The Daily Market Report: Gold Underpinned as Safe-Haven Bid Offsets Deleveraging Pressure

24-Aug (USAGOLD) — Gold is holding up remarkably well in the face of today’s global stock market rout. Safe-haven demand seems to be offsetting the broad deleveraging pressure being seen in other markets.

Chinese stocks got whacked again today, with the Shanghai Composite plummeting another 8.5%. European indexes were down about 5% and the DJIA opened a whopping 1,000 points lower. Other assets, particularly commodities are under heavy pressure as investors are jettisoning anything-and-everything to raise cash. Seemingly with the exception of the ultimate safe-haven . . . gold.

Silver, which derives most of its demand from industry, is trading more like a commodity today, pushing the gold/silver ratio to a 6½-year high of 79.14. Given the huge demand for silver we’ve seen lately and the exceedingly tight supply, one might suspect that the downside is limited from here.

Global markets are reacting to mounting growth risks and the possibility of a disinflationary depression. The financial press would have you believe that equities elsewhere in Asia, in Europe and the U.S. are tanking simply because they’re following Chinese stocks lower. In reality, Chinese stocks are falling because there is growing evidence that China will miss its growth objective, potentially by a wide margin, resulting in a hard-landing.

But, it’s not just China: U.S. growth has been tepid at best. U.S. Q1 GDP was a mere 0.6%. The initial look at Q2 GDP was a pretty soft 2.3%. The Atlanta Fed’s GDPNow forecasting tool, which has been pretty accurate lately, sees Q3 GDP weakening to 1.2%.

The more compelling evidence came out of Japan last week, where Q2 GDP actually contracted by 1.6%. That dismal result despite trillions of yen in quantitative and qualitative easing. You don’t get that kind of spectacular ‘fail’ unless there is a severe underlying problem that simply can’t be papered over.

Japan’s massive intervention in markets has included the direct purchase of equity funds. In the last couple weeks, the Nikkei index has plummeted nearly 12%, severely undermining confidence in ‘Abenomics’.

The ECB remains fully engaged in its ZIRP and QE programs and the latest GDP read was 0.4% in Q1, down from 0.9% in Q4-14. Expectations through year-end remain well below 1% q/q. Hardly anything to get excited about.

Emerging market, that are largely commodity based economies, are likely to be decimated by rapidly falling commodity prices. Those falling commodity prices are amplifying the disinflationary pressures, while simultaneously undermining growth potential.

The current market rout can not and should not be overly-simplified, suggesting that all would be just fine, if it weren’t for China. There is plenty of trouble to go around, which suggests that investors should be diversifying their portfolios to make sure they have adequate protection in the event that the current situation does indeed devolve into a disinflationary depression.