Gold prices are up nearly $20 per ounce in early trade this morning as stocks cratered this morning and oil slipped below the $30 per barrel level. Heading into a long holiday weekend, investors may prefer to sell risk assets rather than going into a long weekend that could be filled with uncertainty.
Chinese stocks were hit heavily once again last night, dropping by over 3.5 percent. Chinese equities have now entered bear market territory following recent declines and there could be yet more selling to come.
Selling and volatility in Chinese markets have clearly been a major driver of risk aversion in global markets. Crude oil, however, could potentially be an even bigger catalyst. Crude is trading at levels not seen in many years, and the notion of $20 per barrel oil is gaining more credibility. In fact, some analysts are now even calling for a possible move down to $10 per barrel!
The ongoing pressure being seen in crude oil is fanning the flames of deflation. And crude isn’t the only commodity potentially pointing to price deflation. Copper prices are below the $2 mark while natural gas may be headed back below the $2 level as well.
Deflation taking hold is a very significant concern. As price declines continue, companies could be forced to cut workforces and jobs may suffer. As jobs suffer, economic activity can suffer as discretionary spending declines. Deflation also increases the real value of debt and can become a slippery slope that is very difficult to deal with.
Already, there is talk of the U.S. once again entering recession next year. This comes at a time when the U.S. has just begun raising interest rates while many other parts of the world continue with easing measures.
Add to this the ongoing tensions in the Middle East and North Korean nuclear saber rattling and you have a recipe for ongoing risk aversion and lower risk assets.
Gold and other precious metals could potentially stand to benefit if the selling in equities continues. Investors may look for alternatives, and with so many wildcards right now they could potentially seek out the perceived safety of gold and other precious metals.
While gold recently broke out to the upside from its recent trading range, the yellow metal has pulled back. It remains unclear if the market is, in fact, headed higher from current levels or if the breakout will prove to be false and gold remains in its previous range, or possibly even heads lower.
