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Asia Slowdown Portends More Stimulus

by Peter A. Grant

Oct 08, AM
(from USAGOLD.com) --

Gold is defensive at the start of the week, as mounting global growth concerns lead to risk aversion and a rebound in the dollar. Trading is expected to be thin during US hours today, due to the Columbus Day holiday.

The World Bank lowered its outlook on Asia, citing the "considerable risks" to export demand posed by the eurozone debt crisis and the looming US fiscal cliff. The World Bank now expects 7.2% growth in the region for this year, down from 7.6% forecast in May. That revised estimate is an 11-year low. The bank's 2013 projection was lowered to 7.6%, from 8.0%.

The Asian Development Bank comes up with an even weaker assessment of Asia, although it take a broader look at the region than the World Bank. The ADB is calling for just 6.1% growth in 2012 and 6.7% next year.

The Brookings Institution-Financial Times Tiger (Tracking Indices for the Global Economic Recovery) index reveals waning global economic momentum as well. The FT also reports that the IMF will cut their global growth forecast to 3.3% for 2012, and 3.6% for 2013 on Tuesday.

In a weekend FT article, Professor Eswar Prasad of the Brookings Institution, said: "The global economic recovery is on the ropes, battered by political conflicts within and across countries, lack of decisive policy actions, and governments’ inability to tackle deep-seated problems such as unsustainable public finances that are stifling growth."

When Professor Prasad speaks of a "lack of decisive policy actions," I presume that he's speaking of fiscal policy actions, because the monetary policy actions of global central banks have been nothing short of mind-blowing.

Chart by Also Sprach Analyst

Given the unprecedented monetary policy response over the last several years, what's really astounding (or perhaps not...) is the absence of results on the growth front. Of course, the king of expansive monetary policy by the 'percentage of GDP' metric is China, as this second chart by Also Sprach Analyst clearly shows. However, interestingly the PBoC's balance sheet has been shrinking at an accelerating pace lately.

Chart by Also Sprach Analyst

The World Bank assessment suggests that there is room for additional fiscal stimulus in Asia, and the PBoC hinted at as much over the summer. However, make no mistake, if Chinese manufacturing and exports continue to slow to the point where unemployment starts getting uncomfortably high, the PBoC would likely have a monetary policy response as well.

Such a response, on top of all the other global of stimulus — both monetary and fiscal — should continue to underpin the gold market. While recent tests of the upside have faltered ahead of $1800, corrections should continue to be shallow and short-lived do to robust investment and central bank demand.

It's also worth noting the rebound of the gold/silver ratio above 52.00, following a number of unsustained probes below 51.00. I suggested in commentary on 26-Sep that the ratio seemed to be trying to bottom and there was potential for a rebound to the 54.00 level. Today's gains make me more confident in that call and naturally the significant rise in growth risks would indeed tend to have a more negative impact on a more industrial metal like silver, relative to a more monetary asset such as gold.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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Asia Slowdown Portends More Stimulus