decreasing. The top world’s finance ministers and central bank governors noted a slowdown in economic growth but did not propose any solutions. The policymakers pointed out the ineffectiveness of monetary policy but did not propose measures to increase its effectiveness or to smartly replace it by fiscal policy or structural reforms. Moreover, they repeated previous pledges not to engage in competitive currency devaluations, pointedly glancing at the Bank of Japan and its recent introduction of negative interest rates. Thus, concerns about currency devaluation are another factor limiting the central banks’ options. As Germany’s finance minister pointed out, “fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts without reforms”. On the one hand, if all agree that monetary policy reached its limits and there will be no further NIRP's or further rounds of quantitative easing, it could be negative for the gold, which usually benefits from low or negative real interest rates. On the other hand, the lack of confidence in central banks and governments to spur economic growth should increase the safe-haven demand for gold. Structural reforms are facing the lack of political will; therefore, without any other shortcuts (like monetary easing or incurring new debts) global growth would remain stagnant. It should be positive for the price of gold, which usually shines in such an environment.

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 Sieroń is the author of Sunshine Profits’ monthly Gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast, and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.