As goes January 2014, so goes the year 2014?

stock_market_crashhigher_interest_rates

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of January 27 and the month of January 2014.

And we will try to find an answer if the important quote on wallstreet “As goes January, so goes the year 2014” which has been right in 62 of the last 85 years, or 73 percent of the time, might be applicable this year.

Highlights of January 2014:

  • Rising Interest Rates in Emerging Markets to fight inflation
  • Capital Markets Down World Wide
  • Rising Gold prices

RISING INTEREST RATES IN EMERGING MARKETS:
As discussed in our article of January 18th, 2014, Brazil’s Central Bank hiked the country’s to 10.5 percent.

In the week of January 27, Turkey’s, India’s and South Africa’s Central Banks surprised the markets with rate hikes to stem inflation as follows:

TURKEY:
On Tuesday January 28, 2014, Turkey’s central bank aggressively raised rates late, in a drastic move aimed at bolstering the country’s currency the “Lira”.

At the emergency meeting of last Tuesday, the central bank increased a series of short-term interest rates. It increased the marginal funding rate, an overnight rate, to 12 percent, from 7.75 percent.

Turkish Central Bank Govenor

In a statement the Turkish Central Bank said:

  • Recent domestic and external developments are having an adverse impact on risk perceptions, leading to a significant depreciation in the Turkish lira and a pronounced increase in the risk premium.
  • It increased the marginal funding rate, an overnight rate, to 12 percent, from 7.75 percent.

The moves are intended to help the country’s currency. Higher interest rates tend to push up the value of the lira by offering a greater return on investments denominated in the Turkish currency.

The Turkish economy grew an estimated 4.3 percent last year, according to the World Bank, up from 2.2 percent in 2012. But there was concern about inflation, which the International Monetary Fund estimated would average 8 percent in 2013.

INDIA:
On Tuesday January 28, 2014, the Reserve Bank of India (RBI) raised the benchmark repo rate – the amount at which it charges to lend to commercial banks – to 8 percent from 7.75 percent.

Raghuram Rajan, India’s central bank governor

In a statement India’s Central Bank said:

  • The country’s main gauge of inflation, the wholesale price index (WPI), rose 6.16 precent in December, from a year earlier.
  • Meanwhile, the country’s consumer prices index (CPI) – which is seen as the key gauge of inflation across most other countries – rose at an annual rate of 9.87% in December.
  • Inflation excluding food and fuel has also been high, especially in respect of services, indicative of wage pressures and other second-round effects.

India’s main share index fell following the announcement, with lenders such as ICICI Bank leading the decline.

SOUTH AFRICA:
On Wednesday, January 29th, 2014, the South Africa Reserve Bank unexpectedly increased its benchmark interest rate, following central banks in emerging markets from Turkey to Brazil that tightened monetary policy to bolster their currencies and to curb the rising inflation in that country.

gill-marcus

The Monetary Policy Committee lifted the repurchase rate to 5.5 percent from 5 percent, Governor Gill Marcus told reporters in Pretoria Wednesday. It was the first increase since June 2008.

The move didn’t help to support the rand, which fell 1.9 percent to 11.2516 against the dollar on Thursday, January 30, 2014.

CAPITAL MARKETS DOWN WORLD WIDE:

USA:
For January, the USA Dow Jones Industrial tumbled 5.3 percent and the S&P 500 slid 3.6 percent – their worst monthly percentage declines since May 2012.

See below January 2014, chart for the DOW-30 for details:

DOW January 2014

EUROPE:
In Europe the Dutch, AEX-25, tumbled 3.72 percent, German DAX-30 slid 2.57 percent, French CAC-40, slumped with 3.01 percent and the UK FTSE-100, decreased with 3.45 percent

See below January 2014, chart for the AEX-25 for details:

AEX January 2014

ASIA:
In Asia, Japan Nikkei-225 tumbled 8.44 percent, Hong Kong Hang Seng Index slid 5.45 percent, the Australian ASX-200 decreased with 3.03 percent and India Sensex Index slumped with 2.94 percent.

