Investors around the world are feeling the pain of sharp stock market selloffs that began last week and continued into Tuesday, while gold prices remain in positive territory for the year. Tuesday saw another heart-stopping 500 point drop for the Dow at open.
After Monday’s record-breaking drop, the Dow scrubbed its 2018 gains and ended down 1.5% for the year. The S&P 500 also erased its new year gains and ended the Monday down 0.9 percent for 2018.
Goldman Sachs believes “stock market correction signals are flashing” and is advising clients to prepare for a severe correction. Goldman chief global equity strategist Peter Oppenheimer says whatever the trigger, a correction of some kind seems a high probability.
No wonder the CBOE Volatility Index (the best gauge of fear in the market) has just hit a high not seen in years.
This is a time when you can clearly see what role gold can play in your retirement portfolio when the going gets rough. Gold rose on Monday and is actually up over 2% for the year so far.
If you are a regular reader of this column, you will know the reasons why.
If not, you need to get informed right away.
We frequently hear from our clients that gold is not only about diversification, but also about peace of mind.
Market declines like we saw on Monday can be really scary if your portfolio isn’t properly diversified. On Monday, both the Dow Jones and the S&P 500 indexes fell like stones, with the Dow dipping into correction territory and ending the day down 4.6%. The S&P’s 4.1% drop was the worst seen in almost 7 years.
What is going on? USA Today cited “fears of spiking inflation and borrowing costs.” It was a “liquidity-driven selloff,” said an Evercore ISI analyst. “Panic settling into the marketplace,” said CIBC World Markets.
Adding insult to injury, traders were taken by surprise Monday afternoon when a computer-trading “flash crash” suddenly drove the Dow down to almost 1600 points below the previous day’s close. Market safeguards jumped in, and the market recovered somewhat, but the extreme whipsaw effect was a chilling reminder of what could be just around the corner.
Are our stock market safeguards really up to the challenge of an even more serious market downturn?
Remember the Flash Crash of 2010, when computer-generated trading programs run amok sucker punched the stock market, taking it down 9.2%? According to Bloomberg, that flash crash was caused by the “withdrawal of stock orders rapidly exacerbating price declines.” Market watchdogs tightened up market controls in the aftermath, but it wasn’t enough to stop a shocking drop in a matter of minutes on Monday. The Dow was down 6.3% at one point that day!
That is a critical blow for many small everyday investors to lose in a matter of minutes. Don’t let it happen to you and your life’s legacy.
RESEARCH STUDY: WHEN INFLATION HAS RISEN, GOLD HAS TOO
Economic reports have recently shown there is solid wage growth and falling unemployment here in the U.S., which is great news for workers but also portends higher prices soon for everyday items like gasoline, groceries and apartment rents. In many major metro areas across the U.S., prices have risen so fast that it is already hard for professionals to afford basic housing.
A recent market study by the World Gold Council has made a clear connection between gold prices and inflation.
The WGC reports that, since 1970, annual gold returns have been around 15% on average in years when inflation was 3% or higher year-over-year.
Retirees on fixed incomes especially suffer when inflation cuts how far each dollar will go. Over 20-30 years, the effect can be devastating to buying power and lifestyle in the declining years.
Thomson Reuters GFMS analysts predict gold prices heading to $1,500 an ounce sometime this year on inflation fears, putting gold at a level unseen since April 2013. According to Thomson Reuters, recent protectionist moves by our government are inflationary and the recently enacted tax cut package will cause many major companies to increase wages.
Frank Holmes warns if the U.S.A. withdraws from NAFTA, prices on consumer goods and services could become destabilized and begin to go up dramatically. Holmes suggests that investors might want to consider adding to their gold exposure, which has a history of performing well in times of rising inflation.
Tocqueville’s Senior Managing Director John Hathaway favors a portfolio allocation to physical gold because of these factors he sees:
1.Deteriorating U.S. fiscal position
3.Precarious structure of financial markets
4.Bullish supply and demand outlook for physical gold
5.Expected further weakening of U.S. dollar
6.Gold’s role as a portfolio diversifier and risk dampener
MORE TROUBLE AHEAD FOR STOCKS?
Last week, Dallas Federal Reserve President Robert Kaplan warned the U.S. economy will show further signs of inflation pressure in 2018 and the Federal Reserve should continue raising interest rates.
After years of depreciating prices, inflation appears to be back and the recent stock market losses are a sobering reminder to investors that markets go down as well as up. Frank Holmes and John Hathaway think that the tax cuts will increase deficits, hurting the dollar, and inflation will erode the purchasing power of your paper-based assets.
Physical gold deserves to be considered for your portfolio because it has historically helped to mitigate risk when inflation rises and market crashes strike.
Some pertinent questions to ask yourself, before it is too late:
1. Are you truly diversified at a time when the stock market could be heading south?
2.Can you survive the loss of your buying power over decades in retirement as inflation surges?
3.Can you sleep well at night when the market starts to gyrate like it did this week?