While all eyes have been on the Federal Reserve in recent weeks, events in Europe have shaken things up, bringing the realization that the trigger for the next recession could very well be abroad. And in response to these events, the gold price increased $30 in trading on Wednesday as more people sought safe haven assets.
It’s easy to get distracted with domestic concerns, whether it’s what the Fed is doing, how high inflation is rising, or even natural disasters like Hurricane Ian. But in our interconnected world, events halfway across the globe can have a major impact on markets and, by extension, your finances.
UK’s Bond Market Predicament
Perhaps the most important international event affecting markets has been the weakness in the UK’s bond markets. As a result of the new government’s tax cut plans, bond markets saw a selloff that impacted interest rates.
That forced the Bank of England to pledge to engage in strategic bond buying of long-dated bonds in order to support bond markets. This quantitative easing is a reversal of the BoE’s plan to start selling its existing holdings of government bonds.
What this means is that the Bank of England is engaging in quantitative easing at the same time as it is raising interest rates. Said another way, it is easing in one area while tightening in another.
No one had thought this would happen. Easing and tightening were thought to be an either or thing. The idea that a central bank might simultaneously buy assets while raising interest rates seemed completely absurd.
Yet here we are, with the Bank of England having to buy bonds at the same time as it is tightening monetary policy by raising interest rates. And this brings up important questions for the Fed.
Granted, the market for US Treasuries is significantly larger than the market for gilts, but still, it’s not inconceivable that the Fed might have to do something like this in the future if Treasury markets start to falter. Would the Fed be prepared to do that?
Weakness in bond markets isn’t a rare occurrence either. We saw bond markets nearly freeze during the 2008 financial crisis, so we know that there’s a very real danger that bond markets could be in danger during a recession.
What’s happening in the UK right now is a flashing warning sign that all is not well with the global economy. The UK could very well be the canary in the coal mine, giving us a foretaste of what’s to come. And it may only be a matter of time before the US finds itself in similar circumstances.
EU Gas Supply in Doubt
The other international event that has roiled markets was the emergence of gas leaks in the Nord Stream gas pipelines underneath the Baltic Sea. Both the Nord Stream 1 and Nord Stream 2 pipelines have developed leaks, which were preceded by explosions.
No one knows yet how the pipelines started leaking, although sabotage is the initial explanation that seems to have gained favor at the moment. The usual finger pointing is going on, with some in the West blaming Russia, although Polish MEP and former Defense Minister Radek Sikorski seemed to finger the US.
Even if the explosions were accidents resulting from the pressurized gas contained in the pipelines, the effects on Europe’s energy security could be dire. Russia had halted gas deliveries through Nord Stream 1 in August, while Nord Stream 2 had yet to go into service. And now Germany fears that the inflow of saltwater into the pipelines could cause corrosion that would render the pipelines permanently inoperable.
While Germany and other European countries had already taken steps to try to decrease their reliance on Russian natural gas, the potential that the pipelines might now be permanently out of commission would be a harsh blow. That’s particularly the case for Germany, which has pledged to decommission its last nuclear reactors, is trying to reduce its dependence on coal, and which has had difficulty filling its natural gas stores.
Natural gas prices in Europe rose on the news of the leaks, as you might expect. And this winter promises to be a difficult one for Europeans, as they will be forced to try to conserve energy as a result of higher energy prices.
Just when we thought central banks might be able to get inflation under control, here comes something that will boost energy prices, which could also boost consumer price indices and keep official inflation figures high. That in turn could result in central banks keeping monetary policy tighter for longer.
We also can’t forget the potential geopolitical ramifications if this does turn out to have been an act of sabotage. Even though the war in Ukraine seems to be as stalemated as ever, events like this could fire things up. And with Russia’s recent reiteration that it reserves the right to use any means necessary to defend itself, we can’t rule out the possibility of intensified international conflict.
The Outlook for the Future
What this means for the future is that things are just as uncertain and unpredictable as they’ve ever been. Events in the UK, in particular, indicate that the negative outlook for markets is warranted, and that further market upheaval could be coming.
The fact that gold saw such a sharp rise was also an encouraging sign that investors still see the yellow metal as a safe haven. And depending on how things proceed in the future, this safe haven asset buying could provide further support to the gold price in the coming months.
These warning signs should also serve as an indicator to US investors that economic upheaval could make its way to our shores too. So if you haven’t already prepared to protect your assets against the likelihood of market downturns, now is the time to start thinking about that.
Many investors have already taken steps to protect their financial well-being with gold, whether it’s through starting a gold IRA to protect their retirement savings or just buying gold coins and bars to protect their cash holdings against high inflation. Gold has served as a safe haven for centuries, and continues to play that role today.
If you are looking to protect your savings with gold, call Goldco today. With thousands of satisfied customers and over $1 billion in precious metals placements, we have the knowledge and expertise it takes to help you protect your financial well-being with gold.