On this our last day of trade for 2016 we look at the year that was…
As we reported yesterday it was a year that was set up through the US Fed hiking rates for the first time in 9 years and confident of more to come in 2016… Whilst that happened in December 2015 it set the stage for the biggest financial markets fall in a new year in history (the S&P500 down over 10%) which in turn saw gold and silver take off as their historically negative correlation often sees them do.
Gold was the first out of the blocks and we saw the gold silver ratio (GSR) hit a long term high of 84 in February. But from there, as the ‘GSR sling shot’ came into play, silver shot up peaking at $27.11 in August, up 43% since the beginning of the year. Gold was no slouch either, peaking at $1818 in July, up 25% for the year. At it’s lowest the GSR hit 63 before finishing at 71 as silver retreated more than gold.
This market turmoil saw the Fed not proceed with the progressive rates hikes it talked up in December, and indeed it took a full year to hike just once by 0.25%. That didn’t stop them jaw boning a potential rise ‘soon’ all year long…
The theme for that first half of the year, even in mainstream media, was a loss of faith that central banks ‘had this’; a growing belief that all the monetary stimulus wasn’t working and indeed could become destructive.
Of course there was the small issue of Britain leaving the EU in June that saw things take off again after the January / February market meltdown.
When the world didn’t end shortly after and markets realised this was a process not an event, they rebounded strongly and gold and silver started a gradual declining trend thereafter.
What Brexit did however was awake the world to the extent of the anti establishment and anti globalisation movement. Most post-mortems of Brexit concluded it was clearly about that, and not whether the UK should be in the EU. Apparently it wasn’t enough of a wake up call as the polls still had Clinton as the likely victor in the US Presidential race but again Trump showed very clearly the level of discontent with the status quo out there. Everyday people are feeling screwed over by the rich getting richer on all this stimulus and them going backwards, together with the impacts of globalisation. That was soon followed by the Italian referendum with the same result and drivers.
What probably wasn’t expected was the extent to which the market ‘bought in’ to the Trump promise of economic prosperity and its impact on gold. Most expected gold would surge on a Trump victory with all the geopolitical and economic uncertainty he brings to the table. And surge it did… for less than a day. Just as shares tanked and gold surged on the realisation he was going to win, on one acceptance speech devoid of blunders and talking up unity, tax cuts and fiscal spending the market about faced and went ‘all in’ on risk again. Everything was now suddenly awesome. US shares surged to new highs and gold fell. The irony of markets all of a sudden trusting the promises of the same man they derided for policy inconsistancy and lies, and accepting at face value both his ability to get $5t more debt through congress and without consequences was nothing short of staggering. And yet hope is a wonderful thing and something the US hadn’t felt for some time. Hope however is not a good investment strategy and we are yet to see euphoria meet reality.
At home it was a year notable for growing concerns around our property bubble as the RBA dropped our rates to the lowest in all history and Aussies took on more personal debt than any other country in the world per GDP, mostly in property. That denominator didn’t help that equation as we continued to struggle with our post mining boom reality and saw a negative GDP print in Q3. We were reminded in this final week of the ‘rock and a hard place’ scenario the government finds themselves in with regard to our coveted AAA rating. In May S&P put us on notice it was at risk. Our languishing economy is screaming out for Trump style fiscal stimulus on infrastructure, but to do so would seal the fate of us losing the rating and the political and real cost of that $1 trillion foreign debt pile increasing. The looming apartment market crash and this rating will likely be key themes of next year for Australia.
Globally we have more to come on the groundswell of anti establishment and anti globalisation movement with the Italian elections (sometime between Feb and May), French elections in April and German in September. Still in Europe and the number of ‘black swans’ in banking and debt markets continue to circle the skies. The Middle East needs no additional comment from us.
But it will likely be the US that will hog the economic headlines as we see how the rubber hits the road with President Trump. When he is inaugurated it will mark the 3rd longest market expansion in history. How much is left in it? The US has $20 trillion in government debt and he wants to add $5t to that. How is that going to be passed and serviced? His muted policies have seen the USD and bond yields surge. How will that affect exports and housing? Last night he appointed the author of "Death by China" and "Crouching Tiger: What China’s Militarism Means for the World" (Peter Navarro who advocates a more aggressive stance in the ‘economic war with China’) to head up the National Trade Council. What will be the geopolitical ramifications? We could go on and on…. 2017 will be an incredibly interesting year and one with potentially huge volatility. Arguably never before is it as important to have your wealth truly balanced by including uncorrelated hard assets.
So as we look today, our last day, this is how things played out over the year:
Gold – up 8% in AUD and 7% in USD
Silver – up 17% in AUD and 15% in USD
AUD – down 0.6%
USD – up 4%
All Ords – up 6% (but still not higher than pre GFC)
S&P500 – up 11% in USD (to new all time record high)
So despite the gut wrenching precious metals correction since November we still find silver the number one performer for the year and only the S&P500 outperforming gold.
Let us take this opportunity to wish you and yours a very Merry Christmas, a safe and enjoyable holiday and a prosperous New Year. Thanks too for your support and patronage this year.
Whilst we reopen on 9 January we won’t be back with the daily news until the 16 January.
So for the last time this year lets us leave you with our moto…
Balance your wealth in an unbalanced world.