Gold 2048 brings together industry-leading experts from across the globe such as George Magnus, senior economist; Rick Lacaille, Global Chief Investment Officer of State Street Global Advisors; and Michelle Ash, Chief Innovation Officer at Barrick to analyse how the gold market is set to evolve.
Key trends this report explores:
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- Economic growth is good for gold. As the middle class expands rapidly in China, India and elsewhere, demand for gold will undoubtedly increase.
- Technology is likely to become an increasingly important sector for gold, as the world becomes more digital and connected.
- Gold mining industry is going to be challenged to produce as much gold in the next 30 years as it has done during recent years.
- Production methods and stakeholder relations will need to evolve if the gold industry is to make a meaningful contribution to society over the next three decades.
How can we map the global economy between now and the middle of the century? Looking back 30 years, people did not even predict the fall of the Berlin Wall or much more that was to follow. On the other hand, they knew about the countdown to ageing societies; they were aware of Asia’s growth potential; and some even had an inkling about the embryonic information and communications revolution.
Clearly then, a degree of humility is required as we look to the future. Nonetheless, certain trends and patterns should provide useful guidance about the next 30 years.
Emerging markets and their challenges
Emerging markets have been behind the biggest economic shift in recent times. In terms of purchasing power parity, they lifted their share by nearly 23 percentage points to 58.7% between 1980 and 2017, according to the World Bank. In reality, though, this is essentially about China, which boosted its share by nearly 15 percentage points to stand at 18.3%. India’s share was comparable to China’s 30 years ago, but it is a more humble 7.2% today. In current US dollar terms, more appropriate when looking at China, GDP shares are rather lower, but the trend is the same. India’s share is a somewhat paltry 2.8%, while China’s is 14.8%. No other country has come close to the latter’s economic achievements.
Barring unforeseen shocks, the relative heft of emerging markets in the global economy should increase further, especially while advanced economies languish in the long shadows of the financial crisis. Much of the world’s population growth will occur in emerging and developing countries, and most people expect the rising emerging-market middle class to be the big story of the next quarter century. It is true that most new entrants to the middle class will be at the lower end of the scale, not high-rolling members of the Shanghai and Mumbai elites. Nonetheless, a recent report from leading US research group Brookings predicts that, over the next 17 years, 170 million people will enter the middle classes every year from emerging markets, mostly in Asia, especially China and India.
Yet, as a reminder about how forecasts can go astray, we should note that in the last century, Germany did not end up ruling the world, while the Soviet Union and Japan both failed to live up to the high expectations of the time. Will China and India fare any better? Perhaps, but also perhaps not. In fact, since 1945, only about a dozen countries have managed to break out of or avert the so-called middle-income trap, and sustain adequate economic growth for long enough to attain income per head on a par with the
35 advanced economy members of the OECD.
Countries such as Brazil, Argentina and Venezuela have actually regressed. Malaysia and Thailand may now be trapped. India can certainly make a lot of economic progress before it needs to worry, but China is already a high middle-income country. To become a high-income country, it needs to focus hard on the institutional, technological and organisational reforms that sustain high productivity growth. Advances in technology and innovation are not hard to see – China is already a world leader in many advanced technological fields. Institutional and organisational reform may prove more challenging.
The impact of demographics
Demographic trends will play a significant role. Growth in the working age population is positively associated with economic growth, but a stagnant or weak working age population is linked to weaker savings and investment, lacklustre stock markets and price-earnings ratios, and a greater preference (by older cohorts) for income.
The predicted two billion rise in Africa’s working age population will be slightly more than the increase in the rest of the world combined, and Africa’s share of working age people will rise from about 13% to over 40% by 2100. This gives Africa the potential for extraordinary and transformational change.
Yet it is not assured, and depends on many factors, including improved reproductive and general health; sustained investment in education and skill formation; strong institutions; and, importantly, enough jobs to absorb large increases in the working age population. Normally this depends on labour-intensive manufacturing: but how can we know how this will evolve in the age of automation and artificial intelligence? Nevertheless, this is certainly a part of the world that will merit close monitoring.
China’s age structure, by contrast, is changing faster than anywhere else on Earth. Its working age population is expected to fall from just over one billion people to 794 million by 2050. This alone will lower economic growth by close to 1% per year. The over-60 cohort will rise from about 201 million to over 490 million, or 36.5% of the population. The old age dependency ratio (over 60s as a percentage of working age population) will rise from 13% to 46.7% by 2050. Put another way, while there are 7.7 workers to support each older citizen today, there will be only 2.1 workers by 2050. This would be less than the 2.7 workers in the US, and much lower than the five workers in India.
China has banked its demographic dividend – the phase associated with falling child dependency, an expanding workforce, rising levels of consumption and savings, and low levels of inflation. It did so successfully and in benign global conditions. Now, the country must evolve coping mechanisms to address very different economic and social conditions.
India is altogether different. Its population will overtake China’s in a few years. Its fertility rate is falling but it remains almost twice that of China. A third of the population is below the age of 15, and as these children grow up, they will boost India’s labour force over the next 30 years by about as much as the entire working age of Western Europe today. By all demographic metrics, India’s demographic dividend is just begging to be exploited. Yet, we cannot be certain that India will be as successful as China.
