I’m sure many of our readers are familiar with the famous investment saying; “the market can stay irrational longer than you can stay solvent.” I actually like a former colleague’s twist on the phrase; “the market will stay solvent longer than you can stay irrational.” Whatever way we view the phrase, coined by John Maynard Keynes, the British economist whose ideas, known as Keynesian economics, had a major impact on modern economic and political theory and on many governments’ fiscal policies, there are times when the market behaves in such direct contradiction to the supposed laws of economics that it can leave you dizzy with indecision and one of those times may be now. However, perhaps to paraphrase another famous quote; “we should all be greedy when others are fearful”…
Currently just about every commodity (not just precious metals) is collapsing in price around the globe. From sugar to oil, the sell off is arguably the worst witnessed since the heady days of the ‘Lehman collapse’. And yet stock markets continue to reach new highs, spurred on by previous rounds of QE and ZIRP (zero interest polices) by central banks. The commodities markets and market makers are suggesting a global slowdown in the demand for just about every resource on the planet.
The Bloomberg Commodity Index tracks billions of dollars of investments. The index is made up of 20 commodities including: gold, silver, zinc, copper, natural gas, Brent crude oil, sugar, coffee, live cattle and lean hogs. The index has fallen by approx. sixteen percent since the end of the April 2014.
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The sell off has been triggered by the strengthening of the US dollar which has hit a four year high versus a basket of currencies due in part to the ending of the Federal Reserve’s QE programme, making dollar denominated assets such as gold and oil more expensive for foreign investors and less attractive. Rising supplies in key markets and concerns about weak demand, due to the uncertainty over the outlook for the global economy (in particular China), have also hit commodity prices.
Industrial metals haven’t fallen as hard and quickly as precious metals, however, copper is down more than seven per cent during the last twelve months and copper is often regarded as the barometer of health for the global economy. Iron ore, lead, nickel and steel are also under, but falling reserves caused aluminium prices to rise higher last month. Corn is down fourteen per cent over the past year, wheat down eighteen percent and soybeans down twenty percent. So when we put the collapse of commodities into context is there an argument to be had that gold (specifically) has actually held up remarkably well?
Due to weak global demand for goods most of the freshly printed money has now found its way into intangible investments and as a consequence inflation hasn’t been a major problem, so far. But on the subject of inflation and why gold is still a valid investment in these uncertain times, let’s end our article with another pearl of wisdom from the mouth of John Maynard Keynes;
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”