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The uneasy calm in markets can’t last, and may be bullish for gold

Volatility is at multi-year lows, and yet that seems counter-intuitive in a world where certainty is a commodity increasingly hard to come by
Yellen: safe pair of hands?

Volatility – where’s it gone?

The complex volatility measuring tool devised by the Chicago Board Options Exchange known as the VIX and tradeable through various ETFs and ETPs this week hit lows not seen since 1993, coincidentally the same year that an FBI chief last got fired by a US President.

It’s true that in 1993 the index was only a couple of years old, so we don’t have a comparison to 1987 or any earlier times of major financial distress, but still, that 24 year run is pretty impressive, given the complex political background investors are now operating in.

So, given that there are wars in the Middle East, President Trump is rattling his sabre at North Korea, tensions between Russia and the West continue to simmer, what exactly is it that’s making investors so sanguine.

The answer was partly illuminated in an insightful article by Nouriel Roubini [] this week, in which he highlighted the impact of US shale in reducing sensitivities to Middle Eastern upheavals.

President Trump may be flip-flopping around on Syria and Iraq, but as far as the spreadsheet models of global economists are concerned, what happens there now just doesn’t have the same kind of significance as it did in 1973, when the Egyptians and the Syrians nearly wiped out Israel, or 1990, when Saddam Hussein decided it was time for his tanks to remove the border with Kuwait.

There’s also the impact of improving headline economic numbers. Chinese PMIs may be weakening, but they are improving in Europe, and in the US although growth is coming in fits and starts, it is coming.

Technological innovation continues to drive economic advance, most significantly in the fields of motoring and battery technology, and this has had a discernible positive knock-on effect on the mining sector amongst others.

Lithium batteries use ten times as much graphite as they do lithium, so if you think the graphite boom has gone away, think again – whatever the technology, materials will need to be mined to build it, so the mining sector will never get old.

And yet, having said all that, there is a palpable sense of unease abroad in the markets. What’s causing it is complex and undefined and if traders knew the VIX probably would be where it is now.

But certain underlying themes do present themselves. The initial shock of Brexit is over, and it looks as though institutions on both sides of the new European divide will survive relatively intact. But the uncomfortable truth, not much highlighted in coverage of the recent French elections, is that a traditionally fascist party won 35% of the vote.

That means that 35% of the electorate in one of the two remaining pillars of the European project prefer to embrace an extremer form of politics than tackling the issues of ever-closer union. Precisely what it means for the long-term isn’t clear, but it doesn’t bode well and it may end up making Brexit look like a mild and modest manoeuver.

More than that, there’s the pricing of markets themselves. Almost everyone agrees that equity markets around the world trade at unsustainably high levels around the world, and have been doing so supported by nearly a decade of near-zero interest rates.

Since the received wisdom is that the best traders burn out by the age of 30, that means that hardly anyone on a trading desk has ever seen a full interest rate cycle. The same is true of the guys that write the programs for the automated high-frequency trading that moves so many prices these days – and predicting how all those computers will interact in the event of a major market crash is a nigh on impossible task.

It was bad enough in 2007, when there was still room for manoeuvre on interest rates. What would happen now is beyond the understanding of most market participants. And that realisation makes them uneasy, to say the least. So while, there is willingness to participate in upward moves, there is also increasing wariness.

In part, that explains why the Fed has been so cautious when it comes to moving on rates. But if no one is hailing Janet Yellen as a genius, it may be for good reason – her predecessors Alan Greenspan and Ben Bernanke were both lauded when they had the job, but the global economy that they bequeathed to the current generation is still recovering from the shocks that occurred when they were in office.

Avoiding similar shocks may be Yellen’s greatest legacy, if she can do it. But it won’t be easy in a world where Donald Trump is President and significant balancing has yet to recur. 

© mining Capital 2018

Mining Capital, a subsidiary of Proactive Investors, acts as the vanguard for listed mining companies to interact with institutional and highly capitalised investors.
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