World Volatility Sparks Gold Rush

Global equity markets continued their declines last week on increased fears about the stability of the European banking system and the viability of sovereign governments. Investors also seemed concerned about future growth prospects in the eurozone.

Fears of a double-dip recession were rife on the back of widespread implementation of austerity packages and an escalation of military tension between North and South Korea.

The Iseq was not immune to the quickest declines since the credit crisis began in 2008 with the banks being the main victims of the sell-off as their borrowing costs rose to their highest levels since July last year on concerns about the integrity of the European banking system.

Risk appetite returned at the latter end of last week after China's State Administration for Foreign Exchange (SAFE) denied media reports that it was reviewing its exposure to European government assets. Even allowing for the emphatic denial, it would be surprising if they hadn't at least been assessing them, considering the inherent problems within the European banking sector in these volatile markets.

Markets were also boosted after the Spanish government was able to approve a €15bn austerity budget, though the margin of the vote was a little close for comfort, as it was passed by a single vote.

The Dublin market rose in line with Europe's markets. European shares rose to a one-week high on Thursday as sentiment lifted and euro crisis concerns were dampened by China's clear intention to remain a long-term investor in Europe.

CRH was a main mover on the Irish index last week with the stock up substantially from a closing price of €17.70 on Monday to €18.70, at time of writing. James Hardie Industries (an Australian-based leading supplier of fibre cement siding and backerboard) reported an upward adjusted operating profit of Aus$133m (€100m) for the 12 months to the end of March, also an indicator that the cement industry may be finding some stability.

For now, it seems investors are taking the opportunity, given the declines that we've had this month and the long weekend in the UK coming up, to snap up some bargains.

The oil and gas sector led the rally on Thursday, with firmer oil prices pulling the sector higher.

Earlier in the week, BP Plc continued to lose ground, hitting a nine-month low of £4.70 (€5.50) as the extent of the oil leak in the Gulf of Mexico was reported to be around 18,000 barrels a day. This news continued to drive up its clean-up costs, which have been in the region of about $760m (€620m) since the disaster struck.

However, the BP share price gained 5%, closing on Thursday at £5.20 (€6.14) as the Los Angeles Times reported that the process has been able to stop oil and gas flowing into the Gulf of Mexico from a damaged well. These reports remained unconfirmed by BP spokesman Robert Wine at time of writing.

The Dow Jones Index declined below the psychological 10,000 level on Tuesday but managed to stage a comeback the following day on the back of higher durable goods orders in April and new-home sales also giving the market a boost, rising 14.8% against expectations of 3.4%.

US markets also managed to open significantly higher on Thursday after an extremely volatile week on revised US Q1 GDP numbers, and the slightly improved weekly jobless claims came through.

The euro suffered badly at the hands of sterling and US dollar last week but managed to pull a halt to the three-day decline strengthening 1% against the dollar; a rebound from a four-year low and settling at 0.8500 against the pound at time of writing.

Despite the improvement in risk appetite, the rise of gold as a safe haven asset continues.

The crisis surrounding the euro has left German investors scurrying to buy krugerrands as a form of insurance. Currently off its highs, the precious metal's $1,200 (€980) per ounce price-tag represents a 90% rise since the start of the credit crunch in June 2007, easily outstripping all other asset classes.

The Swiss press has reported that Germans are travelling across the border to buy gold coins and bars. While Germany has a tradition of buying gold – an historical case in point would be the hyper-inflation of 1923 which seemingly underpins the nation's attitude to saving – but even taking this into account the demand is unprecedented. The Financial Times reported recently that the kruggerrand refinery, which usually sells krugerrands in more than 2,000 coin lots, had received an order for 30,000 coins from one German bank alone. Combining this demand with the institutional funds pouring into gold-backed exchange-traded funds (ETFs) then the market would seem to bear all the hallmarks of a rush.

Brenda Kelly and Michael Hewson, CMC Markets www.cmcmarkets.ie