Market Comment 01/07/2020

As we approach the end of the second quarter, stocks have held on to most of the gains seen over the past three months. Markets continue to focus on the progress of the coronavirus pandemic. The trade-off between the easing of lockdown restrictions and the risk of rising Covid-19 cases is no better illustrated than in the US. Southern states which opened up early, such as Florida and Texas, have seen a surge in new cases, forcing the re-closure of bars and restaurants. So far, however, it seems unlikely that complete lockdowns will be reinstated.

One of the surprising things for many over the course of the quarter is how strong gold, a classic ‘risk-off’ asset, has been. Global equities have risen by around 16% from the end of March (as we write) while the gold price is up by 12%. There are many reasons why this may be, but here are three.

First, gold has traditionally been seen as a store of value. In a world of negative interest rates, cash deposits are no longer a store of value. People may be reluctant to hold cash in the bank under those circumstances.

Second, we have seen an increase in the monetary base beyond that caused by quantitative easing where central banks are now ‘lending’ money to governments that may never be paid back. If that money is saved, there is little inflation risk, but if it is spent, then inflation can rise. Think of the $1,200 recently given to each US citizen for example.

Third, global interest rates are near zero and no central bank is talking about raising them for at least the next two years. Unless we have deflation for that entire period, you will have negative real interest rates i.e. inflation above the interest rate. That is historically a good environment for gold.

Finally, just a month after declaring May as the hottest month on record globally, last week saw the highest ever temperature in the Arctic Circle when Siberia saw thermometers hit 38 Celsius. A reminder that Covid-19 is not the only challenge facing humanity.