Gold predicted falling world growth and inflation. What now?

By Paul Nathan

My exposure to resource stocks is as low as it has been in recent history and still, I'm nervous. Things are happening that shouldn't be. The last time I said that was last July when I turned bearish and defensive on gold. 

And here in October I'm sensing the same thing. Let me repeat my thesis: that the world economy is moving toward deflation and recession and the realization of this is just dawning on most market participants and that's why stocks are falling. The IMF just announced a downgrade to their world growth estimates. Analysts suddenly fear deflation and recession abroad and are beginning to blame that for the stock market decline. That's a first. They have finally come around to my way of thinking that falling world growth is a real threat to the US and will affect our growth rate here at home and therefore, corporate earnings.

Gold has proven to be a good barometer of future growth and inflation rates and caught these developing trends months ago. The stock market just caught on, hence the huge triple digit losses of late.

At the beginning of the year gold was selling at 1180, its lowest level to that point, even though US growth was moving up briskly at a 4% rate. What gold was forecasting was the coming drop in growth in the first quarter which ended down almost 3%. Gold rose from there to 1382 in March forecasting a rebound in growth in the US and abroad and an increase in inflation domestically and internationally even as growth was plummeting 2.9%.

What gold saw was a reversal in the deflationary/recessionary trend toward higher inflation and world growth ahead. And, indeed that's what happened. But in July, at the peak of new inflation fears and a good rebound in growth to over 4%, gold began to fall. It fell from 1340 back to almost where it is now and where it began at the first of the year. What gold was predicting was a return to the deflationary/recessionary bias that plagued the world in 2013 and early 2014. And here we are today with that very scenario hitting the headlines on Wall Street and around the world.

So what is gold telling us now? It is holding just above its December low, and if it can hold here we may see some stability in currencies, interest rates, and the commodity and stock markets. As of this writing gold has regained the 1200 level, and copper is holding above the 3 handle. But a breakdown of such levels could spell serious trouble ahead. Oil has fallen below 90 dollars a barrel as interest rates continue to fall and stocks are down hard in what could be the third consecutive week of stock market losses.

The IMF downgrade of its world growth rate may be a still absurdly high rate if markets continue to plunge. Germany just released a surprising negative report on industrial production which plunged an unexpected 4%. Italy may be in recession already, and France is a basket case. Then there is Japan whose GDP fell 7% and China whose growth rate is suspect. Here in the US the news has been much better although it was just reported that consumer credit is falling. And concerns about the real estate market are surfacing.

We need to stabilize here. If markets continue to break to new lows it could mean serious trouble ahead for both the financial system and the world economy. A continuation of present trends, especially abroad, can be extremely painful in the future and is already spreading to the US.

I've said many times in the past that I believe the Fed and most other central banks are too tight monetarily. A return toward deflation and recession are testimony to that fact. Our money supply based on M2 has stagnated, taxes are too high, and controls and regulations impose costs on all consumers and this at a time when real wages and incomes are falling. Gold and the entire commodity sector are telling governments to loosen up. Buying bonds has not and will not keep recession and deflation at bay.

The Eurozone, Japan, and China are no better off today than they were 5 years ago. And the US is undergoing the worst recovery in its history. Obviously something has to change. It's time for governments and central bankers to re-think their monetary theories and fiscal policies.

Post Script. The Fed minutes just came out and indicated concern over falling growth and inflation rates. This is bullish for gold and for the markets and economies of the world IF these concerns are followed up by actions and not just words by governments and central bankers around the world.

Paul Nathan

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Author`s name Dmitry Sudakov