• Gold finished the quarter at a six month of high of US$1400/oz. leading to the usual heated debate between gold bugs and the non-believers as to what drives the price of the yellow metal. Gold is seen as a safe haven and provider of protection against inflation, recession, political upheaval and just about everything else thus making it pretty easy for the gold bugs to pin a rise on anything they wish. 
  • It is possible to be a bit more granular about this and track the behaviour of Gold against two of the other traditional safe havens, US Treasuries and the US dollar. Gold typically displays a negative correlation with US Treasuries, the lower the real yield on Treasuries the better Gold (which earns no income) compares. Thus, a weaker US growth outlook and a more dovish Fed is in theory bullish for Gold which typically also has a negative correlation with a weaker US dollar, because as the dollar weakens so gold (which is priced in dollars) becomes cheaper in other currencies and thus more attractive, causing the price to rise. Technically US$1350/oz is a key level, proving to be an iron-clad coffin lid to any rises over the last five years so the breakout to US$1400/oz following the strong lead from the US Fed that rate cuts are on the way is the most bullish move for a long time.
  • Oil remains a complicated market, driven by political events as well as the supply/demand balance. Brent charged up from US$50/bl to US$75/bl in the big ‘risk on’ rally in the first quarter and had retraced much of this during the quarter until renewed political fears sent it surging back up finishing the second quarter at US$65/bl. Supply is constrained by the OPEC/Russia cartel production cuts and now further by US sanctions against Iran and Venezuela. About a fifth of the world’s oil travels through the Strait of Hormuz where the recent attacks on two tankers took place. The driver of the slump in the price earlier in the quarter appears to be on the demand side which has fallen away as the global economy has started to shudder. 
  • Energy and mining company shares have benefitted from the rise in the underlying commodities and in the general ‘risk on sentiment’ prevalent in financial markets this year. The bell weather JPM Natural Resources Fund has risen a whopping 16% so far this year.

Summary: Energy and mining stocks have produced strong returns this year but with global growth slowing this momentum looks likely to fade. Gold is a beneficiary of lower US interest rates and a stalling US dollar and has broken through its US$1350/oz resistance level.

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