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LAWRIE WILLIAMS: Gold rises as global equities see red.

Gold’s resurrection looks as if it may be continuing as global equities fell almost across the board Friday and Monday. Markets seem to be becoming convinced that the beginnings of a global economic downturn, if not a full blown recession, is beginning to get under way. If the markets are correct in this assumption then gold could be due to hit a new high for the year in the short term and then go even higher during the remainder of the year.

But today gold has come off its recent higher levels and seems to be consolidating in the $1,310-$1,320 range and equities are picking up a little after a couple of days of falls – indeed the falls on Friday in the U.S. and in Asia on Monday were quite spectacular. The Dow picked up by an insignificant amount on Monday, but the S&P and NASDAQ both continued to fall, although not as steeply. Today has started with something of a recovery in Asian and European stocks but not a particularly confident one. This has been following through to U.S. markets but investors remain nervous, particularly as there are a myriad of warnings out there that U.S. equities may just about be due for a spectacular crash.

Bitcoin too, which has received a lot of commentator support (presumably mostly from those with a vested interest in a cryptocurrency recovery) has seen BTC slip back below $4,000 again. We still think this is a house of cards and further falls back below $1,000 are possible in the medium to long term.

But bitcoin aside, what are the signs that a recession is imminent? In the U.S. the yield curve has inverted, which means long term interest rates have fallen below short term ones. This is seen as a precursor to recession, although not necessarily an immediate one. It is certainly a warning sign which suggest that it might well be a good time to pare equity investments ahead of a possible fall which may yet be perhaps anything from 6 months to a year into the future.

Precious metals – gold in particular – may be a good place to park one's money meantime. Gold is not necessarily immune from a recessionary fall in value as liquidity issues often mean good assets like gold need to be sold off to keep afloat, particularly where equities have been bought on margin. However gold is usually far quicker to recover and tends to go from strength to strength once the recession bottoms. We certainly saw this in 2008/9 in the then financial crisis with gold recovering any lost ground within a couple of months from the big turndown and then rising rapidly for a couple of years thereafter. Equities took far longer to make a recovery and some disappeared altogether.

This time around the U.S. economy is looking vulnerable – the reason why the Fed is backpedalling on its tightening programme – but the global economy is perhaps looking even worse. Europe of course has potential fall-out over Brexit, which is why the EU powers that be are intent on making the U.K.’s withdrawal as difficult as possible. The EU’s two major powerhouses, Germany and France, both seem to be seeing a huge fall-off in manufacturing output and exports yet paradoxically the U.K., despite all the Brexit uncertainties, is seeing a boost in people-in-work to the highest level since records began and unemployment down to levels which many EU nations would give their eye teeth to replicate.

Asia too is seeing economies stuttering and turning down. China is probably the most important player here. Its economy may even still be growing but at an almost minimal rate compared with only a few years ago. It seems to be the principal victim of the Trump-generated trade war, which in retrospect is perhaps proving just as damaging, if not more so, to the U.S. with the strong dollar eating into exports while making even tariff-struck imports more attractive to consumers. Trade wars seldom do anyone any good!

So what is the best place to store any accumulated wealth at the moment given markets look vulnerable? Cash might have an appeal, but many banks are looking vulnerable too – even some of the biggest ones – and the rewriting of banking regulations which makes big individual deposits usable to bail the banks out Cyprus-style, with no redress, places risk here too. Holding gold thus becomes attractive as an alternative, with the prospect of rising values (gold tends to perform well in a general economic downturn as a wealth protector), but then perhaps not best to keep it in your bank (see above)! There remains the worry about government confiscation of gold, but this has so far proved to be scaremongering by those offering places to hold gold which may note be subject to government interference.

The fall in the gold price today, albeit relatively limited, has largely been put down to profit taking, although the dollar index is showing some signs of strength which tends to be negative for the gold price. This could remain a problem for any serious gold price advance as although the U.S. economy is almost certainly not as healthy as the politicians would have everyone believe, it may still be healthier than that of most other countries against which the economy, and the dollar, may be rated.


26 Mar 2019 | Categories: Gold

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