Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Great Fiscal Rotation and Gold

Commodities / Gold and Silver 2017 Feb 10, 2017 - 01:57 PM GMT

By: Arkadiusz_Sieron

Commodities

Reflation is a fact, at least for a while. And it is not limited to the U.S., as it is a truly global phenomenon – since 2016, the rebound in economic activity has been seen both in the advanced and emerging markets (this is partially due to the flattening in deep recessions in Russia and Brazil). The broad-based improvement is bad for the yellow metal, as it signals a more lasting revival. Additionally, although the recent rebound has mainly been triggered by the huge fiscal stimulus in China, the advanced economies have also improved significantly, in particular the U.S. It means negative news for gold, which is more sensitive to developments in America.


Going back to China, the country announced an infrastructure spending program worth half a trillion dollars. The program should not be underestimated, given the fact that China contributes about half of all global growth. Moreover, the UK also declared the biggest government investment program in over a decade, worth about £23 billion. Even the fiscal policy in the euro area has turned modestly expansionary. All these actions, as well as Trump’s fiscal plan, signal an important shift in global policy towards a more active role of fiscal policy, which may be called ‘The Great Fiscal Rotation’.

The new global regime – which only gradually materializes and results from the slow recovery, weak productivity and the widely perceived need for infrastructure investments – is negative for the gold market. We are not great fans of government spending, but fiscal policy can indeed stimulate the GDP in the short-term. The acceleration in the economic activity should support risky assets and put gold into limbo.

To be clear, we do not mean that the global economy entered the land of milk and honey and all risks vanished. Not at all. Significant threats may stem from the China’s economy, the wave of populism and protectionism, or European banking sector. Nor should we forget about the global indebtedness, high fiscal deficits, and the bitter truth that there is not much room for fiscal stimulus. In good times we should not borrow to accelerate growth, but we should actually save for bad times – otherwise we risk being less prepared for the next crisis when it comes. In particular, Trump’s tax cuts may not drive growth and only make budget deficits surge. Although many analysts make parallels between Trump and Reagan, the comparison with George W. Bush may be more appropriate. Bush’s fiscal policy did not work and had no effect on jobs or investments. Instead, it just planted the seeds of the great recession and blew out the deficit, hurting economic growth and undermining fiscal position, as one can see in the chart below.

Chart 1: Federal surplus or deficit as a percentage of GDP from 1971 to 2015.


We simply point out that the macroeconomic situation turned out to be less favorable for gold. First, economic growth is accelerating globally, but the U.S. leads the race with Europe or Japan. This development should support risky assets and the greenback, which are negatively correlated with gold. In particular, the manufacturing sector and corporate investment seem to be rebounding as the energy shock dissipates. Secondly, monetary policy ceased to be the only game in town. With fiscal policy more active, monetary policy becomes less accommodative. As a reminder, gold gained in 2016 to a large extent due to fears that monetary policy was ineffective. Even if these worries are warranted, as we argued in the October edition of the Market Overview, the effectiveness of monetary policy is less important when the fiscal policy is also strongly in play. And again, the Fed is the leader of the monetary tightening, which should strengthen the U.S. dollar and weaken the yellow metal.

Summing up, policymakers have called for a more expansionary fiscal policy for years. Now, it seems that the consensus has shifted in favor of fiscal stimulus. Actually, some governments have already eased their fiscal policies, and others are going to do that soon. The shift in the global macroeconomic regime is negative for the yellow metal, as it makes risky assets more attractive. Surely, the fiscal policies effects seem to be exaggerated – neither Bush’s nor Obama’s Keynesian stimuli boosted economic growth – but gold investors should remember that reflation trade is rooted in something more than just Great Fiscal Rotation. The regime shift simply coincided with the spontaneous, cyclical acceleration in the global economic growth.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in