See below January 2014, chart for the Nikkei-225 for details:

Nikkei 225 January 2014

RISING GOLD PRICES:
The Philadelphia Gold and Silver Index traded 6.8 per cent higher for the month, while physical gold put in a more modest gain of 3.14 percent. This was the complete reverse of what we saw in 2013.

See below charts for details:

GDX January 2014

gold_30_day_o_usd January 2014

PGM CAPITAL COMMENTS:

Equities – Gold Market a New trend?
This may be a new trend for 2014 with a rotation out of US stocks and into gold with the S&P 500 down by four per cent in its worst month for more than a year.

Still gold has been rising against the huge sell-off in equities around the world in January, completely contrary to the broad consensus against the yellow metal at the end of the year and bullish euphoria about stocks.

If the stock market moves from weakness to a full-on rout or crash then it is not clear how gold will move.

As our readers you may remember, we have predicted rising interest rates world wide in 2014.  India, Brazil, South Africa and Turkey have hiked their interest rates sharply in January 2014. We expect more countries to do so and that the markets may force the FED, ECB, Bank of England and Bank of Japan to start raising their rates much sooner than most people believe. If this happens it will be a repeat of 1994, the bond markets worldwide will fall like a stone.

The above scenarios are tail wind for Gold, Silver and the stocks of their miners. Due to this we are accumulating these stocks in our personal portfolio and those of our Clients and have a STRONG BUY RATING of the Market Vectors Gold Miners ETF (NYSE: GDX)

Regarding Silver we are even more bullish. Here below we have pinpointed a number of key drivers that may indicate why silver may be poised for a spectacular run in 2014:

  • Silver traders closely watch gold price action. Since the 2001 bull market began, 92% of silver’s price behavior has correlated with gold’s. That’s why gold’s recent strong price action since the start of 2014 is a positive sign that silver’s poised to rise too.
  • Back in early December, silver-futures short positions of all speculators hit a bull-to-date high at 54,000 contracts, which is a great contrarian indicator.
  • In the past decade, the range Gold to Silver ratio was mainly been between 45 and 60. Currently, one gold ounce is good for 63 silver ounces. That’s high by historical standards, and it’s high by bull-to-date standards.
  • As can be seen from below chart history has proven that in the eye of the storm, the Gold to Silver ratio has always gone to 17. Which means that when real panic hits wall street and other capital markets and everybody is running to the exit and seek the safe heaven of Gold and Silver, the Silver price will shoot through the stratosphere.Historical Gold to Silver ratio

The questions most investors will be asking themselves are:

  • How sharp will the correction in the markets be and how much upside potential does Gold have?
    • PGM Reply:
      Our fundamental analysis combined with history is telling us, that we can expect a downward of 20 percent correction in the USA markets and that Gold has an upside potential of approx. 50 percent from its current level. Regarding Japan we are very bearish and for the European Markets, we expect a more moderate correction. The corrections for emerging markets will be highly dependable of their respective interest rates level, exchange rate stability and internal political situation.
  • How high might Interest rates go?:
    • Currently governments all over the world are doing window dressing with both their GDP and inflation figures, by overstating their GDP and understating their inflation figures. Due to this it is not if but  when main-street will lose its trust in these official government figures and start running out of bonds and other fixed term deposits, with rising bond-yield as a consequence.

Last but not least, we once more wish to stress once more the two following applicable quotes that describe the current market situation the best:

THE MARKET CAN REMAIN LONGER IRRATIONAL THAN YOU CAN REMAIN SOLVENT!
John Maynard Keynes

BE GREEDY WHEN OTHERS ARE FEARFUL AND FEARFUL WHEN OTHERS ARE GREEDY!
Warren Buffett

So referring to the famous to the famous quote:

AS GOES JANUARY SO GOES THE YEAR

If statics are applied for 2014, we may see a decline of the USA and Japan Index, a rise of the Gold and Silver prices and an increase in interest rates world wide.

Until Next Time,

Eric Panneflek

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