2 new rock-solid reasons for gold: Japans negative rates, falling U.S. GDP
We already knew that gold was the standout asset class so far in 2016. The metal was trading just below three-month highs Friday afternoon, and two headlines from major news organizations confirm the obvious:
Now two head-turning surprises Friday suggest that the Federal Reserve would be crazy to continue with its announced policy to raise interest rates four times this year.
No. 1: The Bank of Japan, the Feds central-bank counterpart, shocked the world with the announcement that it is imposing negative interest rates for the first time ever.
To goal is to stimulate inflation by charging banks fees on deposits, which they then impose on their customers. Since holding cash in a bank is a money-losing proposition under this regime, bank depositors are then more likely to spend the cash throughout the economy, thus increasing monetary velocity and inflation.
Economic kamikaze under way: But critics of the move by Japan say its a bad idea. I think its economic kamikaze, Lindsey Group analyst Peter Boockvar told CNBC. Lets tax money and hope things get better. Lets create higher inflation for the Japanese people, who are barely seeing wage growth. And lets amp up the currency battles, and hope everything gets better. I think its insane. If this means now that theyre out of bullets with [quantitative easing], and this is their last hope, then I think this is a mess.
New currency wars looming: Credit Agricole analyst Valentin Marinov also sees the risk of increased money printing worldwide as other central bank follow suit to keep their own currencies competitive from a trade standpoint.
Given that the rate cut could fuel more global currency wars and global growth uncertainty, it need not necessarily support investors risk appetite, he wrote.
Its going to make it very hard for the Fed to be the sole holdout, the one thats hiking while everyone else is cutting below zero, added Aaron Kohli of BMO Capital Markets. Up until now, we had hoped wed see some stability in foreign-exchange rates, and we wouldnt see further pressure of the disinflationary kind from abroad.
Rate-hike odds fall with U.S. GDP: And already, fed fund futures are signaling that the odds of a Fed rate hike are now falling. The CME Groups FedWatch tool also sees little chance for rate hikes this year.
No. 2: The fourth-quarter estimate for U.S. GDP was abysmal, expanding just 0.7%.
Thats a big slowdown from 2% growth in the fall and 3.9% last spring, thanks to sluggish consumer spending, slowing exports, and a stronger dollar.
The economy perhaps isnt quite as strong as we thought it was, said Nariman Behravesh, chief economist at IHS Inc.
Inflation expectations falling: In fact, the last time that the University of Michigan consumer confidences inflation expectations were this low was September 2010, when Bernanke hinted at QE2 at Jackson Hole, Zero Hedge noted.
And according to West Shore Group exec Jim Rickards, the chances of a recession are growing if the Fed insists on hiking rates.
The Fed is tightening into weakness, thats clear; youre not supposed to tighten into weakness; youre supposed to ease when you have weakness, he told Bloomberg. This will rank up there with what they did in 1929 and other Fed blunders along the way; theres certainly been a lot of them.
In a recession or close to it: The Feds still on track, in their view, to raise four times this year. They wont get there. I think theyll raise twice: definitely in March, maybe in June. Well see about June. By the summer even the Fed will realize were in a recession or close to it and I think theyll turn around. ...
Inflations actually been going down. Now when you raise rates, what do you do? You strengthen the dollar, which imports deflation. So you have a goal of inflation, but youre on a path to create deflation. How does that make sense
Theyre doing a good job of causing a recession. I think the recession was on the way anyway. The Fed accelerated that. Thats why I call it a blunder. The U.S. has become a sponge for all the deflation in the world.
Fed itself could follow Japan: Chances are good that if the economic damage weve seen so far continues to unfold in 2016, the Fed wont be hiking rates but might actually follow Japans lead into negative interest rates. Former Fed chief Ben Bernanke has already said as much, and so has current Chairwoman Janet Yellen.
I think negative rates are something the Fed will and probably should consider if the situation arises, Bernanke said last month.
Gold has been doing fine after the Feds first rate hike in December since the financial crisis thanks to the uncertainty that the removal of easy money has inflicted upon stocks. If the Fed is forced to reverse course and ease once more, it will be a colossal admission of failure and could ignite an incredible new stampede into gold.