Why gold will remain one of the safest ports during the turbulent times ahead

Peter Cooper tips precious metals, bonds and currencies as the safest place to invest in these volatile times

New Yorkers are reflected in the window of the Nasdaq MarketSite in Times Square. Facebook took a 20 per cent hit in one day last last month, the worst ever loss for a single stock in the history of the US stock market. Photo: AFP

Those who heeded my recent warning to sell their Fang stocks (Facebook, Amazon, Apple, Netflix and Google) will still be sitting comfortably.

Meanwhile for those who ignored it – Facebook took a 20 per cent hit in one day, the worst loss for a single stock in the history of the US stock market. This sort of sudden volatility is an ill omen and seldom ends well for the wider market.  

Facebook was not alone with other Nasdaq stocks also coming under heavy selling pressure, like bellwether Intel, Amazon, Tesla, Visteon and Netflix. Chinese tech giant Tencent saw its shares crash $143 billion (Dh535.3bn) in value, more than Facebook.

The bigger macroeconomic picture is one of investment values inflated by a decade of ultra-low interest rates that are now just beginning to move in the opposite direction. What’s been surprising is how long financial markets have held up under this gravitational force, and yet the sense of inevitability about higher interest rates ultimately means lower valuations have not gone away. 

Long periods of low interest rates are well known for distorting investment, supporting companies that would otherwise be dead and producing all sorts of Ponzi schemes and dodgy investment ideas. Too much credit floats all boats.

In the Arabian Gulf, the unravelling of the Abraaj business empire this year is another classic example of over-extension and an inability to meet loan commitments. China is also seeing large conglomerates fail for the same reasons. 

Indeed, Donald Trump’s trade war with China appears the most likely catalyst to bring the whole house of cards crashing down. 

In July the Trump administration announced it would seek a 10 per cent tariff on thousands of Chinese goods worth around $200 billion, ranging from dog food to beauty products, and it has recently been threatening to raise this tariff to 25 per cent. At the simplest level, trade tariffs are inflationary in that they raise the cost of the item taxed, and distort production away from the most efficient producer. 

They are also highly disruptive to established trading patterns and introduce an unwelcome unknown into commercial life as you just don’t know where they will strike next. Where tariffs go wrong is that they invite a tit-for-tat response. True, China imports far less than it exports to the US, and that makes it impossible for its response to tariffs to be as big. But there are other possible responses, most probably a huge devaluation of the Chinese yuan. This devaluation could be used to offset the entire impact of US tariffs. 

In the recent past, devaluations of the yuan have always been negative events for global stock markets.

Given that a yuan devaluation to offset Mr Trump's threatened half-a-trillion dollars of tariffs would have to be proportionately much larger, then the threat to global stock markets must be proportionately much bigger. 

Certainly any major stress in the global economy is likely to be acutely felt in global bourses because their valuations are so stretched that they are vulnerable to anything that indicates a change in recent strong profit performance. 

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Read more from Peter Cooper:

Buying gold and dumping stocks is a no-brainer this summer

Why Gulf investors should buy and hold UAE property

Tenancy laws need a review to attract more UAE buy-to-let investors

Will new residency and company ownership rules raise UAE house prices?

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Two weeks ago, I am sure a number of readers thought I was mad to warn that Mark Zuckerburg might not be richer than Warren Buffett for much longer. Then he lost $16bn in a day.

To be fair the insider trading reports show he was fully aware of the approaching doom and selling his own shares as fast as he could. Some shareholders are suing Facebook for allowing this to happen

So what are the Chinese up to now knowing, as they do, more about what lies ahead?

Well, in June gold purchased by China through Hong Kong jumped by 40.3 per cent from the previous month to the highest level since March 2017, despite the falling price. China has long been the world’s biggest buyer of gold.

Of course, if you knew a large devaluation of your currency was approaching then shifting money into hard assets like gold, which is priced in dollars, would make a great deal of sense.

So to would the inflationary impact of tariffs. Gold is the classic inflation hedge as a monetary metal.

Strange then that commercial speculators have been running near record short gold positions, driving gold prices lower and lower in recent months. They operate with extreme leverage and this greatly distorts gold prices to the downside.

Then again, as soon as the wind changes and these shorts all have to be covered then there will be a huge surge in the price of gold. Nice for those who bought at low prices in June or now.

Gold analysts have seen this happen many times before and an autumn rally is baked into the cake. That is even without a crisis in global financial markets and a flight to safe havens like precious metals and treasuries.

In the summer of 2015, gold prices rallied 11 per cent after hitting a bottom in July, and from a low in December 2015 the yellow metal moved up 32 per cent. A yuan devaluation is good for gold.

Those market commentators who see a rosy future for stock markets and doom and gloom for gold have got this the wrong way around. Were they also tipping Facebook shares a couple of weeks ago?

In such volatile periods as the one we are heading into, there are few safe places to invest. Keeping cash in multiple major currencies, bonds and precious metals has never made more sense.

But please don’t fall for the canard that cryptocurrencies are all bad except for Bitcoin. It too is a Ponzi scheme with new buyers very welcome so that the original speculators can tip-toe out of the back door before the cinema burns down.

In fact, the only thing Bitcoin will become next is a symbol for everything that went wrong with global finance in the current cycle and credit explosion. The vaults of the world’s central banks are full of gold, not Bitcoin.

Peter Cooper has been writing about finance in the Gulf for more than 20 years. The views and opinions expressed in this article are those of the author