Not weird at all

'Weird' is having its 15 minutes of fame. The Democrats' pick for Presidential candidate, Kamala Harris, has anointed the Governor of Minnesota, Tim Walz, as her choice of VP. Walz has grabbed attention by calling Republicans and their Presidential candidate Donald Trump "weird people". This might have more traction with undecided voters than the previous tactic, accusing them of being the greatest threat to democracy.

It's been a weird week in markets too. The rout, which saw the Nikkei exchange in Japan fall 12% on Monday, was attributed by many analysts to fresh anxiety that the US was about to plunge into a recession. That anxiety in turn was prompted by a lower than expected figure for new jobs in the US, helping push the unemployment rate to 4.3%, the fourth successive monthly increase. On Monday the S&P 500 fell some 4%, the Nasdaq more than 6%. Analysts hastily revised their expectations for an interest rate cut by the Federal Reserve - headless chickens ran riot!

By Wednesday most lost ground was recovered. The chickens were found not to have lost their heads; after all, the S&P 500 since the 1950s has had some 38 corrections, a decline of 10% or more; a correction every 1.84 years. It depends on your source but there have been some 17 big market crashes in the last 100 years, the last being 2020, when Covid-19 struck and markets generally fell by around a third. The most recent correction is not weird at all.

Diversify

This latest stock slide may not be weird, but it's certainly uncomfortable. Gold is a useful diversifier. In the Great Financial Crash, when equity prices collapsed around the globe, gold held its own. Between December 2007 and February 2009 it rose in Dollar terms by more than 20%. Gold is not impervious to panic-ripples but it's remarkably resilient. On Thursday this week for example the Dollar price was still well above $2,400/oz, down less than 2% since the disappointing US jobs report. As of the end of July the gold price across nine major currencies has risen by almost 22% since the start of this year; in the year to date the S&P 500 has returned an average of just over 19%. Investors in tech stocks have done rather better - investors in Nvidia are still sitting on a 100% capital gain so far this year.

But beware bubbles. For Japanese investors in the Nikkei the pain of the 5 August collapse would have been eased had they held gold as part of their portfolio - in Yen terms the gold price has risen by more than 26% since the start of 2024. So just about a quarter of the gains that have been made in Nvidia; but then perhaps less risk of being in bubble territory.

Eyes on the Fed

The short sharp correction inevitably brought on cries of 'recession' in the US and knee-jerk calls for the US Federal Reserve to cut interest rates, currently 5.25%-5.5%. Various senior Fed figures rapidly denied the US is headed for a recession, arguing that the jobs report was not weak but on trend. "We're slowing but not falling off a cliff" was the view of Mary Daly, president of the San Francisco Fed. There are as many voices predicting recession as those asserting the US economy is normalizing and that the markets correction was a Japanese-created blip, brought about by a modest rise in interest rates from an extremely low level, which upset speculators borrowing in Yen to buy high-yielding assets elsewhere. That kind of leveraged bet got burnt.

Clearly however even if this correction is not fundamentally worrying it demonstrates how fragile the mood is in markets. Investors are now very twitchy and are desperate to see interest rate cuts by the world' most influential central bank, the Federal Reserve. They will have to wait until September, and even then the cut will be very modest. But a modest cut will be followed by further cuts, so that 2025 may well see rates close to 4%-4.25% - which would stimulate greater risk-taking and delight whoever becomes the next US President, 'weird' or not.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.