India’s rural sector is still home to 70% of the population but there is a much weaker tendency for people to leave for an urban life than in China. Poverty and relatively low educational attainment mean that far too many people are ill-equipped for productivity-enhancing work. There is a high incidence of poverty among those classified as workers. In any event, without a thriving manufacturing sector and plentiful infrastructure, it is by no means certain that India will be able to generate enough jobs for its teeming working age population.
The country is buffeted by headwinds of its own making, such as complex labour laws, regulations and subsidies that depress employment, and a manufacturing and services technology environment that favours local provision of goods and services, rather than foreign investment. These could all affect India’s chances of success and define the challenge it must rise to in the decades ahead.
India undoubtedly has a lot of work to do but there are signs that its government is making progress and putting in place policies that will serve the economy well in the future. In the past few years, it has implemented policies to formalise the grey economy, eliminate ‘black money’, improve corporate and financial balance sheets and roll out a nationwide, efficient Goods and Services Tax. These measures have caused short-term problems and economic growth dipped in 2017. In the long run, however, they have the potential to make India more efficient and boost economic growth.
A 30-year bond bear market
One of the biggest sources of uncertainty is whether ageing societies will prove to be inflationary or deflationary – a distinction with significant implications for real interest rates and the investment climate. Based on current forecasts, these societies include Europe, the US and Japan. There is a consensus view that they will be less dynamic, featuring weaker savings and investments, continued low inflation and persistently low levels of real interest rates. But this might not be right.
The stagnation or fall in the working age population in ageing societies will make skills, and perhaps labour in general, scarce. Scarcity tends to be reflected in higher returns, in this case wages. The era of low inflation and flat Phillips curves (insensitivity of wages to low rates of unemployment) may be ending, therefore, and inflation could rise again. Some of the factors that have held back wages and pricing power may not suppress inflation as much in the future as they have done in the recent past. These include the lingering effects of the financial crisis, anaemic demand and weak investment, globalisation, and lower skilled people replacing higher skilled retirees and those digitised out of jobs.
Age structure is also likely to affect inflation, regardless of the role of monetary policy and inflation expectations. According to IMF researchers, the larger the proportion of children and older citizens in the population, the greater the likelihood of higher inflation.1 The argument is that different age groups have different consumption and savings patterns, which affect inflation. The young and the old are consumers, not producers, while working age cohorts are the opposite.
To the extent that the demographic dividend era in the West was characterised by low or lower inflation, changes in the age structure can be seen as an important influence on bond markets. The period in which falling child and rising old age dependency just about balanced out was associated with low inflation and falling or low bond yields. There were, of course, many other important factors, including central bank policies, political and policy sensitivities, and booms and busts. Yet, as age structure changes again in the future, we should not be surprised if inflation rises again, pushing bond yields up. It will then be up to central banks to determine whether to accommodate it with a slower rise in interest rates or curb it by pushing policy rates up more firmly, and by implication long rates too. Either way, the falling and low real rates of the past 30 years may be drawing to an end.
More redistributive Western politics?
The impact of automation and machine intelligence on labour markets and inflation is unknowable and equivocal. There is no question that they will displace more jobs than they create, in line with every technology shift over time. In middle-skill, middle-wage-paying jobs, we can already see those effects. In the end, though, every technology shift has delivered productivity benefits from which either workers or owners of capital have benefited, and jobs have been created as those benefits became entrenched. If this time is different, it is because the main beneficiaries of new technologies are the owners of capital. The current climate already suggests that we should expect politics and policies to become increasingly redistributive to compensate – or face rising social tensions that lead to the same outcome.
In the Western world, there is already a growing chorus of debate about coping mechanisms to deal with the widespread technological unemployment that some fear. These range from training and retraining programmes to the legislation of a universal basic income (UBI), which is already being piloted in a handful of countries, states and cities. It is likely that UBI will always be too little to make a real difference to those automated out of work and weaken the welfare system for the needy. And if it is enough for these cohorts, it will probably place an excessive burden on the state – especially as age-related spending starts to surge.
Yet it is easy to see why investors need to keep an eye on the policy responses to automation, which could in some cases prove to be financially burdensome and aggravate pressure on interest rates and credit markets. With luck, we can look forward in due course to higher productivity growth, and eventually the creation of new occupations and employment that are impossible to predict today.
What crises will emerge?
Inevitably, we will face periods of macroeconomic instability and geopolitical crisis. A multilateral world order from which the US is retreating as a benign hegemon, and in which China, Russia, Iran and Turkey want to assert their presence, is a recipe for disorder. Europe has survived its first crisis, but Brexit and unresolved political and banking issues remain to be addressed. Yet the biggest canary in the coal mine is likely to be the way in which Sino-US relations evolve.
China’s global role is certain to be influenced by both homemade factors and the response of other major nations to its Belt and Road Initiative, a massive infrastructure project designed to boost economic growth – and China’s influence – in Asia and beyond.
At home, China will have to endure a major deleveraging sooner or later. Bad or uncommercial debt has to be recognised, written down and paid for eventually, and regulators will need to defuse the volatile and risky funding structure of the liabilities created to issue debt. Whether the government chooses, or is forced, to embrace a proper deleveraging, the economy is likely to face a protracted period of slow growth, which will spill over into commodity markets and supply chains. This ‘crisis’ is unlikely to look like the 2007–08 variety in the West, but it will almost certainly shape China for a good few years.
Article by World Gold Council
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