Raphael Stevens

Traders have an expression to describe how unpredictable financial markets can be: “better off dumb”. Stocks or other financial markets can sometimes behave in unforeseeable ways. Analysts predicted that American share prices would collapse if Donald Trump won the election in 2016—they soared. Companies that post better-than-expected earnings sometimes see their share prices decline. Glimpsing the future should give a trader an edge, and most of the time it would. But not always.Say you knew, at the start of 2021, that inflation was going to soar, the consequence of rampant money-printing by central banks and extravagant fiscal stimulus. In addition, perhaps you also knew that inflation would then be stoked by trench warfare in Europe. With such knowledge, there is perhaps one asset above all others that you would have dumped your life savings into: the precious metal that adorns the necks and wrists of the wealthy in countries where inflation is a perennial problem. Better off dumb, then. The price of gold has barely budged for two years. On January 1st 2021 an ounce cost just shy of $1,900. Today it costs $1,960. You would have made a princely gain of 3%.What is going on? Working out the right price for gold is a difficult task. Gold bugs point to the metal’s historical role as the asset backing money, its use in fine jewellery, its finite supply and its physical durability as reasons to explain why it holds value. After all, at first glance the phenomenon is a strange one: in contrast to stocks and bonds, gold generates no cash flows or dividends. Yet this lack of income also provides a clue to the metal’s mediocre returns in recent years. Because gold generates no cash flows, its price tends to be inversely correlated with real interest rates—when safe, real yields, like those generated by Treasury bonds, are high, assets that generate no cash flows become less appealing. Despite all the furore about the rise in inflation, the increase in interest rates has been even more remarkable. As a result, even as inflation shot up, long-term expectations have remained surprisingly well anchored. The ten-year Treasury yield, minus a measure of inflation expectations, has climbed from around -0.25% at the start of 2021 to 1.4% now. In 2021 researchers at the Federal Reserve Bank of Chicago analysed the main factors behind gold prices since 1971, when America came off the gold standard, a system under which dollars could be converted into gold at a fixed price. They identified three categories: gold as protection against inflation, gold as a hedge against economic catastrophe and gold as a reflection of interest rates. They then tested the price of gold against changes in inflation expectations, attitudes to economic growth and real interest rates using annual, quarterly and daily data. Their results indicate that all these factors do indeed affect gold prices. The metal appears to hedge against inflation and rises in price when economic circumstances are gloomy. But evidence was most robust for the effect of higher real interest rates. The negative effect was apparent regardless of the frequency of the data. Inflation may have been the clearest driver of gold prices in the 1970s, 1980s and 1990s but, the researchers noted, from 2001 onwards long-term real interest rates and views about economic growth dominated. The ways in which gold prices have moved since 2021 would appear to support their conclusion: inflation matters, but real interest rates matter most of all.All of this means that gold might work as an inflation hedge—but inflation is not the only variable that is important. The metal will increase in price in inflationary periods if central banks are asleep at the wheel, and real rates fall, or if investors lose their faith in the ability of policymakers to get it back under control. So far neither has happened during this inflationary cycle.A little knowledge about the future can be a dangerous thing. “The Gap in the Curtain”, a science-fiction novel by John Buchan, which was published in 1932, is a story about five people who are chosen by a scientist to take part in an experiment that will let them glimpse a year into the future. Two end up seeing their own obituaries. It is the “best investment book ever written”, according to Hugh Hendry, a Scottish hedge-fund investor, because it encourages readers to envision the future while thinking deeply about what exactly causes certain events. As the recent seemingly perplexing movements in gold suggest, unanchored future-gazing is a dangerous habit.■Read more from Buttonwood, our columnist on financial markets:Can anything pop the everything bubble? (Jul 4th)Americans love American stocks. They should look overseas (Jun 26th)Why investors can’t agree on the financial outlook (Jun 22nd)Also: How the Buttonwood column got its name More

