Was it worth it?

That’s the question we think a lot of investors will be asking as they wrap Xmas presents this year. The hours spent reading blogs and research and balance sheets and company announcements, all trying to work out which asset class to invest in, which ones to avoid, or which sectors of the market to focus their capital in.

In truth, whether we look at Australian equities, at gold, at the bond market, or global stock exchanges, 2015 is not one most investors (unless they’re been great stock pickers or market timers) will look back at fondly, with quite a few swings in asset markets, but few that have appreciated meaningfully.

What follows below is a review of 2015, not so much looking at asset market returns themselves, but what some of the major drivers have been, as well as commenting on a few things that have caught the eye in the last 12 months, both in Australia and overseas.

We will also share some our favourite charts for the year.

Obviously we’ll also take a look at the precious metal market, summarising our thoughts on its current state based on the developments we’ve seen not only in the past year, but since the cyclical peak in gold back in 2011.

The Year in Review

At a macro level, there have been a few key themes, nearly all of which are interlinked in some way, that have dominated the headlines.

If we can sum it in just four words, we’d choose the following: Janet, commodities, China and yield.

Obviously the Fed has been a major focus for the entire year, with the market obsessing on whether they would, or wouldn’t raise interest rates in 2015.

At the start of the year, most participants were locking in a H1 2015 ‘liftoff’, but a terrible start to US macro data (based on the Bloomberg macro surprise index – see chart below from Zerohedge, 16th March 2015) saw the Fed hold fire, pushing out expectations until the latter half of the year.

All year the ‘will they or won’t they’ debate raged as to interest rate policy, with the Fed dot plot even scandalously including a projection of negative interest rates, something that only the truly economically desperate (i.e. Europe) would ever resort to.

In the end, the Fed ‘came through’, and lifted rates at their just completed FOMC meeting, marking the first interest rate rise in the world’s largest economy since 2006.

Despite the headlines this ‘historic’ event initiated, those of us who are trying to keep our heads can’t help but notice that the majority of the world remains painfully addicted to ZIRP and/or NIRP, in ‘real’ terms at least.

That much was made painfully clear in the following chart, which comes from Davin Rosenberg over at Gluskin Sheff. This beauty was one of my early contenders for chart of the year.

As you can see, some 90% of the industrialized world now requires policy rates at or below zero, with this number growing nearly every year since the onset of the Global Financial Crisis.

Janet may have hiked, once, but Mario, Kuroda-San, Carney and company, not to mention the local boy Glenn are still playing it pretty fast and loose in monetary policy world, with more to come in 2016 if the global economy continues to cool.

Of course, when ZIRP and QE were just babies back in 2009, the major warning or concern was that consumer price inflation would immediately take off. This has not happened, with official inflation rates in much of the developed world at or near all time lows, owing to the chronic weakness in commodity prices (more on this below), as well as the very low money velocity that we’ve seen since the GFC hit.

Low consumer price inflation and support for asset prices is of course the dream for Wall Street, her cheerleaders in the asset management industry, and her benefactors in Washington, which is why, by and large, unconventional monetary policy (UCM) is seen as a roaring success.

It is also why people like Ben Bernanke can publish books with a title like “The Courage to Act”, and charge upwards of $200,000 an hour to deliver speeches on the international speaking circuit, though amusingly Goldman Sachs and UBS apparently decided he wasn’t worth the money.

In all seriousness, we are not sure if the above book belongs in the comedy or fiction section of your local bookstore, though we were politely refused by the friendly staff at ours when we asked if we could print some of our own money to pay for a copy of the above.

Back in the real world though and UCM isn’t quite the success many would have you believe. That is of course if you measure economic policy by things including real employment growth, real wage growth, social equality, business investment, stronger economic growth – basically all the things that make us prosperous in the developed world.

Evidence of that abounds everywhere – but perhaps nowhere is it more prevalent than in the death of new business, and the reticence of large businesses to invest.

