Monthly Markets Review: Risk Aversion Rises in August as Double Dip Concerns Grow

August and the summer are now over and investors and savers are now focusing on the autumnal months ahead. Stocks internationally had their worst August performance since 2001 and the ISEQ fell 7.2% in the month. Mounting concerns about the health of the economic recovery in Ireland, the US and internationally saw investors move into government bonds and gold. Some respite came due to the falling price of oil – oil was down 8.9%, its first monthly decline since May.

The Dow Jones Industrial Average ended the month 4.3% lower, while the S&P 500 was down 4.7%. The weak performance of equity markets was mirrored across the world’s major financial centres, with the Nikkei 225 down 7.5% and Germany’s Dax down 5.8%. Mining stocks on the FTSE helped it to only fall 0.6% in the month. With the S&P 500 index down 5.9% for the year and September being historically the worst month for stocks, traders are bracing for a continued downward bias.

Gold was up 5.6% in August thereby regaining the 5% losses seen in July. Importantly, from a technical perspective gold recorded a record (nominal) monthly high close (see chart below) which should see momentum traders continue "to make the trend their friend". This could result in June’s record high being breached again, possibly as soon as in September. Especially as safe haven demand for bullion internationally remains robust and Indian festival seasonal demand looks set to be healthy.

Gold – 30 days (Tick). Click on image to view full size

Gold is only a few dollars below the record daily high close ($1,258/oz)and record inter day high now ($1,265/oz) but it is important to remember that these record highs are nominal highs and gold remains  nearly half the more important record inflation adjusted high of $2,400/oz.  Gold is now up 14% so far in 2010 and looks set to have the 10th year of gradual appreciation (some 16% per annum in dollar terms).

The ECB keeping rates at a record low of 1% and zero interest policies in the US and in most western economies remains bullish for gold as the opportunity cost, the lack of yield, of owning gold is negligible, especially with inflation having picked up recently in many economies internationally. Further signs of burgeoning food inflation were seen in the surge in the price of global meat prices which have risen to 20 year highs.

Gold in USD – 5 Year (Monthly). Click on image to view full size

September can be the ‘cruelest month’ for stocks. Conversely, more years than not, precious metals prices perform well in September and many analysts reckon this year will not disappoint those owning gold. Given the uncertain financial and economic outlook, it is important that investors remain diversified with allocations to cash, short dated government bonds, international equities, and gold.

Mark OByrne

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