5 Major Market Themes In 2016

It is the time of the year in which we review the major themes of the past year, and project the key trends for the next year.

We have identified 5 major market themes in 2015. In today’s edition, we explain what we expect from them in 2016. As much as possible, we link them to our favorite asset, i.e. GOLD.

1. Debt problem grows bigger

According to the world debt clock, the global governement debt stands at $62 trillion. That is a mind-boggling figure. As a ‘comparison’, the global GDP is approx. $72 trillion in 2015.

So the whole planet has a debt ratio of 80% compared to its total economic output. Talking about a bubble!

Looking at the 4 major regions in 2015, we see an outspoken debt growth in Europe and Japan, a stabilization in the U.S., and a slight decrease in China.

 

The government debt bubble will grow bigger in 2016. Gold remains the antidote against stupid monetary policies of central planners.

You better hold your gold as monetary protection, even in the worst case if the price of gold will not rise (significantly).

2. Interest rate hike a blip from an historical perspective

The overhyped interest rate hike by the U.S. Fed was already a big bubble in previous years. But it reached ridiculous levels in 2015.

To put things in perspective, it is always interesting to look at a longer term chart. The reference for interest rates in the U.S. is the 10 yr Treasury yield.

Try to imagine what a 25 basis points increase means on the following chart.

 

Indeed, it is totally meaningless.

Yes, gold did survive the interest rate hike, notwithstanding the expectations created by mainstream media and pundits that it would collapse.

We said many times in 2015 that the gold price has already priced in an interest rate increase.

The downside in gold is limited, for sure in 2016, as the Fed will only continue its path of rate hikes as soon as inflation starts picking up.

3. Inflation remains a key objective of central banks

We have explained in 2015 that inflation expectation is an important driver for gold. The disinflationary environment in recent years was an important driver for gold’s correction.

The 5y forward inflation expectation rate is not coincidentally at its lowest level since 2009. The gold price and inflation expectations are highly correlated.

 

Now mainstream media and economic pundits will tell you that you should not own gold because low inflation expectations. Nothing is further from the truth.

Central banks are committed to fight deflation, with all means. The Fed, in its latest announcement, added an important sentence to underline their focus on their inflation objective, see the sentence on the chart above, which comes from the Fed’s announcement.

Central banks WILL get inflation. The thing is that it could get out of hand, as inflation can rise in a very unexpected and sudden way. You better hold gold beforehand.

4. Currency wars

Unsurprisingly, governments devalued and revalued their currencies in a typical ‘overnight’ fashion, creating huge spikes in currency land.

The Swiss National Bank unpegged its currency from the euro, resulting in a revaluation of the Swiss Franc. China devalued several times its currency against the dollar. The list of smaller, less important countries that devalued their currencies in 2015 is long.

As currency wars rage across the globe, investors should expect that trend to continue in 2016. We did not see an apocalypse yet, which is the ultimate sign that the war will continue.

Similar to a ‘regular’ war, there is no constant battle. Rather, battles take place occassionally. Investors better avoid investing in currencies in 2016.

The ultimate currency to invest in? GOLD!

5. Gold sentiment and precious metals miners

In 2015, gold sentiment reached the lowest readings in many decades. From a contrarian perspective, that is fantastic news. The thing with sentiment is that it’s not a timing indicator.

Precious metals miners have been slaughtered in recent years. In 2015, however, they held up relatively well compared to prior years. That is a reliable sign of selling exhaustion!

The gold to miners ratio is at an all-time low. The gold stock sentiment has reached all-time lows.

Gold miners have to revalue, sooner rather than later.

With that, we have reached one of the imporant projections by the Secular Investor team for 2016: gold miners will start shining again.

Our expectation is that gold stocks will rally in the first months of 2016.

In doing so, they will offset part of the technical damage that was created in recent years. We are closely watching how high they will get with the next rally, as that will be a gauge for the trend reversal we anticipate.