This past week in the markets set the scene for a diverging picture in terms of monetary policy in the United States versus the reset of the world. Through speeches and congressional testimony, US Fed Chair Janet Yellen made clear that a December rate hike remains on the table as the US Federal Reserve looks to lift off of rock bottom interest rates on December the 16th. This would be the first rate hike by the Fed in ten years. On the other side of the Atlantic, Mario Draghi and the ECB perhaps fell short of investor’s expectations Thursday, but nonetheless remain in an accommodative stance as they extend the duration of their bond purchasing program and cut key policy rates. The path of rate hikes by the US Fed and how their policy diverges from their fellow G7 nations continues to be heavily debated and will be one of the foremost important themes for the global economy in 2016.

There is no question the decision makers at US Fed sit between a rock and hard place. A report out of the Financial Times at the end of last week revealed more than a trillion dollars in US corporate debt has been downgraded so far this year. This represents a 72 per cent jump in the total value of US debt that was downgraded in the first 11 months of 2014. Much of the story is related to the energy picture and US companies that face declining revenues with weaker commodity prices, but also linked is the fear and pressure created from higher interest rates from the path of Fed rate hikes.

Fitting in the commodity story is another very relevant question. The old adage use to be the cure for lower oil prices is lower oil prices. This current down period in energy markets is certainly putting pressure on that theory. As OPEC meetings finalized in Vienna this week, there is only more excess supply uncertainty for the market with the cartel opting not to constrain output and abandon a production target until their next meeting. Relating to the dollar story, it’s not only higher interest rates in the US prompting a strong dollar trade, but also a continued outlook for weak commodity markets.

Tying this together speaks to investor caution of whether the credit cycle seen in global bond markets is nearing its end. Eight of the largest US banks were downgraded by rating agency Standard and Poor’s this week and four of them including Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley were stripped of their coveted A ratings. Only 3 US corporations now have AAA rated credit (and potentially soon to be 2 as one is ExxonMobil) whereas five years ago that number was over 20. In broad terms, as creditworthiness declines and risk increases, investors must look for preservation and return of their capital.

It was interesting to see gold Friday surge over 25 dollars an ounce against the backdrop of fundamentals that would otherwise be bearish for the precious metal. By no means am I attempting to call a bottom in gold prices, but as commodity markets got hammered Friday with the OPEC news and the dollar strengthened with Fed rate hike anticipation, gold as well traded higher in tandem. This rare occurrence when gold and the dollar strengthen together can often signal investors are in search of a safe haven at a time of heightened uncertainty. Whether gold has bottomed is to be determined, but with limited opportunity from relatively stretched credit markets, and an uninspiring equity market backdrop, diversification to gold is worth examining in 2016.

The three words in the title sufficiently describe the state of the globes financial markets. Although, directionless might be a little over optimistic given the S&P 500 is down nearly 6 per cent over the last 3 months and the yield on the US 10 year bond has moved from approximately 2.3 per cent to again below 2 per cent for the fifth time this year. The volatility in the markets this week was no doubt prompted by nonfarm payroll numbers out of the US Friday morning. The labour force participation rate is at a low last reached in 1977. And an economy that averaged 260 thousand jobs a month in 2014, a 3-month average from July of this year through September of 167 thousand certainly raises some concerns.

Of course, it relates back to what has the strongest influence on the markets, and that is the zero interest rate policy at the US Fed. Personally, I go back and forth on the debate of whether we overanalyze their policy statements and speeches too intently as it almost seems market participants have lost the ability to think for themselves. As the Fed is data dependent, investors are dependent on the guidance of policy makers. Part of the work of former Chair Ben Bernanke was to increase the transparency of the institution; investors almost have to question whether we demanded too much and bit off more than we could chew, while being inundated with a deluge of information.

The policy setting committee at the US Fed has marginally more certainty than the educated investor whether they’ll raise rates in December of this year, and that is because of the Fed’s data dependency. Moreover, to take the other side of the coin, the availability of Fed officials to deliver speeches and comment on their policy has reinforced the idea of a communications problem from the respective officials. This is especially true as of late when we are potentially on the cusp of a policy shift.

