When 2013 unfolded, many investors felt that the U.S had adequate forward economic momentum to weather sub-par economic growth. But it was not to be. Though The Dow and S&P 500 (INDEXSP:INX) indices rallied, the US and other economic expansions have recently been called into question. Recent data shows slowing growth in the United States and China, while Europe’s recession is still underway. Last week, the International Monetary Fund cut its outlook for global growth as it believes the world economy will grow only 3.3% in 2013. However some economists consider this prediction to be highly optimistic.
In a bid to spark inflation, Japan is injecting money into the economy on a massive scale. Earlier this month, Japan’s central bank said it would start purchasing longer-term debt and securities like ETFs at an annual pace of 60 to 70 trillion yen.
Perhaps the Q1 U.S. across the board 2% “Payroll Tax” (FICA) increase coupled with worldwide slowing is overwhelming the modest economic momentum that the U.S. had. Economic growth in the U.S. isn’t likely to be as strong in the second quarter. Other economic data such as job growth, retail sales and manufacturing sector showed signs of weakness.
Amidst all these, in the U.S. a key Fed indicator recently flashed caution that the Fed may revisit, rather than reduce, its QE program. While the inevitable QE repercussions are unknowable, the Global Financial Crisis (GFC) QE has been good for both gold and financial asset prices. On January 25, 2013 the U.S. Federal Reserve took the historic step of explicitly targeting a 2 percent inflation rate.
It is felt a common proxy for the Fed’s interpretation of market expectations of future inflation is the “5-year Treasury / TIPs bond breakeven rate”. It is pertinent to note since the GFC, yield contractions in this proxy have often been a precursor to Fed action. This view gets strengthened when one takes a closer look at the following graph:
According to a recent report dated April 25, 2013 released by Industrial Alliance Securities Inc titled “Gold may find support from an old friend: Not so fast with that QE end game”, for gold bulls, the above indicators are Manna for the case against currency debasement. The report concludes that they remain committed to their Guerrero Gold Belt buys, as they believe this is a transformative year for the district.