Hu xijin is best known for his calls to prepare for war with America. But recently the 63-year-old nationalist media personality has been exhorting his countrymen to invest in Chinese stocks. On July 7th he told 25m followers on Weibo, a social-media site, that he had opened a trading account with 100,000 yuan ($13,900). Stop buying homes, he pleaded, and start piling into the stockmarket.Chinese social media is full of positive takes on grim market news. Commentary such as this is becoming the main message netizens receive about the market, regardless of how it performs. As China’s economic recovery falters, authorities are cracking down on divergent or negative views. For some analysts at Western banks, who are tasked with keeping global clients informed, the backlash is proving painful.Goldman Sachs, an American bank, is the latest to find itself in hot water. On July 4th an analyst at the firm downgraded his outlook for several Chinese financial institutions, advising clients to sell the shares of banks such as Industrial and Commercial Bank of China, owing to concerns about bad debts linked to local governments. This pushed down some Chinese bank stocks by several percent.The response from the state was rapid. On July 7th Securities Times, an official newspaper, rebuked Goldman, saying that its downgrade was based on misinterpretations. Then on July 10th Banxia Investment Management, a large hedge fund, insisted that the bank’s claims would be proven wrong. The same day China Merchants Bank, one of the lenders targeted in the downgrade, accused Goldman of misleading investors, according to a statement seen by Bloomberg, a news agency.There is a reason why Goldman’s analysis has touched a nerve. The Shanghai Composite, a benchmark index, is down by more than 5% since this year’s peak in early May. The index is hovering around 3,200 points, where—except for a few boom-and-bust cycles—it has languished for more than a decade. An uptick in economic activity at the start of the year, as the country left behind its disastrous zero-covid policy, revived hopes of a surge. Now most economic indicators point to a slowdown.Inflation data released on July 10th showed that consumer prices were flat year-on-year in June, indicating weakening demand. Goods-price disinflation is also intensifying as manufacturers sit on more capacity, according to hsbc, a bank. Growth in the seven-day moving average of home sales was down by 33% on July 9th, against a year earlier, according to Nomura, another bank. Discussing these trends on social media is becoming increasingly dangerous. Three bloggers, including Wu Xiaobo, one of China’s most prominent financial commentators, were blocked from Weibo in late June, after alluding to negative market moves. The social-media company accused Mr Wu of spreading false information related to the securities industry and undermining government policy.More established firms are also feeling the heat. A financial-information provider was recently forced to stop granting overseas clients access to some data, including detailed property-sector indicators. Consulting companies have been targeted for researching sensitive topics. Chinese stock watchdogs have recently begun advocating for a revaluation of clunky state-owned enterprises, insisting that their value to society as a whole, not just annual returns, ought to be considered.For tips on investing, Chinese netizens may have to turn to more upbeat commentators, such as Li Daxiao, an indefatigable perma-bull fund manager. Mr Li’s views have at times been so positive that authorities have told him to pipe down during market routs, lest unsuspecting retail investors take his advice and lose their savings. After a few recent rough days of trading, Mr Li posted a video on July 7th to comfort his followers. In it he concludes that “only by making it through the insipid can we receive future glory”. Who could doubt such fine rhetoric? ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Industry has an allure all of its own. More

