By Debbie Carlson
(Kitco News) - The sharp fall in equities and most commodity markets recently have revived memories of the credit crunch and market crash of 2008, and while there are some similarities, market watchers are quick to point out differences between then and now.
In the initial break in 2008 after the failure of Lehman Brothers, stock markets and industrial commodities such as crude oil and copper fell quickly. Gold rallied $70 – which was 9% of its value at the time - on Sept. 17, 2008. The U.S. dollar also spiked. However, the global weakness eventually pulled even gold down, with prices falling to just under the $700 region by late October. In October alone, gold prices fell 17%, according to Commerzbank.
In the current market turmoil following Standard & Poor’s downgrade of U.S. debt, equities and most industrial commodities have been selling off and gold has been rallying. This action had been occurring even before the downgrade, but that announcement caused the biggest market moves so far. Since Aug. 1, September S&P futures at the Chicago Mercantile Exchange have lost about 12% of their value as of Monday’s close, while gold prices have set all-time nominal highs far over $1,750 an ounce. U.S. Treasury bonds and notes are rallying, pushing down yields.
One big difference in market action between then and now is the dollar is “just holding its own,” said Shawn Hackett, president of Hackett Financial Advisors. “The huge distinction is the U.S. dollar is not rallying big time like it did in 2008 or like it did last year (during a financial market break)…. The Treasury market is a safe haven to park, but the U.S. dollar is not viewed as currently a safe haven to guard against catastrophe. It’s very different,” he said.
Hackett said it wasn’t surprising to see investors still buy U.S. Treasurys even with the debt downgrade because of a lack of other safe-haven alternatives. Other markets that have been beneficiaries of safe-haven money like gold or the Swiss franc – which has also set price records – are not nearly as large or liquid as the Treasury market, he said.
So what does the lackluster performance of the U.S. dollar potentially portend as the latest fiscal crisis unfolds?
“It suggests a big change; that maybe commodities won’t perform as badly as they did last year or in 2008, relative to stocks. This is setting up like the 1970s kind of scenario where stocks and commodities fall but commodities go down less. In the 1970s, we had monetary transgressions where people lost confidence and commodities outperformed. In 2007-08, commodities lost their edge,” he said.
FUNDAMENTAL DIFFERENCES BETWEEN THEN AND NOW
Simply put, the 2008 financial market crash was caused by excessive credit which started in the U.S. housing sector and wormed its way to the global economy – helped in part by lax credit-rating firms and securitizing of bad debt. The current financial turmoil is a lack of confidence that global governments have been unable to successfully revive the world’s economy properly following the 2008 recession and the amount of public debt they have taken on to do so.
Thus, stimulus money that has been injected by governments has generally been stuffed in the mattress – as evidence by huge demand for record-low yielding U.S. Treasurys, corporations holding record amounts of cash on their balance sheets and excess cash sitting in bank vaults. Cash held by banks was at a record $981 billion during the week ended July 27, the Federal Reserve said on Aug. 5.
It’s also meant a strong appetite for hard assets, especially gold.
That’s seen by heavy demand among the various ways to trade the asset, from physical demand, to futures to exchange-traded funds.
Commodity Futures Trading Commission data showed speculative buying, in one of its weekly commitment of traders reports, was at a record level and Barclays Capital said gold ETF holdings are at a record.
Commerzbank said it’s not surprising to see gold outperforming equities and other commodities now. In times of falling equity or commodity markets, rising bond yields, inflation or increasing risk aversion, gold shines.
Even with the high current price of gold, the underlying fundamentals of U.S. and European debt and still expansionary monetary policies in the major industrialized nations, inflation in emerging markets and low real interest rates, gold should stay in demand, they said.
Yet the hefty rise of gold in the past few days – coupled with its gains in July – are causing some gold market watchers to be cautious with prices at these levels, even if they think prices in the long run could go higher. Several market watchers said just as there is panic selling pushing down stock prices, panic buying is lifting gold prices. Once that buying exhausts itself, prices could fall at least in the short term.
“Keep mind to reduce risk but be careful now of ‘safe haven’ trades mostly in the currency basket that include the Swissy and the Shiny Ones as recent record levels can reverse quickly on profit taking,” said Janet Mirasola, managing director, R.J. O'Brien & Associates.
WHERE MARKETS GO FROM HERE
Hackett said it’s still early in the equity and commodity market’s reaction to the newest turmoil. Stocks could go down further and commodities may repeat their break from 2008, especially if the world goes back into a recession and would bring a deflationary environment. He believes we’re at a “line in the sand” moment.
While some commodities have seen a significant correction, the Continuous Commodities Index is only down about 10%, which he calls a “garden variety” correction. “Do we break away and base-build (before rebounding)? Or do we have a true deflationary scenario where it could go down a lot more,” he said.
The deciding factor could be what the Federal Reserve does regarding any further stimulus programs to prevent deflation, he said. The markets could get a hint of what the Fed plans Tuesday afternoon after the Federal Open Market Committee meets.
Commerzbank is also cautious for investors who see the potential to pick up commodities other than gold given recent losses.
“The mantra so often heard from commodities experts in past years of ‘this is only a short-term correction because the fundamental data have not changed’ could prove wrong this time round. Unlike previous corrections, the general basic conditions have visibly deteriorated. At the latest after weak economic growth has emerged in past weeks for the world's largest economies, the global picture has now clouded,” they said.
Specifically they note that unlike in 2008, governments and central banks hardly have any ammunition left in the form of new economic stimulus programs and lower interest rates.
“We would first wait now until things have calmed down, as there is no urgent reason for any bargain buying at the moment in our opinion,” they said.
Hacket said if commodity prices do fall further, there is a great opportunity to buy hard assets at lower prices because longer term, as he sees inflation coming. His particular favorites are in the agriculture space: corn, wheat and lumber.
By Debbie Carlson of Kitco News dcarlson@kitco.com
