Gold hits a new high - the week ahead

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

The pull-back from the February market high continues, with shares falling heavily on Wall Street and investors seeking safe havens from tariff-fuelled turbulence. The most popular of those - gold - hit a new high after the Easter weekend, rising above $3,500 an ounce for the first time.

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Another week, another fight

There was no let up from Donald Trump over the weekend. Having fuelled a market rout with heavy-handed - and unpredictable - tariff announcements throughout April, the President has picked a new way to unsettle investors.

His new fight is not with other countries, via trade war and tariffs, but what he sees as the ‘enemy within’, the Federal Reserve - specifically the chairman of the Fed, Jerome Powell, who he has taken to calling ‘Mr Too Late’.

That refers to Mr Powell’s unwillingness to bow to the White House’s demands for lower interest rates. Powell has instead said that, in his view, the President’s policies will lead to slower growth and higher inflation. He points to the White House as the reason the Fed is currently sitting on its hands with regard to monetary policy.

The President’s undisguised dislike of the Fed chair and his implied threat to the independence of the central bank has unsettled markets. Separation between the Fed and the government is a cornerstone of the US’s institutional reliability. The possibility of government interference in US monetary policy is just the latest reason investors are looking for financial ports in the storm. Gold is the most obvious beneficiary of this flight to safety.

Good as gold

The precious metal this week hit a new all-time high above $3,500. That is more than twice gold’s level in 2022 when it traded at just $1,600 an ounce. Gold thrives in a period of uncertainty, especially when other traditional safe havens lose their appeal. The dollar, for example, has fallen by 9% so far this year against a basket of other currencies. And even US Treasuries are out of favour as investors lose trust in the US administration’s policies.

It is unusual for the dollar and US government bonds to both fall at the same time. Higher bond yields (a product of falling bond prices) are usually a trigger for a higher dollar as investors seek out the higher income available on US assets. The fact that both are falling at the same time speaks of a flight to safety that’s confirmed by the rise in the gold price.

Exactly the opposite is happening in Germany where the euro is rising alongside lower European interest rates and bond yields. Investors no longer seem to care about interest dynamics. Rather they are seeking out safe havens. A worrying sign that all is not well in the world’s biggest economy.

Where next for shares?

In the short term, worries about what’s going on in Washington are feeding through into lower share prices. The S&P 500 is 14% below its February high and 7% down since the start of the year. The big investment banks are all pulling in their forecasts for the year end level of the US benchmark. The average is 6,000, roughly where it started the year. Some, like JPMorgan, are lower still.

In the longer-term, questions are being raised about the sustainability of a bull market which has been running for 16 years since the financial crisis. That puts the current positive run almost on a par with the two big post-war bull markets of the 1950s and 1960s and then the 1980s and 1990s.

Where shares head next will be determined by a combination of the following:

• Market leadership - if the Magnificent Seven continue to underperform, it will be hard for the overall index to buck the trend given the dominance of the big tech stocks in the benchmark.
• Margins and valuations - companies prospered in the low interest rate world after 2009. Having doubled, profit margins look harder to sustain in the face of Trump’s tariffs. That inevitably will make high valuation multiples harder to justify.
• Inflation and interest rates. In a world of higher inflation and so higher interest rates, investors will demand a higher premium to hold riskier shares compared with safer, higher-yielding bonds.
• Fund flows - foreign investors hold 18% of US shares today compared with 10% in 2007. If the flight from the US continues, that will hurt Wall Street. The question then will be whether a sneeze in America causes the rest of the world to catch a cold.

It all makes a strong case for investors to diversify broadly. Both out of the US into other markets around the world. And out of shares into other assets, including gold, bonds, property, cash and infrastructure.

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