LAWRIE WILLIAMS: The implications for gold of a global stock market crash

Could global stock markets be about to crash?  That certainly looks like it could happen at the moment, with virtually EVERY stock exchange around the world showing sharp falls from their past year’s peaks.  The falls range from a little under 7% in Russia to over 40% in China, but the falls are universal and the recent sharp downs and ups in the markets do not seem to bode well.  That suggests market nervousness and it doesn’t take much to turn nervousness into a rout.  Markets opened mixed today for the most part, although some key indexes saw further falls, but with volatility continuing it is hard to tell in which direction the next significant moves will occur.  What must be worrying for investors is that over the past month the trend on the key North American, European and Asian bourses has been strongly downwards.

Stock Market indices – 52 Week High and Current

Index and Country

52 Week High

Current

Fall (percent)

NORTH AMERICA

 

 

 

Dow Jones (USA)

18351

16371

10.8%

S&P 500 (USA)

2135

1953

8.5%

NASDAQ (USA)

5232

4806

8.1%

S&P TSX (Canada)

15510

13353

13.9%

EUROPE

 

 

 

FTSE 100 (UK)

7123

6085

14.6%

DAX (Germany)

12391

10132

18.2%

ESTX50 (Switzerland)

3829

3176

17.1%

CAC40 (France)

5284

4518

14.5%

MICEX (Russia)

1848

1730

6.4%

ASIA/AUSTRALASIA

 

 

 

Nikkei (Japan)

20953

18059

13.8%

Hang Seng (Hong Kong)

28589

21500

24.8%

Shanghai (China)

5166

3029

41.4%

Shenzhen (China)

3157

1608

49.1%

BSE 100 (India)

9231

7982

13.5%

S&P ASX (Australia)

5997

5019

16.3%

AFRICA

 

 

 

JSE (South Africa)

55188

49367

10.5 %

LATIN AMERICA

 

 

 

IBOVESPA (Brazil)

60243

47282

21.5%

MEXBOL (Mexico)

46230

42827

7.4%

 

For another view perhaps we should take a look at the VIX index.  This is a measure of volatility on the S&P 500 index options put together by the Chicago Board Options Exchange, and also known as the ‘Fear’ index.  Recently the Vix has seen a recent big spike upwards as the major stock exchanges have seen untoward ups and downs – perhaps stimulated by the puncturing of the Shanghai and Shenzhen Stock Exchange bubbles which are off over 40% from their highs of earlier this year.  Ironically these Chinese indexes in reality are still running substantially above their levels of 12 months ago though (The Shanghai Stock Exchange Composite Index is still over 30% higher than 12 months ago while by comparison  the Dow is actually 3.5% down over the same period).  This suggests that the Chinese markets could have more downside to follow, while the recent fragility in the Western markets suggests it might only take a tiny nudge to tip them over the edge and stimulate a true market crash - as the doom and gloom merchants (including some big names) have been predicting.

The US Fed Open Market Committee meets this week and its deliberations are awaited not only by the U.S. markets, but by global ones too with many emerging economies worried about the strains rising US interest rates may put on their economies.  No doubt the rate setters will also be bearing this in mind as well as the potential for even a very small rate rise to have an adverse effect on the seemingly very fragile North American stock indexes.  Could a rate rise signifying monetary tightening, however small, be the trigger to crash an already nervous market?  We’ll have to wait until later in the week for the result of the FOMC deliberations to be made public.  Maybe they’ll just kick the can down the road yet again,   but if not .....

So what could all this do for precious metals and for gold in particular.  Uncertainty in the markets can generate safe haven demand which would likely be positive for gold, but perhaps not hugely so, although a change in sentiment in gold’s favour would be welcomed by precious metals investors.  But it is sobering to look at what happened to gold in the runup to, and aftermath of the 2008 market crash in case the recent downwards trend accelerates.  Gold had been showing some signs of strength ahead of the crash – indeed it passed $1,000 an ounce earlier in 2008 for the first time – but as markets behaved more and more nervously, gold stuttered too and once the markets fell rapidly the gold price came off – not to the same extent as the stock markets, but still significantly, falling to just below $700 at the peak of the market decline as liquidity concerns meant that those institutions which held easily tradable solid assets like gold were having to divest these to stay afloat.

But, on the positive side for holders of gold the price had recovered to around the high $800s by the year end and then progressed solidly to re-breach the $1000 barrier in September 2009 and on to $1100 by the year end and continued upwards from there for nearly another two years to its $1900 high.

It’s an ill wind that blows nobody any good.

 

15 Sep 2015

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com