22 February 2025
There's something going on in the markets. They are set to pause, perhaps worse. Why?
Markets seem to be topping. Take VHVG, SGLN, ZPRW and WSML, draw a horizontal line at what looks like the top, and then mark in a stop loss 7% below that. As / if price dips towards that stop loss, we should be thinking about what to do next if we are to preserve wealth.
For example, this chart, taken from 11 February, shows that for YTD, VHVG (developed world markets) has been trying without success to breakthrough 92.30. It's much the same for the others, and it's still the same today.
So it seems that after reaching new peaks, financial markets have decided to take a breather this week, spooked by the spectres of a trade war, the possible return of inflation meaning at that interest rates will be on hold, and the ongoing geopolitical uncertainties in Ukraine, Palestine and the Middle East, and China.
The major indexes may have paused, but overall momentum remains intact. There is confidence from continuing positive fundamentals and earnings results, a process both started in Riyadh to end forever wars, to judge from volumes investors keep buying. Markets on the march often pause to rest and when good news emerges they recover and continue up - recall the taper tantrums of 2013, the covid crash of 2020 and the fed hike fears of 2023.
For a good understanding of the macroeconomics of the moment, listen to Luke Gromen. Interesting answer on revaluing gold to question two. It's hard to see how this could ever happen. For a fuller explanation, listen to Joseph Wang.
The baseline understanding of the price of gold. is that
• rising inflation would be dealt with by rising interest rates, which would strengthen the dollar and increase its attractiveness as a safe haven vis-à-vis gold
• remember too that, as a safe haven in times of geopolitical attention, investors prefer gold - safer them treasuries. But note that with the arrival of Trump, tensions are lessening.
• And thirdly for reasons - the narrowing interest rate differential between Japan and the States - although the dollar has been weakening against DXY, this has not led to a decline in the value of gold.
• So the conclusion would seem to be that gold is at a high and possibly an all year high, and it might be worth switching to silver.
With significant events on the horizon this weekend, German elections being one, and next week, investors should brace themselves for some volatility, but the overall message is continue as you were, cautious commodities, keep an eye on the Japanese Yen as this could likely be the main driver of US equity markets for the next few months.
Footnote - risks are building:
It's worth noting that margin balances are increasing and investors are piling into ETF, with leveraged ETFs getting more attention than normal.
This is okay as momentum is still there, it is a sign of confidence. But if there is a reversal, the losses could be big and then you get what's called margin call and traders could be forced to sell assets in order to cover their borrowings. This will reduce liquidity and have a downward effect.