For evidence of the first of those developments, we think the following chart, which comes from the US Census Bureau, is worth a look, as it highlights the net number of new businesses created in the United States in any given year.

Jim Clifton, chairman and CEO of Gallup noted that; “business startups outpaced business failures by about 100,000 per year until 2008. But in the past six years, that number suddenly reversed, and the net number of U.S. startups versus closures is minus 70,000”.

Commenting on this development, and the lack of attention it receives in the mainstream media, Clifton also noted that; “My hunch is that no one talks about the birth and death rates of American business because Wall Street and the White House, no matter which party occupies the latter, are two gigantic institutions of persuasion. The White House needs to keep you in the game because their political party needs your vote. Wall Street needs the stock market to boom, even if that boom is fueled by illusion. Let's get one thing clear: This economy is never truly coming back unless we reverse the birth and death trends of American businesses.”

Moving back to big business, and their reticence to invest seems a logical outcome due to evolution in the global economy, and monetary policy since the GFC hit.

The economy itself remains incredibly weak, with little in the way of real wage gains. With households still needing to deleverage, it is nigh on impossible to meaningfully grow sales and top line revenues, at least for big businesses as a whole.

Meanwhile, UCM leaves investors desperate for yield, like drug addicts needing their next hit. And like drug addicts, they’ll both turn to anyone who will offer them that hit, and turn on anyone who can’t provide the stimulus they’re looking for.

The end result? An explosion in payout ratios, and a corresponding in compression in yields across large corporates, irrespective of the sector they’re in, or the underlying health of their operations. For evidence of this, consider the chart below, which shows not only payout ratios for the ASX200, but also EPS.

As you can see, the amount of money corporates are willing to handover to their shareholders is at its highest in a decade, rising ever since 2011, even though earnings are essentially flat. We are sceptical this is in the long term interests of shareholders, nor does it necessarily make for the healthiest of balance sheets over the long-run.

At the same time, much like a Floyd Mayweather boxing match (we’ve called it a match because he doesn’t really fight), the yield party attracts all the famous and powerful, even if they find it distasteful. Everyone feels like they have to be there, even if they’d rather not, and secretly can’t afford it.

Evidence of this is captured in the following chart, which comes from BT Funds management, and an appropriately titled investment conference they gave in 2015, which went by the name; “Central banks, easy money & other performance enhancing drugs.”

The title says it all. Yield is no longer a differentiator, with corporates desperate to maintain their dividends, even in the face of declining earnings.

That BHP and RIO have tried to maintain or enhance dividends the past few years, despite plunging iron ore prices and over 60% decline in earnings for resource stocks in Australia (source BT and Goldmans) is surely something market historians of the future will scratch their heads at.

Of course, those historians will not have been around to witness first hand the courage of the central banking act that is playing out before us.

And with that, it must be said that whilst the market has obsessed over the Fed this year, and the potential impact on asset prices, it has been China, and her impact on the commodity market, that was the real story. The devaluation that took place in August, and the many that have followed since would have seemed unthinkable only a few short years ago.

Many a fortune was made betting on the China story up until a few years ago, but ever since, it’s been slower going in the Middle Kingdom, with the pace of growth declining, and the nature of it changing, which is arguably more important.

The massive fixed capital investment that took place in China in the past twenty years, with bridges to nowhere and houses for no-one (quite a feat in a country of over 1 billion people), will be felt all around the world in the coming years, not just in China herself.

And that is because large parts of the developed world bought into this dream, with massive investment into the expansion of commodity supplies, especially in countries like Australia.

By 2015, we were exporting 39 million tonnes of iron ore a month, an all time high, though prices were close to just USD $40 a tonne, a far cry from 2011, when it nudged USD $180. The slowdown in China has wreaked havoc on commodity markets, which are now back to where they were in 1999, which you can see nearly in the chart below.

