gold01 30-week trend for gold will have seen gold extend 20 per

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Volatility hits temperatures of August 2008

By Matthew Vincent

It’s just like 2008 all over again. But is it really? Whenever commentators cite analogous recent history to rationalise irrational markets, I tend to view their comparisons with suspicion. Price history never repeats itself exactly – if it did, we’d know where the market was heading next, and there’d be no fear or uncertainty to fuel the volatility.

But when the FTSE 100 index sees six intraday price swings of more than 2 per cent inside three weeks, and the commentators harking back three years are the FT’s John Authers and Gillian Tett, even I start looking for parallels. Or similarly shaped wiggly lines on a chart.

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As Gillian wrote a fortnight ago: “Call it, if you like, the curse of August: just as in 2007 and 2008 (or 1997 and 1998) the fact that senior leaders are absent and markets are thin is threatening to unleash a new wave of volatility. But it is not just the summer temperatures that have historical echoes… the manner in which this eurozone story is playing out feels unnervingly similar to the pattern behind the American financial turmoil of late 2008.” She compares Greek government debt to Lehman Brothers – both were initially considered small local difficulties relative to their wider sectors: Greece had €200bn of foreign-held central government debt, while Lehman’s assets were $600bn. However, when funding dries up and rating agencies downgrade, trust evaporates. “Will this now be followed, as it was in 2008, will a full-scale financial meltdown?” This week, markets seem to think so.

As John said last Friday: “The similarities are overpowering. A huge shock administered over the weekend was followed by dramatic central bank interventions, and then a huge stock market rally, prompted by a ban on short selling. That describes the week just gone, and it also describes the week after the collapse of Lehman Brothers.” He is wise to the danger of “narrative fallacy”, adding: “There is no reason why this week, like that one, need be followed weeks later by a global market collapse.” Again, though, the markets don’t seem to buy the argument. Or anything other than money-market funds.

So can the price movements of assets in August 2008 tell us where to invest now? Here is a comparison of ‘safe haven’ asset prices, now and then.

Gold. As a write this, the gold price is rising to yet another record high, somewhere in the region of $1,850 an ounce. But Ross Norman of London Based Bullion Brokers Sharps Pixley says: “We do hold to our view that gold is in overbought territory technically. Long term investors looking at a 30-week trend for gold will have seen gold extend 20 per cent beyond its trend line only three times since 2007 and on the last two occasions it sold off sharply and reverted to its mean. We are there again today at 21 per cent above the trend.” At the beginning of August 2008, the gold price was $913, and it fell 8.7 per cent in the month. Would you buy it at $1,850? Neither would I.

Gold mining shares. If gold is overvalued, the same can’t be said of shares in gold miners. At least Angelos Damaskos, adviser to the Junior Gold Fund can’t bring himself to say it. He said this week: “The recent sell-off in global equities has widened the dislocation between gold mining equities and the bullion price. We believe that gold shares currently discount a long term price of about $1,000 an ounce, which, given the strength of gold, cannot go on forever.” It could go on in August 2008, though. Taking the price of AngloGold Ashanti as a proxy for gold miners, prices fell 10.7 per cent in the month.

Emerging markets. This week, new FE Risk Scores – which measure volatility in markets – showed that emerging market equities had become “a less risky alternative” to UK shares. Compared with a risk score of 100 for the FTSE 100, the Global Emerging Markets fund sector saw its score decline from 115 to 106 – “almost at par with the FTSE”. Similar patterns have been seen in the Asia Pacific and Japanese sectors.” But were emerging markets less risky in 2008? Not exactly: the Hang Seng index fell 7 per cent in the month.

Global blue-chip shares. Clients of Coutts were this week reassured that “Large companies in the developed world that have a large and growing exposure to revenues from faster-growing emerging markets are likely to outperform their domestically oriented peers.” Gore Brown saw similar resilience in “companies with strong balance sheets, excess operating cash flow, and a consistently increasing dividend”, such as BAT and Vodafone. This, at least, provides a modicum of comfort: in August 2008, Vodafone posted a price rise of 2.5 per cent, and BAT 2.7 per cent.

But there is one type of investment that did better then, and promises to do so now: the structured product. August 2008 was widely regarded as their final demise, when the collapse of Lehman Brothers exposed the risk or relying on a counterparty bank for capital protection. This week, however, as markets plunged, a product from Barclays matured with capital intact and a 10 per cent return. More remarkably still, a product from Legal & General matured with a positive return of 5.5 per cent even though it had Lehman Brothers as one of its counterparties. If an investment can come through August 2008 and August 2011 intact, it deserves a place in history.