If 2012 was a year of transition in the global economy, 2013 is likely to see a number of macroeconomic chickens coming home to roost that could disrupt commodities.
The first of these risks, according to French Bank Natixis, lies within the US, which looks like it may finally have to stop the rapid expansion of its balance sheet and, instead, attempt to follow the path of fiscal austerity already tried by Europe. Whether or not this will be contemplated and, indeed, if it is actually possible, is likely to be one of the big questions of 2013.
“If the US embarks on a programme of fiscal retrenchment that is too tough, it may (in conjunction with the associated fiscal multipliers) lead to a sharper than expected slowdown in US economic growth. If, on the other hand, it becomes clear that the US either cannot or will not reduce its fiscal deficit, then monetisation of debt becomes the sole policy option, alongside credit downgrades, depreciation of the dollar and higher inflation,” the bank writes.
An associated risk to this lies in the end of the Fed’s QE policy.
” The Fed must tread very carefully in deciding when and how to unwind the abnormally low interest rates that have been created by successive bouts of QE. It is hard to know what the next financial bubble might be, but it is reasonably certain that there will be one if US interest rates remain too low for too long.”
These events, particularly the ones surrounding the March 1st deadline whereupon spending cuts in the US will be automatically invoked if a new budget deal has not been agreed are likely to impact the gold market significantly.
While the bank’s central scenario for the yellow metal this year is one of modest decline after a bout of volatility in the early part of the year, the risk of no agreement and a subsequent downgrade of the US credit rating cannot be overlooked. And, If the country either cannot or will not reduce its fiscal deficit then the alternative option of monetisation of debt, alongside credit downgrades, depreciation of the dollar and higher inflation would offer a significant boost to demand for gold.”
If a compromise is reached, however, the bank says, “this will take the US on its first steps towards fiscal retrenchment, with the prospect that the country’s debt can ultimately be brought back under control. In this scenario, the need to hold gold as a safe-haven would be significantly reduced.”
The second significant upside risk likely to be closely watched by the gold market is one that has already been looming over the global economy for a number of years – the potential for a major recession, secession or default in Europe.
“Such a major crisis in Europe could easily push European investors back into gold once they perceive the inevitability of a major crisis for the currency… Events in the Middle-East and North Africa could also lead to higher gold prices, if tensions present in a number of countries escalated into more significant conflicts across the region.
On the downside, however, Natixis maintains that, if the world were to see a better-than-expected recovery in the US housing market and/or a significant fall in US net imports of oil and oil products, investors “could push the dollar higher as well as supporting risky assets such as equities and credit”
Likewise, “A stronger than expected recovery in China could similarly encourage investors to move away from gold into more risky assets such as equities or real estate. In both cases net demand for gold could potentially turn into net supply, especially if investors started selling gold holdings in bars or physically-backed ETPs,” the bank writes.
Given its strong correlation to the yellow metal, the risks both on the upside and down side are likely to affect silver in similar ways to those described for gold above but, there are a number of additional industrial-based risks facing the ‘poor man’s gold’.
Should the European crisis deepen, governments could well reduce even further, the feed-in tariffs on photovoltaic panels that have buoyed the silver market in recent months, Natixis says.
” In addition, should the global economy improve to an extent where it is clear that we are out of danger of a global recession, this could impact silver prices as investors holding silver become net sellers of the metal as they move into higher yielding and/or riskier assets.