Is the double dip upon us? Markets, gold and commodities plunge

The latest falls in the markets and gold and commodity prices are raising the fear factor among investors as worries about a double dip recession resurface.

JOHANNESBURG - 

A disturbing analysis of the financial positions of several Eurozone countries - notably Greece, Portugal and Spain, from the European Central Bank head, Jean Claude Trichet, yesterday seems to have been the trigger for a sharp downturn in stock markets across the globe.  Gold (and other precious metals) was horrendously hit with the sharpest one-day fall seen since 2008, with a further downturn today before a slight recovery, but this was before U.S. markets opened .

The Trichet statement hit the Euro hard leading to a sharp fall against the dollar as investors suddenly saw the dollar as being strong  vis-a-vis other currencies and perhaps likely to stay that way for a period.  Dollar strength tends to mean gold weakness and as the Euro plunged, gold crashed with it.  The spectre of continuing global weakness though hit stock markets in general right across the world - and coupled with recent Chinese moves to tighten domestic availability of easy money there is an element of fear developing in the investment sector.

The question is, though, is this the indication of the onset of a double dip in financial markets as some of the gloom merchants have been predicting?  If so what does this mean for gold and commodities?

The trouble with a double dip is that if one waits to see whether or not the second dip really is happening, it is usually too late to get out if it does!  Fear drives the markets down and this can result in a downward trending spiral.

Downward trending markets tend to lead to illiquidity in the financial sector and as was seen dramatically in October 2008 good assets need to be offloaded for investors to stay afloat along with bad.  But, as in that dramatic month and the ones which followed, gold was the quickest to recover - and it did not fall as much as most other assets in the first place.  Whether that will happen if there is a second severe dip remains to be seen, but history suggests that gold will outperform most other assets in a long term recession/depression scenario.

As to other commodities the scenario is a little more complex.  If the U.S. economic downturn is beginning to flatten or pick up, and if China and India remain reasonably buoyant then oil and metals commodities should have a good future as producers will struggle to meet demand.  But, speculation in some of these - notably copper - has been rife, and copper tends to be the benchmark so there is further vulnerability here, and with metals in general if economies do not recover or stabilise.

So far Chinese and other BRIC country growth has been the catalyst for the strong metals price performances over the past year, so if this stutters and there's no real uptick elsewhere, commodities markets could be in for a torrid time for a period.  What may be ominous here is that it is the Far Eastern stock markets which have fallen furthest and fastest over the past day or two, suggesting a lack of confidence in the region which is key to global growth.

What is apparent from the latest market slump, though, is that we are far from out of the woods yet with respect to the global downturn, despite politicians and some economists trying to talk the economy up at every available opportunity - perhaps excluding Jean Claude Trichet!  History shows us that gold tends to perform better than most other assets under such circumstances so even if gold and precious metals fall, other sectors may well do worse.

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Spelling Names Correctly In today's ever more multi-cultural and transcultural world (sometimes excessively transcultural), we also observe many laudable attempts to do a better job of spelling non-English-language place and personal names correctly or of better . .more transcribing them into English so as to more accurately reflect their pronunciation in their original languges. The best-known examples are probably the replacement, over the past several years, of "Peking" with "Beijing" and of "Bombay" with "Mumbai". So could you please, in the future, spell French names such as Jean-Claude Trichet with the hyphen? Many thanks in advance! Neil Bishop . .less by Neil Bishop on February 05 2010, 07:54 Find this comment inappropriate? Report it

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