Indeed, despite trillions in QE, the oversupply of commodities, a lack of meaningful growth and the continued lack of monetary velocity has led to a situation where commodity prices are some 20% below the level they hit during the depths of the GFC.

Some correctly predicted pullbacks in iron ore, or coal, and even gold, but we would love to see a forecast issued around the time the Fed first fired up its monetary helicopters for QE 1 that predicted such a thing.

Personally, we think the worst of the commodities crash is behind us. That’s not to say that there aren’t years of troubled times ahead for the sector, which will have to slowly unwind the excess capacity that has built up, for there will be, and we wouldn’t be piling in to invest in BHP or RIO or other companies in the sector.

Instead, our belief that the worst is over is based simply on the fact that prices have crashed so far and so fast, there is only so much crashing left in them, and economic activity, weak though I expect it to remain, will still roll on.

How About Gold?

It’s been another tough year for precious metal investors, though Australians holding the precious metal have been supported by the decline in the AUD. All things considered, we’ve been satisfied with how the market has performed, with gold once again differentiating itself from the broader commodities complex, which has been hammered relentlessly, as covered already in this report.

When analysing the future direction of the gold price, it’s important to remember that there are at least five identifiable groups participating in the market at anytime. These include;

• ETF investors, who often treat gold as a tactical asset, wanting to own it just like they might shares in a company they fancy, but who have no major long-term conviction

• Hedge funds and speculators, many of whom use the futures market to express their view, often looking to add a few basis points to monthly performance, whether that be by going long or short gold

• Western physical bar and coin investors, who tend to be accumulators and are holding gold as a strategic long term investment (This is me in case you were wondering)

• Central banks, who are again this year acquiring physical gold, building up their strategic holdings and diversifying their foreign exchange reserves

• Far Eastern, Indian and Middle Eastern buyers, who are accumulating gold both as a store of wealth and as ostentatious display of it.

In the last four years, since gold peaked in August/September 2011, we’ve seen some interesting developments amongst these groups. When considering the first two, we’ve seen the wide scale of abandonment of the gold market by ETF investors and those speculating on higher prices in the futures market.

For evidence of this, consider the fact that ETF outflows have totalled close to 1,200 tonnes since the end of 2012, pushing total gold ETF holdings back to levels last seen before the onset of the Global Financial Crisis.

Meanwhile, speculators are now so bearish on gold that they’ve completely abandoned long positions, with the futures market now net-short, or very close to it.

As you can see, hedge funds were net long almost 260,000 contracts in 2011, but that has been fully unwound now. That’s some 800 tonnes of gold that has been effectively sold over that time, which combined with ETF outflows pushes total gold divestment from these two groups above 2,000 tonnes in the past three years.

We have three observations about this. Firstly, it is no surprise gold has been weak the past few years, with this kind of selling. Secondly, none of this is corrupt or illegal or even immoral. Gold bulls, myself included, were perfectly happy for ETF investors and futures speculators to add upside pressure to gold prices leading into 2011.

I think many of these people will eventually rue their decision to sell, or go short the market, but that’s entirely different to thinking they should be banned from doing so, or that there is some grand conspiracy in their behaviour.

Finally, and most importantly, I see the above as great news for future price movements in precious metals. ETF holders have almost completely abandoned the gold market.

That’s great, for if they’ve already sold, they can now only come back as buyers. Ditto for hedge funds and short term speculators, many of whom are now short the gold market, betting on lower prices. They were clearly wrong to be hyper-bullish back in 2011, when they were all sure gold would permanently blast through USD $2,000oz. They are just as likely to be wrong now that they are hyper-bearish, all certain that gold will fall, and stay below USD $1,000oz.

If Yellen doesn’t follow through with the rate hikes they expect, or if equity market volatility sees some safe haven gold demand, then a lot of these speculators could easily lose faith in their positions, which would lead to a bout of short covering and a meaningful move higher in prices.