With the September meeting, the Fed cited global concerns impacting their decision to keep interest rates on hold. Following Friday’s jobs report, which is argued by many as the single most important monthly data release for Fed officials, investors have to question whether concerns over the domestic economy are as much an issue as what’s going on outside the US. It does relate back to a question raised when the European Central Bank and Bank of Japan began their monetary stimulus programs as the Fed was withdrawing support, and that is whether the US economy can go at it alone, and be immune to headwinds of global growth.

If anything is evident by the market reaction of the last three months, it’s that monetary policy in the US has failed to suppress financial markets instability. Fed officials have been challenged to lift off zero interest rates, and although in their view economic conditions may not warrant any action just yet, they are unable to put a lid on volatility that has been absent over the last six years.

This is partly due to what is being perceived as an inconsistent message. If the Fed can raise rates by the end of the year, it will be reinforced by a view of sufficient US economic fundamentals. Otherwise, if they don’t, it will question the impact headwinds from a slowing global economy have on the US and North America, which would seem appropriate.

August was the 80th successive month of the US Federal Reserve standing pat and not adjusting their key policy interest rate known as the federal funds rate. This Wednesday could mark the first rate move since December of 2008. As investors attempt to determine the actions of the US Federal Reserve, this “will they, or wont they” scenario has cast a cloud over the markets for the past few month as the US Fed readies themselves for liftoff. Investors have been essentially at a dead split in terms of their projection for whether the US Fed’s policy setting committee, known as the FOMC, would hike rates; moreover, consensus has now moved to being a little less likely as the market is currently pricing in a 25 per cent probability the Fed hikes this Thursday.

There is a very complex debate taking place for whether the fed should raise interest rates. For starters, the US Federal Reserve has never raised rates in a period when the global economic outlook has such a high level of uncertainty. Even though the argument is more globally based than the Fed’s domestic interests, it still might be the best reason for the Fed remaining on hold.

Harvard Economics Professor and former Director of the National Economic Council to President Obama, Larry Summers is arguably one of the most vocal advocates for why the US Federal Reserve should remain on hold. In a recent blog post he states five reasons for why the Fed should do what is potentially the hardest job for a policy maker, which is nothing. His strongest argument is that hiking rates for sake of doing so and not having a “commitment to a series of hikes is specious.” In his opinion the Fed sits in a role of guiding the more cyclical economic growth trajectory of the United States, versus acting in a reactionary fashion and adjusting rates as they see fit. Summers is also right to point out rate hikes shouldn’t come until there is a commitment of continued hikes.

The takeaway from all of this is really the bind US policy makers, and the global economy finds itself. Just this week Citibank’s Global Chief Economist stated there is a 55 per cent chance the global economy will slip into recession. And although the contraction and time horizon both are forecast to be moderate, it speaks to a level of uncertainty and fragility the financial markets are effectively displaying. At the same time, we have a US economy projected to grow between 2.5 and 3 per cent in 2015 with an employment rate moving near and soon below 5 per cent, which indicates a rate hike from the Fed.

As it is clear Wall Street is no longer predominantly bullish on US stocks, the question is whether the outlook for US growth can look past the uncertainty elsewhere in the world. As notable economists like Larry Summers, and many others have pointed out, a ‘one and done’ is not what the Fed intends to achieve when they raise rates. Should they decide to hike this Wednesday, it would likely imply a level of confidence in the US to navigate the perils of a China and emerging market slow down. From similar logic, if a threat of a global slowdown will substantially affect US growth, the beginning of higher interest rates may be delayed a little longer. Will they or wont they carries deeper implications than the simplicity of “global uncertainty,” and investors have to be cautious to the consequences.

It may just be my natural bias, but it seems the “anti-gold bugs” have more animosity and emotion when expressing their views on gold then the gold bugs have in their excitement for the yellow metal. And there is absolutely nothing wrong with being bearish on gold at present time. Especially as the trend following the undeniable strength of the US dollar and chatter of the US Federal Reserve hiking interest rates gives little reason or evidence to go against consensus. But the “anti-gold bugs” are wrong to rejoice or point out the fact that gold has failed to rally when fundamentals should suggest otherwise. That is simply incorrect.

The most common examples or better, what have been misconceptions of the failed rallies in gold in recent weeks are the China stock market turmoil and fears of a Grexit, or Greece exiting the Euro currency. We’ll examine both.

