Gold Prices Shine When Central Bankers Scurry Into Action

-An upcoming G20 meeting in Shanghai over the weekend appears to have stoked hope for Central Banks to discuss fiscal growth strategies.

– Chinese regulators provided hints of upcoming stimulus: Governor Zhou Xiaochuan has said that ‘China still has some monetary policy space and multiple policy instruments to address possible downside risks.’

– The Dollar remains well bid across-the-board; you can look to pick this off in various pairings by watching SSI for stretched positioning ratios.

All eyes are on Shanghai this weekend for the upcoming G20 meeting. Despite US Treasury Secretary Jack Lew’s pleas earlier in the week for investors and markets to keep expectations low, it appears that at least some strength in equities has shown over the past two days in anticipation of this meeting.

The core of the problem for global markets right now is a currency issue. After Japan’s stealth-like move to negative rates three weeks ago, the fear of competitive devaluations began to get a lot more real. This is the prospect of an economy trying to weaken their currency simply to derive trade flows from their neighbors. Good for the economy that weakens, bad for everyone else especially at a period when global growth is so questionable. Competitive devaluation is a nice way of saying ‘currency war,’ which is a term that should be avoided out of both accuracy and respect, as anyone that’s had an actual relationship with a real war can attest. In a real war people lose lives. With currencies we’re watching Central Banks try to push numbers: Big difference.

But this topic was touched on by Mr. William Dudley of the NY Fed earlier in the month. After Japan went negative the United States was sticking out like a sore thumb. This was the lone major economy looking at higher rates, and further to that point, it was one of the few Central Banks that wasn’t openly deflecting capital flows. Europe has been on negative rates for almost two years now, and when this is combined with money coming out of China and now the threat of even deeper negative rates in Japan, there was simply no other place for capital to flow.

This brought strength into the US Dollar which became just another headwind for growth as the US grappled with continually falling commodity prices. As that US Dollar got stronger and stronger, more and more pressure was added to US exports. As Mr. Dudley pointed out, this will, eventually, pull the United States back into recession along with the rest of the world.

Created with Marketscope/Trading Station II; prepared by James Stanley

The Fed, however, really seems to be struggling here. They continue to use antiquated models that have difficulty accounting for a truly globalized economy by micro-managing lagging data prints that said one thing yesterday but another today. Central Banks haven’t yet adapted to globalization, and the constant pattern of bubble-boom-bubble-boom-bubble that we’ve seen in the S&P 500 since the mid-90’s is indicative of this.