MUMBAI (Commoditiescontrol) - UBS - the leading merchant banker, has come-up with rosy picture for gold and not so rosy picture for US economy. Its basis of observation has been the deteriorating economic condition in the US, led by concerns over poor debt situations.
This year credit conditions in the US look to be worsening, possibly dramatically. Of that the National Association of Credit Management (NACM), which surveys credit companies in the US about debt, has become increasingly convinced. In February NACM warned of deteriorating conditions, though there was some question if the decline in its index was temporary.
”There is quite obviously some serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward,” NACM wrote in late march.
The data from the CMI is not the only place where this distress is showing up, but thus far, it may be the most profound.
In a recent note UBS’ commodities team took this, among other factors, as a “flashing red” signal that credit conditions in the US have gone sour and that the US Federal Reserve will be forced back to loosening its belt again. As UBS has argued for some time, it sees this as making for a bull run in gold, and gold equities in particular.
Other debt related signals don’t look so bad, as UBS’ commodities team notes. Growth of US bank loan assets has recently looked strong. But UBS’ commodities team sees this sort of signal as slow to react to economic issues.
“Only once banks have tightened lending standards aggressively will we see a clear net slowdown in credit growth,” UBS writes. “Just like in 2007/8, we suspect that the market will price in trouble well before the bank loan data confirm it.”
So with tightening credit and pressured cash flows, the UBS commodities team sees possible signs of a market correction.
UBS says, “The last four times this has happened equities corrected 20-60%.”
Fed's reaction to such a correction might help reignite gold and gold equities.
“In our view in commodity strategy, this brings the Fed back into the equation. Over the past 20 years, the Fed has always moved to reflate the economy, cutting rates or announcing QE, whenever the S&P has fallen by 20% from peak and high yield has become stressed, UBS report suggested.”
UBS sees this as setting the stage for excellent returns on gold companies which meantime have been driving down costs.
(By Commoditiescontrol Bureau; +91-22-61391533)
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