The S&P/TSX Composite index (INDEXTSI:OSPTX) finished lower yesterday led by Bombardier, Inc.(TSE:BBD.B)Enbridge Inc(TSE:ENB), and Royal Bank of Canada (TSE:RY) (NYSE:RY). China’s deteriorating financial condition continues to weigh, and oil slid back below $30 a barrel as the World Eocnomic Forum in Davos, Switzerland wrapped up with an apparent absence of any new strategy for dealing with the world economy.
The obvious beneficiary of the world’s fears was reflected in the performance of all things gold related; from bullion to junior explorers, gold’s rise to US1,116.70 earlier today is a clear signal that the U.S. dollar’s ‘safe haven’ image may be on the wane. If a full blown financial market deflation occurs, its looking like this time around, no amount of capital fabrication and ZIRP will assure investors, and gold could potentially explode to the upside. The U.S.-centric futures market for precious metals has been able to depress the gold price for almost 5 years now with the proceeds of capital expansion, but may be losing control of the market.
If world market indices deteriorate by another 5 percent collectively, expect gold to flirt with its historic high of US$1923.70 reached on September 6, 2011, before heading higher.
Barrick Gold, Agnico-Eagle Mines, Goldcorp Power Higher
Among gold miners, Barrick Gold Corp (TSE:ABX) notched an 8.8 percent increase, climbing $1.08 to $13.24 on double average daily volume of 6.9 million shares traded. Agnico Eagle Mines Ltd (TSE:AEM) closed higher by 2.95 percent at $39.78, adding $1.14. And Goldcorp Inc (G.TO)
Of course, all eyes are on the Fed. According to Nouriel Roubini, the Fed started raising rates way to soon, but ruled out a return to the crisis levels of 2008. International Monetary Fund Head Chrisitine Lagarde is on record as saying that growth forecasts are still up for 2016, and that for the world economy to plunge into recession, either the U.S. or China would have to be the main force to drive it down.
This Isn’t 2008 – It’s Worse
Jim Rogers reiterated in a recent interview with The Ten Baggers that Central Bankers’ arsenal of weapons to combat economic contraction only contained ZIRP and QE, and that both of those tools had reached the end of their ability to sway investors, as is evidenced by last weeks brief market giddiness on Mario Draghi’s comments suggesting more easing was possible, and China’s dropped 400 billion yuan QE bomb.
Meanwhile at Camp U.S. Federal Reserve, Janet Yellen is nervously eyeballing markets and, while there is no mandate for the Fed to target stock performance, with then-Fed Chairman Ben Bernanke declaring “The focus of the (Fed’s) policy going forward will be to support the functioning of financial markets and stimulate the economy through … measures that sustain the size of the Federal Reserve’s balance sheet at a high level.”
The Fed and ZIRP
The Fed dropped interest rates to 0.25% from 1 percent in December of 2008, and that single announcement caused the Dow Jones Industrial Average to soar by 4 percent, bringing to an end the steep losses that had characterized globoal markets after the fall of Lehman Brothers.
Now, the effects of that policy are known. The easy money led to companies buying back shares to boost EPS on the balance sheet, but resulted in no real substantial economic growth or investment in infrastructure.
Janet Yellen is going to resist reversing course, as doing so immediately calls into question her credibility and fitness to lead the bank. That resistance will delay the inevitable reversal, and continuing market volatility predominantly to the downside will be the result.
Full capitulation, and financial system recalibration is ahead.
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