Europe

European Economy

After a big decline of 4.1% in GDP growth Euro Area bounced back with a growth of 1.7% in 2010.

It is likely to grow at a rate of more than 1.5% p.a. in the next few years.

Consumer Price Inflation after moderating to 0.3% in 2009 increased to 1.4% in 2010 and it is likely to be in the same range for the next few years.

But in the new Member states, it is likely to be at a higher level at 3.2% in 2011.

To address the present crisis , the policy makers has created a permanent crisis management mechanism which should help to address the economic issues in different countries with increased level of coordination..

The establishment of E 750 bn emergency funding facility by IMF is a great positive which should make the stabilization of economies faster.

After Greece and Ireland, Portugal is likely to draw funds under the above arrangement and Spain is likely to depend on Markets for raising funds for some more time to come.

Hopefully, Spain should be able to manage the requirements from markets instead of seeking the help of IMF facility at least for a few more months.

IMF is hesitant to buy Euro government bonds in large number like the US government and if required IMF should consider large purchases of EU government bonds.

The Euro governments can seek the funds from Soverign wealth funds from other parts of the world. SWF’s are sitting on assets of $$ 4 trn. China has shown interest in buying the government bonds of distressed countries. Japan had shown its inclination to follow a similar strategy. These sources can go a long way in supporting the European Economies under distress..

There is a need for European countries under stress to follow austerity measures and adopt prudential financial and monetary management practices.

At this moment, all the governments in Euro zone should act in Unison to address the issues as if the problem was in their own countries and arrive at political consensus to weather the storm.

Germany has to take a lead role in coordinating this effort and stick to the commitment to Euro and remove the apprehensions of strong countries exiting the Euro Currency Mechanism.

There is an immediate need for increased level of coordination between countries in terms of Political approach , Economic revival and crisis management and differences in ideologies should take a back seat till Euro region revives.

The coordination efforts between the Euro Area countries so far are in the right direction and countries should continue to engage in addressing the crisis together and emerge successfully.

Gold price Outlook in 2011

Gold price Outlook in 2011

• All the analyst reports are very bullish on Gold in 2011. Most of them expect the silver to reach $ 30.
• Goldman expects, the price to average $ 1575 in 2011.
• Societe General expects this to reach $ 1485.
• BNP Paribus had revised its forecast upwards from 1275 to 1500
• Barclays sees a steady uptrend quarter on quarter and expects by Q3 it will be 1450. By the end of the year it could be 1850.
• Bank of America’s expectation is $1500.
• CIBC Canada expects it to be 1600
• Scotia capital expects the high price will be $ 1500 and it will be at $ 1400. They are the largest traders of gold in the world. 24 months it will be $ 1700.
• UBS expects an average price of 1400.


My observations :

• Gold is always a good hedge when economies don’t do well.
• US and Euro are likely to go through the pain for at least a year.
• Since US Economy is very weak, countries accumulating forex reserves want a save heaven for diversification of their assets.
• Gold provides a safe heaven.
• For the first time, China imported more gold than India.
• Since China has more than $ 2.5 trn of reserves and of that more than $ 1.5 trn has been invested in US bonds ./ treasuries, there is an immediate need for China to diversify.
• The reserves it accumulates in future, it might start investing in gold in a big way.
• Similar trends could be observed when emerging economies with good reserves start diversifying their assets.
• Since Euro is weak, US economy is Weak, Gold can play a role of good hedging against the economic risks.
• Since all the market players, who are not buying gold not for their own use but for speculation expects the prices to go up, their behaviour in the market would reflect their forecast.
• Hence, the price is bound to go up.
• Gold will be a good investment in 2011. Silver is also likely to move up well.