When thinking about the sharp market correction in recent days, dramatic headlines like the ‘biggest single day points drop on the Dow Jones’ and the ‘bloodbath on Wall Street’, have reminded us that markets do not and should not travel in straight lines.
The myopic investor might have forgotten this truth, following on from what felt like an unstoppable bull run for equities. However, the market maelstrom has prompted some serious investor reflection. One conclusion could be that the volatility arguably increases the interest in safety assets like gold. Angelos Damaskos, Principal Advisor of the Junior Gold Fund, said that the recent gyrations have very much brought the focus back to precious metals, with gold the standout asset to keep an eye on.
We have been seeing a clear pattern over a number of months where traditional market correlations appear to have struggled to hold. These include the inverse link between the Nikkei 225 and the yen, equities and bonds, and on the economic front, inflation and unemployment. Another correlation that appears to have hit a stumbling block is the inverse link between safe-haven assets, like the yen and gold, with risk sentiment. When market volatility strikes, the challenge of finding a successful flight-to-safety trade is all the more taxing.
Since the trough in December 2016 to January’s peak, gold has rallied by more than 20%, outperforming the broader Bloomberg Commodity Index. However, the precious metal has given back some of these gains since the peak in mid-January. In this sense, the stock market sell-off has failed to support gold prices. Nonetheless, Damaskos remains constructive on gold from a macroeconomic standpoint. As inflation expectations grow, he says gold could be a good hedge against higher prices. However, he recommends gold mining equities, because he believes they offer better returns than gold bullion. He points to the crash of the global financial crisis in 2008 when gold prices declined, but the precious metal still significantly outperformed other asset classes like equities. Damaskos says we have been seeing the usual signals of a market topping.
One of the key signals was bitcoin's sharp price rise in December, with a subsequent crash. He says these fashions are chased by speculators with absolutely no relevance to the fundamentally long-term driven investor community, including pension fund managers. These investors, he says, are the type of players who are interested in gold.