Investors await the U.S. Federal Reserve chair Janet Yellen's semi-annual testimony to the Senate Banking Committee and House Financial Services Committee, which is expected to reflect the recent Fed's minutes or be a bit more hawkish. This statement noted a slowdown of growth in China "as a factor restraining economic expansion in a number of countries." Therefore, the situation in China is worth analyzing for a while, before we will know the content of the testimony. What are the implications of the Chinese slowdown for the global economy and gold market?
The Chinese economy grew at 7.4 percent in 2014, which is the slowest growth rate since 1990 (and in 2015 growth might be as low as 7 percent). The one reason for the slowdown is the burst of the housing bubble. Money supply (M2) growth, which fueled the bubble, dropped to just 10.8 percent in January, the lowest level in recent history.
The consequences for the global economy are very significant. According to the World Bank, a one percentage point decline in China translates into a half percentage point drop in the world's economic growth. Lower economic growth means less intense trade and further downward pressure on commodity prices. Some economists believe that situation in China is responsible for relatively low oil prices, which may remain low through at least 2016.
The Chinese economic slowdown can also entail important consequences for the gold market. On the one hand, the slower pace of growth in real incomes may decrease purchases of gold jewelry; however, demand for gold in developing countries “does not systematically rise with per capita income,” according to the Starr and Tran paper. Please also note that the rise of Chinese middle class seems to be undisturbed in the long run (and the consolidation in this market is presumably behind us, as 2014 witnessed a 33 percent decline). On the other hand, global economic slowdown may increase demand for gold as investment (which performs relatively well in such economic conditions).
Summing up, the global sluggish growth, which is caused partially by the Chinese slowdown, seems to be positive for the gold, a traditional safe haven during tough times. Current economic conditions put downward pressures on interest rates (there have been 19 'eases' by central banks this year), which additionally supports gold prices.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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