There are still reasons to be worried about the issues in financial markets in China, despite being absent from the headlines this past week. The list of measures that were taken to support their market makes it essentially improbable for them to retreat any further. At one point in recent weeks, half the publicly traded companies on the Shanghai and Shenzhen exchange were halted from trading for multiple days. China’s central bank was directly financing a crown corporation to actively buy equities. Shareholders with greater than 5 per cent ownership of any public company are banned from selling for six months. Derivative markets and short selling have been banned. The list goes on. To suggest that financial instability in China generates demand for gold implies liquidity, which is non-existent.

Story number two is Greece. And this is more a story that fits into the greater trend in financial markets, which is the slow decline of the euro. In this kind of economic setting money has been gravitating towards the US dollar. The European Central Bank is extremely active in European debt markets, and has a higher probability of becoming more accommodative than less. The US is getting more and more likely to raise interest rates come September. This world is being weighed on a relative basis and although gold bugs, perhaps to a fault, see too many problems ahead for the US economy, compared to the Eurozone or elsewhere in the world, its clear why capital is headed towards the United States for the time being.

The question then, is where that leaves us with gold. It’s been a while since I’ve pounded the table and made a bullish case for precious metals. This still might not be it. I believe in accumulation and I believe in allocating a small percentage of your portfolio to physical gold as insurance. Especially in a world that is so tied currently to decoupling with the US economy, gold is not only the natural hedge, but the perfect hedge.

The other point to make is how much downside a person can be comfortable with. Investing in physical metal as a hedge against geopolitical uncertainty and US dollar instability is one reason. But if gold has a floor of 950 or 1000 USD per ounce, is it worth risking that capital to be invested if, or when this market turns.

Markets don’t seem to be overly obsessed with developments in Greece. I, however, continue to watch with absolute astonishment as the idea of a currency that was established only 23 years ago sees the potential of fracturing so quickly. With 10 days left in the month of June, key deadlines are quickly approaching for whether Greece can finalize a deal with their creditors and secure funding. Ongoing is the threat of the stability of their financial institutions with overnight lending from the ECB routinely being increased to support the outflow of customer deposits. Still this story, which resembles somewhat of a boy who cried wolf scenario, drags on for 5 years now and counting, but finally it could potentially be nearing a new chapter.

There are legitimate concerns for financial and monetary authorities, such as the ECB and the IMF, to question their support for Greece. The continued pressure put on the European Central Bank to provide a lifeline to Greece’s battered banks is an extra stress in an already beleaguered Eurozone. However, as many involved within the debt negotiations have expressed, Greece’s presence in the Eurozone has been a political decision from the beginning, and for that reason whether they remain should be a political decision as well. That being said, finer details of any such agreed upon deal by the Greeks and their creditors must satisfy the conditions set by the economic institutions like the ECB and IMF in order to provide financial support.

At the risk of not oversimplifying the situation, two potential scenarios seem to be floated by the markets. First is the risk of default, which is paired with an exit from the monetary union (or leaving the euro), and the second is that a deal is reached and everything goes back to business as usual. The latter is what’s more likely priced into the markets with near term Greek debt still priced at less than a fifty per cent chance of default. A legitimate fear for the markets, however, is the amateur Greek government, compared to its predecessors, lacks the credibility or follow through that suggests that even though a deal may be forged, a very likely scenario to one we are in now will be revisited upon the next set of deadlines.

The probability of default, however, still seems underpriced. For starters, at no point during negotiations have the Greeks or the creditors showing any leeway to the other party. The creditors want pension reform and for the Greeks that remains their sacred cow. The question becomes whether the stubbornness of the Greeks, or their inability to concede will stall the IMF from offering any concessions whatsoever. The other point that is worth noting though goes back to the money. The country has entered into a damned if they do, damned if they don’t scenario. Deposits at Greek banks are estimated to be down by 30 per cent this year as a staggering 3 billion euros has left Greece this week alone. Long-term solvency of the Greek banks becomes yet another uncertainty, particular for the German controlled ECB who are the major source of funding for the banks.

Although the story with Greece will continue to steal headlines for months into the future, these next few weeks could see a further concentrated amount of action and volatility. Greece is and always has been a distraction for the ongoing and real problems elsewhere in Europe, but how events unfold will also set precedent for debt negotiations with nations like Spain, Portugal, and others. One would hope for a deal and for Greece to remain in the Eurozone, as any fracture to the euro currency only increases its overall level of fragility.