Are investors whistling past the graveyard?

Monday, 20 August 2018
Melbourne, Australia
By Bernd Struben

  • The girl who cried, ‘Wolf!’
  • Going down…
  • Turks look to gold
  • Pink gold?

We start this week with a laundry list of fears. Fair warning. If these aren’t already causing you to lose out on precious sleep, they may be soon.

No, snakes and spiders are not on this list. Rather our investor focused fears involve…

The simmering global trade war, which threatens to take the steam out of economic growth.

A world drowning in debt, with Turkey teetering on the edge of default, fanning fears of contagion spreading across emerging markets.

Brexit…hard…soft…a second referendum?

Falling house prices in Australia’s capital cities are predicted to continue. Could this be the precursor of a major real estate collapse?

Rate rises in the US are leading towards the dreaded inverted yield curve. That’s the sticky scenario where short term interest rates are higher than long term rates. This indicates the market sees more risk for lending money over the next 12 months than it does for lending it out over the next 10 years. And it’s historically served as an uncannily accurate predictor of coming recessions.

Real wage growth in Australia and most developed nations is flat or even negative.

And on the domestic political front, Australia looks like it could have yet another new prime minister before heading into federal elections next year. Yes, Peter Dutton. We heard your protests at entertaining such aspirations. Duly noted.

These are just a few of the issues competing for investors’ attention in 2018. You’ve likely got some of your own fears churning away in the back of your mind not mentioned above.

With fears like this routinely blasting from financial news headlines — and trotted out by your editor — you’d think Aussie investors would be headed for the exits.

But as you can see in the one-year chart of the ASX 200 below, that’s far from the case.

chart image

Source: Google Finance
Click to enlarge

At time of writing the ASX/200 is up a 0.01% for the day.

That’s up 10.1% year-on-year…and up 10.1% since the low on 3 April earlier this year.

The index also happens to be at its highest level since 28 December 2007. While it’s still below the record levels reached in November 2007, it’s getting mighty close.

So how does a soaring stock market jibe with the list of legitimate concerns we touched on above?

We’ll get back to that, right after a look at the markets…


Over the weekend the Dow Jones Industrial Average closed up 110.59 points, or 0.43%.

The S&P 500 gained 9.44 points, or 0.33%.

In Europe the Euro Stoxx 50 index finished down 4.62 points, or 0.14%. Meanwhile, the FTSE 100 rose 0.03%, and Germany’s DAX closed down 26.62 points, or 0.22%.

In Asian markets, Japan’s Nikkei 225 is down 32.94 points, or 0.15%. China’s CSI 300 is up 0.22%.

In Australia, the S&P/ASX 200 is up a slender 0.33 points, or 0.01%.

On the commodities markets, West Texas Intermediate crude oil is US$65.81 per barrel. Brent crude is US$71.66 per barrel.

Turning to gold, the yellow metal is trading for US$1,183.29 (AU$1,620.50) per troy ounce. Silver is US$14.77 (AU$20.23) per troy ounce.

One bitcoin is worth US$6,498.31.

(To stay atop all the latest investment advice on bitcoin, ether, XRP, litecoin…and the rest…click here for details on Sam Volkering’s Secret Crypto Network.)

The Aussie dollar is worth 73.02 US cents.

The girl who cried, ‘Wolf!’

Over in the US, the Dow Jones is close to reclaiming the record high of 26,616 points it set back on 26 January this year.

And as mentioned above, the ASX 200 is at 10-year highs…and closing in on its own all-time high.

Faced with a dozen plausible scenarios that could see markets plunge over the coming months, why are investors still happily piling into stocks?

I’d say there are three main reasons.

First, interest rates Down Under remain at a record low 1.5%. And RBA Governor Philip Lowe has given every indication they’re likely to remain this low for the next six months or more. Companies and investors like cheap money. It’s almost always good news for the stock market.

Second, a company’s share price generally reflects its earnings. And the earnings reports coming in over the past two weeks have been significantly better than most analysts had forecast.

As The Australian Financial Review notes:

Investors are feeling confident that a better than expected earnings season will extend into its third and busiest week as anticipated weakness in companies exposed to soft consumer spending has so far failed to translate into poor profit results.

August has proved “a lot better than people had expected”, Atlas Funds Management portfolio manager Hugh Dive said…

The upbeat tone has been reflected in the fact that about three in five reporting companies have enjoyed a share price boost on the day of their announcements, AMP Capital head of investment strategy Shane Oliver said. More than 80 per cent of companies have reported higher profits than a year ago, against the average of 66 per cent.’

