So says Matthew Lynn (marketwatch.com) in edited excerpts from his original article* entitled Three warning signs from higher gold prices.
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Lynn goes on to say in further edited excerpts:
There are three possibilities:
1. A Crash in China
No one knows for certain what is happening to the Chinese economy, partly because the statistics are so untrustworthy but what we do know is that there has been a massive buildup of credit, and the country’s turbo-charged growth is starting to slow, and that is seldom a happy combination.
China’s new rich have been putting their money into a new breed of unregulated high-yield wealth management products, many of which have turned out to be about a reliable as a Florida subprime mortgage application in 2007. If that money heads for the exit, and the economy starts to wobble as well, then Chinese investors will switch into gold as their traditional safe haven. A wall of money will hit the precious metal. How big could that be? Enough to make a big impact on the price, that much is for sure.
2. The Arrival of Deflation
The market has decided just to ignore the way that deflation is starting to get a hold on the euro zone but it may not be able to remain indifferent much longer. Figures released on Monday showed consumer prices dropping at their fastest rate since records began. Cyprus and Greece now have falling prices year-on-year. Italy & France cannot be far behind with prices falling there by 2.1% & 0.6%, respectively, in January.
Falling prices are partly an indicator that the economy is in fresh trouble — after all, companies don’t cut prices because the demand for their products is booming – but it also is catastrophic for nations that have very high debt levels such as all the peripheral members of the euro zone. The debts remain the same, while the income to service then shrinks every year, and if your debt-to-GDP ratio is already 130% as it is in Italy, then that is a big problem.
If deflation does take hold, then two things follow.
- the euro crisis may move into its third and final act, paving the way for a final breakup or
- the European Central Bank will be forced to launch quantitative easing on a massive scale to try and stop prices collapsing, and taking economies down with them.
Either of the above is certainly going to send gold upwards in price.
3. Another recession
…In the normal course of things, the economy slows down every four or five years. If the recovery started — admittedly very slowly — in the middle of 2009, then there would be nothing very surprising about a slowdown later this year, and some kind of shock before the start of 2016 is just about inevitable.
There are already signs of slowing growth everywhere, from weak jobs growth in the U.S., to turmoil in the emerging markets. The recovery from the crash of 2008 is likely to be a one- or even two-decade process. There will be bumps along that road, and we are about to run into one. The gold price may well already be forecasting that.
Gold has a long and impressive record of warning of trouble ahead in the global economy. It has usually been right in the past — and it is telling us right now that the outlook is much less secure than the market assumes. You ignore it at your peril.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://www.marketwatch.com/story/three-warning-signs-from-higher-gold-prices-2014-02-26 (Copyright © 2014 MarketWatch, Inc. All rights reserved.)
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