31 March 2016

Message from the markets: nobody knows what to think


I always prefer to look at economic indicators in front of my nose before consulting surveys and statistics, so when I stopped to fill up my scooter to discover the cost of petrol was 106p a litre, an alarm bell rang in my head.

Hang on, I thought. Last time I filled up it was 99p. Petrol prices have risen 7% in a month. That wasn’t supposed to happen.

It is only a month or so ago that markets were collapsing left right and centre, with investors scrambling into supposedly safe assets, like government bonds. Since then, partly due to a state orchestrated surge in bank lending in China and partly due to indications from the chairman of the US Federal Reserve, Janet Yellen, that the US economy is weaker than expected so she is “cautious” about future rate rises, markets have turned round 180 degrees.

Armageddon has been delayed. Everything seems to be pointing upwards, with the recovery in commodity prices, notably copper and iron ore especially marked. In the US, the S&P500 is back in positive territory for the year. The pound is back at $1.44 to the dollar, having hit a “Brexit low” of $1.38 just a few weeks ago. Oil is hovering around $40 a barrel, up slightly from its $38 low. The shares of the struggling mining giants of the London Stock Exchange, Glencore and Anglo-American, have gone through the roof, up more than 60% each in a month.

In the gold market, traders are in a state of near over-excitement, with the price up $130 to $1230 an ounce since the beginning of the year. It seems that whatever your investment thesis: deflation, inflation, crisis in the euro zone, Brexit, no Brexit, a crisis in the Remninbi, or whatever, the answer is: buy gold. This, it has to be said, does not say much for investor confidence. A friend of mine, a usually calm hedge fund manager, has bought some real physical gold and put it in a bank vault in Switzerland. There are reports that German retail investors are doing the same and Sharps Pixley have opened a gold shop in St James’s in London, which seems to be doing a roaring trade.

The consensus among market participants is that the rally in China and in commodity prices is skin deep and everything will tumble again soon. That said, it is precisely when that sort of consensus takes hold we should be sceptical. Markets may do the opposite.

As for the rest of us, the message is clear. We live in a time of acute volatility. Massive changes, unleashed by huge global forces, such as technology, demographics, ultra-low or negative interest rates, migration and political upheaval, are at work. Nobody can be quite sure whether the outcome will be good, bad, or a mixture of the two. No wonder some people find gold so attractive, apparently the one asset politicians and central banks cannot mess about with.

George Trefgarne is founder of Boscobel & Partners, a communications firm.