And over the next few years that’s exactly what I expect will happen, as demand, and buying patterns amongst the last three types of investors remains incredibly strong.

Central banks are on track to add between 550 and 600 tonnes of gold to their holdings this year, continuing an impressive pace of accumulation that began around the onset of the GFC, as you can see in the chart below.

Meanwhile, bar and coin demand at a retail level continues to thrive in Western markets, with silver coin sales in America for example hitting a record in 2015, breaking the previous peaks in 2013 and 2014.

Strong retail demand amongst Western investors is something we at ABC Bullion can attest to, with the number of new clients walking through our doors, or transacting with us over the phone or online growing at an impressive clip in 2015.

The two interest rate cuts by the RBA this year, and the battle with 5,000 points that the ASX is currently engaged in have been key drivers of this increased demand, especially amongst SMSF Trustees and some higher net worth investors, though buying amongst some of the shops that service Australia’s Chinese and Vietnamese communities has experienced an enormous pick up in Q4 2015.

And that leads to the last part segment of bullion buyers, which is of course the Indian, Chinese, other Asian and Middle Eastern markets, many of whom prefer to buy gold in jewellery form, seeing it as wearable wealth.

Again here, demand is incredibly robust, with the Shanghai gold exchange on track for record withdrawals in 2015, whilst India consumed nearly 270 tonnes of gold jewellery, bars and coins in Q3 2015 alone, up 12.5% on the previous year.

The appeal of gold in these countries is one of the main reasons why we believe the market is so wrong to focus exclusively on the Federal Reserve, US interest rates and the US dollar, with the World Gold Council themselves noting that more than 90% of global gold demand occurs outside the United States, and that it’s local currency prices that count the most.

On that note, the gold price in most currencies, including Australian dollars, is looking more than healthy, unlike broader commodities. That much is evident when looking at the following chart, which measures the global gold price, and comes courtesy of Incrementum AG and the Federal Reserve of St Louis.

As you can see, the global gold price looks like it bottomed in 2014, with an uptrend now emerging. It is unlikely to be smooth sailing, with further volatility highly likely, but holding gold as a core investment in a portfolio is still sensible, as it has been for the past 15 years.

If (though in our opinion it remains when), investors in the developed world realise how expensive financial markets are, and how difficult the period ahead will be for risk assets, we have no doubt they too will seek out an allocation to precious metals.

And on that note we’ve been highly encouraged, though not at all surprised, to see some of the heavyweights of the wealth management industry, including Stanley Druckenmiller, Ray Dalio and Jean Marie-Eveillard all express the rationale underpinning gold investment, and why they have it in their own portfolios. This was something I wrote about in short piece over at Livewire news titled “Three Wise Men”, which you can see here.

When the developed market investors do inevitably return, it is my hope they will express their gold and silver ownership through physical bars and coins, which are the safest, most flexible from a trading perspective and often cheapest (especially cast bars) way of owning precious metals.

But even if it is via ETFs or the futures market, the impact for those of us who already own those bars will be the same; higher prices and better overall portfolio returns.

Silver has even more upside from here

We do not write about silver perhaps as much as we should. The major reason for that is that gold is the headline grabber, and in an environment where educating people on the importance of precious metal ownership is the number one objective, it makes sense to focus on gold, which also has more stable supply and investment characteristics.

Physical silver, which makes up just as much of my own precious metal portfolio as gold does, remains the more volatile of the two, and also has more of an identity crisis, still seen as a quasi-monetary and quasi industrial metal.

But as we enter 2016, one can’t help but be optimistic about its return potential, once this cyclical bear market in precious metals ends, as they all do.

With the gold silver ratio still pushing 75:1, gold’s little cousin is even more unloved than gold itself, which of course spells opportunity for those of you with investment capital to deploy.

I’ve been gradually accumulating more metal over the past two years, and will be using my next SMSF contribution to top up my holdings of physical silver, confident it will outperform not only most financial assets, but most likely gold too, in the coming years.

