Market optimism appears to be waning, the dollar is falling and the prices of gold and oil are rising again as a consequence. The big question now facing the investments sector is whether the latest stock market downturn marks the end of the recent bear rally and the bear market in equities is about to re-emerge sending stocks to new lows.
The long-expected weakening of the dollar is emerging as the US Fed is seen to be pouring still more money into market stabilisation, yet there is still no sign of inflation being stimulated, which must be a major worry for the authorities who probably see controlled inflation as the way forward. Indeed the opposite is still occurring. In the UK for example the latest cost of living indices are falling ever faster turning recession into deflation. This is a frightening scenario given the billions of dollars, pounds and euros being pumped into the global economy.
The oft-heralded green shoots now seem to be a figment of over optimistic politicians' imaginations as they try to talk the economy up, except perhaps in China where there do seem to be at least some signs of growth. But it is doubtful that China can continue to grow at even the lower current rates if the country's export markets do not show any signs of revival. And should the renminbi appreciate as strongly against the dollar as is justified by reality, Chinese exports would be in even further trouble.
So where does this leave gold and gold stocks? Gold moved back up through the $950 psycholgical barrier yesterday - well up past a resistance level at about $928-930 - despite relatively poor fundamentals. Demand from the world's largest consumer, India, dwindled to virtually nothing in the first quarter, although may be beginning to pick up, but price sensitivity there may see another fall-off as gold rises. The latest statistics from GFMS and the World Gold Council show that China has replaced India as the world's largest jewellery market consumer, but this statistic dwarfs the huge fall off in Indian demand over the past six months and while Chinese demand is rising - and will probably continue to do so - it cannot yet offset the falls in other traditional markets.
Investment demand, which has compensated for much of the shortfall in jewellery demand over the past year, seems to have flattened with the biggest ETF showing virtually no growth over the past month after a meteoric rise in the first quarter. There is, anecdotally, still strong demand for physical gold in coins and bar form, but scrap sales remain very high. With gold mine output pretty flat, the equation balance would suggest the gold price should be falling with excess of supply over demand - but it isn't! This surely is sending out disturbing signals as far as the global economy is concerned and suggests some hidden buying - Central Banks perhaps?
In reality though, with the falling dollar, a rise in the headline dollar gold price suggests little more than a protection of values - or perhaps a marginal increase - in stronger currency terms. But does this represent the calm before the storm.
Some technical analysts see the current scenario as the point of take-off for gold to run up to $2,500 and then perhaps fall back to $2,000 before another run up to far higher levels. This is a frightening prospect for the majority of the global population as it is predicated on a collapse in the US dollar and other major currencies and of global equities, and deflation followed almost immediately by a move toward hyper-inflation - a triple blow which could destroy wealth all around the world.For gold enthusiasts it may be all very well protecting one's own assets should such a scenario come to reality, but in truth the kind of world one would find oneself in might not be one it would be easy to live, or survive in. As we recently quoted Ian McAvity speaking at the New York Hard Assets Investment Conference, Be careful what you may wish for.
While financial Armageddon may be the logical progress of the current economic situation as far as some observers are concerned, there are plenty of others out there who are far less pessimistic, although we would aver that the optimists predicting the worst of the recession being over may be viewing the situation through rose tinted spectacles and be believers in political hype - always a dangerous practice.
Central Bank currency manipulation may help stabilise the dollar against other currencies and mitigate its fall, although whether they any longer have the political will to sell gold is perhaps more doubtful. While the financially-educated may see a rise in gold as being a de facto fall in the dollar, it is doubtful whether the general public sees it as such and the potential political fallout from selling gold reserves, which are holding value, in favour of the dollar or US Treasury bonds, which may be losing theirs, may not make it worth the risk. Indeed there is evidence that more hard currency believers are beginning to hold sway as gold has been proving itself well through the recent economic fiasco.
To come back to the main subject of this article, gold and carefully selected gold stocks are still probably the best means of securing one's wealth. On the latter it may be safest to be wary of those dependent on mines in more politically volatile environments as these are in areas most likely to affected by unrest if there is a global economic meltdown - or even a partial one.
What of other metals and minerals? Silver mostly follows gold, but it is ultimately much more of an industrial metal these days and thus more dependent on the state of the global economy - and this applies even more so to platinum and palladium. One has to remain wary on base metals too although to an extent all of these do offer some kind of hedge against the US dollar. Oil was, as we said at the time, heavily oversold and it may be approaching more stable levels. OPEC is probably not keen to see it move up above $100 and will probably try and stabilise the price by controlling supply if, and when, it gets back to $75 - still a useful price increase.
Of the bulk minerals potash may be the best bet out of necessity, as economic crisis or no, the world population will keep growing with ever accelerating demand for agricultural production, but the outlook for iron ore and coal may be more limited unless demand begins to pick up - and there's little sign of that yet except perhaps in China.