Italian Bond Drama Continued This Week
European geopolitics continued to cause volatility in the markets this week. Last week, Italy in particular triggered concern, and this week the Italian bond drama continued. This week, the Italian 10-year bond yield was at a 4 year high while the Italian 2-year yield had its biggest jump in more than 25 years. While this certainly spooked the markets, it is happening in an incredibly easy monetary policy environment that helped stave off some of the pain for now at least. Without a central bank offering support, or when monetary policy has become more normalized, the shock would be much harder to disperse. As it was this week, the European Central Bank (ECB) was able to ease the bond pain in Italy.
What this means for investors: The coalition, ruling parties 5 Star and Lega also finalized their coalition deal, which helped to ease some fear. However, the coalition’s penchant for spending will put the country’s finances on an unsustainable track. Italy is the third largest economy in Europe, so contagion there could wreak havoc on the Eurozone. It is similar to the situation preceding the great Recession.
Gold Back and Forth with the Dollar
Gold prices were back and forth this week. Bond worries, of course, were one of the factors. Mid-week, the dollar index fell and boosted gold to around $1,305. By Friday though the dollar gained back some strength on upbeat jobs data, and gold fell just under the $1,300 mark. Promising signs of dialogue between the United States and North Korea eased some of the safe haven buying from last week as well. Silver closed out the week just short of $16.50.
What this means for investors: May is historically a slow month for gold. Because of that, it is often a time to look for price dips to buy. If the dollar index maintains its strength, gold could be under pressure for a while yet. However, sky-rocketing debt, inflation, currency crises around the world, and a too-rapidly-rising-rate environment are poised to support gold prices long term.
Trade War Fears Were Back This Week
The markets retreated on Thursday on fears of trade wars, which boosted gold prices. The United States put tariffs on steel and aluminium imports Canada, Mexico, and the European Union. The EU expressed displeasure, Mexico threatened tariffs, and Canada did impose tariffs on some U.S. goods. Commerce Secretary Wilbur Ross, however, stated that he doesn’t think it will be detrimental long term. Stocks recovered some of those losses by Friday.
What this means for investors: We have previously discussed the historical lesson from the Smoot Hawley Tariff Act of 1930 here, but it warrants looking back at again this week. It also involved impositions of tariffs by the United States on key trade partners, and retaliatory tariffs by those partners. Furthermore, it occurred in a rising bond yield environment much like today’s. The repercussions of the Tariff Act ultimately furthered the economic pain of the Great Depression and hindered recovery. Of course though, a successful re-negotiation of NAFTA (which is President Trump’s plan) could stave off future volatility around trade and currency.
Gold and Oil Price Correlation
Gold and oil prices have had a predictable correlation since the early 1970s when the United States left the gold standard. That correlation (a ratio of around 15 to 1, give or take) stayed much the same through the 1980s and 90s. Through the Great Recession the two commodities held together until 2014 when oil took a huge dive and gold took a lesser fall. Right now, the prices are converging again and the ratio seems to be stabilizing.
What this means for investors: Interest rates, the dollar’s strength, uncertainty in the markets, and volatility are all the chief drivers for gold prices, but some of these other factors too, like the relationship to oil prices, are indicators worth noting. As oil prices continue to rise and the oil price to gold price correlation normalizes, gold could sees some additional support.
As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at 602-955-6500 or toll-free at 877-354-4040.