Just like the weather, there are various barometers that can give a good indicator as to what is brewing up in the financial space. The indicator on these barometers may mean differently for the various type of investments (i.e. stocks, bonds, forex, etc.) that are out there. Listed below are just some of the major barometers that financial analysts look into in order to gauge what’s happening in the financial markets:
1 – Gold. It’s a popular hedge against inflation. It’s also called the “fear metal”. Because when the stock market becomes a scary place to invest, a lot of investors turn to gold. See chart. In general, when the stock markets becomes depressed, the price of gold goes up. So does that mean it’s the best time to buy gold? Maybe not. It’s probably the best time to buy stocks. Best time to invest in gold is when inflation is down, a recession, stock market is up, the price of gold is down and there’s relative peace in the international scene.
2 – Silver. This is also considered a safe haven in a bad economy. Silver has more industrial use than gold though. Recently, Warren Buffet has made the plunge with silver although he really wasn’t into investing with commodities (Source: Trade Like Warren Buffet. James Altucher. pg. 12). Silver is seen as a better alternative to gold by some investment gurus because of its economical material for industrial use, laptops, smartphones batteries, jewelry, silverware and photography. Other gurus discount this by saying that governments keep gold in their central banks as a hedge for inflation and thus places more importance of gold rather than silver because in the real economy whoever has the gold makes the rule. But keep in mind that gold and silver prices are also affected by the law of supply and demand. The opportunity for silver is that governments have dump their silver inventory which means that, later on, there would be more demand for it and then there would be a need to meet this new demand.
3 – Copper. Because of its many industrial uses, copper has been a good barometer for predicting economic downturn and growth. Copper turned higher in 2003 as the economy recovered from the 2001 downturn. It turned lower in 2008 as the credit crisis was getting started. And the metal started moving higher in the last days of 2008, three months before things turned around for the stock market. Fear of recession and a recession drives down the value of copper.
4 – Manganese. Just like copper, manganese is tied closely to the economy because of its many uses in building materials and infrastructure. It is not exchange traded and the price is based on supply and demand. And thus, it can be a strong barometer to gauge the world economy.
5 – Oil. Everything is tied to oil but it is especially seen as a barometer for commodities.
6 – SWIFT index. This relatively new financial barometer tracks money in the global banking system. It is a payment and messaging system owned by ten thousand banking organization.
7 – Economic Bubbles. Sectors of the economy can be in a bubble. The stock market, IT industry, housing industry, the price of gold, stock of a blue chip company, etc. are good example of sectors that can be in a bubble. And it is good to know when a major sector is in one because you do not want to be heavily invested especially when the bubble pops. So how would you know whether a sector is in a bubble? Read a Venture Capitalist’s explanation. Examples are: Enron, housing crisis of 2008, IT crisis of 2000.
8 – Stock Markets. Especially the US stock market. There’s a quote that says that when America sneezes, the whole world catches a flu.
9 – Natural and man-made disasters. Example of this are: Japan’s Fukushima nuclear crisis brought down uranium stocks; hurricane Katrina brought oil prices up;
10 – International and national politics. It’s a global economy. A war in a major oil-producing nation affects the price of oil which in turn affects the prices of other goods and services. Examples are: World Trade Center attack brought down the insurance and travel industry;
In the face of predicting what the financial environment will be like, it’s a general rule of thumb to look for patterns and comparisons from historical data. It’s also responsible to look for at least a dozen economic signals in order to form a more clearer view of the financial landscape. This is how Nouriel Roubini was able to predict the collapse of the housing market and worldwide recession.
But just like the weather, there are no guarantees that the prediction would be accurate. For example, no one has ever had a good track record of predicting when the next recession will come. According to Prakash Loungani, who was an Assistant to the Director at the External Relations Department, IMF, that “…if past performance is any guide, a recession tends to arrive before the forecast… Only two of the 60 recessions that occurred around the world during the 1990s were predicted a year in advance.”