Welcome to our active management update on the market

The decline in many stock market indexes on Monday (8/5) took the popular averages down to levels close to their 200-day moving averages. There are several ways to calculate moving averages—some of which result in slightly different numbers. So, when reading or listening to the press, pay attention to which of these methods they are using.

Shown in the following graph are two of the more popular methods to calculate moving averages: exponential and simple. Without getting into the math, the exponential moving average is a bit more sensitive than the simple moving average. Yesterday during the day session, markets challenged the exponential moving average. During the overnight session, markets continued lower, challenging the simple moving average. From a technical analysis perspective, these moving averages should lend enough support to generate a bounce higher. We will be watching that bounce and noting its magnitude and volatility. Stay tuned.

In the financial press this morning, there was a lively discussion about precious metals moving higher because of the threat of inflation. While this may be partially true, there is another driver of capital into gold. When interest rates are low, in today’s case near 0%, the opportunity cost for owning precious metals is very low. For example, say interest rates are at 4%. If we take money from an account with a 4% interest rate and buy gold, we need to make at least 4% in the gold holding to come out even. However, if interest rates are just 1%, we risk less interest income by putting our money in precious metals, which pay no income—they just fluctuate in value with the currency we invest in.

In the markets of late (the following is a one-month daily-basis graph), as interest rates have gone down (bond prices up), gold has also appreciated. So, as the world turns and the news changes, strategic diversification proves its value again.

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