A Weakening Global Expansion Amid Growing Risks. Will Gold Benefit?

Thousands of political, business and cultural leaders are heading now towards Davos, Switzerland, to attend the World Economic Forum. On the eve of the world’s biggest annual gathering of the rich and powerful, the International Monetary Fund released its newest world economic outlook. What are the forecasts – and their implications for the gold market?

Global Expansion Weakens

Well, the title of the IMF’s update is telling: “A Weakening Global Expansion”. The global economy is projected to grow at 3.5 percent this year, 0.2 percentage point below last October’s projections and estimated performance in 2018. The revisions carry over from softer economic momentum in the second half of 2018, in particular in Germany, due to the problems of the automotive industry, and in Italy, due to the worries about sovereign and financial risks. Moreover, the experts acknowledge now the weakened financial sentiment and project deeper contraction in Turkey than previously anticipated.

What is the most important for the gold market, the US economic growth is expected to decline to 2.5 percent in 2019 (unchanged forecast from October) because of the unwinding of fiscal stimulus and further monetary tightening. The slowdown in America may push some investors into gold’s arms, although, given the sluggish growth in Europe, US dollar-denominated assets still look attractive.

While Risks Grow

The downward revisions may seem to be modest. However, the report does not end here. The problem is that risks to more significant downward corrections are rising. What are these risks? First, a further escalation of trade tensions. Higher trade uncertainty could further dampen investment and disrupt global supply chains. Second, a further deterioration of financial conditions: stock valuations went south, while credit spreads widened. Given a high level of debt, a more serious tightening of financial conditions may be particularly dangerous.

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