LAWRIE WILLIAMS: Gold price undecided as equities crash may have started
As we had predicted, the somewhat unwarranted positive reaction by U.S. equities to the statements following this week’s Federal Open Market Committee (FOMC) meeting were indeed premature, with markets coming down to earth with a profound bang on Thursday with the Dow dropping by over 1,000 points, after a 900 point rise in post FOMC trading on Thursday. We certainly did not understand Wednesday’s upwards move which seemed to be because Fed chair Jerome Powell seemed to rule out any forthcoming 75 basis point rises in interest rates, not that this seemingly ultra-cautious Fed body was ever likely to impose rate rises of this kind of magnitude, whatever the inflation level! Although it will never admit it, a high inflation level may well suit the Fed in helping it slow the economy down, while enabling it to apportion the blame to factors largely outside its control.
This coming week’s new Consumer Price index (CPI) and Producer Price Index (PPI) data, due to be announced by the Bureau of Labor Statistics (BLS) on Wednesday and Thursday respectively will give us the next window on inflation’s path. With food and energy prices still appearing to be on the up there is the prospect of another rise taking the CPI ever nearer double digits – a level not seen since the index was re-organised back in the 1980s, some would say to help reduce social security payments which are based on the index level. Inflation levels will also likely be exacerbated as sanctions being imposed on Russia as a result of the war on Ukraine, and corresponding retaliatory action, have a growing impact on the considerable levels of Russian exports to the West – in particular of energy, metals and agricultural-related commodities, and the additional costs of replacing these from other supply sources. The impacts of these changes in the supply pipeline in some cases will take months, if not years, to filter through and thus cumulatively contribute to inflationary pressures for some time to come.
We, among others, have long been predicting a severe equity markets crash in the U.S. – one which is likely to spread globally. As we had noted, even a 50 basis point interest rate rise, coupled with the withdrawal of other Fed financial stimuli, particularly when coupled with the promise of more such medicine to come, could be enough to tip the U.S. economy into recession. Quite how deep may depend on how the Fed handles this going forwards. Indeed this recession may well have commenced, although it is not yet deep enough to be irreversible, although it will take cautious hands to make this into the proverbial soft landing – often talked about but seldom achieved.
As for gold, at the moment it seems undecided whether to rise in its role as a wealth protector, or fall alongside equities. Its performance continues to be decidedly mixed, with swings both up and down. At the time of writing the gold price was at $1,876 in European trade, down marginally on its overnight closing level in the U.S. after being up a few dollars earlier. U.S. markets may well see further changes ahead of the weekend.
Readers, with even relatively short memories, will recollect, though, that back at the last big equity price collapse in late 2008, the gold price followed equity prices down as individuals and funds with liquidity issues needed to sell their stronger assets to remain financially afloat. However, gold did recover far faster than equities and went on to new highs within the next couple of years. We suspect that the portents for the gold price again are better than for equities which we feel have been driven up in price beyond their true value and could well come down much further accordingly.
As for bitcoin, this too is showing considerable signs of weakness and while there are the usual suspects telling us its price will go to the moon there are others who warn it could trough to $20,000 in the current risk-off environment. We have never been supporters of the digital currency, tending to align ourselves with Warren Buffett and Charlie Munger on this. Maybe we just don’t understand crypto. Like so many other fads nowadays there seems to be no real substance behind it. But then the value of something is what one is prepared to pay for it. In Tennyson’s words – “Ours not to reason why.”