Calendar year 2015 is but 15 days old and already markets are in turmoil, with commodities continuing to tumble, equity markets volatile, Bitcoin on the ropes and bond yields plunging as global growth forecasts are slashed. Gold, as we’ll cover at the end of this report, is a relative sea of tranquillity, edging higher in the face of the uncertainty other markets are displaying.

We’ll start our first report of 2015 by looking at commodity markets.

Cop That

Market talk at the back end of 2014 was dominated by the crash in oil prices, which fell some 46% last year, a trend that has so far continued with oil falling as low as $44.20 a barrel in New York. Whilst the oil story is still front and centre, Copper is also on the radar now, with the price recently falling to a 5 year low.

Copper, often known as the ‘Doctor’, because it is supposedly a great barometer of economic growth, is all of a sudden looking very sick himself, as the chart below, which is courtesy of the Daily Reckoning, highglights.

It’s still a long way above its 2009 GFC induced low, but as you can see, it’s dropped a long way since the halcyon days above $4 back in mid to late 2011. The entire bull market for copper, which began back in 2001, saw prices rise more than 600%

Whilst we can’t be sure, that chart sure looks like it could head to $2 very soon, and with China, which had accounted for over 40% of copper demand in recent years, slowing, it’s hard to see any kind of major uptick in demand here.

The weakness in commodity markets, and the lower growth forecasts that have helped bring it about are also impacting equity markets, the majority of which have started 2015 on the back-foot. So far, the Dow, the EuroStoxx, the Nikkei and the ASX 200 are off 2%, 1.7%, 3.7% and 1% respectively.

Hardly anything to panic about that’s for sure, but not the kind of Happy New Year that the market, which is overwhelmingly dominated by stock bulls, was hoping for.

Bitcoin Burning

Arguably the investment story of 2013 was Bitcoin, with prices for the digital currency at one point topping USD $1000. At the time, we expressed our admiration for the technology itself, which we believe one day will have applications across the broader banking, finance and wealth management industry.

We also expressed no shortage of concern about the price of Bitcoin, and the ‘fundamentals’ supporting the explosive returns seen to that point. Indeed, in one our Bullion University articles, published just under a year ago, and which you can see at this link, we warned that “However, investors should be aware that rapid and violent drawdowns in the price of Bitcoin are possible. A repeat of the slump seen between April and July 2013 could see Bitcoin head down toward USD $200, a rather large loss of capital for those investing now.”

Overnight, Bitcoin prices, which had already fallen 15% the day earlier, were pummelled, dropping a further 20%, and at one point hitting just $170 per coin. People who bought into the market at its top near $1200 a couple of years ago are now sitting on losses of some 90%

Bitcoin is great technology, but it is not, and will never be gold!

My Name is Bond

Whilst Bitcoin and Copper are copping it in the neck, it’s a very different story for the bond market, which really is harder to kill than Ian Flemings famous Double 0 character. 2013 looked like the year that the 3 decade plus bull market in bonds had come to and end, with the Fed announcement that they were looking to scale back their asset purchasing programs seeing bond yields climb higher.

At the start of 2014, nearly every economist on the planet was forecasting higher bond yields again, with the 30 year US Treasury bond forecast to hit 4.25%. Today, they are nearly 200 basis points, or 50% lower, trading around the 2.40% mark. Investors in this end of the bond market gained over 30% last year, whilst the overall Treasury market rose by nearly 8%.

t’s not just the USA either, with yields in Japan, Europe and the United Kingdom all plunging to new lows, as a report from the World Bank lowered forecasts for global growth to just 3% this year, down from 3.4% which they’d been forecasting in June. 0.4% might not sound like much of a change, but that is a more than 10% downgrade of total expected growth. It is therefore a material downgrade, and should serve as a sobering warning to all those who thought that 2015, llike 2014, 2013, 2012, 2011, and 2010 (i.e. every year since the GFC hit), would be the year the world returned to higher levels of sustainable organic economic growth.

Slowdowns in China and Europe are to blame, though we expect the recent crunch in oil prices will have a much larger impact in the USA than is currently being forecast, with Shale states dominating job growth and economic activity in the USA these last couple of years.

Outlook for Gold

Gold has been doing its job perfectly in the face of this market turmoil. Despite the volatility in 2014, it ended the year essentially flat, and up about 8% in AUD terms due to the falling currency. Nothing to get excited about, but when cash is paying you nothing, equities didn’t deliver, commodities crash and official inflation is low, it was actually a terrific year for bullion investors.

Heading into 2015, sentiment was again poor towards the yellow metal, with little interest shown in the market, but the recent weakness in copper and commodities in general has not dampened enthusiasm for gold at all, with the metal now up about USD $30oz for the year. This performance is even more impressive when one considers the fact that the markets are starting to price in actual deflation in consumer prices.

In that sense, the action in the gold market very much looks like traders positioning themselves for an even longer period of low rates out of the United States, with little reason for the Fed to be hiking. Very weak retail sales out of the United States overnight, which fell by just shy of 1% will be even more of a reason for the Fed to stay it’s hand, leaving anyone short gold no doubt feeling a little nervous.

We don’t want to call a major rally in the metal just yet, for we have had a number of false starts in the gold market since it’s initial plunge to $1180oz all the way back in June of 2013. The market also looks a little overbought right now, and any more capitulation selling in commodities could take some temporary wind out of golds sails. We’ve also not seen any major buying in the gold ETF’s yet, indicating that institutional investors are still holding fire when it comes to the yellow metal.

As such, though our long term extremely bullish outlook has if anything been strengthened by the last few weeks market action and economic developments, we’re short term neutral. Gradual acquisition, the benefits of which we discussed all of last year, still looks an incredibly prudent course of action.

For a recap on our piece that we published just before Xmas, and the varying views you’ll hear on the gold market, please click here

Wishing you all the best, and much prosperity in 2015

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. This report was produced in conjunction with ABC Bullion NSW.