While falling commodity prices are beneficial to countries that are net energy and commodity importers they actually may be signals of economic weakness across the globe and weaknesses in the growth of the global economy.
So said Nouriel Roubini in an edited transcript of a recent interview on CNBC-TV18 by www.moneycontrol.com, India’s No.1 financial portal. Check out the 11 “Related Articles” at the end of this post for other points of view on the subject. Your comments are encouraged in the “Comments” section.
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Further edited excerpts from the interview:
Q: In the last eight weeks, what has really churned…the asset markets seems to be the very steep fall in commodities….What exactly are we going through?…
A: The falling commodity prices, while being beneficial to countries like India and others that are net energy and commodity importers, may actually be signals of weaknesses in the global economy.
What has happened for the last few weeks is that most of the macro economic news has been actually quite negative and surprising on the downside:
- The Eurozone peripheral recession is not bottoming out and now this recession is spreading even to the core of the Eurozone. France and even the latest data from Germany forward-looking indicator of manufacturing have been weak.
- The US now is slowing down. The effects of increasing taxes and the sequestration of spending is now having a negative impact on economic growth — slower consumption growth, slower private sector growth and the fiscal austerity is going to have a negative effect on growth.
- Now, even the data coming from China, the second largest economy of the world, suggests that in spite of another round of credit fueled investment, the growth of China might be slowing down. Both first quarter growth numbers and now the forward-looking indicator like the purchasing managers’ index (PMI) suggest the softness of China.
So in that sense, if the fall in commodity prices is caused by a growth scare, and if it is not just a growth scare but we are going to see economic weakness in Europe, in the US, in UK and now even in China, that is going to be bad news.
While a fall in commodity prices benefit commodity importing countries, if the reason why commodity prices are falling is that markets looking forward are pricing in softer global economic growth, then that is going to be bad news for India…Asia and for the global economy so it is a mixed bag.
Q: Logically if there is so much money being printed gold should not fall so much and yet we see gold becoming the worst causality of the commodity fall. [Why is that?]
A: The reason why commodity prices are falling in spite of easy money is because right now there is a growth scare….
In my view, the reasons why gold is falling in price are several:
- The risk of another global financial meltdown has receded. The tail risk, for example, of a breakup of the Eurozone is lower. Usually, gold tends to do well when you have a risk of a global financial meltdown….
- Weak growth is associated with deflationary, if not disinflationary pressures. So in spite of a rise in liquidity there is no inflation. If anything, these growth concerns imply disinflationary pressures and therefore holding gold because of worries about hedge against inflation is going away.
- The increase in liquidity has now restored economic growth both in advanced economies and emerging markets and there are other riskier assets that can give you a greater return than gold like US and global equities. For example, gold doesn’t have any income — doesn’t pay coupon, doesn’t give you dividend like equities. It is only based on having a capital gain if gold prices go higher. While equities provide you potentially both a capital gain and dividend, bonds can give you a capital gain if the price rises and they give you an income in terms of a coupon.
In some sense, actually, the fall in the price of gold is a good signal because it says that, in spite of the recent concern about the global economic growth there is a global economic recovery and that:
- there are other real assets like
- good corporations in advance economies and emerging markets,
- good bonds in advance economies and emerging markets,
- real estate and
- some commodities
that can give you a higher return.
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