LAWRIE WILLIAMS: Markets slowly recovering from some big downturns.
Almost all markets may at last be coming to the realisation that global efforts by global central banks to control the inflationary pressures which have been the chief cause of the global economic downturn are not being particularly effective. They may be aided in their efforts by apparent falls in energy prices, probably the principal contributor to global inflation, but we fear this may only be temporary as long as the Russia/Ukraine war persists and there looks to be no short term end in sight to this. Indeed energy prices did also look to be trending higher again in this morning’s trade in Europe and in the U.S. too.
The conclusion is that recession is probably already with us. The technical definition of such is two successive quarters of negative economic growth, The world’s leading economy, the U.S., has already confirmed negative GDP growth in Q1, and the Atlanta Fed has come up with figures suggesting negative growth in Q2 as well. Where the U.S. leads, the rest of the world tends to follow. The signs are ominous to say the least.
As far as the Ukraine conflict is concerned – the direct and indirect cause of many of the global inflation problems - President Putin may decide his principal objectives will have succeeded should his troops gain total control of Ukraine’s Donbas region, and cease further attacks, but it takes both sides to end a war. Ukraine may still refuse to accept its loss of territory without attempting to win it back – particularly if its army continues to receive more modern weaponry from the West. If this is the case Russia could find itself in a prolonged conflict with Ukrainian forces determined to win back lost territories in the south and east, while at the same time the former would be trying to consolidate its gains in the face of a massive infrastructure rebuilding programme amidst an at least partly-hostile population – even among predominantly Russian speakers who may have become used to the enhanced freedoms of expression the Ukraine may have offered.
So far both precious metals and equities have been showing some considerable weakness, with all now suffering year-to-date losses. However those for gold have been pretty minimal at about 3% compared with around 14% for the Dow, 19% for the S&P 500 and 27% for the NASDAQ in the world’s dominant economy. Even copper, that global economic bellwether, is down around 20% year-to-date.
The biggest losses for gold have mostly been in the past couple of days in response to the stronger dollar index (USDX), which had risen to its highest level for just under 20 years as a safe haven investment. Whether that has been a wise move given the adverse impact of what is probably effectively double digit inflation on the dollar’s purchasing power remains to be seen. We suspect that on further analysis the apparent wealth preservation attributes of the dollar will warrant a different conclusion! Over time we still feel gold will be a better wealth protector, with the dollar coming back down to earth.
The USDX is a comparative measure however, and with many comparative currencies and economies in at least as much trouble as the U.S., the dollar’s apparent strength is not too surprising. European economies are mostly in disarray because of their reliance on Russian exports of natural gas, which Russia is using as a potential economic weapon against countries it sees as ‘hostile’ to it over its Ukraine war. The UK, which is not quite so vulnerable to Russian energy supplies, is in the throes of a domestic political crisis with the resignation today of Boris Johnson as Prime Minister over a seemingly ever ongoing series of political scandals, while other potential global geopolitical crises loom.
Inflation, due to high energy and food prices which are mostly outside of central banks’ capabilities to control them, is rampant worldwide. The overall effect on economies is not a positive one, so investors should be prepared for further slippage in economic growth and a probable continued fall in equities. Bitcoin has been pretty indeterminate in finding direction and could move either way, but one cannot anticipate strong positivity, although another sharp weakening trend could easily develop as cryptocurrencies seemingly have little in the way of substance behind them in our opinion and seem to be hugely vulnerable to fraudulent activity.
For precious metals – or at least for gold – the future could well be a little brighter if the dollar’s vulnerability to inflation gains realization. Platinum and palladium are perhaps too dependent for any price growth on the general health of the economy, while silver falls somewhere between gold and the pgms. It does have a history of moving in the same direction as the gold price, often in a more exaggerated manner, but increasingly its principal price drivers are industrial, so it is a more difficult metal to predict. On balance its affinity with gold probably make it a more positive choice than the pgms - particularly so than palladium which is hugely dependent on strength in the light motor vehicle market. The latter will not do well if we really are headed for a serious recession.