Slowly but surely, the markets and media are waking up to the actions of policy makers and central banks. This is reflected in the Gold price, which remains stubbornly above the previous breakout level. Additionally, there has been an explosive increase in articles on how to invest in gold and why it is going up.
A number of factors have contributed. First and foremost was the breakout of the previous high of $1350. Indeed, gold reached a 6-year high only a few days ago. Such price action garners attention in the markets and creates a positive feedback loop as momentum buyers step in.
The second factor is the continuing increase in gold-price friendly news. Deteriorating politics and economic numbers have again combined to create calls for policy-makers to be more interventionist.
Source: BlackBull Markets
Gold relative to USD is also a fascinating chart (Ryan Detrick) which shows upward momentum on a longer-term time frame:
What happened in the markets?
Recent economic data has again been poor. And definitely poor enough to create more hope of more easing. Here are a few highlights since last issue:
- Japanese machine tool orders June final reading -37.9%
- South Korea exports -13.6% in July
- German wholesale inflation data: -0.5%
Global economic contraction and price deflation continues. And this is more than enough to justify further measures from the powers that be. As if on cue, the New York Fed’s John Williams made comments during a speech last week that, “when you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”
The market saw this as a new doctrine of pre-emptive action. And though his comments were later “clarified” it is now the expectation that the US will start to approach zero-rates eventually like much of the rest of the world.
However, as David Ingles writes such cuts are not usually so good for stocks:
And with the amount of debt out there, a few cuts of interest rates would probably not suffice to prevent a new recession. That’s why the “new normal” of central banks buying stocks is about to become just normal in Europe. Here’s the world’s largest asset manager calling for the European Central Bank to directly purchase equities.
Blackrock’s CIO of Fixed Income also wrote an opinion piece arguing the same in Financial Times (paywall).
In other signs of excess, the hugely unprofitable WeWork CEO cashed out a portion of his holdings ahead of a debt raising and potential IPO. In China, a major conglomerate defaulted on $500 million of debt due next month.
Despite all the bad economic data and stories that are only seen during the last stages of the cycle, equity markets remain buoyant. The US S&P500 is again flirting with a new all-time high.
What happened in politics?
- Further tensions with Iran appeared with the taking of a British-flagged tanker in retaliation to a similar British move in the Mediterranean last month. The US continues its aggressive posture toward Iran as the nuclear deal now looks in tatters.
- Trade talks between the US and China continue but with little progress despite the hopeful headlines. This is a battle for dominance for the 21st century and beyond and will not be resolved easily.
- Meanwhile in Hong Kong, the protests continue as China warns continued action will not be accepted.
- In the UK, Boris Johnson became the Prime Minister with a mandate from the Conservative party to leave the EU on Halloween with or without a deal. This significantly increases the chance of a no-deal Brexit.
- South Korea had to fire warning shots to Russian fighters encroaching on its airspace.
The political change in the world is unfolding at a breakneck speed. While the global economy splutters the default is now to print more money, or to directly buy equities. When will this end? Under what conditions does this experiment run its course? Is this the beginning of the end of such policies or only the end of the beginning?
If the US starts to buy its own stock market, then increasingly capital markets will become less important as public equities become central bank held companies. Some see this as a step toward socialism or communism via the back door. Others view it as a necessary step to stop asset prices decreasing. What is in no doubt, however, is that the end of these policies will not be for a while yet.
We are in paradigm shift as Ray Dalio points out in his excellent article. For all investors, this is worth a read.