The Bullion Desk: Gold price to rally once equities accept harsh reality
Global central banks continue to prop up equity markets by printing money but this accumulation of debt and persistently slow GDP growth will eventually become too much to overcome, Lear Capital CEO Scott Carter
A painful correction in stocks and a powerful rally in bullion is inevitable, he told FastMarkets in an interview.
The past week has been a struggle for those who are long gold. The Federal Reserve last Wednesday released a hawkish policy statement that officially ended its quantitative easing programme and painted a generally rosy picture of the US labour market and inflation expectations.
The impact was immediate and dramatic. Gold has since fallen about $80 per ounce to $1,170 per ounce, while stocks once again turned red-hot. Last week, the Dow Jones industrial average climbed 3.5 percent to 17,390.52, ending Friday at its 19th record close for the year.
“The strength of the US stock markets and their ability to withstand negative news is very powerful. And while I’m long stocks like everyone else, I’m a realist – the world economy is weak and if it weren’t for the Fed, even the US would be in a recession right now,” Carter said.
“Worldwide economic growth is slowing down dramatically – this has central bankers quite concerned,” he added. “At the forefront is Europe, where nearly every country is in a recession or at best at zero growth. China is slowing and even the US economy is not yet at breakaway speed.”
In data released over the weekend, the China HSBC final manufacturing PMI came in at 50.4 for October, which is far from the levels required to instil confidence that the country will meet its 7.5-percent annual GDP growth target.
Elsewhere, the International Monetary Fund (IMF) cut its German economic growth forecast for 2014 and 2015 to around 1.5 percent, citing the crises in Ukraine and the Middle East, while the eurozone GDP as a whole is only expected to expand by just 0.8 percent this year.
“Governments around the world are piling up a mountains of debt, yet they have very little to show for it,” said Carter, who calculates that global debt recently crossed the $100 trillion threshold.
Just last week, the Bank of Japan surprised global markets by expanding its stimulus programme – to 80 trillion yen per year from 60-70 trillion yen – in an admission that economic growth and inflation have not accelerated nearly as quickly as expected.
Meanwhile, the European Central Bank, which meets on Thursday, might have no choice but to implement its own full blown quantitative easing programme.
All this cheap money in the system creates an aura of invincibility within the equity markets, Carter said.
“Even though there are many reasons to be fearful, investor complacency is back to 2007 levels. No one believes they will lose money in the stock markets. This alone should be a red flag,” he added.
But there will be a sharp sell-off in equities once reality sets in, which will generate enormous demand for safe havens such as government debt and gold, he predicted.
“A correction is coming and, when it does happen, it will be violent and painful,” Carter said. “I saw gold at $1,440 by the end of the year, and obviously that going to be hard to reach now, but I do think there are some warts on the real economy that will make it near impossible for the central banks to get totally out of the market.”
“Everything that is happening with central banks and global economies lead me to believe that we will see safe-haven investing play a huge role over the next 12 months. It’s just a question of when, not if,” he concluded.
Los Angeles-based Lear Capital sells semi-numismatic and premium rare coins. As well as selling precious metals, the company also offers IRA rollover services.
Source: The Bullion Desk