29 October 2015

The Playbook of the Central Banks is Becoming Clearer

There was an article in ZeroHedge recently that outlined the probability that the Central Banks of China, Australia, Japan and Europe would all soon line up for even more monetary stimulus. Well, it looks like that prediction is starting to come true. (Source: ZeroHedge 2015 October 21st)

According to an article in Reuters, China lowered its benchmark lending rate last week, which is the sixth interest rate cut in a year. China continues to be plagued by low growth and deflationary pressures. This is probably not the last move for China’s Central Bank. 

The Reuters article goes on to say "We've got half the world's central banks in easing mode," said Joe Rundle, the head of trading at ETX Capital in London. "And we'll probably see more easing from China to come.” (Source: Reuters 2015 October 23rd)

China’s economy is forecast to experience the lowest annual growth in a quarter century. China’s problems are the same as everywhere else. Weak growth and a lack of inflation. So as expected, China is combating this low growth by moving interest rates lower.

ECB Press Conference

Last week Mario Draghi signaled to the financial markets that the ECB may be adding more stimulus in December of this year. The specific language from the press conference was:

“a whole menu” of options that would be considered at the December meeting, including QE that could be adjusted in “size, composition, and duration.” (Source: The Guardian 2015 October 22nd)

The reaction from traders and investors to Draghi’s comments caused the Euro to collapse against the US Dollar. At one point the Euro plunged over 2% against the Dollar which is huge move for a currency.

The dovish press conference by the ECB shows that they do not want a strong currency. Deflationary fears are mounting so its reasonable to expect that the ECB will come through with a major policy announcement in December.

Its funny how just a few words from a Central Banker can have such a dramatic effect on the markets. Its more proof that market participants have been reduced to trading on the words of Central Banks and not on fundamentals.

This is probably one of the reasons that stock markets in Europe, the US and China have rebounded. The reflation trade is now back in play for the short term. More stimulus from China and Europe are luring traders back into equities. 

The ECB Just Trumped the Fed

To maintain some type of credibility the Fed is going to likely try and raise rates by a quarter of a point within the next six months or so. But the problem now for the Fed is that a December stimulus announcement from the ECB will further weaken the Euro against the Dollar.  

With stimulus measures likely coming from Europe, Japan and China before the end of the year the chances of a rate hike by the Fed is growing slim. Economic weakness and deflation are also taking a toll on the US economy. So tightening monetary policy in the face of a deteriorating economy will in effect put more gasoline on the flame.

According to an article in ZeroHedge, the third quarter ended with a rise in job cuts. US based employers announced that they will cut 58,887 jobs in September, which is a 43% increase from the previous month. (Source: ZeroHedge 2015 October 1st)

Tightening by the Fed will likely become impossible. In fact, odds now favor the Central Bank re-joining the global easing party.

Update on Negative Interest Rates

As we have discussed in past articles the only tools the Central Banks have left are quantitative easing and negative interest rates. We are seeing this play out as the global economy continues to deteriorate. 

As of now their are three countries who have negative rates. Denmark where the bank rate is at minus 0.75 percent; Switzerland who has kept their rate at minus 0.75% since early this year. And Sweden where the rate is minus 0.35%.

By imposing negative interest rates, these three countries are attempting to stop capital inflows into their currencies. So one of the objectives is to prevent the currencies from appreciating in value to a point where its misaligned with the Euro. 

The play book of all the Central Banks is becoming clear. Through negative interest rates and quantitative easing programs currencies will continue to loose value and depreciate. As we have written in the past this is going to cause a crisis, and many financial writers and analysts are predicting that it is coming soon.

It will be interesting to see what the European Central Bank and the Bank of Japan come up with as their next policy move and how the Fed will ultimately react.

The End of Financial Engineering

The actions and likely new stimulus programs by the Central Banks will lead to more volatility and disruptions in the currency markets. 

In the recent Gold market update we posted a link to an article in ZeroHedge that  discussed how the models linking quantitative easing to markets have broken down. (Link to zerohedge article)

What this means moving forward is that more quantitative easing programs and debt accumulation is not going to produce any measurable benefit to the global economy. It is only going to make the crisis more severe. 

The Central Banks have relied on sophisticated financial engineering as an attempt to manipulate the markets to look healthier than they really are. As the article in ZeroHedge says the models do not work anymore. In the very near future financial engineering is going to be exposed for what it is, which is a scam.

What About the Current Gold and Silver Rally

As always these discussions about quantitative easing, negative rates, and the global economy always lead us back to the precious metals and what may be next. 

There was a recent headline on ZeroHedge titled “Gold – A Rally No-One Really Believes In”. The article highlights that skepticism of the current Gold rally from mainstream investors remains high. 

If you have been following the Gold and Silver markets over the past several years you know that we have been here before. Seeing a Gold rally look promising but then losing steam and falling short.

The point is that Gold and Silver investors should not be overly influenced by what the mainstream has to say about Gold. Remember that in 2011shortly before Gold peaked above $1,900 most of the mainstream press was bullish on Gold and expected higher prices.

Gold and Silver still have a ways to go before the average investor will jump on board. The targets we outlined in the latest Gold update are first for Gold to recapture the $1,200 level. But things will really not get interesting in the Gold market until the 2015 high is taken out which is above $1,300.

Whether or not this rally ends up being the start of the next bull market is still unknown at this point. But with the anticipated new stimulus programs from the Central Banks coming soon the turbulence in the currency markets is only going to increase. 

Its looking like most currencies are going to continue to be devalued. This why over the long term physical Gold and Silver are one of the best forms of wealth preservation.

Author: celticgold.eu

Older Gold University paused until October 27th 2015 Newer Currency Markets: The Next Battleground?