Level 1 — Absolute Beginner

Gold and oil are two things that people buy and sell. On Monday their prices go in different directions.

The price of gold falls. It goes down by more than three percent. One ounce of gold now costs about 4,181 dollars.

The price of oil goes up. It rises by almost three percent. One barrel of oil now costs about 95 dollars. There is trouble near Iran, so people worry about oil.

Shares also fall a little. Many families in America feel worried about money. They think prices in shops will go up again.

gold

A yellow metal that is worth a lot of money.

oil

A thick black liquid from under the ground, used to make fuel.

price

The amount of money you pay for something.

barrel

A large container; oil is measured and sold in barrels.

ounce

A small unit of weight; gold is sold by the ounce.

fall

To go down.

rise

To go up.

share

A small part of a company that people can buy.

Level 2 — Elementary

Investors normally buy gold and oil for different reasons, but both are often called safe havens. On Monday the two moved sharply apart. Gold fell 3.24 percent to 4,181 dollars an ounce, while November crude oil rose 2.89 percent to 95.08 dollars a barrel.

The rise in oil followed new tension around the Strait of Hormuz, the narrow sea passage through which a large share of the world's oil is shipped. When traders fear that supply could be interrupted, they pay more for every barrel.

Stock markets opened lower. Futures on the S and P 500 were down 0.47 percent, the Dow was down 0.36 percent and the Nasdaq fell 0.98 percent. Borrowing costs stayed high, with the ten year Treasury yield at 5.18 percent and the thirty year mortgage rate above 7 percent.

American households are not feeling confident. A closely watched measure of consumer sentiment sits at 48.1, close to its lowest level ever recorded, and families expect prices to rise by 4.6 percent over the coming year. Investors are now waiting for new job figures, growth data and results from the chipmaker Micron.

investor

A person or company that puts money into shares, bonds or other assets.

safe haven

An investment people buy when they are worried, because it is expected to hold its value.

crude oil

Oil in its natural state, before it is refined into fuel.

trader

A person who buys and sells shares, currencies or commodities.

supply

The amount of something that is available to buy.

yield

The return an investor earns on a bond, shown as a percentage.

mortgage

A loan used to buy a house.

sentiment

The general feeling or mood of a group of people.

Level 3 — Intermediate

It is unusual to see gold and crude oil pull apart as sharply as they did on Monday. Gold, which had spent much of the year climbing, shed 3.24 percent to 4,181.40 dollars an ounce, while the November crude contract added 2.89 percent to 95.08 dollars a barrel. The two are often lumped together as crisis assets, but they are priced by very different mechanisms, and this session exposed the difference.

Oil responded to a specific physical risk. Renewed friction around the Strait of Hormuz, the narrow channel through which roughly a fifth of seaborne crude passes, raised the probability that supply would be interrupted, and traders priced that probability directly into the barrel. Gold, by contrast, competes with interest bearing assets, and with the ten year Treasury yield sitting at 5.18 percent the opportunity cost of holding a metal that pays no income becomes harder to justify.

Equity futures reflected the same tension between growth and borrowing costs. The S and P 500 was indicated 0.47 percent lower at 7,767.25, the Dow 0.36 percent lower and the Nasdaq 0.98 percent weaker at 30,586.75, with the rate sensitive Russell 2000 down 0.61 percent. Individual names diverged sharply: Bloom Energy climbed 8.27 percent and Credo Technology 7.65 percent, while Zscaler lost 10.06 percent and Twilio fell 7.96 percent after a downgrade from HSBC.

The macroeconomic backdrop remains uncomfortable. Consumer sentiment stands at 48.1, close to the lowest reading on record, households expect inflation of 4.6 percent over the next year, and the thirty year mortgage rate is above 7 percent. A crowded data calendar, including the Dallas Fed manufacturing index, job openings and revised growth figures, along with earnings from Micron and Jabil, will determine whether that pessimism is justified.

crisis asset

An investment expected to perform well when markets are under stress.

seaborne

Transported by ship across the sea.

opportunity cost

The benefit given up by choosing one option instead of another.

equity

Ownership in a company, usually in the form of shares.

downgrade

A lowering of an analyst's rating or recommendation on a share.

backdrop

The general conditions or situation in which events take place.

pessimism

The belief that the future will bring bad outcomes.

contract

An agreement to buy or sell an asset at a set price on a future date.

Level 4 — Advanced

Monday's session offered a useful reminder that the shorthand grouping of gold and crude oil as crisis assets obscures more than it explains. Gold surrendered 3.24 percent to 4,181.40 dollars an ounce even as the November crude contract advanced 2.89 percent to 95.08 dollars a barrel. Nothing about that divergence is paradoxical once the two are priced on their own terms: one is a claim on future physical scarcity, the other a zero coupon store of value competing against a five percent risk free rate.

The bid in crude was event driven and geographically specific. Renewed friction around the Strait of Hormuz, the chokepoint through which roughly a fifth of seaborne crude and effectively all of Qatar's liquefied natural gas transits, raised the market implied probability of a genuine supply interruption. Traders do not need to believe a closure is likely; they need only revise the tail risk upward, and the forward curve does the rest. Gold faced the opposite arithmetic, with the ten year Treasury yield anchored at 5.18 percent and the thirty year mortgage rate above 7 percent, a configuration that steadily erodes the case for an asset generating no cash flow.

Equity futures pointed lower across the complex, the S and P 500 indicated down 0.47 percent at 7,767.25, the Nasdaq weakest at 0.98 percent lower and the small capitalisation Russell 2000 off 0.61 percent, a hierarchy that tracks duration sensitivity almost exactly. Dispersion beneath the index was wide. Bloom Energy gained 8.27 percent and Credo Technology 7.65 percent on the power and connectivity theme, while Zscaler shed 10.06 percent, Twilio 7.96 percent following an HSBC downgrade, and Okta 5.54 percent, a pattern consistent with capital rotating out of high multiple software.

The macroeconomic setting is what makes the configuration precarious. A consumer sentiment reading of 48.1 sits within touching distance of the series low, and one year household inflation expectations of 4.6 percent sit uncomfortably above anything a central bank would describe as anchored. Long term borrowing costs that keep climbing while confidence deteriorates is the combination policymakers least want to see. The week's calendar, the Dallas Fed manufacturing survey, job openings, revised growth figures and results from Micron and Jabil, will decide whether the market is pricing a genuine slowdown or merely an expensive one.

divergence

A situation in which two things move apart or develop in different directions.

zero coupon

Describing an asset that pays no regular interest or income.

chokepoint

A narrow passage that traffic must pass through and which is easily blocked.

tail risk

The risk of a rare event with a very large impact.

forward curve

The set of prices at which an asset can be bought for delivery on future dates.

dispersion