In 2019, 49 central banks cut interest rates 71 times. The Bank of Canada was not one of them. The US Federal Reserve accounted for three of those instances. Interestingly, the Canadian central bank stayed put. A stable enough domestic Canadian economy buoyed by a rebounding housing market was able to withstand the geopolitical turmoil from China-US trade negotiations, Hong Kong protests, and even Brexit. The obvious question now is what’s in store for the new year?

 

Where it still seems likely the Bank of Canada may trim interest rates in by the middle of 2020, they have not had to be as reactive to a global slowdown. A resilient Canadian consumer and a rebounding housing market driven by the demographic trends of major cities were supportive of the Canadian economy in the past year. That said, a noticeable slowdown into the end of 2019 with sagging retail sales and a lethargic labour market shifts the picture and will test their hand in 2020.

 

One question though, is whether a single or series of rate cuts will effectively make any long-term difference to the trajectory of Canadian growth?

 

One of the discussions being had in policy making circles, especially in the United States and Europe is over the limits of central bank policies. Greg Ip wrote an excellent column in this weeks WSJ on the topic.  As financial market participants, we’ve witnessed the adjustment of interest rates to attempt to slow inflation in economic booms by raising rates, and conversely spur economic activity in downturns by cutting interest rates. As we’ve seen policy rates drift towards zero and go negative in other parts of the world, the efficacy of these policies is being tested in low growth and low interest rate environments.

 

To expand further, many market commentators have discussed a needed shift from monetary to fiscal policy. Simply put, the onus will fall to elected officials to make the smart choices of investments in infrastructure, skills training, and other selective investments. As a headline example, its obvious why some may be skeptical of handing more power to politicians as the fiscal deficit in the United States surpasses a trillion dollars for the first time since 2012. Similarly, in Canada, from a time when a balance budget was a matter of national pride even under previous Liberal governments, the conversation has shifted to maintaining ratios relative to the size of the economy. In both scenarios, the underlying assumption for their stability is low interest rates and economic growth.

 

Whether the Canadian bank cuts rates or not in July may create some short-term noise, but it should not distract from the bigger picture. That is a global trend of slowing growth and whether interest rates near zero have the same ability to spur economic activity.

For nothing more than an arbitrary statistic, as of Fridays close gold prices in US dollars are already up 2.3% on the year. That follows an approximately 4.5% gain in the month of December. The market technicians will remark of the strengthening seasonality picture this time of year also. Gold in January has averaged 3.4% gains over the past 10 years and for the last 5 years has gained every January between 3-8%. Examining fundamentals, several major market moving headlines over the past month can be turned into a bullish story for gold.

 

The gold market has momentum. The market moving forces of a weak USD dollar and the positive global growth story resulting from the anticipation of the US and China inking a Phase 1 trade deal has ensued a risk on trade. Additionally, events at the end of last week adding to heightened tensions between the United States and Iran have renewed gold’s geo-political safe-haven bid. It also can’t be forgotten that a strong base for the precious metals was provided by the theme of central bank easing in 2019 where we witnessed a 10 year high in terms of the percentage of central banks cutting interest rates.

 

Looking at the central bank picture, minutes out of the latest FOMC meeting released last week also revealed a heightened level of caution. Officials at the US Fed seemed focused on risks to the US and global economy. Current discussion is whether heading into another election cycle there is the possibility for a rate cut from the Fed. Nonetheless, a consensus seems to be building that the Fed would opt to let inflation run a little higher before being quick to raise interest rates.

 

In a gold market like this, where every headline seems to appear bullish, it might be wise to exercise some caution. A pull back following a geopolitical (war-type) spike should not be a surprise as investors can sometimes be a little overzealous or too cautious entering the safe-haven hedge. There seem as many historical examples of where a geopolitical induced rally has been short-lived verses being sustained. Ultimately it seems the dollar should be the area of focus right now with the Bloomberg US dollar index down 2% in December for its biggest monthly decline of the past 2 years. This potentially could be a headwind to gold.

 

Still, as the vulnerability of the risk assets showed back in July/Aug when the S&P500 fell 5% in a couple days, gold and the USD can trade higher together, which I think is possible when the next negative trade development comes. In addition to this, with equity markets trading at record highs following a banner year, the higher gold prices with the higher equity markets is exhibiting this degree of caution in the markets.

 

With a quick note to the physical market, the retail reaction to the events Thursday evening was a heightened level of buying/selling from customers as they continue to be ever more price conscious and reactive to large market movements. This isn’t necessarily an anomalous phenomenon as increased volatility traditionally sees higher volume in financial markets. On the one hand we’re back at our record 52 week high in USD and within 2.4% of record highs in Canadian dollars, so clients are both happy to be selling near record highs, but also buyers looking for diversification are active as we continue near record prices.