Sluggish Growth, Ineffective Policies Drive Precious Metals Rally - Economic Calendar Special Report

In the wake of the Brexit shockwave, anemic growth is increasingly viewed as the new normal for the US and global economies. This environment is expected to keep monetary policies highly accommodative, as central banks continue to apply old formulas to new problems, which presents an excellent opportunity to invest in physical precious metals as the global economy is currently going through one of the most economically uncertain periods in recent times.

Precious metals surged following the United Kingdom’s decision to leave the European Union (EU) on June 23. Perhaps contrary to expectations, the price of gold and silver remained well supported even during the six-week equities rally – a period that was marked by improved risk sentiment in the global financial markets.

In the United States, a series of upbeat economic reports during the month of June raised bets that the Federal Reserve is on track to raise interest rates this year. Those bets quickly faded after the Commerce Department said the economy expanded at a dismal 1.2% annualized rate in the second quarter, a fraction of what analysts had predicted.

Just two days before the Q2 GDP report, government economists also reported a 4% plunge in durable goods orders in June. That was the biggest drop in almost two years, reminding investors that the US economy continues to struggle with weak manufacturing demand and a lack of business spending.

Durable goods orders reflect demand for manufactured goods meant to last three years or more. Since the onset of the financial crisis, durable goods orders have consistently lagged other segments of the economy, offering a strong signal that business investment has not responded to low interest rates to the degree that consumers have benefited. The second quarter GDP result showed an increasing reliance on consumer spending to drive growth, with household consumption rising 4.2%.  

Against this backdrop, it came as no surprise that the Fed voted against raising interest rates last month. It will also come as no surprise when policymakers forego a rate hike again in September.

In a June 15 press conference, Fed Chair Janet Yellen discussed the “new normal” that is holding interest rates down. Yellen told reporters that interest rates are being depressed by “factors that are not going to be rapidly disappearing, but will be part of the new normal.”

Lawrence Summers, who was a favourite to replace Ben Bernanke as Fed Chairman in 2014, has been arguing for years that the United States and its advanced industrialized peers are part off a “secular stagnation” of weak economic growth.

Expectations for continued low-rate stimulus will continue to drum up support for precious metals and other so-called risk-off assets. Investors have been hedging against anemic growth all year long. The Japanese yen, Asia’s preferred risk-off currency, has gained over 15% against the dollar this year.

Loose monetary policy out of Washington has direct implications on the US dollar, which has seen its bull market threatened repeatedly this year. The performance of the greenback is directly tied to perceptions about monetary policy and the pace and timing of future rate hikes. A shaky dollar provides even more scope for precious metals to continue their rally.

Brexit has also heightened downside risks in the global economy, as evidenced by the International Monetary Fund’s recent World Economic Outlook (WEO) report. The IMF downgraded its outlook on global GDP, citing post-Brexit uncertainty as one of the main challenges.

“With “Brexit” still very much unfolding, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting,” the IMF said in its July WEO update where it lowered its global outlook this year and next.

Over the past six weeks, silver and gold prices have set consecutive two-year highs. Gains in silver have been even more pronounced, with the grey metal capitalizing on risk aversion and supply shortages tied to its industrial applications. Even with US stocks at all-time highs, precious metals have established a stronger baseline of support than at any other time over the past two years.

The price of silver set a fresh two-year high last week, where it narrowed its discount to gold to just 66 ounces. The gold/silver ratio is down nearly 10% over the past two months, reflecting silver’s momentous gains since the Brexit vote.

Written exclusively for APMEX by Sam Bourgi of EconomicCalendar.com

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