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Discussion Topics -- December 16, 2014

What to Watch for in 2015

(December 16, 2014 discussion) As we head into 2015, it seems we're amidst a growing storm. Here in the United States, Congress recently passed the latest spending bill, a whopping $1.1 Trillion. While the contributions to the national debt alone (we just crossed $18 trillion, by the way!) are enough to raise an eyebrow, buried - though not too deeply - in the bill was a roll back of a number of Dodd-Frank restrictions on banks. Central to the restrictions being rolled back was a provision where banks were not allowed to invest in derivatives with FDIC insured deposits. Well no more! Only three years after banks were (rightfully) restricted in the areas thought to be most responsible for causing the financial crisis (and the highest risk of causing another), the banks have been given free reign again. And the language for this roll-back was authored by none other than CitiBank.

Meanwhile, the situation in Russia is growing ever more precarious. Oil prices have plummeted over the past few months, and its hard not to think that some political wrangling is at play here. Russia depends greatly on oil exports, and the fall in oil has hit them especially hard. The Ruble is under enormous stress, having fallen nearly 50% in the last month. Mired in a true currency crisis, talk of capital controls in Russia has now entered the conversation as they do anything and everything they can to stabilize their economy. But the falling oil price has knock on effects, especially in the realm of high yield corporate bonds. Roughly 15% of all corporate bonds are tied to energy companies, and the falling oil price has put them at risk of default. Already the junk bond market is starting to fracture, and the consequences will be something to monitor in 2015.

Let's not forget Japan amidst the mess in Russia. Shinzo Abe maintained his power and majority in a snap election last week, essentially earning the support he needs to continue with his mandate, the three arrow approach of ultra-loose monetary policy. Beneath the confirmation is the reality that the turnout for the election was the worst in years, with nearly 50% of voters not participating - an indictment not just of Abe, but of the Japanese political landscape in general. With Japan falling into recession again, one has to seriously start to question the efficacy of QE there. Debt is reaching preposterous levels, which is weighing on the Yen, and the solvency of the country. Most already believe Japan has effectively nationalized its bond market, a reality that could have far-reaching consequences. Nonetheless, Abe intends to keep the pedal to the metal - another story to watch as we head into 2015.
Can't leave out "Super Mario" and the European Union. That's right, Europe isn't escaping discussion in this video, as the ECB is now in plans to push for QE of its own at the start of next year. And why not? Greece is a mess again, Spain was just downgraded, and the whole region is threatened with a recession. The Germans are pushing back with everything they've got, citing, among other things, the extremely low value/utility in QE policies. All the while, we must ask, why are so many European countries repatriating their gold?

And while all of these elements in conjunction would suggest support for gold prices, gold continues to struggle around $1200 and stocks push toward all time highs. Perhaps, we are at an inflection point. A really interesting chart was published a week or so ago showing Hindenburg omens over the past few decades. While in 1987, a single Hindenburg omen was seen right before the crash, a more concrete indication appears to be the build up of omens over a period of time. The graph says it all, but in essence, the buildup of omens looks an awful lot like the periods prior to the market declines of 1999-2000 and 2008.

If these gathering clouds converge into a perfect storm in 2015, it could prove to be a very interesting year for gold - and we'll be here to report it every step of the way. Thank you for your support over the years. From all of us at USAGOLD, Happy Holidays, Happy New Year, and all the best for a Golden 2015! 31:51 Minutes, with Jonathan Kosares, Peter Grant and George Cooper.

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