Gold Heartbeats: Most bubbles tend to burst

Goldex Team

Editorial content

As mentioned in our last issue, slowly but surely the global financial markets are beginning to wake up to the fact not everything is as rosy as it once seemed…

Let’s take a look at the S&P500 Index for the last 12 months:

While hardly the ugliest chart in the world it is important to note that the previous high in the Autumn of last year could not be held. This fact, despite the insistence of central banks that they maintain an easing bias, says a lot.

Global economic data continues to disappoint across the world while geopolitical uncertainty refuses to go away. Big ticket items such as property and autos posted worrying data once again. They key Asian data set reported:

“China Industrial profits fell -3.7%, manufacturing -4.7% largely as Motor Vehicles fell -25.9% . Revenues growth slowed from 7.2% to 4.9%”

This data adds to an already worrying trend for European Auto manufacturers, especially when one sees that German auto and auto part exports in 2016 were over USD 200 billion. The announcement this week of the Fiat Chrysler and Renault merger was, like the failed Commerzbank and Deutsche Bank merger, defensive in the extreme.

And yet the interventionism by governments and central banks shows no sign of slowing down via @ericlamTOon Twitter:

When things are put into perspective things really look serious via @Wu_Tang_Finance:

Furthermore, a number of stories and charts, such as the below, are highlighting the danger of such exuberance from central banks and the hope that this policy will always continue, and most importantly, continue to “work”. It’s always good to follow the behaviour of private money placements:

It all sounds very familiar to many who were managing assets in 2007. Adam Tempkin reported a story in Bloomberg last May 21stthat quoted CSAM saying that “Hybrid CDOs are the ‘Cheapest Thing in the Entire Globe”. These are products that bundle bonds and loans together into higher-rated securities. According to CSAM’s Amir Vardi, a structured products portfolio manager at the firm, AAA through BBB tranches look cheap. We may be seeing the reincarnation of collateralised debt obligations!

What does this mean for Gold?

For the time being, the reaction in Gold remains subdued. This is because of the continued narrative that there is no inflation, and in fact there is stagflation or disinflation on the way.

The thing with crises is that they happen suddenly. Only in hindsight can the trigger or catalyst be pinpointed. Over the coming months, there may be some of event that will shock the market. Perhaps it will be a mega-cap company write-down, a fraud, a bankruptcy or a geopolitical shock. But once this comes the whole narrative will change, and the market will become uncontrollable for a time. It is at this point, that gold could really rally. And really, rally hard.

The list of potential catalysts, not of all which will transpire, is vast. Bubbles abound everywhere. Property, Venture Capital, Equities, Private Equity. Another banking crises in Europe looms overhead with Deutsche Bank making new all-time lows. Italy also faces the prospect of being fined up to EUR 4 billion by the EU for not complying with budget requirements. Should such a fine occur then the fallout could be serious for European bond markets, already under a great of pressure, despite being propped up by the European Central Bank.

As stated at the start of the report markets are slowly waking up. Risk-aversion is increasing, reflected below in the US Treasury market. The market is now pricing in three interest rate cuts by the Federal Reserve by the of 2020.

But what makes the current situation even more uncertain is the trade war potential. Far from being resolved, it appears both China and the US are hardening their respective positions. China has even leaked to the press a possible export ban on rare earth metals. This was in response the latest pressure on Huawei by US companies severely reducing links with the Chinese company. Furthermore, Japanese giant Softbank announced its UK asset, ARM, would also cease to cooperate.

Compared to a decade ago there is far more to worry about. Not since the end of the Cold-War has there been a sense of being on the verge of so much profound and drastic geopolitical and economic change.

Economic data is not good, and worsening. Trade war rhetoric is not getting any better. Domestic politics is fragmented and increasingly conducted with a populist rhetoric. Geopolitics, with a very hawkish White House, is facing a moment where cooperation and globalisation could turn very quickly to nationalistic and mercantilist policies.

All of this combined, at the same point in time is unprecedented for such an interconnected and debt loaded world.

In times such as these, perhaps the calm before the storm, there will be many wise heads and old hands steadily adjusting their risk and looking for safe havens.

Until next time.


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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.