LAWRIE WILLIAMS: Gold and oil prices drop and recover, stocks rise and fall, Inflation still the key
With Russia apparently making only slow progress in Ukraine and reportedly taking heavy losses of troops and military equipment, perhaps a negotiated peace deal seems marginally closer and markets have been moving accordingly. Oil and gold prices both fell back sharply initially and equities made something of a recovery, But beware – these latest price moves may not hold. Indeed the gold price regained the $2,000 level this morning in Europe, albeit briefly. Oil also regained some of its losses and despite some quite big equity price rises in the U.S. and Asia yesterday and overnight, they were turning down again in Europe today and also at the opening of the U.S. markets.
However, although higher level negotiations between the warring parties appear to have got under way in Turkey, Russia appears to be playing hardball and is demanding terms that it knows are unacceptable to the Ukraine government in order to cease the attacks. Bullying tactics in other words.
High inflation levels, though, remain a major problem for the global economy and these still look to be rising and may well be the major influence on market performance going forward. The latest CPI figure in the U.S. came in at an annual inflation increase of 7.9% and that will have been before the impact of the Ukrainian conflict will have had any effect. The Ukrainian impasse will have been having a particularly big impact on energy prices, which have already been a major constituent of rising U.S. inflation. Thus things are likely to get worse for the U.S. and global inflation rates before they even begin to get better. Higher energy prices will be even mor of a problem in continentl Europe than in the U.S. because of the high reliance thefre on Russian oil and gas supplies.
High inflation and ultra-low interest rates lead to strong negative real interest rates, and these tend to be hugely positive for a non interest-generating asset like gold, so upwards pressure on the gold price seems likely to continue unchecked. This is because central banks are unlikely to be able to raise rates fast enough, or high enough, to stem the tide without a devastating effect, even initiating a recession, on their own domestic economies.
We will thus follow with particular interest what the biggest central bank of all, the U.S. Federal Reserve (the Fed) does at its forthcoming FOMC meeting in a week’s time. The world’s central banks tend to take their lead from the Fed so the report on the deliberations and decisions taken at the event will almost certainly be key to the global approach to the inflation problem. We suspect there will only be perhaps a 25, or possibly 50, basis point U.S. interest rate rise agreed at the meeting and this seems unlikely to slow the pace of inflation measurably, although it may have a knee-jerk adverse effect on stock prices given that the markets will expect it to be followed by more interest rate rises this year, and in the future. Gold may thus start to stabilise above the $2,000 an ounce level and equities see another downturn develop.
We still see gold and gold stocks as positive investment choices. The former will act as a safe haven wealth protector while the latter should see good gains because of high profitability levels and the prospect of increased dividends even at current price levels. Most of the major gold miners are profitable at a gold price of a little higher than $1,000 – how much more so when gold is at double this price level?