Saturday, January 17, 2015

Central Bank Omnipotence

"Top 10" lists, we all have them. Some favorites might include "Top 10 Movies of All Time", "Top 10 Baseball Players of All Time", Best Presidents, Richest Individuals, Greatest Golfers, "Top 10 Stocks", etc.

How about "Top 10 Most Important Dates of All Time"?

Everyone's list will be different, of course, but most will probably include December 7th, 1941 and September 11th, 2001. It may be interesting to see if January 15th, 2015 will be on anyone's list in the months and years ahead.

On January 15th, 2015, the Swiss National Bank (SNB) abandoned its pledge to support the Euro at a 1.20 ratio versus the Swiss Franc in foreign exchange dealings.

Since this pledge was first made in September 2011, how many Euros has the Swiss National Bank had to buy to keep the Euro above this key level? When the 1.20 peg was finally abandoned on January 15th this past week, how much money was then lost by the Swiss National Bank on its $500 billion balance sheet of reserve currencies (of which approximately 50% was allocated to Euros)? We may never know the full extent of the almost unimaginable losses sustained by the Swiss National Bank this past week. However, I have no doubt that when the final tally is in, total SNB losses will exceed the equivalent of $75 billion dollars (almost 20% of Swiss GDP). Is Thomas Jordan (the Chairman of the Swiss National Bank and architect of this failed policy of massive foreign exchange interventions) now considered the biggest losing trader of all time? Probably, but more importantly, does the SNB shocker of January 15, 2015 finally dispel the current myth of global central bank omnipotence? I believe the answer may be YES!

What does it all mean for traders and investors moving forward? Lots of questions, but as usual, no certain answers, just interesting speculation! Here are some known facts:

Year-to-date (YTD) - Gold, Silver, and precious metals related investments have been the biggest winners by a large margin so far in 2015:

Gold       +  8.1% (YTD)
Silver     +14.0% (YTD)

The Philadelphia Gold/Silver Stock Index (see chart below) is now up 15.6% year-to-date, which makes it the best performing index among major U.S. stock indexes so far in 2015. For comparison purposes, the S&P 500 Index is down 1.9% so far in 2015, while Oil and Oil-service stocks are down about 9.2% so far year-to-date.

Can Gold and Silver investments continue to outperform in the weeks and months ahead, or will profits fade again in this "most hated" sector just as they did after last year's blazing start? More questions, but no certain answers, as usual.

In the interest of full disclosure, my allocation to Gold and Silver mining shares reached 45% in mid-December 2014 from 0% in mid-October 2014. The 2-month period between mid-October and mid-December was brutal for Gold and Silver investors, and I was no exception. However, the investment returns since mid-December have been more than stellar, and well worth the sweat and tears of that 2-month losing period. Gains of 50% or more are the rule, and not the exception, for precious metals mining stocks since their mid-December lows! My current allocation to Gold and Silver mining shares is 25%.

When a stock investment is up 50% or more in less than a month, is it too greedy to expect more? Another question without a certain answer, but at this point I firmly believe that Gold and Silver investments will continue to be the best performers in 2015. Unlike last year, when there were several false starts for the precious metals mining shares, I think a major new bull market is now underway in this exceptional group that will surprise almost everyone with its longevity and upside scope!

Gold ETF (symbol GLD) Monthly Chart with Computer-generated Buy & Sell Signals


Philadelphia Gold/Silver Stock Index (XAU) with 200-Week Moving Average Line

Gold ETF (symbol GLD) with 200-Week Moving Average Line and Computer-generated Buy & Sell Signals

Silver ETF (symbol SLV) with 200-Week Moving Average Line and Computer-generated Buy & Sell Signals





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