Yesterday was a day for selling. But it is noticeable that while gold fell to a 34 month low, and US government bonds to a 22 month low, on the whole equities merely fell to a one month low.
At the time of writing gold is trading at $1,295. To put that price in context, back in September last year it was going for $1,778. The last time it was so cheap was September 2010.
Some say they are puzzled by the falls, but gold really is one of those riddles wrapped in an enigma – a golden enigma, in fact.
Gold rose in the aftermath of the finance crisis, and then again in the aftermath of the aftermath, because many feared a major meltdown as countries raced to devalue, and it was being said that QE created the danger of hyperinflation.
Talk of QE creating hyperinflation always was nonsense. As this column has said before, what matters is the broad money supply, and at a time when banks didn’t want to lend, while households were trying to repair their balance sheets, there was little chance of the broad money supply rising significantly, whatever central banks did.
Now the US economy is showing signs of real recovery, and the Fed chairman Ben Bernanke has suggested QE will be easing up soon and interest rates are likely to rise in 2015, everything looks different.
When real interest rates are negative, the fact that gold offers no yield is a trivial concern. But now that rates seem set to rise, that lack of yield seems to matter a great deal.
As for bonds, the yield on US 10 year treasuries has risen from 1.38 per cent last July to 2.39 per cent at the time of writing.
Markets are moving away from so-called safe harbour assets. During the era of QE, many feared currency wars, as loose monetary policy pushed down on the dollar, and other countries tried to devalue so as not to lose their competitive edge. Now the era of loosening is approaching an end; currency wars have moved to currency peace, and the new fear is that some currencies are in danger of becoming too weak.
As for equities, they too have fallen sharply, but just remember that the falls are not as drastic as recent rises. The FTSE 100 started 2013 on 5,898, rose to 6,840 last month, going close to the all-time high set in 1999, before falling to 6,159 last night.
Look at how equities have fallen since the end of May, and the sell-off looks drastic. Look at equities this year, and the market still looks attractive.
Above all, just remember that it is good news on the US economy that lies behind markets selling.
As rates rise, there will be losers, and for a while the markets may even punish those with strong fundamentals, but a resurgent US consumer is a good thing, and once the dust has settled we will see plenty of winners. But watch the Eurozone, emerging Europe, and maybe Brazil, for the real woe.
© Investment & Business News 2013