I began my last year’s "Looking Forward" article saying about the coming year:

"I think the biggest surprise in 2015 will be how long interest rates stay low. I wouldn't be surprised if the Fed did not raise the fed funds rate all year. Falling commodity prices and the subsequent dislocations they can cause may prevent them from doing so. The vulnerability of Europe is another reason to delay. But even if they do I seriously doubt that will affect the long end of the interest rate curve which has much more of an economic impact on the economy than short rates. Long rates won’t move significantly higher until inflation or debt concerns reemerge. And at that point, gold will move up for the same reasons.

The biggest threats to both gold and economic growth in 2015, in my judgment, are a deflationary recession which looms in many parts of the world. The continuous fall in commodity prices are still signaling this vulnerability."

This is still the case today.

Interest rates as expected did stay low. The ten year is almost exactly where it was last year at this time, even given the increase of the fed funds rate. And the story of the year was falling commodity prices with gold falling again to new recent lows. Economic growth fell during the year along with inflation rates, contrary to most economists and the Fed's expectations.

I used to characterize the future of the economy each year after the recession ended as a continuous "year of L", which I said "would last as far as the eye could see" and we have flat lined for all of these years as expected. Looking forward, I don't see much change. In fact the picture has actually deteriorated.

When I look into 2016 I have three concerns:

The first is that while we have been seeing falling rates of growth and inflation during 2015, we could actually enter into a deflationary recession in 2016. The trend is in that direction as most of the data is pointing down. The fact that the Fed increased interest rates in the face of this data is counter-productive. The Fed has chosen to roll the dice on their theory that the economy and inflation will increase during the year. If they are wrong, they will have exacerbated what amounts to a recessionary deflationary bias here and around the world. A bias is not necessarily a destination; but the direction in both growth rates and inflation is down instead of up, and the Fed's decision to raise interest rates won't help in reversing the direction.

My second concern is geo-political. The increasing attacks by terrorists around the world and here at home are likely to continue. And cyber-attacks on our infrastructure, our grid, our financial system, and many of our top corporations are continuing and it is a battle we're losing. A government report this month said as much, concluding that we are vulnerable, with no guarantee of being able to fend off more sophisticated attacks on our economy and our society in the future. The number of breeches is increasing and the attacks are becoming more effective. A pervasive and successful attack would have major consequences to the economy.

And third, the combination of both of the above could result in another leg down in almost all markets. Commodities could continue to fall causing more and greater bankruptcies; stocks could fall substantially causing wealth reduction and the consumer to pull back; and debt problems would soar as government spending increases and tax receipts dwindle. The national deficits and debt, plus those on the state and local level would all soar with no end in sight. Add to that the already receding economic and monetary conditions around the world led by China and it would make for a dreary year indeed if these fears became facts.

But they are still just fears. The optimistic view is that energy prices are falling putting more money into the pockets of the consumer. Auto sales are breaking records. And home sales are good. Our technology sector continues to create and innovate, and we now have the ability to export oil and gas to the world which not only is a wealth generator for this country but adds to our security. The US economy is resilient and may surprise on the upside in 2016.

Bottom line: the future course of the economy and inflation is still unresolved. The falling gold price that began in 2011 has predicted and led the commodity sector, the economic growth rate, and the inflation rate down. Gold is an excellent leading indicator of economic and monetary conditions in the future. As we close the year gold is marginally lower but stable, interest rates on the long end are basically unchanged, stock prices are flat for the year, and most economic and monetary indicators mirror the beginning of the year. We are today where we began. It has indeed been a year of L.

As an investor and trader of gold and silver stocks, I sold out most of my gold position in both physical gold and gold and silver stocks and went to 100% cash in 2011. I have only a small position in precious metal stocks today. I stopped trading gold and silver stocks entirely in April of this year and have only recently begun to build a new position. I think we are beginning or nearing a new bull market in gold.

I made my first buy of physical gold this month in the mid $1000 area. If gold continues to fall I plan to average down; and if it rises I will average up.  And I am ending 2015 with the largest percentage holdings of precious metal stocks of the year, but with a tight stop to protect against further declines if this is just another false alarm.  I think it's time to begin accumulating gold and silver once again both as an insurance policy and as an investment.

In real terms gold is selling today as cheap as it was in the year 2000. And gold and silver stocks are even cheaper. It's hard to believe that there is much more downside in the resource sector in general. In real terms we are already at historic lows in most commodities.

If we see another leg down, chances are it is telling us we will see deflation and recession world-wide. And if the reverse occurs we are likely headed for higher world growth and inflation rates. Either way, 2016 should be a year of resolution. For those who are also thinking along these lines, check out my Market Update service above.

Have a happy and prosperous new year!

Paul Nathan