In 2014 tom price, a commodities strategist, visited a “funny little building” in China’s south-west. It was a warehouse where Fanya, a local trading firm, stored metals including gallium, germanium and indium. The company’s “stockpiles” simply sat in boxes on shelves. Yet for some of the minerals, these meagre supplies represented the majority of global stocks. A year later Fanya was closed by China’s government, which kept the stash—as well as the reserves and plants to produce more. Today Western countries wish they, too, could produce some more. On July 4th China announced that it would restrict exports of gallium and germanium, of which it supplied 98% and 60% of global output, respectively, in 2022. Produced in tiny quantities, the metals have little commercial value. They are nevertheless crucial for some military equipment, including lasers, radars and spy satellites. The decision highlights that “critical” minerals are not limited to those which underpin economic growth, such as nickel or lithium. A dozen obscure cousins are also vital for a more basic need: maintaining armies. The eclectic family of war minerals spans generations. Antimony, known in biblical times as a medicine and cosmetic, is a flame retardant used in cable sheathing and ammunition. Vanadium, recognised for its resistance to fatigue since the 1900s, is blended with aluminium in airframes. Indium, a soft, malleable metal, has been used to coat bearings in aircraft engines since the second world war. The family grew rapidly in the cold war. Long before cobalt emerged as a battery material, nuclear tests in the 1950s showed that it was resistant to high temperatures. The blue metal was soon added to the alloys that make armour-penetrating munitions. Titanium—as strong as steel but 45% lighter—also emerged as an ideal weapons material. So did tungsten, which has the highest melting point of any metal and is vital for warheads. Tiny amounts of beryllium, blended with copper, produce a brilliant conductor of electricity and heat that resists deformation over time. The superpowers of other minerals became known decades later, as military technology made further leaps. Gallium goes into the chipsets of communication systems, fibre-optic networks and avionic sensors. Germanium, which is transparent to infrared radiation, is used in night-vision goggles. Rare earths go into high-performance magnets. Very small additions of niobium—as little as 200 grams a tonne—make steel much tougher. The metal is a frequent flyer in modern jet engines. Beyond their varied properties, this group of mighty minerals share certain family traits. The first is that they are rarely, if ever, found in pure form naturally. Rather, they are often a by-product of the refining of other metals. Gallium and germanium compounds, for example, are found in trace amounts in zinc ores. Vanadium occurs in more than 60 different minerals. Producing them is therefore costly, technical, energy-intensive and polluting. And because the global market is small, countries that invested in production early can keep costs low, giving them an impregnable advantage. This explains why the production of war minerals is extremely concentrated (see chart 1). For each of our 13 war materials, the top three exporters account for more than 60% of global supply. China is the biggest producer, by far, for eight of these minerals; Congo, a troubled mining country, tops the ranking for another two; Brazil, a more reliable trading partner, produces nine-tenths of the world’s niobium, though most of it is sent to China. Many minerals are impossible to replace in the near term, especially for cutting-edge military uses. When substitution is possible, performance usually suffers. The combination of concentrated production, complex refining and critical uses means trading happens under the radar. The volumes are too small, and transacting parties too few, for them to be sold on an exchange. Because there are no spot transactions, prices are not reported. Would-be buyers have to rely on estimates. These vary widely. Vanadium is relatively cheap: around $25 per kilogram. Hafnium might cost you $1,200 for the same amount. All this makes building new supply chains much more difficult. America is investing in a purification facility for rare-earth metals in Texas, which is scheduled to come online in 2025. It is nudging Australia and Canada, the only two Western countries with decent reserves, to produce and export more rare metals. It is also doing its best to forge ties with emerging markets in the Indo-Pacific, where there are deposits waiting to be tapped.Even so, America’s army will remain vulnerable to a supply squeeze until at least 2030, reckons Scott Young of Eurasia Group, a consultancy. Its cold-war stockpiles, once sizeable, were liquidated after the fall of the Berlin Wall (see chart 2). Its strategic stash now mostly comprises energy commodities such as oil and gas. Weaning themselves off China might take decades longer for Europe, Japan and South Korea, which are devoid of deposits and lack America’s diplomatic clout. That does not mean their armies will run short of high-tech metals, but they will probably have to buy them from America—at a price already buoyed by their ally’s scramble to rebuild stockpiles. Last year’s gas drama, prompted by Russia’s invasion of Ukraine, amplified Europe’s dependence on American fuel. The metals squeeze threatens to make Uncle Sam a still bigger magnet for panicked procurement officials. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Public, the U.S. brokerage startup, is rolling out its platform in the U.K. on Thursday.
The company will offer British users the ability to trade 5,000 U.S.-listed securities, including stocks and ETFs.
The move will see Public compete with a flurry of well-established digital brokerage platforms, as well as upstarts like Revolut and Freetrade.

The Public.com app displayed on a smartphone.
Gabby Jones | Bloomberg | Getty Images

American stock brokerage startup Public launched its services in the U.K. Thursday, marking its first international expansion its launch in 2017.
The app, backed by celebrities including Will Smith and skateboarding legend Tony Hawk, will offer U.K. users commission-free trading in over 5,000 U.S.-listed stocks during the country’s regular trading hours.

