Gold’s appeal is as a hedge against two things: inflation and, well, apocalypse (i.e., ’flight to safety’).
Photo: David Gray/Bloomberg NewsIt’s getting harder to bet on a strong economic recovery. The wave of states opening up their economies has directly resulted in a wave of new coronavirus infections.
This hasn’t become a major issue for the stock market, yet. The Dow Jones Industrial Average is on pace for a small loss this week, but the S&P 500 and tech-heavy Nasdaq Composite are both up on the week.
But some perspective: The S&P 500 has been treading water for about a month now. Traders may be bullish, but they aren’t blind. The economy is still pinned down by the pandemic.
Let’s look at this week’s winners and losers:
Winner: Goldbugs
Gold is usually the late-night infomercial corner of the capital markets, except for times like these.
Gold futures again crossed $1,800 this week, hovering at levels last seen in 2011. It traded as high as $1,829 Wednesday, putting its all-time high of $1,888.70 within reach.
Gold’s appeal is as a hedge against two things: inflation and, well, apocalypse (i.e., “flight to safety”).
Gold’s peaks tend to coincide with red-letter Bad Times. It peaked in January 1980 when inflation was raging, unemployment was rising, and the U.S. was in the middle of the Iranian hostage crisis. Its price didn’t return to those levels until the end of 2007 when a recession was at hand. It peaked again in 2011 after U.S. debt, for the first time in history, suffered a surprising downgrade.
It’s important, though, to look at what happened after those peaks. In January 1980, the Dow Jones Industrial Average was at 876. One decade and an economic boom later, it was at 2700. In September 2011 it was around 10900. One decade and a long economic expansion later, and it closed at 25706 on Thursday.
Kudos to the goldbugs for their new highs. Late-night television will surely be flooded with new infomercials. But keep in mind that gold’s highs usually aren’t the best predictors of where the world is headed.
Loser: The Oil Patch
Just because the goldbugs tend to be excitable doesn’t mean they’re necessarily that far off. Look at what the energy sector reflects about the economy.
Energy stocks were this week’s biggest losers, with the sector itself down 7.6% through Thursday. The worst losses were suffered by Oneok Inc., Phillips 66 and Valero Energy Corp., all of which fell at least 10%. But the sector’s biggest names, Exxon Mobil Corp., Chevron Corp. and ConocoPhillips were all down as well.
The much-anticipated reopenings have backfired. Rather than leading to an economic surge, they are leading to a coronavirus surge.
“It’s now evident that the economy is entering the third quarter with much less momentum than previously anticipated,” said Oxford Economics chief U.S. economist Gregory Daco. The firm has seen an increase in “mobility,” but it’s come from commercial air traffic and public transport. Driving and gasoline demand were down in the last two weeks of June.
Those conditions haven’t been reflected yet in the major indexes. But they’re already showing up in other corners of the markets, like energy, and gold. How much further they go, only God and the Federal Reserve know.
Next Week: Bank Earnings
Second-quarter earnings season begins in earnest next week. First up: banks. Citigroup Inc. and JPMorgan Chase & Co. report Tuesday, followed by Bank of America Corp. and Morgan Stanley on Thursday.
We already know this round of profit statements will be brutal: S&P 500 profits likely contracted 44% overall, according to FactSet. And, of course, everybody is focused on the outlooks, what companies say about the second half of 2020 and into 2021.
For the banks, one interesting thing to look for: companies apparently have been repaying commercial loans that they took out in the first quarter much faster than expected, JPMorgan analysts said. The firm estimated that two thirds of the “draws” at large banks have already been repaid.
That would hurt the banks’ net interest margins, JPMorgan said, but they will probably be offset by fees from record bond issuances, and the loan repayments anyway would help capital ratios. As we’ve pointed out in this space before, even when the big banks look like they’re losing, they find a way to win.
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