Three Upside And One Downside Risk For Gold

We stated earlier that unless something bad happens, 2020 may be worse for the yellow metal than 2019, as gold fundamentals seem to have deteriorated since the last year. Of course, bad things are happening all the time, but do not result in any possible negative developments. Rather, we have in mind three downside risks to our macroeconomic outlook or three upside risks for gold. What are they?

First, the economic crisis in China may break out, as the country's level of borrowing has grown dramatically in the past decade and that pile of debt is a key source of vulnerability. In any Western country with a market economy, such a debt problem would already have triggered a financial crisis.

And investors should remember that China's local governments must pay-off over $283 billion in maturing municipal debt. Undoubtedly, they would like to roll over the maturing debt. But the problem is that it could push interest rates up, worsening the financial position of provinces and cities, which is already not in the greatest shape. In 2019, a few Chinese banks - China's Baoshan Bank, Bank of Jinzhou, Heng Feng Bank - failed and were nationalized for the first time ever.

So, increasing credit defaults and corporate bankruptcies are now coming to the surface amid the economic slowdown. At the same time, China has to deal with protests in Hong Kong and tackle the trade dispute with the U.S. With all these problems happening simultaneously, there is a risk that something will get out of control. Any crisis in China would spill over to other markets, supporting safe-haven assets such as gold.

Second, risks are rising in the bond market. We mean here mainly high levels of risky corporate debt. The ultra-low interest rates encouraged excessive debt buildup. As one can see in the chart below, the credit granted to all non-financial corporations from all sectors at market value as a percentage of GDP in both the U.S. and China is significantly above the pre-crisis level.

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If you enjoyed the above analysis and would you like to know more about the most important macroeconomic factors influencing the U.S. dollar value and the price of gold, we invite you to read the ...

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