The investment headlines over the last week were dominated by China and gold, with a sprinkling of bleak warnings about Crash risk from central bankers. I’ll touch on these and finish by dealing with a request to look at profit-taking – what it means, and how you might be applying this approach today, with a number of markets hitting new highs.
Starting with those nervous central bankers, they are not concerned about one risk but multiple, and here’s just three:
· Stock market crash. The focus is on the AI bubble. The IMF likens it to the dot-com bubble, which burst over 3 years with losses around 80%.
· Loss of confidence in central banks. Pressure from the likes of Trump to cut interest rates can backfire, especially if people start doubting central bank independence and their willingness to tackle inflation. This could develop into a nasty wage/price spiral. See The Economist cover today, “The Coming Debt Emergency”.
· Collapse of shadow bank system. These are very real concerns about parallels with 2008 when the world financial infrastructure was on the brink, and a couple of bankruptcies have rattled markets in recent days. Here is some background…
Doubtless you will remember the scary and seemingly overnight collapse in the world’s financial infrastructure in 2008, when the Bank Of England came within hours of shutting the countries cash machines. For a recap, see the marvellous film The Big Short which highlights the fragility, corruption and greed at the centre of the 2008 debacle, in common with all end-of-cycle bubbles.
The result was much tighter bank regulation, to stop banks doing stupid things. But the pursuit of this objective over the last 200-300 years is like playing whack-a-mole – no sooner do you knock the mole on the head than he pops up elsewhere. And so it seems yet again. As traditional lending became difficult and more expensive for mainstream banks, the demand for loans, substantial and risky loans, migrated outside the regulated banking sphere, for example to hedge funds and private equity firms.
In this post-2008 environment high risk lending was literally pushed into the shadows. The problem was, and is, that the regulated banks helped fund these shadow banks, and this inter-connection creates the possibility of contagion to the wider banking system and the economy at large, just like 2008.
The 2008 financial crisis featured a banking crisis (dodgy lending), property bubble, low quality bonds, lack of liquidity, lack of visibility, inadequate regulation, and overvalued equities. It is a similar mix in 2025 (notably without a property bubble), but definitely worse in key respects, particularly the scale of the US stock market bubble, the exposure of global investors to that bubble, unsustainable government debt and deficits, flaky leadership, geopolitical risks, and a very unpredictable transition, from a 40 year cycle ending with bonkers complacency to a new cycle marked out by higher inflation, more volatility and a mountain of uncertainty across a range of issues…
Which leads us to gold, midst a mania of its own. It is difficult to value gold, so you can’t easily pinpoint a valuation bubble. But it is not difficult to observe an investor mania, which is different e.g. in 1987 there was an investor mania but no valuation bubble, which was key to the quick recovery from the Black Monday crash.
“Gold has become so big… that you cannot ignore it.. it becomes impossible not to own it”, said one fund manager in the FT. Another said that for the first time in a long time there have been significant enquiries from clients exploring taking long term positions in gold. Hmmm. Long term? And only considering buying now after it has gone up more than 60% year-to-date? It’s very FOMO-ish.
Yet as I often say, there is no rational end to a mania, by its very nature. I will return to the issue of profit-taking shortly, but first China.
In the midst of all that serious stuff, we are being entertained in the UK by tales of Chinese reds-under-the-bed. Have you stopped and asked yourself what the alleged Chinese spies are hoping to uncover? I have. I am struggling for an answer. The two alleged spies apparently leaked “secrets” on the Tory leadership race. Let’s hope the Chinese shared them with Conservative Central Office.
Surely there must be more to it? So I met up with agent Bao O’Bun somewhere near a Greggs in central London, and these were his exclusive insights, which he has asked me not to share, on pain of choking on a duck spring roll:
“The objective of our extensive UK spy network was to uncover the hidden sources of Britain’s enduring influence, despite its crumbling infrastructure, soggy climate, and obsession with apologising. These are some of our key findings.
· Potholes are not defects but part of a subtle national defence system. Enemy tanks would lose suspension before reaching London. Genius. We will deploy a similar strategy around Beijing ring roads.