Australian Economy

Before wrapping up this report, I wanted to share some thoughts on likely economic developments in Australia in 2016, as well as some other observations that touch on standards of living in both Australia and the United States, and the Bank of Japan.

It’s hardly news to ABC Bullion clients or indeed most Australians with an interest in investing that the Australian economy faces a number of headwinds in the coming years.

The continued unwind of the mining capital investment boom and the adjustment to much lower commodity prices are widely acknowledged, though to these challenges we can add a likely peak in housing construction, and the impending closure of the car industry, which are both likely to occur in the next 24 months. Of those, we see the peak in home construction as the one most likely to worry investors, as many had hoped that the building industry would absorb the large number of workers no longer required in the mining space.

And with the federal government facing sizeable budget deficits as far as the eye can see, stimulus from Canberra is unlikely.

All of this portends a potential period of low growth and “recession like” conditions for years to come, which in our opinion is best defined as a period of low to negative real wage growth, a decline in disposable income per capita, rising unemployment and underemployment, as well as weak business investment.

This is our base case for the Australian economy between 2016 and the latter part of the decade, even if official GDP figures continue to grow due to our exports of ever less profitable mineral deposits.

In truth, an end to Australia’s 25 year golden run of rising output should hardly come as a shock, with this unparalleled period of growth hiding some of the fragilities and imbalances that have developed in the local economy since the 1990s.

The biggest question is what happens to the Australian housing market, which is only natural when it completely dominates household wealth in the nation, and was last valued at some $5.9 Trillion by the ABS, or some 3.5 times total GDP.

In short, we think the top is more or less in for Australian property, though some cities will outperform others. There are a handful of reasons why we think this is so, including;

• The APRA crackdown on ‘risky’ mortgage lending to investors. APRA would rather banks lend to over-stretched first time homebuyers than investors, who had been dominating demand since the last RBA rate cutting cycle.

• The government crackdown (even if it’s partly just for show) on foreign home buyers, which will deter some overseas buyers to a degree, especially when other countries like the United States are opening their doors to foreign property investment.

• Investor and first home buyer frustration, not only due to slower capital gains (which affect both), but also the lack of rental growth, and rock bottom yields.

• Oversupply, with the supposed housing shortage (at least on a nationwide basis), one of the worst myths that exists re the Sydney housing market. Look for another rise in the number of people residing in each dwelling when the next Census is released. We have way too many rooms in Australia.

• A continued slowdown in the Australian economy, with unemployment set to rise, and wages set to continue their fall in real terms.

• The unfolding disaster in the Perth property market, which will roll across the land like a bushfire, denting property investors’ confidence all around the nation.

Of course, owing to the size of financials within the ASX 200 (+45% of the total), and the weight of equities, both domestic and international, in Australian superannuation funds, the answer on what happens to housing will heavily impact the performance of the stock market, and superannuation itself.

It is our belief that the slowdown in housing will limit earnings, and potentially share price gains for the ASX 200. We expect unemployment, and especially underemployment to rise, with a continuation of negative real wage growth across the nation. As such, companies will continue to struggle to meaningfully grow sales, and will remain reluctant to invest, or add to full time payrolls.

That’s the best-case scenario. The worst case is a meaningful decline in home values, which will throw the lever on the “wealth effect” into reverse, as well as lead to a sharp decline in bank valuations and share price.

With resource set to struggle, and these two sectors comprising 60% of the ASX 200, it’s hard to see how the overall ASX moves meaningfully higher in such an environment.

Standing in the way of all this is of course the Reserve Bank of Australia (RBA). The RBA stand ready to ease policy further, should the Australian economy continue to deteriorate, and especially if there is a hiccup in our housing market.

On that note, we couldn’t help but laugh when seeing the following chart, which we saw on Fairfax a few days ago, highlighting the “perception of monetary policy standing” in a handful of developed market nations.