Public hopes to broaden its U.K. offering over time to include other asset classes already available in the U.S., such as ETFs, U.S. government bonds, and cryptoassets. The company also plans to launch an “investment plans” tool in the future that lets users come up with customized recurring investments.
Public’s U.K. debut will see it compete with a flurry of well-established digital brokerage firms like AJ Bell and Hargreaves Lansdown, which make money from commission charges and management fees, as well as upstarts such as Revolut, Freetrade and eToro, where revenue comes mainly from subscriptions and other fees.
It is a heavily congested market — but Leif Abraham, Public’s co-CEO, touted the company’s lower foreign exchange fees as one element separating it from the pack in the U.K. 
“Most of our competitors in the U.K. will charge currency conversion fees on every single trade,” Abraham told CNBC in an interview. “We only do it with the money deposited, and our fees are going to be dramatically lower than most of our competitors.”
Public will charge 30 basis points, or 0.3%, on each deposit to convert British pounds into U.S. dollars.

The firm has European roots, having been founded in September 2019 by Jannick Malling and Abraham, from Denmark and Germany, respectively, who now serve as co-CEOs.
The platform, which lets people build portfolios and invest in stocks and cryptocurrency, hit more than 1 million users in 2021.
It benefited significantly from the GameStop saga of early 2021, which saw the share price of the U.S. game retailer and other heavily-shorted companies skyrocket on the back of buzz from an online community of investors.
The period shone a light on the controversial “Payment for Order Flow” (PFOF) practice, where brokerages are paid by market makers like Citadel Securities to route customer orders to the firm.
In 2021, Public removed PFOF from its platform, concerned it was driving customers to unhealthy day trading habits. It also added “safety labels” to certain stocks to inform users when certain companies are facing heightened bouts of volatility or the risk of bankruptcy.
PFOF is already banned in the U.K., while the European Union is planning to follow suit with its own prohibition of the practice.
Public has gone down the route of partnering with a firm that is already regulated to provide its services in the U.K., rather than apply for its own license. “A ton of fintechs have gone through this route,” Dann Bibas, the company’s head of international, told CNBC.
Public will operate in the U.K. as an appointed representative of Khepri Advisers Limited, which is authorized and regulated by the Financial Conduct Authority.

Bibas said that, for now, the U.K. is the only country Public is focusing on for its international expansion. In the future, it hopes to take learnings from its U.K. launch to open in other European markets. Public has offices in New York, Copenhagen, London, and Amsterdam.

Tough market conditions

Online brokerage platforms have had a tough time lately. The rising cost of living has made it tougher for consumers to part with the cash they were flush with during the days of Covid. 
Freetrade, the U.K. brokerage startup, slashed its valuation by a whopping 65% last month to £225m in a crowdfunding round, citing a “different market environment.”
Abraham said Public didn’t face the same problems facing many retail brokerage apps, which have been left facing a funding crunch due to a rise in interest rates.
“We have a very healthy cash balance,” Abraham said. “Hence why we can do things like expanding into the U.K., the U.S., and so on.”
Public, he said, saw no reason to raise cash at this stage. It has already raised $300 million from investors including Accel, Greycroft and Tiger Global. The company was last valued at $1.2 billion, giving it coveted “unicorn” status.
Abraham said that higher interest rates have actually benefited Public to some extent, as it is earning yields on the cash customers deposit and seeing increased interest in other assets such as U.S. Treasurys.

Can Public succeed where others have failed?

Public is hoping to avoid the fate of its U.S. peer Robinhood, which abandoned its U.K. operation in 2020 to prioritize its home market. Abraham said he’s convinced this won’t happen in Public’s case.
“We don’t have to reinvent our business model in order to enter a new market,” he told CNBC.
“It’s not like – to take the other extreme – like the last-mile delivery company, where you have to now have a massive footprint,” Abraham added. “We can actually expand in other markets with a fairly lean team that’s responsible for that.”
Robinhood does have plans to reenter the U.K., however – it is set to launch in the country at some point in the near future following its acquisition of cryptocurrency trading app Ziglu last year. More