New year optimism has quickly faded after the major geopolitical earthquake of the assassination of top Iranian General Qasem Soleimani. Gold moved higher and broke $1,600, a seven year high, before retracing somewhat.
Iran’s retaliation was fairly swift, but exceptionally low key, with some analysts suggesting that Iran deliberately missed key targets in order to de-escalate the situation. White House insiders were also suggesting that the US President now wanted to calm the situation.
What is clear however, is that the story will not end here. Iran’s retaliation and response has not yet occurred. A few missiles do not constitute a commensurate response to its top General being assassinated. The Iranian Government’s response should be considered on a timeline of years, not days, and has always operated on its own timeline. This excellent thread by Yashar Ali explains why:
This is certainly not the last we have heard on this story. The consequences are profound. President Trump’s statement regarding more NATO involvement and less direct US involvement in the Middle East has profound consequences for the global political and economic order:
A further point is that with US now a world leader in Oil production, does the US need to be involved so much in the Middle East? Add to that, the slow move away from fossil fuels and the era of US dominance in the region, which still retains so much geopolitical importance, could now be coming to an end. The US may not need Middle East oil any longer. But the rest of the world certainly does. Without the world’s sole superpower dominating the region, then the tinderbox of dormant rivalries could certainly spark up again. This would have serious consequences for the global economy and of course benefit Gold once again.
Away from the Middle East it was a more benign and predictable start to the year. Central banks continue to underwrite the markets with “unconventional means”. The chart below nicely sums up the exceptional situation where even though even though Italy’s Debt to GDP ratio is the highest in 40 years, its net interest payments as a percentage of GDP are the lowest since 1980:
In Japan the story is similar. Almost 44% of Japanese government debt is owned by the Bank of Japan. Compare this to just 8% in 2008:
Also in Asia, the narrative of the China miracle is beginning to lose its shine. The Shanghai Composite Index of leading companies actually fell 7% during the last decade:
The idea that the masses of rural workers were flocking in their hundreds of millions to the urban centres to become middle class consumers is also now being questioned:
Which is one reason why perhaps the German motor industry continues to stare down the barrel of secular decline:
Elsewhere in the auto industry, one company’s valuation seems to be doing rather well.
This amazing fact is even more astounding when you consider the fact that Tesla sells just a fraction of vehicles compared to its main rivals. A combination of high interest in the stock and easy monetary conditions make these sky-high valuations possible. Markets don’t care at the moment but the chart below implies we are now at a credit cycle peak:
These low rates are keeping Zombie companies alive. Corporate debt in the main US stock market has grown significantly in the last ten years:
Finally, without any irony, the St. Louise Federal Reserve have published a paper – warning governments not to print money when in trouble:
The world starts the decade in a precarious place. Gold’s continued ascent, even when stock markets make all-time highs, geopolitical tension is ignored, trade wars are forgotten and economic data is poor shows that the precious metal is sending a signal: be careful.
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.