Market Update: Gold weakens as markets shudder

Irrespective of their market of choice, investors the world over got a wake up call overnight that risk does in fact still exist.

In what was the most tumultuous night for markets in many months, with stocks and commodities hit, whilst bond markets held up.

European markets we ugly, with the Euro Stoxx down 1.7%, whilst the French, German and Spanish bourses were down between 1.5 and 2.1%.

The news was no better on the other side of the Atlantic, with the Dow down 1.9%, the S&P500 off 2% and the NASDAQ faring even worse.

Whilst one might have expected gold to find buyers in the face of such a risk off day on equity markets, there was no such luck for the bulls, with gold prices heading as low as USD $1278oz before recovering a few dollars

The yellow metal, which had held up incredibly well earlier in the week in spite of the +4% US Q2 GDP print and the further tapering of QE, is now sitting just below the key 200 day moving average.

On that note, whilst I’m going to pick up some more metal today (always buy on days were the market has pulled back is my general strategy) it must be said that gold is looking a little fragile short-term, and should a much stronger than expected non-farm payroll print in the US tonight eventuate, a further move lower couldn’t be ruled out.

Silver would likely be similarly affected, and its not entirely improbable that we could see the white metal back in the $19 range as part of this pull-back.

For Australian dollar investors, the overnight weakness in commodity and stock markets saw the AUD get whacked down into the USD $0.92 range, helping to smooth out returns

No doubt the RBA will be pleased with the pullback in our dollar.

For the month, gold (in USD terms), was off about $30oz, or just over 2%, whilst silver was off a similar amount.

Looked at in the context of typical returns in Q3 of any given year, that’s a little out of the ordinary, and as this is typically a strong period for gold prices, it might be well worth buying up a bit more metal on this pullback.

So what’s behind the sell off overnight?

As we’ve already covered, it wasn’t just bullion, but stock and commodity markets the world over that took a hit too, whilst there was considerable volatility in bond markets, though they largely finished unchanged.

In truth, there wasn’t one catalyst per se, but rather a mix of

• Fears over the Fed tapering, and their ever so hawkish commentary regarding inflation expectations

• Declining inflation in the Eurozone (making it more likely that the European Central Bank will have to unleash their own QE soon)

• Escalating tensions in Gaza, Iraq and the Ukraine, with rising fears of Russian retaliation to Western sanctions

• Fears re the Ebola virus developments in Africa

• Portugese banking concerns, which could theoretically spread into other European countries

• The Debt default by Argentina

This was then exacerbated by the 0.7% rise in the employment cost index for Q2 2014 in the United States. This number is the fastest quarterly gain in several years, with private sector wages and salaries and benefits growth recording rises of 0.8% and 1.1% respectively.

Whilst the Fed has been at pains to stress that there is “significant underutilisation of labour resources”, a sharply rising employment cost index suggests otherwise, and could herald a sharper uptrend in inflation.

If you’re looking for more details behind the sell off, then one of my favourite market strategists, Chris Weston at IG Capital Markets had this to say to his clients this morning

Whilst its only a one day correction so far (of 2%), there is already alarm bells ringing in some circles, with Business Insider carrying a piece from Henry Blodget with a headline; “Yes, Stocks could drop 50%”

Considering the risks the global economy still faces, and the valuation levels markets are at, i’m in complete agreement with Henry (I don’t beleive that markets will rise in real terms in the next decade that’s for sure), but it might be a bit early to be panicking about an imminent crash.

Henry’s article is worth a read though, touching on the Fed, the level of corporate earnings, and where valuations are at based on the cyclically adjusted price earnings ratio.

Forewarned is forearmed

The link is here

Economic Data out this week

Obviously the big news of the week was that headline beating 4% Q2 GDP figure in the US earlier this week, which was a full percentage point above market expectations.

Whilst it was an undoubtedly excellent headline print, it’s worth pointing out two things

Firstly, the original Q1 2014 print in the US was positive, but it finished at -2.1%. There is a good chance this 4% will be revised lower.

Secondly, even if its not, over the first half of the year, growth in the US economy was hardly going gangbusters, and most analysts are now projecting that growth for 2014 as a whole will only be around 2%.

Considering the fiscal and monetary accommodation going on, no one should even be ordering the champagne, let alone popping the corks.

This is especially so as some of the data out of the US is still very weak, highlighted overnight by the crash in the Chicago PMI, which fell to 52.6, versus expectations of a read of 63.

This was the biggest fall since late 2008, and the index is now at 13 month lows.

Looking at the internals, we can see that prices paid, production, new orders, order backlogs and inventory all fell compared to last month.

Nick Xenophons Plan for Superannuation

One of the major talking points in Australia this week was the mooted plan by Nick Xenophon to allow first homebuyers to use some of their superannuation money as a deposit for buying a home.

The idea has been widely panned by a number of commentators, many of whom I respect enormously, and many of whom often talk of similar challenges to me when it comes to what the next decade will look like for the Australian economy.

I am also in total agreeance with them that the plan wouldn’t help improve affordability per se, and looked at from that perspective, it’s not the greatest idea.

But when we look at it from a few other angles, we see that there a few things to like about the idea, including the following;

• Freedom - its peoples money – they should have a degree of freedom and choice with it

• Competition- it might make the super funds work a bit harder for their clients

• Evening the playing field with SMSFs, who can buy investment property with their superannuation portfolios.

I wrote a blog about it that you can read here

Final read for the week

One of the market forums I regularly contribute to (and get research from) is the excellent Livewire forum, which I’d recommend readers take a look at.

One report this week caught my eye, dealing with India, a country of obvious importance to any gold investor. This report doesn’t deal with the Indian gold market at all, but rather 15 insights from the authors trip to India. If you have a few minutes, take a look by clicking here.

Until next week

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