With the stock market at nosebleed levels, analysts are sounding the alarm on paper assets.
An article on MarketWatch.com today detailed the numerous red flags they see:
- A stock market moving too much, too fast
- Excessive bullishness by the financial media
- Temporary pullback in oil, gold, and emerging markets
- Interest rate hike around the corner
- Inflation around the corner
Market forecaster Tom DeMark is predicting as much as an 11% decline ahead for the S&P 500. Veteran trader Mark Cook says: “We got an old historical technical divergence that has been almost foolproof throughout decades of stock market history… this top that we are putting in could be a top that won’t be eclipsed for years, if not decades.”
Good time to consider your diversification strategy and hold on.
INTEREST RATES AND GOLD
U.S. Federal Reserve Chair Janet Yellen announced last week that an interest rate hike is likely right around the corner.
Here’s a gold stat that may surprise you!
Consider the last four interest rate hikes by the U.S. Federal Reserve. How many of those resulted in higher gold prices right after the increase?
According to HSBC’s Global Research team: gold prices increased after all of the last four hikes. There are several reasons why this is so.
First, confidence in the Federal Reserve’s ability to improve economic conditions positively with experiments like quantitative easing is truly at an all time low. President-Elect Trump has hammered the Fed in speeches over its inept handling of the economy. Issues like our ballooning national debt are now so serious that they are beginning to outweigh any benefit from higher rates long term.
Second, investors driven by conventional wisdom tend to bid down gold prices in anticipation of tightening monetary policy. These selling pressures are sustained until the Fed announces an actual rate hike, releasing the anticipatory pressure on gold prices overnight.
This could explain the current holding pattern for gold and give a clue as to what could be ahead in December for savvy gold investors.
TIME IS ON GOLD INVESTORS’ SIDE
Sprott U.S. Holdings CEO Rick Rule believes time is on gold’s side. Rule reminds investors that the arithmetic supports gold irrespective of the current media narrative and the recent U.S. presidential election is not a long term concern for gold. Instead, $150 trillion in global debt and negative interest rates are what matters.
U.S. Global Investors CEO Frank Holmes is also bullish on gold because of massive global debt, plus he believes that recession in the U.S. is inevitable. He supports President-elect Trump’s focus on deregulation, which he thinks could reduce the chances of a painful economic backslide.
Editor/investor David Morgan thinks the best is yet to come for precious metals. According to Morgan, historical data indicates that most of gold’s price rallies typically occur towards the tail end of a bull market. Morgan believes we are going to set a record soon in the paper prices of precious metals as the current overheated market begins to turn.
Corvus Gold CEO Jeffrey Pontius expects gold prices to move back to higher levels, especially when inflation picks up. According to Pontius, the recent election results will drive higher inflation and could be extremely positive for gold. CPM Group’s Jeff Christian also thinks gold prices will move higher, albeit at a moderate pace.
Chris Gaffney, president of World Markets at Everbank, thinks the fundamental reasons for owning gold are intact. Gaffney expects gold to end 2016 near $1,350 per ounce (11% higher than yesterday’s low for gold), and he recommends gold investors stay patient and committed to a long-term investment horizon.
Goldman Sachs recently warned investors to stay away from stocks, sell government bonds and purchase gold. Goldman’s chief global equity strategist Peter Oppenheimerfavors gold as a portfolio hedging strategy.
CAN THE STRONG DOLLAR LAST?
The dollar has been on a wild ride since the election.
A strong dollar might seem like a good idea in principle, the reality is not so simple for our country. A stronger dollar can be destabilizing for markets, for foreign assets and for emerging-market nations that pay back their debt in dollars. The speed of the dollar’s appreciation has hurt demand for U.S. products overseas, where they become more expensive. This reduces the value of international sales when translated back into dollars.
An over-heated U.S. stock market is one warning sign expectations might be a bit too high. “Sometimes we have to sit back and take a breath and say ‘we’ve gone too far too fast,”‘ says Art Hogan, chief market strategist for Wunderlich Securities of Boston. “As much as we love to believe in all the pro-business things that the new administration and the Republican Congress is going to move forward with, that’s still next year’s business. You have to look at a market that in the short term is getting stretched.”
There is another factor that could ultimately trigger a collapse of the U.S. dollar: China’s recent success in achieving reserve currency status for the yuan. This happened just this past summer, when China joined the International Monetary Fund’s basket of reserve currencies (the first time a new currency has been added since the euro was introduced in 1999!). As a powerful new competitor, the yuan could soon take the dollar’s place as the reserve currency of choice around the world. A move by central banks and investors into the yuan could spell a serious downdraft for the dollar.
The dollar may be established, but it has only the fraction of the history and staying power of gold and silver. Paper currencies come and go, but gold and silver are here to stay.
MAKE UNCERTAINTY WORK FOR YOUR PORTFOLIO
Dollar collapse or not, diversification just makes sense for any investor who is nearing retirement. The election of Donald Trump, unprecedented levels of global debt and the emergence of reflation in the U.S. should provide meaningful support for gold prices over time. If history is any guide, investors holding gold in their portfolios should experience less volatility over time.