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Stock market shocks could see gold shine

stocks down

Following this week’s market turmoil gold could be set to rally significantly as a number of economic factors come into play for investors

Following this week’s market turmoil, gold hit a nine week price high yesterday, moving strongly past the $1,200 mark, reaching almost $1,228 before coming back down below $1,220. Further strengthening of the gold price is forecast as investors predict an end to the equity boom. “There was no sign that markets were beginning to worry until 24 hours ago,” said the World Gold Council’s chief market strategist John Reade yesterday at a London Metals’ Exchange (LME) focus seminar.

Since Wednesday stock markets around the world have taken a hit, the S&P 500 and the Dow Jones were both down more than 2%, while the FTSE 100 fell 1.9%. A slight rally in Asian markets this morning came after the Shanghai composite fell 5.2%, to its lowest level since 2014.

Such an adjustment is seen as a reaction to the Federal Reserve’s creeping interest rates, warnings from the IMF over global debt and a sense among investors that such a long equity bull run must be coming to an end. “This could well be the change everybody has been waiting for,” one London trader told Glint Perspectives.

In addition to this, the bond markets now appear to be harbouring risk as yields on US 10-year treasury loans rise above the 3% mark, typically seen as a cause for concern among investors. High levels of government debt in the US also remain a cause for concern.

Having pointed to the inverse relationship gold has to the strength of the US dollar, Reade noted there are possibly early signs of stress coming through the US financial assets. “For gold, that’s really important because when that happens we don’t particularly care about the strength of the US dollar; we don’t particularly care about where interest rates are going. When people start to buy gold because they’re concerned about financial stability then all bets are off.”

Reade went on to say he saw an end to the equity and bond bull run shaping a more serious downturn: “Face it, the US will go into recession. We see recessions after a number of years of growth and we’ve seen a number of years of growth. The long-term prospects of gold as a financial asset, in particularly compared to other financial assets, look quite encouraging.”

Reade’s words were echoed by Rhona O’Connell Thomson Reuters’ head of Metals Research & Forecasts, who said she saw the argument for gold as supported on both sides. “There are two ways at looking at gold as an investment,” she said, identifying capital investment and risk diversification.

“A lot of people are disinterested in gold because [equity] markets are strong, it’s highly arguably that that is when you should be interested in it because technically it is undervalued. Equally, if you’re looking at gold as a risk diversifier then its price doesn’t matter a jot.”

“Under those two arguments, I would say now would be the right time to be looking at [gold] seriously.”

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