· On psychological warfare, the British weather is weaponised melancholy — softening enemies with drizzle until they surrender from dampness and mild despair.
· Queueing discipline operates with the precision of an algorithm. No shouting, no pushing — merely silent, resigned order, and they apologise if you bump into them. We must consider same for Crowd control at Shanghai Metro during rush hour.
· Britain voluntarily changes Prime Ministers as often as they change umbrellas, yet national stability persists. Chaos is part of their system.
For all that, it remains unclear how Britain maintains global soft power while exporting only television dramas, irony, and the occasional royal scandal.”
In the meantime, China and the US had another trade spat ahead of their (probable) meeting at the end of the month. Bar the shouting, mutually assured economic destruction should ensure the trade war is contained.
Moving on, Ben has asked if I could talk about taking profits. Strictly it means if you invested £100, and it is now worth £120, you sell £20 worth and safely bank the profit. In practice there is more to it.
In today’s environment, and in its broadest sense, it isn’t just about literally taking the profit but also risk reduction, “profit-taking” being just one of a number of risk reduction strategies:
· Profit-taking. In the narrowest sense, literally bank the profit and leave your original capital invested. This can work well when financial markets are in a comfortable multi-year uptrend i.e. no bubble valuations, no mania. Having taken the profit, your original capital will be protected by the stop-loss. In short, you are harvesting gains, but only making a small change to your overall risk level i.e. in the above example, the sum “at risk” reduces from £120 to £100.
· Risk Reduction. You’re deliberately cutting your total exposure to that investment, not just taking the profit. You do this because you think the outlook has worsened, which is very relevant today. You’re shrinking the whole position to limit potential losses. In the above example, you might sell £60 and cut your exposure in half, taking all of the profit and securing some of your capital in addition.
· Stop-Loss. Initially your stop-loss is to protect your original capital, the £100. As the profits build you can increase the stop-loss, called a rising or trailing stop-loss. For example, when the value hits £120 your stop-loss would be re-set at £110. If you haven’t taken profits, and your investment value falls to £110, you at least secure a profit of £10 and your original capital.
How you apply any or each of these strategies will depend on the size of your position, the profits to date, sense of increasing market risk, and perhaps some nervousness on the investors part – yes, big profits can also make you nervous!
Gold is a relevant example, and also more challenging because you cannot confidently say at a given point “this is horribly over-valued, get out”, as you can with, say, US equities.
If you have 10% of your portfolio in a gold ETF, let’s assume you got in relatively recently. You are up 25% in four months, a decent return bearing in mind that the average long term return from equities is in the region of 10% over a whole year. A 10% weighting is fairly conventional, and even if gold lost 50% of its value from today, it is not the end of your world. Yet in such a precarious investing environment, when gains can be wiped out overnight, taking that gold profit has attractions. It has contributed a 2.5% gain to your whole portfolio, and locking that in seems sensible. If gold carries on up, you will enjoy the ride with your 10%, and if it falls sharply your original capital value is protected by your stop-loss.
At the other extreme, suppose you bought earlier in 2025, and not only committed 50% of your portfolio to gold, but to a gold mining fund. You are up 100%! Personally I would take profits and reduce my 50% position down to 10% in gold, and switch to a physical gold ETF, which is much less volatile than a gold mining fund. You got lucky with your over-sized allocation, and you have enjoyed outsize percentage gains. This doesn’t happen often (believe me!) so take those huge profits, protect your capital, and dine out on it (literally and metaphorically).
I hope that helps Ben.
Over the last week, most stock markets are down 2-3% partly due to trade war wobbles, and latterly as concerns have grown over the cracks coming into plain sight in the shadow banking system. Gold and silver miners and palladium were up 7 - 10%. In the last two days it is notable that gold miners have underperformed the gold price – as I write gold is up 1% today but gold miners are down 2.5%. Why? There are a lot of profits to be taken in the miners. In addition gold has become the latest home for punters, moving on from crypto, they are now buying geared gold ETFs. That can work well, until it doesn’t. For example, if China announces it has enough gold. Just saying.