Tonight’s the night…
Finally, at last, we are almost here. At 6am tomorrow morning our time we will finally have the US Fed’s rate rise announcement. In easily the most anticipated global financial market ‘event’ in a very long time the scene is an interesting one to say the least. Whilst surely such a talked up, jaw-boned and ‘near certain’ decision is ‘priced in’ few expect the markets to idly go on as they were. The scene is an incredibly dramatic, tenuous and complicated one. On one hand we have the common sense ‘need’ to normalise markets that have been artificially stimulated with near zero interest rates and money printing for 9 years. They have created asset bubbles everywhere and need to start letting markets be markets and stop the bubble inflation. On the other hand those markets are largely still languishing but addicted, and no one knows how they will handle a cut back in the ‘juice’. The cheap USD saw emerging markets around the world borrowing rapaciously ($9 trillion) fuelled by strong commodity prices and a strong Chinese economy. The talks of raising rates has seen the USD rise to long term highs making all that USD debt harder to service (and perversely driving it up further) seeing EM currencies around the world plummeting, the likes of Brazil now in a full depression, others in recession and most others simply struggling under the burden. Plummeting commodity prices, at 13 year lows, mean lower incomes to service that same debt. Along with Brazil, Canada is in a recession and Australia yesterday saw our budget deficit blow out $34b for the same reason. As we’ve reported the last couple of days, all the corporate and junk bonds funding the massive energy sector growth at oil prices triple what they are today are starting to haemorrhage. As regular listeners to our weekly podcast will know the majority and certainly the details beyond the headlines of most US economic data indicators are anything but rosy. A rate rise would ordinarily see a stronger USD, a stronger USD makes US manufacturing and export even harder to compete globally, especially amongst all the falling currencies around the world. China just last week devalued the Yuan again and have flagged pegging it to the SDR basket rather than USD, another clear warning shot to the US Fed at the implications of its actions.
Adding to the drama of the scene, just 2 days after the announcement there is $1.1 trillion in S&P500 options expiring on 18 December….
What all this means for gold and silver is unclear in the short term. A jump in the USD could see more downward pressure but that USD / gold correlation is historically weaker than most commentators credit. Should markets rupture there are plenty predicting more QE stimulus could be deployed, especially in a US Presidential election year. Should that happen you could be fairly certain gold and silver will jump as it is a clear sign of desperation and to be damned with the consequences. One thing is almost certain and that is if they raise rates (and again, lets face it we are only talking 0.25%) it will be accompanied by some very very dovish commentary along the lines of nothing more to see here folks for a long time. This is a face saving, reputational move by the Fed and there appears no going back. Nothing will have materially changed, all the debt, all the derivatives, and all the bubbles are still there. The reasons for owning gold and silver remain as strong as ever.