Early 2016 Observations


  • Central banks are exhausted
  • SNB could be in for rough road
  • GOLD poised for additional gains

PAINFUL TRUTH - In 2016, central bankers are sounding a lot different and their tone is less than reassuring. Market participants have relied on central bankers to guide them through the global recovery and have fully bought into central bank strategies. Central banks have offered free money and the markets have felt good. But in 2016, with all of this free money policy exhausted, we are finally seeing signs of despair on the faces of many central bankers, still trying to accommodate, but getting the opposite reaction this time round. The most recent Bank of Japan move to negative interest rates is a perfect example. The BOJ caught the markets off guard with the decision the other week, and instead of the Yen trading sharply lower, we have since seen any weakness from the policy move more than offset by risk liquidation flow and fresh multi-month highs (not lows) in the Yen. And so, in 2016, we are in a different world, one which is forcing investors to realize that exhausted monetary policy can no longer help. This fact translates into what could be more significant declines in global equities in the months ahead.

HARD TO HIDE - With all this in mind, I think it will be interesting to keep an eye on the Swiss Franc should this risk liquidation keep up. Over the past several months, the SNB has done a good job of making us forget about the Franc's traditional safe haven status. The SNB has moved to negative rate policy, all while reportedly staying active in the currency market and committing to a campaign of endless speeches in which its members talk down the local currency. But if risk liquidation continues, it will likely force other central banks into additional accommodation and if this happens, negative rates in Switzerland are no longer as unattractive as they once were. In a world of lower zero bound and negative rates, it's all relative. The closer these other central banks get to the SNB, the more the Franc once again becomes an attractive safe haven alternative.

2016 is feeling a heck of a lot different than 2015. Via @joelkruger

SHINING AGAIN - Now have you noticed GOLD? It has been on fire. This isn't something that was unexpected from my point of view and it feels good to see it all play out. What's going on with GOLD? Why is it on fire? Well, clearly the uneasiness in global markets is making the yellow metal an attractive alternative. There is no denying this fact. But there is something else going on that I believe is also playing an important part in this rally. The fact that we saw a jump in wage growth in last week's US employment report is something that will unnerve the Fed. Why? Because it means inflation could be starting to pick up all while the Fed is being pressured to hold off on additional rate hikes. So with inflation potentially rearing its head and rates staying low, it makes GOLD all the more attractive. And so, don't be surprised to see this GOLD rally extend another $100 in the weeks ahead. Of course this latest move has been fast and we could see a healthy retrace. But these dips should be very well supported.


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