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Take cover as gold goes eyes $1 000 again

15 July 2008 Gareth Stokes

While scanning recent news items we couldn’t help thinking that we’d seen it all before. Today’s headlines looks exactly like those we were lapping up six to eight months ago... Oil is going higher; gold is going to breach $1 000 an ounce; and the dollar is under fire! And if these ‘repeats’ don’t convince you, consider the resurgence of the so-called sub-prime problem. It’s like we’ve come full circle and are about to experience all these events for a second time.

The reason for the ‘sameness’ of today’s news is that economies and stock markets move in cycles and trends. And they are largely driven by investor sentiment. Over the last year we’ve been taken on a bit of a rollercoaster ride as sentiment hit rock bottom – recovered briefly – and now looks headed south once again. And gold is a good proxy for this sentiment.

Gold goes higher in times of trouble

Gold performs well when sentiment is low. As the global sub-prime crisis unfolded during 2007 the price of the precious metal climbed higher and higher. Gold started 2007 at $637 and broke the $1 000 per ounce barrier some 15 months later at the height of the crisis. We can summarise the factors that helped gold reach that mark... If we take a snapshot of the global economy in March 2008 we find: a very weak dollar, rising oil prices and serious financial concerns in the wake of the Bear Stearns collapse. Sound familiar?

Let’s take a freeze frame of the world economy today... Oil is going higher, the dollar continues on its weaker trend and there are serious financial concerns around two of America’s largest mortgage lenders. Investors have been dumping shares in Fannie Mae and Freddie Mac (who thought up these names) because they’re not convinced the US government can ‘buy’ these companies out of their current difficulties. And there’s growing concern that one (or both) of these companies will face a similar fate to Bear Stearns as the US housing slump continues.

Will gold go through $1 000 an ounce again? On the back of the aforementioned fears, Daniel Hynes, metals strategist at Merrill Lynch says: “A month ago, gold looked like it might have struggled to get back towards $1 000 but it now looks like it could be heading back towards those levels.”

Meaning tough trading conditions in the financial services industry

By now you’re all familiar with the challenges facing the domestic consumer. You know that household disposable income is under threat and that it’s more difficult than ever to service debt. The impact of this financial difficulty is there for everyone to see. There are more than 5 000 car repossessions each month… And the number of houses up for sale is increasing rapidly. We expect most companies in the financial services sector will run into hard times in the coming 12 to 18 months.

And short-term insurance giant Mutual & Federal seems to be admitting to the crisis long before its competitors. Shortly after announcing plans to reduce its workforce the company has released an extremely downbeat trading statement. The country’s second largest short-term insurer announced on Monday that “earnings per share and headline earnings per share for the six months ended 30 June 2008 would be 50% to 70% lower than those of the prior corresponding period!” And that’s chilling news.

The company gives two main reasons for the decline in results. The first is the poor performance from listed equities – something that both short and long-term insurers are going to suffer from in coming reporting periods. And the second is a subdued underwriting result. M&F has raised concerns about its underwriting margin for some time now. It seems the problem is finally affecting the bottom line.

Editor’s thoughts:
Mutual & Federal is one of the first insurance companies to issue a negative trading update. But it’s not the only financial services company that’s going to struggle in the coming months. Have you noticed any early warning signs of other insurance companies being under pressure at the moment? Add your comment below, or send to gareth@fanews.co.za

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