Market News

7th August 2018

Black Swan Events and the Gold Price

It was Professor Nassim Nicholas Taleb who coined the Black Swan phrase just after the 2007 sub-prime crisis in the United States. He maintains there are some events that are impossible to predict and yet have massive knock-on effects on the markets, sending asset prices spiraling out of control. These disruptive events may be impossible to foresee, but they do signal the end of one cycle and the beginning of another. A central point of his theory says a Black Swan event brings an end to a weak system, making way for a stronger one.

The currency markets play an important role in the value of Gold. The end of the EURO-CHF peg was one example of this. The Swiss Franc was unpegged from the EURO at the beginning of 2015 in what is called a Black Swan event. The Eurozone’s economy had reached a low point along with the Euro, so low that the Swiss National Bank decided it had enough of subsidizing the difference to the Swiss Franc. The announcement in January 2015 took the markets by surprise. The Swiss Franc rose by 30 percent against the Euro, reflecting more accurately the health of the Swiss economy versus the downturn in the Eurozone. And Gold soared by 70 US Dollars per ounce in one day.

The dot.com crash of 2001 is another example of a Black Swan event. The rapid rise of Internet technology stocks started in 1997. It entered a downward cycle after a number of the listed companies went bust. They were over-leveraged and over-valued, and by the time the Black Swan event had ended in 2002, five trillion US Dollars had been wiped off the US stock market’s capitalization. In the years to come, the technology sector stabilized, even being led by Amazon.com whose owner Jeff Bezos is the richest man in the world by share value.

The precious metal is often used as a hedge and safe-haven against Black Swan Events. During the 2008 financial crisis in the USA, Gold made gains while other assets crashed and burned. When Lehman Brothers failed, the US stock market tanked along with banking stocks, but Gold saw buying demand. The 1997 Asian Financial Crisis was another global Black Swan Event, crushing Asian currencies and stock markets and knocking on global investor confidence. In this case, however, Gold didn’t rise, it fell, because the US economy was strong and investors preferred to buy US Dollar-denominated Treasury bonds as a safe-haven.

Gold’s value is based on interlinked cycles from the orbiting worlds of geopolitics, macro-economics and currencies. It rises and falls in tandem with rare Black Swan events. Currently, it is on a declining trend reflecting a stronger US Dollar and more stable economy in America. There’s no telling how long the downward swing may last, where the next Black Swan event may come from or what the next geopolitical crisis will be that sends Gold swinging back up.


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