/ 21 September 2008

Gold shines as markets shudder

The JSE lost 7% in the first three days of this week as the world faced the biggest financial meltdown since 1929.

The JSE lost 7% in the first three days of this week as the world faced the biggest financial meltdown since 1929.

However, by Thursday the local bourse appeared to be stabilising as gold stocks shot up on the back of a meteoric rise in the gold price as investors fled to safety.

On Wednesday the gold price rose nearly $100, driving gold shares up nearly 10%. This continued into Thursday morning, with the gold index up a further 5%.

Although the platinum price initially fell earlier in the week it followed gold on Thursday morning, rising nearly 6%.

However, prices of both oil and copper continued to fall. “All base metals continued to fall on fears of global recession, however precious metals rallied as a safe haven for nervous investors,” said Patrick Lawlor of Investec Securities Online.

Global and local bonds also benefited from the panic. The collapse in confidence in the banks left most investors too fearful of putting their money into cash, opting rather for government bonds.

Although financial and industrial shares had held up reasonably well compared with resources, they came under further pressure on Wednesday, shedding 6% within the first three days of the week.

The financial sector started to recover on Thursday morning with the resource index, which began to reverse some of its 9% losses.

South African banks are reasonably insulated from the crisis and remain well capitalised. But the resulting slowdown in global growth will ultimately affect South Africa’s economy.

International markets continued to reel:

  • On Thursday the sale of beleaguered Halifax Bank of Scotland to Lloyds TSB for £12,2-billion was confirmed. The merger creates one of the largest banks in the United Kingdom, but will cost thousands of jobs, reports The Guardian.
  • Central banks across the globe, including the Federal Reserve, the European Central Bank, the Bank of Japan, the Swiss National Bank, the Bank of Canada and the Bank of England have transfused $180-billion into global money markets, aiding cash-strapped banks, the Guardian reported on Thursday.
  • UK-owned Barclays plc came to an agreement on Wednesday night to pay about £1-billion for assets in failed Wall Street firm Lehman Bros.

  • Reuters reported that Morgan Stanley was discussing possible deals with US regional banking powerhouse Wachovia, HSBC Holdings and China’s CITIC Group. The bank, with fellow Wall Street stalwart Goldman Sachs, suffered massive share price declines throughout the week.

If panicky investors start withdrawing their money and other banks do not step in, there could be more failures.

Barking on the bourses
Shares in the troubled British bank HBOS are up and down like a manic-depressive, writes Oliver James. It is tempting to assume that the brokers doing the buying and selling are every bit as febrile. Indeed, a study of 26 successful New York brokers from 2000 suggests they are distinctly flaky.

They had high levels of depersonalisation (feeling detached from one’s surroundings) and two-thirds were depressed. The more they earned, the more likely they were to have these problems. Twice daily they consumed both alcohol and an illegal substance (mostly cocaine). For relaxation they chose solitary pursuits: jogging, masturbation and fishing were common. But for all their Affluenza-driven compulsions and misery it would be wrong to characterise brokers’ turbulent share dealing as mental instability.

In fact, it is a rational response to the way they are incentivised. In the financial services industry their bosses motivate them with short-term rewards. If success means to slap a bet on HBOS shares falling, then it is rational to do so.

Even if it is true that HBOS is not as close to insolvency as Northern Rock, it is rational for brokers to make these bets — once the predatory herd have got an institution in their sights the more people believe that it is going down, the more they bet on it happening, the more likely it is to happen.

Much more interesting, psychopathologically, is how those in charge allowed it to get like this. Yet many financial institutions exist through lending borrowed money, rather than their own. How could they allow a system in which many of the financial institutions were living on the never-never? Even at the individual level we have been coerced into spending more than we earn. Whatever happened to Thatcher’s pious homilies about householders having to balance their books?

If the current stock market roller-coaster symbolises lunacy, it resides in those who set up and monitor the system, not the money-chasing traders wanting a larger second home. —