As you can see, based on the below, market perception is that the RBA is soon to turn from a dovish to a hawkish tone, with rate hikes potentially on the cards in 2016.

Looking at the above chart, it is actually a sign of just how moribund growth in the world economy remains that the RBA, the central bank of a nation going through the unwind of the largest mining boom in history can be seen as the third most “hawkish” central bank of significance in the world.

That the Bank of Canada is next is even more incredible, especially when the same people clearly see the PBoC moving in an ever more dovish direction, courtesy of the slowdown that is occurring there.

Indeed, unless the Federal government abandons all hope of ever returning to surplus, or actually of just balancing the budget, there seems little that can stimulate the economy in any meaningful way in 2016.

“Confidence” will be touted as a key, and the Turnbull government and the RBA and associated cheerleaders will do their best to talk that up, hoping for a lift in consumer spending, but the sad fact remains that on aggregate, the picture for the Australian consumer remains bleak.

As it stands right now, this is the reality facing everyday Australians as Xmas 2015 approaches;

• Australia’s savings rate is just 9%. That includes compulsory superannuation of 9.5%

• According to a 2014 ME BANK survey, less than 50% of households are saving anything on a monthly basis, whilst those that saw their average saving per month drop 15%

• Australian wages are growing at just 2.3% per annum, the lowest rate on record.

• Australia’s household debt to GDP ratio is over 120%, one of the highest rates in the world

• Cost of living pressures are real. Official inflation may be low, but price rises for the must haves (health care, education, insurance, transport) are running at 2 to 3 times the pace of overall CPI increases.

For evidence of that last trend, look no further than this chart, which highlights the percentage of consumer spending dedicated to essentials, vs. discretionary spending, and how it has changed since the early 1990s.

Source: Minack Advisors

Is it any wonder that discretionary retail is struggling whilst the ALDIs of this world flourish, or that the sharing economy is growing, or that there has been a 15% increase in the percentage of young Australians who choose to live at home since the GFC, or that businesses are struggling to increase sales and remain reticent to invest?

We for one do not think so.

Make no mistake, there will be no rate hike in Australia, and if there is, it will prove as false an indicator, and as temporary an event as the RBA move to raise rates “post GFC” through 2010 proved.

In short, we see lower cash rates (1.50% maximum by end 2016), a lower dollar, weak business investment, declining or barely rising house prices, and a difficult environment for the overall equity market and traditional superannuation funds in 2016.

“Recession like” may end up being too optimistic indeed.

Living Standards

One of the more interesting pieces of research we came across in the latter part of this year was the one released by PEW Research in early December. In an article titled; “The American middle class is losing ground”, PEW commented on trends in household wealth over the past several decades, and found that the American middle class is now effectively outnumbered by those in the economic tiers either above or below it.

You can see that in the chart below, which highlights the fact just 50% of adults now live in a middle income household, with the number a full 11% lower than 1971, when Nixon took the US off the gold standard.

The percentage of people living in lowest income households has also grown, as has the percentage of people living in the highest income households.

This disturbing trend is even worse than the above chart highlights, which we can discern by looking at the wealth data that underpins poor, middle income and wealthy families, and how that too has changed over time.

As you can see from the above chart, the wealth of people in middle income and low income families has either not moved, or in fact declined since the start of the 1980s, whilst both have been savaged since the onset of the GFC.

And it is young people, i.e. our future, that are paying the price the most obviously, with PEW noting that; “The biggest winners since 1971 are people 65 and older. This age group was the only one that had a smaller share in the lower-income tier in 2015 than in 1971. Not coincidentally, the poverty rate among people 65 and older fell from 24.6% in 1970 to 10% in 2014. Evidence shows that rising Social Security benefits have played a key role in improving the economic status of older adults. The youngest adults, ages 18 to 29, are among the notable losers with a significant rise in their share in the lower-income tiers.”

