Daily Reckoning UK

The Stocks-Gold “See-Saw”

Macro view of stacks and rows of gold ingots or golden bullions bars with selective focus effect
Ben Traynor

by

Posted 10th January 2017

At the time of writing it’s Day 11 of the FTSE 100’s steady climb.

It’s probably my natural caution/pessimism/miserablegittery/doommongerishness, but I find myself thinking about altitude sickness.

And about how the advice to mountaineers feeling symptoms is to descend to a lower altitude.

At some point that’ll happen. But for now, the FTSE 100’s getting a lift from the weaker pound, thanks to all those constituents who make their money outside the UK in currencies that aren’t the pound.

Gold meanwhile has edged back up above $1,180 an ounce to reach its highest level since late-November.

There’s a bit of a “see-saw” situation emerging vis-à-vis gold and UK equities, at least as far as currency moves are concerned.

If the pound continues to weaken, it’ll continue to behove stock analysts to uprate their estimates of FTSE companies’ earnings when translated into sterling.

On the other hand, if the dollar falls lower (and it’s already softened a bit since the turn of the year), that should be good for gold.

Gold prices in dollars, obviously, but I know from years spent watching gold’s price action every day that when the gold price moves in dollars, it usually moves in other currencies too, in the same direction.

If you’re a UK investor with exposure to both gold and the FTSE, then I’d say that’s a nice balance to have.

And I hope I haven’t just jinxed it!

Actually, before we get carried away, I’ll reiterate the point I often make when others talk about gold vs stocks.

Namely that there’s no automatic, mechanistic relationship. Both can and sometimes do go down together.

Oh, and none of the above gets us off the hook if there’s a sudden stock market panic, or if a particular company you hold gets into difficulties (or the market just doesn’t fancy it as much anymore).

Still, I wanted to highlight the current “see-saw” dynamic between UK stocks and gold, because it’s a nice illustration of diversification at work.

I don’t talk about that as often as I probably should because it’s, well, a bit dull. Common sense often is.

If you want to know more about investing in gold and how it fits in with your other assets, click here.

In defence of footballers

Now, fair warning. The rest of today’s DR is something I always think is a bad idea but sometimes can’t help doing.

It’s me talking about politics. With some football thrown in for levity. If you want to hit the ejector button I won’t blame you!

On Sunday the prime minister wanted to talk about domestic policies, but Brexit dominated the coverage.

Today it seems Jeremy Corbyn wanted to talk about Brexit but he’s drowned himself out with domestic policy chat.

As you’ve probably seen elsewhere, Corbyn likes the idea of some kind of earnings cap.

He’s not given any specifics like a number because he’s Jeremy Corbyn and he doesn’t do that sort of thing.

But listeners to the Today programme this morning were left in no doubt that he’s at least 7-out-of-10 full bore behind the idea that this is something his party should be looking at and having a self-indulgent “conversation” about.

To be honest, my initial instinct was to think “It’s just Jeremy Corbyn” and get on with my day.

But then I thought “It’s Jeremy Corbyn, the Leader of Her Majesty’s Official Opposition.”

And he’s spent his morning doing the rounds of media studios to float some meddlesome, bureaucratic, interventionist notions he clearly hasn’t thought through, rather than leading efforts to hold the government to account.

“The salaries that are paid to some footballers are simply ridiculous,” said Jez on Sky News earlier, sounding a bloke ringing talkSPORT on the way back from an away game.

On the face of it a perfectly reasonable assertion. But let’s walk through it, starting with where that money comes from.

I respect your privacy and will never pass on your email address to anyone else.

For my sins, I’m a football fan. Which may well make me an idiot when you consider I’ve just bought a ticket for a game I now can’t go to because they moved the date to accommodate a cup replay after my team couldn’t win a game it should have.

Despite that, I’ll probably be back for more such treatment at a later date (that’s the idiot part).

Football fans, as a general rule, are loyal customers. They pay small fortunes for tickets, for TV subscriptions, and they’re a captive audience for advertising, attracting more money into the game.

The huge following football has is also why the mega wealthy buy clubs and pump their riches into them.

Left to its own devices football is a business with a lot of money flowing through it. As such, it’s a business where someone, somewhere, is going to make more than a few quid.

Here’s a question: if some people are going to make loads of money out of football, who should those people be?

Try as I might, I can’t think of a “fairer” answer than the people who play the game.

Those whose talents people pay and travel hundreds of miles to watch.

Those whose endeavours make the game such a river of money in the first place, often in the glare of publicity while getting sworn at by armies of strangers every weekend.

Those who run the risk of having their careers derailed or cut short by anything from a bad injury to just not being quite good enough to make it at the top level.

Football is one of those professions where a handful of people at the top earn outsize sums.

That’s a fairly common market outcome, seen in fields as diverse as literature (most authors make buttons, a few are millionaires) to technology start-ups (most don’t turn their founders into billionaires).

The market’s not always perfect, and we shouldn’t just slavishly accept its outcomes.

But seeking to override them with brute force is a tactic we as a species have tried before. And we know (or ought to know) it’s a crap idea.

Besides, it sidesteps the question of why the market delivers such outcomes. It’s intellectually lazy as well as economically dangerous.

None of this is to say inequality doesn’t represent a threat.

It’s a topic for another day, but I’d argue that for one thing it encourages over-indebtedness, a recipe for economic and financial instability.

But we can recognise inequality and strive to deal with it without resorting to having the government set prices and wages.

From time to time we may tell you about regulated products issued by Agora Financial UK Ltd. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment.