THE stranger aspect of the Iran conflict’s fallout on markets – at least, for South African investors – has been the rout in gold shares these past two weeks.
With gold down 17% since its January peak, there’s been nothing safe haven about the precious metal at all. In fact, it’s the main reason the JSE’s all share index has tumbled 14.8% since touching 129,330 on March 2.
But such was gold’s rally – to more than $5,400 an ounce by January 28 –that gold miners on the JSE had risen to a point where they represented 20% of the top 40 index before the ructions in the Middle East began, says Protea Capital Management founder Jean Pierre Verster.
“While gold and gold miners have been seen as hedges, and have worked [as such] during previous crises, the moment a hedge asset becomes expensive it becomes less effective,” he tells Currency.
That’s because, inevitably, an asset that has risen relentlessly tends to attract leveraged positions. And that, says Verster, creates fragility when such leverage unwinds. “It’s not a surprise that assets that see a significant speculative element in their ownership would go down,” he explains.
While gold has been hammered, world markets haven’t been immune either. In the US, the S&P 500 is now down about 5% year to date, while the Euro Stoxx 50 is off 6% and the Hang Seng in Hong Kong has slipped 4%.
Not a calamity – yet
But as Anchor Capital’s Peter Armitage points out, these falls are hardly calamitous.
“We haven’t had any kind of capitulation,” he says. “It’s natural psychology: I was looking at my own portfolio and wondering if I should sell shares. That’s where you are globally.”
While “it feels like everything is falling off a cliff”, most investors are only slightly worse off overall, he says. “Where people have been burnt is that they thought gold was a place of safety – and that’s been a disaster. Look at Sibanye, it was R15 per share a year ago and it got up to R82 – so any hint of it coming down and everyone just took profits.”
Some assets have even had a pretty good war so far. Locally, shares in petrochemical company Sasol topped R212 on Friday, a gain of almost 51% in the past month (and 103% this year), as the price of Brent crude oil has rocketed from less than $70 per barrel to $109 at last count.
So too with coal miner Thungela, which has rallied almost 61% over the past month. Coal prices are a major beneficiary of a global gas supply crunch, where production has indeed been pulverised; last week’s strike on Qatar’s Ras Laffan gas field instantly shut off almost a fifth of the country’s total output, and will take between three and five years to fix.
It’s not just the war though. The US market was already experiencing a wobble of its own before the Gulf crisis began, as software companies tumbled on fears that AI would prove hugely disruptive to their until-now lucrative prospects.
Arguably, markets (aside from commodities) should have taken a bigger knock from the turmoil in Iran, given how destabilising this war could be for global growth.
The next Suez crisis?
Verster says this relative calm may be an indication of complacency, which is potentially dangerous. “But it’s only dangerous if the US has entered a quagmire and this situation continues for an extended time [where] oil stays above $100 a barrel,” he says.
In Verster’s view, it all comes down to two competing narratives, and there is no way to definitively say yet which one will prevail.
“The first is that this is going to be short term and Iran will be eliminated as a threat in the Middle East, and in a few months’ time everything is back to normal and the only people that need to adjust are those with leverage.”
The second narrative is that this is going to be an extended war, similar to the 1956 Suez crisis, which demonstrated to the world that Great Britain was no longer the superpower it had been before. This is the grim scenario sketched out by Bridgewater Associates founder Ray Dalio recently.
Iran could be America’s next Suez crisis, says Verster. “We have exited the unipolar power period, and we’re now entering the multipolar power period, and the likes of China will feel more confident in moving away from the dollar, and the world will move away from US hegemony.”
For those seeking reassurance that America hasn’t lost its marbles, the weekend’s news was anything but comforting.
On Saturday, US President Donald Trump threatened that America would “hit and obliterate” Iranian power plants should the country not fully open the Strait of Hormuz to shipping traffic in the next 48 hours. Iran, showing no indication that it intended bowing to that threat, threatened to attack “vital” infrastructure in the Middle East – including critical water desalination plants – should Trump do what he promised.
This leaves Trump in a bind: if he doesn’t follow through on his threat, his credibility takes yet another hit and adds new fuel to the belief that “Trump Always Chickens Out”; if he does follow through, this conflict threatens to spiral into all-out warfare, destablising the region to an unprecedented extent.
Israel, meanwhile, has shown no signs of wanting to slow down. While Trump has also said that Iran is “finished” and the war is as good as over, Israel’s military chief Eyal Zamir said that his country is “not even halfway” through its campaign. All of which suggests a much more prolonged energy shock than many investors seem to be bargaining for.
Forget cuts, odds favour rate hikes …
Armitage says he isn’t worried about a shortage of global oil supply, which is plentiful, but he warns that inflation expectations are now very different to what they were a month ago. That’s a big deal for South Africa, which until recently was basking in the glow of an emerging markets love-in.
Last year, for example, foreign buyers ploughed R90bn into South Africa’s bond market – yet two Fridays ago they took R18bn out in one day. This switch in sentiment has pushed the 10-year bond yield from 8% to 9.2% in very short order.
“Up until two months ago, the local factors and the global factors were all positive for South Africa, but that has certainly shifted and even if this thing ends, and oil comes down, I don’t think we’re going back to where we were,” warns Armitage.
Again, it is not just South Africa in the cross-hairs. Traders are now betting that the US Federal Reserve will be forced to raise interest rates this year, in stark contrast to expectations before the Iran war began that rate cuts were imminent.
Traders now “put the odds of a quarter-point interest rate increase by October at almost 50%, a dramatic shift from pre-war expectations of two or three cuts by the end of this year”, wrote the Financial Times on Friday. In the UK, 10-year borrowing costs have risen to an 18-year high of 5%.
The few winners in this scenario are those who have spare cash lying around, and are now earning more interest as a result.
Valuations always matter
But the current moment raises the deeper philosophical question for investors: are you really in it for the long term – in which case, you bite down and stick to your guns – or do you take your cue from the legendary British economist John Maynard Keynes, who said that “when the facts change, I change my mind – what do you do, sir?”
Verster, for one, says he has hardly changed his portfolios in the past couple of weeks. But for him, it all boils down to valuations.
“General investment skill implies that you are a buyer of cheap assets and a seller of expensive assets and over time that’s what works,” he says. “The way in which you exhibit investment skill is not to be very active in the midst of a crisis, but rather to build a portfolio that can do well in spite of a crisis, and take a more anticipatory approach rather than a reactive approach.”
Which is all fine to say, but it takes no small degree of phlegmatism to stay the course at a time like this. Many retail investors have already been washed out with the gold and platinum slide, and depending on what Trump does in the next two days, it may get far, far worse.
This article first appeared in Currency.