Meanwhile in Australia, research from the National Centre for Social and Economic Modelling (and contained in an article in the Australian), suggests that 47.4% of Australia’s 9.2 million households are not net taxpayers.

That is up from 43.9% in 2005, and is on track to pass 50% in the coming years.

In essence, the world’s largest and most powerful country is in a situation where the middle class continues to decline, with wealth inequality getting worse on an almost daily basis, with the deterioration in living standards concentrated in her younger citizens.

Meanwhile, in Australia, despite an economic miracle for the past 20 plus years that is the envy of the developed world, we are about to enter a scenario where more than half the population can’t function without some form of handout from the authorities.

If this is what “big government” leads to, and it is widely considered a success, then we’d hate to see what failure looks like.

North Korea, Zimbabwe or Cuba we suppose.

Bank of Japan crosses the Rubicon

Before finishing the final market update of the year, we wanted to share with you what we think is actually the most important development in central banking this year, which is the news that the Bank of Japan is now the largest holder of Japanese government bonds.

Whilst the market has focused on the Fed relentlessly, Kuroda-san (Haruhiko Kuroda is the head of the BoJ) and his team have kept on buying Japanese bonds.

Today, the BoJ is the largest funder of the government of Shinzo Abe.

The development in this trend is easily seen in the chart above, which shows the BoJ now holding more than 30% of the Japanese Government bond market, up from barely 10% just 2 and a half years ago.

If the Federal Reserve in the United States were to hold a similar amount of Treasuries, it would need to own closer to $6 Trillion in US government bonds.

The phrase “Crossing the Rubicon” relates to the return of Julius Caesar to Rome, after his victory in the Gallic wars, the most notable of which was his victory in the battle of Alesia over Vercingetorix.

Rather than disbanding his army before returning to Rome, Caesar marched with them into Italy, crossing the Rubicon, which was a river that marked the boundary between Gaul and Italy proper at the time.

This was a capital offence, for governors of Roman provinces were not allowed to command their army outside of the specific province they’d been handed control over.

In defying his orders, Caesar effectively put paid to the Roman Republic and gave birth to the Roman Empire. Ever since, the phrase “Crossing the Rubicon” has been used to express a scenario where a point of no return has been crossed, hence the analogy with the Bank of Japan.

It is implausible Shinzo Abe and Kuroda-san don’t realise just how significant the above chart is. It is also inconceivable that the Bank of Japan can ever stop (or even meaningfully slow down) their bond buying program now, for Japanese financial markets and the Japanese government themselves are now entirely reliant on this ongoing stimulus.

Indeed so grotesque has the position become that the Japanese government was spending close to 30% of tax revenue on debt payments, even though rates are at record lows. This is seen clearly in the chart below, which comes from a report issued several years back by Societe Generale.

As Caesar noted, the die has well and truly been cast.

Maintaining confidence in this charade is the number one priority for the Japanese government and the BoJ, which is no doubt one of the reasons Kuroda-san has said he theoretically sees “no limit” to how far this policy can be pushed.

But all markets have limits, and the unwinding of this scenario will have major ramifications not only in Japan, but all around the world, including in Australia, with Japan still a major destination for our exports, whilst these bonds are still almost laughably described as “assets” in Australian investor portfolios, including “balanced growth” superannuation funds.

As a result, alongside many of our clients at ABC Bullion, I for one am more than happy to keep a larger portion of my capital in physical gold and silver in the coming years, safely sitting on the sidelines whilst the monetary policy games crank up a notch, the economy continues to deteriorate, and financial markets go through an inevitable rebalancing.

Short-term, the precious metal market may be volatile, but with zero credit risk, exceptional liquidity and infinite duration, time is well and truly on my side, and yours too I certainly do hope.

Until next year, wishing everyone a Merry Xmas and a Happy New Year!

Warm Regards

Jordan Eliseo

Disclaimer

This publication is for educational purposes only and should not be considered either general or 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, and 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.