2016 is behind us and we have started a new year with great gusto and no small measure of anxiety. The potential for unknown unknowns turning into banana skins is very high. Right now we are looking at:
- The broad US stock markets & the UK FTSE are breaking new highs
- Investment flows are rotating from Bonds to Equities on the back of a Trump driven reflation outlook
- Donald Trump is President Elect
- The Fed has initiated a long anticipated rise in interest rates
- Global Debt levels as a percentage of GDP has never been higher
- Britain is going through the painful process of divorcing itself from the EU,
- France is facing elections where far right and and anti EU parties may take power
- Italy’s banking system is in crisis with the weight of EUR 300 Billion in bad debts
- Germany’s Merkel is losing core support and the Anti – EU forces are gathering power
- China is being buffeted by global protectionist rhetoric and lacklustre domestic demand, can she manage the domestic discontented?
What could possible go wrong?
Many of these changes have their genesis in misguided monetary policy, specifically those pursued by the US Fed in the 1990’s and since, with micro management of economies via stimulus, artificial interest rates and the Pandora’s box that is Quantitative Easing. The risk of the “2 a.m. tweet” where policy is poorly stated or misunderstood is very real. What is of real concern is that many of the themes we identify are based on developments that are very new and lack much historic context, especially when one considers the scale of the economies that may be effected.
2017 market performance will be determined by a number of themes.
- Can Trump deliver reflation or are the markets set to be disappointed?
Trump has been elected on with a mandate to shake up the establishment, to protect US jobs and to focus internally. The question is can someone with no political experience, significant conflicts of interest, despised by the right and liberal factions, within the US political establishment, deliver? The short answer is that no one knows, but so far he has proven all is naysayers wrong and you would be a fool to bet against his form. The USD dollar has strengthened to its highest level since 1984 and this will certainly hurt US companies’ capacity to earn from foreign operations and thus suppress GDP.
- Can the Fed normalise interest rates?
The Fed has taken that first tentative step and started its long awaited tightening cycle. The concern is with debt levels at such elevated levels, can institutions wishing to refinance do so at newer higher rates and what will this do to debt affordability?
- Will Britain and the EU agree an amicable divorce or will it be a nasty drawn-out affair? The EU has appointed a French bureaucrat as its chief negotiator who is seen as a federalist and someone who maybe likely to seek to punish Britain for leaving. On the British side Britain’s ambassador to the EU resigned yesterday. His resignation note hinted at “muddled” thinking within the British camp.
Outlook for Gold
Positive on continued strong 2016 demand. In 2016 GoldCore experienced significant increases in our bullion storage programme. Clients moved cash out of banks which they believe may be subject to bail-in risks as governments and regulator capitalise the banking systems with depositors cash deposits. Clients also sold gold proxy investments such as Gold ETF funds and Digital gold holdings where clients are forced to hold unallocated and unsegregated gold holdings in favour of GoldCore Segregated and Allocated gold storage.
We do not see a change in this trend and with strong account openings and a massive increase in interest from corporate treasurers seeking to diversify bank risk, we are very bullish for gold demand in the year ahead.
Allocations for gold should be between 5% and 20% depending on a clients risk appetite. Significant systemic risk is very real and can materialise from a number of sectors. Bank deposits remain at very real risk and diversification is advisable.