Glass half-full economy powers gold higher

“Stable but underwhelming growth” is what the International Monetary Fund has projected in its World Economic Outlook, released in late October.

With wars in Ukraine and on two Israeli borders plus a nail-biting U.S. election only days away, things could be worse.

While the IMF’s latest forecast doesn’t call for gangbuster global growth, it does note that central banks are largely succeeding in orchestrating a comedown in inflation — while not choking off growth completely.

The latest forecast even bumped up its projection for U.S. GDP growth to 2.8% (from 2.6%) and its 2025 estimate to 2.2% (from 2%).

Metals-hungry China’s expected to grow 4.8% this year – down from a previous expectation of 5%. Its forecast for next year is lower – a worrisome 4.5%.

Canada, you ask? Growth this year is projected at just 1.3%. Next year looks brighter at 2.4%.

Central banks have cut interest rates, with the U.S. delivering a 50-basis-point cut in September – its first in four years. The supply shocks from the pandemic that made everything more expensive are continuing to fade, helping to further ease inflation.

But inflation is not back to “normal.”

The IMF forecasts global headline inflation will fall from last year’s annual average of 6.7% to 5.8% this year and 4.3% next year, with advanced economies leading the way. Canada in September was already at 1.6% from 3.9% last year.

However, after two years of fearing a hard landing or recession, some still warn we could be in for the ominously named “no landing” scenario. That would see robust growth coupled with stubbornly high inflation.

Golden scenario

In our current middling scenario — averting disaster but not quite out of the woods — gold has outperformed. At press time, gold had risen about 32% for the year, with silver chalking up a 44% price increase. In comparison, the S&P 500 has only gained 23% this year, with the Nasdaq, home to the high-flying Magnificent Seven tech stocks such as Apple and Nvidia, recording a 26% rise.

(Bitcoin, a competitor to gold as another alternative to government-issued currency, has increased by 64% year-to-date.)

Notably, the rise in gold coincides with a pull-back in Chinese demand.

Gold demand in China fell 11% over the first three quarters of this year to 742 tons, according to BMO Capital Markets, with Western buyers picking up the slack.

Central banks’ share of gold holdings is now at 10%, up from 3% a decade ago, Bank of America analysts said in an October report. That could increase further as they seek to diversify their currency reserves.

BofA forecasts the gold price will reach US$3,000 per oz. in next year’s second quarter, before easing to US$2,500 per oz. by the end of the year.

Long suffering gold stocks are starting to gain some traction in the market – with intermediate and junior gold producers outpacing the metal and seeing median gains of 58-60%, according to Canaccord Genuity.

For senior producers and royalty companies, the gains have been more modest at 39% and 25%, respectively.

While the runs seem impressive, net asset value to price ratios suggest gold stocks are still cheap. Canaccord notes that with senior gold producers trading at 0.71x NAV – below the group’s 0.81x average and just above the low end of their 0.65-1.0x range – they still have more room to gain.

US Election

Uncertainty around the U.S. election, slated for Nov. 5, has been one of many factors buoying the price of the yellow metal. At press time on Oct. 28, polls continued to show a too-close-to-call race between Democratic candidate and current Vice-President Kamala Harris, and Republican leader and former president Donald Trump.

Regardless of your views on regulation, taxes and tariffs, immigration, abortion, democracy itself, and any number of other issues that separate the candidates, gold’s likely to be supported no matter who wins.

The U.S. national debt as measured by its share of the economy is projected to reach a new record high in just three years’ time, according to the Committee for a Responsible Federal Budget, a Washington-based, non-partisan think tank.

It estimates Harris’s plans would increase the debt by US$3.5 trillion through 2035, with Trump adding even more – US$7.5 trillion.

The trend is not limited to the U.S. On the contrary, in an Oct. 16 report, the Bank of America notes that leaders of advanced economies around the world plan to spend freely, with implications for gold.

It’s a big deal, BofA analysts wrote, because budgets will see further pressure as countries will need to spend more on tackling climate changeand demographic challenges like older populations, and most likely on defence as well.

“The IMF estimates this new spending could amount to 7-8% of GDP annually on average for the global economy by 2030,” the bank wrote.

“Ultimately, something has to give: if markets become reluctant to absorb all the debt and volatility increases, gold may become the asset of choice.”