The big news this week is that gold has popped back up over $2,000. When it will exceed its all–time high of $2,070 is as yet unknown but the pieces are lining up to send it well on its way. This week we look in depth at what poor economic policies mean beyond interest rates, inflation and high gold prices.
Latin America suffered a lost decade in the 1980s and Japan in the 1990s. Both instances came from misguided government policies and too much debt. The World Bank now warns if government policies continue the current course that we are facing a global lost decade.
“History doesn’t repeat itself, but it does rhyme” – Mark Twain
The World Bank’s report Falling Long-Term Growth Prospects: Trends, Expectations, and Policies opens with:
The overlapping crises of the past few years have ended a span of nearly three decades of sustained economic growth that brought the world a massive reduction in extreme poverty. Starting in 1990, productivity surged, incomes rose, and inflation fell. Within a generation, about one out of four developing economies leaped to high-income status.
Today nearly all the economic forces that drove economic progress are in retreat. In the decade before COVID-19, a global slowdown in productivity—which is essential for income growth and higher wages—was already adding to concerns about long-term economic prospects……. International trade—which from the 1990s through 2011 grew twice as fast as GDP growth—is now barely matching it. The result could be a lost decade in the making—not just for some countries or regions as has occurred in the past—but for the whole world (bolding added).
A lost decade in making?
Readers should note that the World Bank is not infallible. Yet the above discussion does ring true for a key reason. Also, 1990 was the year Capitalism defeated Communism. Communism was discredited by the fall of the Berlin wall in November 1989.
That a global superpower could no longer deny its people the standard of living provided by Capitalism in West Germany meant that East Germany’s reason to exist (namely the iterative perfection of communism by the state on behalf of the people) had expired unfulfilled.
Months later in August 1991, the Soviet Union itself imploded when hardline communists tried to oust Gorbachev but ended up with Yeltsin. Further, Yeltsin declared democracy and the end of communism. Additionally, within a few short years, an entire region of Earth had decided to join the global economic competition for the first time in several decades. Instead of building tanks, the Russians began to build products of more peaceful export like steel.
Western Europe and America as a result were also able to become more productive since military spending could fall simultaneously for everyone. Global GDP grew because jeans and movies were better thing to sell than missiles.
1990 also saw the discredit of communism in favour of capitalism inside China. Deng Xiaoping’s idea that Marxism could not feed all Chinese dates back to 1978. But 1990 was the year, following 1989’s Tiananmen Massacre that communist party leaders struck a new social contract with the population.
Moreover, getting rich through capitalism was now acceptable within China and communism was redefined. This new social contract could be summarized as ‘the communist party allows everyone to better themselves through capitalism, but no matter how rich all we get, the party shall remain in power’. As with Russia’s change, the Chinese change gave global GDP a huge boost which lasted decades until the 2020s.
Now that China wants to turn away from capitalism under Xi, and Russia has abandoned global trade since invading Ukraine; the World Bank concerns seem very timely. What we find very interesting about the World Bank report is that no mention is made of communism’s absence from 1900 until 2020.
The report goes on to say that it will take a big and broad policy push to rejuvenate the global potential growth rate that is expected to fall to a three-decade low of 2.2% a year between now and 2030, down from 2.6% average from 2011-21, and a steep drop from the 3.5% that prevailed in the first decade of this century.
This has been an exciting week for both gold and silver. We welcomed chart guru Patrick Karim back to the show, to take us through his expectations for the new quarter and he was even kind enough to give us some tops tips for any newbies to technical analysis.
The World Bank said that the potential growth rate can be raised, but it will take government policies that grow the labor supply, increase productivity, and incentivize investment.
Six policy actions that will affect demand and supply for silver and or gold
There are six policy actions that the World Bank outlines as ‘priority interventions’ to boost growth.
As you read this list below please consider how each one will affect the demand and supply for silver and or gold. Moreover, if you read them all and understand that achieving them requires more borrowed money to keep the economy spinning, you are on the right track!
Greater investment initiatives to reach climate goal initiatives that do not undermine fiscal sustainability. The World Bank report also suggests reforms that address a range of impediments to private sector development, such as high business startup costs, weak property rights and corporate governance, inefficient labor- and product-market policies, and shallow financial sectors.
Aligning monetary and fiscal frameworks
Robust macroeconomic policy frameworks are critical to support investor confidence and can moderate the ups and downs of business cycles.
Cutting trade costs
Trade costs—mostly those associated with shipping, logistics, and regulations—can double the cost of internationally traded goods.
Capitalizing on services
As international trade in goods has ebbed, the services sector has become an increasingly important engine of growth for developing economies.
Upping labor-force participation
If overall labor-force participation rates, especially among women and older workers, could be boosted to match the best ten-year increase on record, this could increase global potential growth rates by 0.2 percentage point on average by 2030.
Strengthening global cooperation
From 1990 through the mid-2010s, the global economy fired on nearly all cylinders partly because of broad-based international cooperation following the breakup of the Soviet Union.
The problem for World Bankers is that many current policies are working in the opposite direction from the above list of recommendations – and the initiatives above would take a massive change in trade policies.
Despite a low likelihood of success, any money printed or invented to fund the above initiatives will sustain today’s high inflation to the benefit of people holding physical gold and silver.
The investment initiatives, such as the U.S.’s Inflation Reduction Act, and the European Union’s expanded tax breaks on clean-tech companies might be too little too late, and add to already massive debt levels.
Many of the initiatives, in one way or another, involve expecting increased global cooperation, which is instead clearly on the decline – See our April 20, 2022 post “The Friend-Shoring of Gold – A New World Order?”
From The Trading Desk
Last week’s focus on the gold price, we were looking for a monthly and quarterly close above $2,000.
Unfortunately, we did not get that confirmation, closing just 1% below that import level. However, markets opened Monday with a big 2% rally taking gold close to the $2,030 level and have stayed above the $2,000 level this week.
The gold price is now waiting on some guidance where we go from here.
Tomorrow US Non-Farm payrolls are released which are expected to rise by 236,000 for the month of March but unusually this data will be released on a bank holiday Friday when the gold market is closed.
We will have to wait until Monday to see how the gold price reacts.
This data is important as the market is pricing in rate cuts towards the end of the year while at the same time, some fed officials are calling for further rate hike above 5% to keep downward pressure on inflation.
I think we need to remind ourselves how gold is performing here with rates at 5%, which would usually have a negative correlation with the price of gold.
If we do get lower rates towards the end of the year, will be another headwind out of the way for higher gold prices.
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