A close friend of mine recently experienced the longest and most terrifying few minutes of her life while flying in near perfect weather from New Zealand to Tahiti. Without any warning the plane suddenly started to dip and roll before pitching and falling at an alarming speed. It was the equivalent of a high altitude roller coaster ride. What she had in fact experienced was the phenomenon known as clear sky turbulence. Although scientists have a pretty good idea of what can cause this to happen, as yet there is no early warning system.
This is all very interesting, but what has this to do with the financial markets? My own view is that this phenomenon mirrors what is currently happening in the financial markets. You may ask why? Let me explain. After the recent turmoil and problems with sub prime everything now appears to have calmed; both London and New York have posted new highs (even the VIX has calmed down!); the credit crunch, whilst not easing, has at least been locked down. There have been casualties in the money markets, but so far these appear to have been restricted to one or two hedge funds. Market players are beginning to regain their appetite for risk by returning to investments such as the carry trade in the Forex market. The carry trade profits from interest rate differentials between two countries. The Fed too has calmed the market by cutting interest rates and it is likely that the BOE too will begin to cut, as inflation appears to be back below its target figure of 2%
However, just like my friend’s plane trip I don’t believe everything is quite as calm as it looks and my reasons are as follows: First, the price of oil has risen to over $80 a barrel (as I write it stands at $87!) and, in my opinion, is rising inexorably toward the $100 mark. The reasons given have been the tensions in Turkey. Whatever the reason, the effects of this rise will be felt by all of us, as not only will it cost more to fill up our cars, but will cause inflation to rise and the stock market to fall as company profits are squeezed. It is against this backdrop that gold has now become the investment of choice and a “safe haven” in these uncertain and troubling times. Gold, is now at its highest price since 1980 and has risen 15% (about $100) since September 2007 and stands at almost $800 an ounce. It is not inconceivable that it could reach $1000 dollars an ounce. This rise in price has also been attributed to the irrepressible Japanese grannies buying gold futures. The Japanese use candlestick charts in conjunction with the exotic sounding Ichimoku cloud indicator to tell them when to buy and sell and the charts are telling them to buy because the price is rising and likely to go higher. It’s a pity Gordon Brown didn’t consult his candlestick charts between 1999 and 2001 when he sold 395 tonnes of our gold at an average price of $275 an ounce!
So, if I am right, and we are heading for some clear sky turbulence, what should the long term investor be considering at this stage? Firstly I would suggest that your fund or investment manager should be considering moving shares or stocks into more defensive sectors, such as utilities. Whilst these may be unexciting, they do represent guaranteed revenue streams and movement into these sectors is often the first sign of a change in the economic cycle into early recession. Secondly I would suggest government bonds or gilts as these too are considered safe havens in difficult times.
However, if you are keen to invest in gold, there are several ways this can be achieved. It is possible to buy gold bullion directly through the bullion vault, allowing you to own the bar itself (the bad news is it has to stay in the vault!!) Alternatively you can trade in one of the specialist exchange traded funds known as ETFs. These funds are investments designed to track a particular sector, index or commodity, like gold and other precious metals. Like shares they too can be bought and sold at any time during trading hours. Alternatively, it is possible to buy shares in gold mining companies either directly or in some kind of pooled fund.
So buckle up and prepare for a bumpy ride!
