2017 has been a very odd year in markets in at least one respect—at the same time as risk assets have rallied strongly, so too have gold and other haven assets. BlackRock is arguing that at least for gold, that pattern is set to continue. There are two reasons why. Firstly, gold’s performance is highly linked to real interest rates, which are likely to remain low and are in fact falling right now. Secondly, in the long-term gold’s movements have been more tied to political uncertainty than financial market volatility, a point which really resonates in today’s era of doubt over not only domestic US politics, but also geopolitical tensions.
FINSUM: We like gold’s chances right now. Markets are on edge, the political situation is not improving, and rates looked pinned. All favorable for the yellow metal.
Houston is currently reeling from unprecedented flooding being delivered by the remnants on Hurricane Harvey. The city may receive up to 50 inches of rain, and though totals are currently around 30 inches, it is already flooded to a catastrophic level. Beyond the threat to life and home, the flooding is also having a major effect on the oil industry. Gasoline prices surged because of the flooding as Houston is home to major US oil infrastructure. Gasoline futures jumped almost 7% yesterday because of the damage.
FINSUM: It is unclear exactly how bad this will be for the oil industry in Houston, but things there are currently very bleak, with dramatic flooding and thousands having to be rescued.
Market correlations are dropping and uncertainty is rising. Investors are fearful of geopolitical tension and domestic political issues. All of that stress is having a definite effect on one asset class—gold. Gold has been rising on the back of the growing tension and for the first time in six long years (since the bleak year of 2011), gold is rising faster than the S&P 500. Gold is up 12.1% this year, while the S&P 500 is up just over 9%.
FINSUM: So gold and stocks are having a good year, how odd. That cannot be a positive sign for equities, but then again it could just be an aberration.
One of the world’s most mundane and commonplace features, a bastion of modern transport infrastructure, shall cease to exist in the reasonably near future. Electric cars, which many see as the future, will require a different model for refueling. In particular, they will be charged not at stations, but in parking lots, ultimately eliminating the need for gas stations. The only ones that will eventually be needed will be along highways, where distances traveled will exceed single charge ranges for electric cars. However, getting to this reality will be a challenge, as a century of infrastructure development has been centered on building gas stations on every corner.
FINSUM: We think it will take a long time to get to this stage, and that some gas stations will remain, but eventually we might get here. There are some interesting companies working in this area which could prove great long-term investments.
It might seem like it is an over-stretched forecast, but Barron’s is warning investors to prepare for another steep and prolonged drop in oil prices. While prices had a recent bottom in early 2016 at below $30, they have held steady just below $50 of late. The issue is that confidence in OPEC is running very low. The first round of cuts it did clearly didn’t work out, but it renewed them. Since the new deal has been ineffective it is now suspected that several countries will start to cheat on the agreement by overproducing, or pull out of it altogether, which could lead to a sharp and destabilizing drop in prices.
FINSUM: With confidence already so low, a single day dissolution of the OPEC cut agreement could be just the catalyst oil needs to head back down to the $30s.
The oil market is closing in on an almost three-year run of bad news. Oil originally fell because of over-supply to the market, and that theme—despite OPEC’s cuts—has persisted for years, with US shale more than accounting for OPEC’s cuts and keeping the market flooded. Electric cars are slowly sapping oil demand as well, and now a government-driven trend will deliver another blow. That gut punch will be the rising trend of governments banning the use of gasoline and diesel vehicles in some locations. For instance, the UK and France have already passed sweeping rules aiming to phase out all fossil fuel based cars.
FINSUM: Oil continues to receive more and more bad news and our view, which we have maintained for some time, is that prices will likely never regain their former glory (or at least not until oil becomes a niche product long in the future).