The market developments over the past six months have created an environment where a 'crisis' appears all but likely. The world's reserve currency, USD, is now 17% stronger than it was in June on a trade-weighted basis. Europe and Japan, the world's largest and fourth largest economies, are in "triple dip" recession, while China, the third largest economy, is lowering growth forecasts. Indicative of Deflation, the CRB Commodity Index is down 41% since its 2011 peak. Thus these are signs of global deflation in which the central banks have been fearing.
The world's most important commodity, crude oil, has fallen more than 60% since June. Economists are still divided about whether or not cheaper oil is good for the economy. The bullish camp argues that lower prices at the pump are the equivalent of a tax cut. Extreme fluctuations in oil have wreaked havoc on global financial markets. Several metrics indicate we're headed for major volatility. For instance, since 1990, every time 1oz. of gold bought more than 20 barrels of crude oil, there was some form of 'crisis.' Since November, the gold/crude ratio has been surging higher and recently broke through 24. On average, the ratio has historically traded around 15.
Does this mean that gold is overvalued or that crude is cheap? It's too soon to tell today! The last two 50%+ declines in crude oil, during 1986 and 2008, predated 25% gains in gold in the following year. Perhaps both are poised to appreciate. Oil's technical's still look weak as of now with further downside to follow. While the gold / oil ratio above 20 may be an arbitrary indicator, it has accurately predicted 4 'crises' over the past 25 years. It's also a clear signal that investors are nervous, preferring safety over growth.
The global economic depression has settled down on all nations. Every nation is struggling to cheapen its currency. One way of doing this is that central banks are creating new trillions of assorted world currencies. It's rapidly dawning on the wealthy one percent that the fiat currencies they hold are fast becoming worthless. The worst of the fiat currencies have suddenly come into question. Is the reaction of big money to swap their devalued currencies for the only currency that has held its worth in all of history -- gold ?
The base is now complete for the resumption of the bull market in gold. We have a "buy" signal on our short term proprietary models as of Jan 13, 2015 at which Gold was $1233.10/ ounce which hit a recent record high at $1307.08/ounce providing a profit of 6.06% We now await confirmation from our intermediate term model to go on a long term "buy" lasting from months up to a year or so. This "experimental unorthodox" mythology of applying years of QE has loaded the world with an avalanche of fiat money which has created a fire under the world's stock markets and continues to create an even larger " Asset Bubble"
At the same time, the Dow is only a handful away from 18,000, and could easily rally to new record highs. The Transportation average, helped by the collapse in oil prices is at new highs already. If you're now holding cash, which is only fiat money, this is the time to switch to honest money, the only money that has held its value throughout the centuries -- gold.
Given the current high level of risk in the U.S. economy, and specifically the asset bubbles induced by the Fed, 2015 will be a very challenging year. The Fed has basically come to the end of the line. It cannot cut zero-interest rates further, and further debt monetization on top of a $4.5 trillion balance sheet is too risky to contemplate. What is essential for 2015 is economic growth from fiscal policies and tax reform and regulatory relief, which would help the Fed expedite normalization of interest rates and selling assets to shrink its balance sheet.
This is absolutely imperative not only to break the cycle of economic malaise but also to restore the nation's economic insurance policy. As long as it exists and if for no other purpose, the Fed currently does not have the essential tools needed to cope with the next inevitable financial crisis. The The current big negative from ECB's QE program is the plunge of the euro which hurts the revenue and profits of big US Firms with exposure in Europe. This big QE in the EU is just buying more time for European governments to move ahead with economic reforms. It may take years for Europe years to reach its inflation target of 2%.
Watch the currency markets. They will be a key to understanding the price movements in other commodity markets, like Gold and Silver. Gold rallied above $1300 last week, for the first time since August 19, even as the Dollar was elevated to its highest mark in over 11 years. Gold rising with the Dollar rising? That just doesn't happen unless…. the level of uncertainty (loss of faith, loss of control) in the financial world is rising too. In the meantime, as long as the world maintains its trust in central banks to control economies, and as long as the central banks continue to devalue their nations’ currencies by creating more money and using it to purchase the debt of those nations, the more likely that stocks will keep rising. At least, that is, until the belief in the power of those banks is broken.