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Category: Economics

Gold rises as global markets plummet

Stock markets around the world have lost $4 trillion in value over the last week and continue to see record sell offs, prompting a rise i...

6 February 2018

Glint

Stock markets around the world have lost $4 trillion in value over the last week and continue to see record sell offs, prompting a rise in the gold price as investors seek a safe haven

A significant stock-market sell off has seen the price of gold rise. The US Dow Jones lost 4.6% of its value overnight, a dive mirrored in Asia and Europe this morning. Japan’s Nikkei 225 was down 4.7%, while Frankfurt, London, and Paris reported losses of around 3%.

The nosediving markets represent a sell-off of $4 trillion over the last eight days, following previous record highs. “Playtime is officially over, kids,” analysts at Rabobank told Reuters. “Rising volatility painfully reminds some investors that one-way bets don’t exist.”

The downturn has seen a rise in the gold price to $1,342.95 per ounce this morning, following earlier gains on Monday. But other commodities suffered as Brent crude oil’s international benchmark futures hit a one-month low before recovering to stand at $67.28 per barrel, down 0.5 percent on the day.

Market sentiment currently seems to be one of the adjustments as investors look to price in inflation and interest rate rises following a strong wage growth report in the US. A backdrop to this has been the continued strong performances of stock markets for well over a year. For many speculators this is a result of quantitative easing and the flooding of markets with money by central banks, resulting in an “asset bubble” as investors use cheap money to offset low bond-yields by investing in assets.

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That ongoing rise has led to a lack volatility which is now returning to bite. “The difference between this year and last year is we’re going to see more periods of volatility like this as the market reacts to higher inflation,” Joel Prakken, chief US economist for IHS Markit, told the BBC. “We’re just not used to it because it’s been so long since we’ve had a significant correction.”

Whether this market adjustment heralds a wider problem for investors is yet to be seen. The advent of quantitative easing twinned with a pro-longed bull market has been seen by some as the markets gearing up for an inevitable fall. However, there were some who stressed a downturn is an opportunity for those wanting to buy to start spending: Michael Strobaek, Global CIO at Credit Suisse, told clients:

“We still consider the equity bull market to be intact and to have the potential to go further. Yet, as we have said on numerous occasions, the bull market is not going to be as good as what we saw in 2017, and it will be associated with high levels of volatility, as short rates and now yields have left their bottoms and are moving higher. We see the latest developments as a healthy correction that offers a buying opportunity for clients who wish to deploy cash.”

Mining.com reported that many investors had deployed into gold, saying the yellow metal has gained $90 an ounce since mid-December. According to the website, hedge funds have also sought gold, more than doubling their net long positions – bets that gold will be more expensive in future – to the equivalent of 21.4 million ounces.

Institutional investments in gold-backed exchange traded funds (ETFs) have also continued to grow. Last week ETF vaults held 2,255 tonnes or 72.5m troy ounces, levels last seen May 2013, as investors move into the safety of gold and away from the eruption of volatility in the markets.

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