The third reason I believe the ASX 200 is approaching all-time record territory, despite myriad potential pitfalls, is investor complacency.

It’s a bit like the boy — or girl, as I like to read the story to my daughter — who cried wolf.

Almost every day, investors are inundated with new potential meltdowns. ‘Wolf!’ the economic pundits cry, pointing to the latest flashpoint.

At first, say a few years ago, investors tended to take note. They’d reduce their stock holdings and keep a wary eye open for the predator that could take a big bite out of their wealth.

When Brexit first reared its separatist head, for example, global stock markets fell…if not for long.

The same holds true for the other issues we touched on above. To which you could add North Korea, Russia, a slowing Chinese economy…

But as with ‘The Girl Who Cried Wolf’, investors are becoming immune to the warnings. And that may well prove to be to their detriment.

You can see the same scenario unfolding with gold.

Going down…

I showed you the one year chart of the ASX 200 above.

Now compare that to gold’s performance over the same period:

chart image

Source: Bloomberg
Click to enlarge

As recently as 19 April, gold was trading for US$1345.53. At time of writing, one ounce is worth US$1,183.29. That puts the yellow metal down 12.1% over the past four months.

And those were four months packed with dangers and uncertainties you’d normally expect to see this classic safe haven asset thrive.

Part of the explanation here has to do with the rising US dollar. Rather than fleeing to gold, investors have been heading for the perceived safety of the greenback and US Treasuries.

And as Bloomberg notes, this isn’t a unique event in history:

“Gold has not tended to behave like a safe-haven asset in the past during times of stress when the dollar has appreciated at the same time,” Simona Gambarini, an economist at Capital Economics Ltd., said in a note to clients emailed Tuesday.

Buying US dollars and 10-year Treasuries with yields below 3% may be all the rage today. But investors shouldn’t forget about the ballooning US deficit in the face of a US national debt of already roughly US$21 trillion.

The world’s largest economy has kept this economic shell game going for 10 years now. And it may well have some juice left in the tank.

But eventually, I expect investors will look back at the recent events in Turkey and wonder why they didn’t see the leap in US dollar inflation coming.

By then, I imagine, gold will truly have regained its shine.

Turks look to gold

Last week I told you that cryptocurrency trading in Turkey had almost doubled as the lira went into a tailspin.

Gold has enjoyed the same leap from nervous Turks.

From Bloomberg:

Gold futures volumes have surged on the Borsa Istanbul as the volatile currency [lira] attracts speculation and after the lira’s plunge boosted the local price of metal. The 90-day average daily volume more than doubled to 40,000 contracts, from about 17,000 in March. During the same time, the value of an ounce of gold in lira rocketed more than 30 percent.

“It definitely would make sense to own gold now in Turkey given the depreciation of the lira,” Jonathan Butler, precious metals strategist at Mitsubishi Corp U.K. Plc, said by phone. “This is consistent with gold’s status as a safe haven…’

You can see the leap in gold trading below:

chart image

Source: Borsa Istanbul / Bloomberg
Click to enlarge

So far the rest of the world isn’t following suit. And until inflation picks up, investors may remain indifferent to gold.

But that kind of complacency could prove dangerous. As the economic snares continue to multiply, odds are the Australian and global economy are going to get stuck deep into one of them.

That will be good news for gold bullion holders. And great news for investors holding onto the best gold stocks, which are leveraged to the price of gold. That means their share prices tend to rise — and fall — far more than the price of gold itself.

Resource analyst, Jason Stevenson is all over the massive potential on the horizon. You can find his top gold stock picks here.

But what about pink gold…

Pink gold?

You may have heard of pink gold before. It’s also known as rose gold. While it makes for attractive jewellery, it’s not pure, as it gets its rose colour from copper.

I end on this note for a reason.

Market veteran, Ryan Dinse tells me that ‘the “pink gold” boom is forming.’ A boom that could drive select Aussie stocks to new highs even if the wider market flounders.

Yet this boom has nothing to do with the metal.

His new report, ‘Australian Pink Gold’ is due out tomorrow. Keep an eye open for that in your inbox.

Now before signing off, here’s the latest from the US political battlefront from The Australian Tribune:

‘Trump’s Security Clearance Revocations has Deep State Worried’

When you leave your job, for whatever reason, it’s standard practice to hand in your key fob. You’ll also lose access to your company’s email accounts and any other work-related data and clearance you may have had.

In some instances there may be a transition period, where you train your replacements. But at the end of the day, your job is over. You no longer…

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another, then The Australian Tribune is for you.

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