​Are Investors and Markets Losing Confidence in the Power of Central Banks?

Guild Investment Management |

Gold serves as a “vote of no confidence” in the intelligence, competence, and efficacy of government policymakers and central bank governors. That seems to be a significant ingredient in gold’s current rally. Further, markets have not responded as expected to central bank actions and announcements -- with Japanese negative rates, for example, being greeted by a soaring Yen and a crashing Nikkei. This implies skepticism that further extraordinary measures will have the desired economic effect, and such skepticism resonates with the growing nervousness about recession risk making the rounds in financial news.

Since the inauguration of zero-interest-rate policy, quantitative easing, and other extraordinary measures by central banks in the wake of the 2008 financial crisis, investors’ mantra has been “don’t fight the central banks.” We don’t believe that mantra has completely lost its relevance; nor do we believe that a recession is immediately around the corner. We do note, however, that the current response of market psychology to central banks shows signs of strain.

Investment implications: We don’t believe that a recession is around the corner, and we don’t believe that global central banks have exhausted their arsenals. However, market responses to recent central bank actions -- including action in the price of gold -- suggest that skepticism is on the rise. It may be getting that much harder for central banks to convince markets that their powers are without limit.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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