Gold: Understanding the “Fear Trade”

understanding the fear trade

U.S. Global Investors chief executive Frank Holmes believes there is a logical response to today’s current troubling investment environment. He points to massive global debt, rising pension deficits and higher interest rates ahead.

For Holmes, the logical response is to acquire gold.

According to Holmes, gold’s role as a time-tested store of value has never been more important because of geopolitical tensions with Iran and North Korea, political uncertainty in Washington, D.C., an overvalued stock market ripe for a correction and unprecedented levels of debt.

Holmes calls this the ‘Fear Trade’ as he believes investors will continue to gravitate to gold in these times of turmoil.

Holmes identifies three factors driving the Fear Trade for gold bullion:

1. Crippling U.S. government debt: U.S. government debt has passed the $20 trillion milestone and U.S. household debt has reached a mind-boggling $12.73 trillion in the first quarter of 2017! The number of delinquencies grew for the second straight quarter of the year and is ominously reminiscent of the housing crash ten years ago.

2. Global debt at all-time high: Total global debt levels reached an astronomical $217 trillion in the first quarter of 2017 – that is 327% of global GDP. This precarious situation is aggravated because global pension levels are rising sharply. Older workers are retiring in greater numbers and there are not enough young workers entering the labor force to pay for their pensions. The World Economic Forum estimates that the size of the retirement savings gap cold grow to as much as $400 trillion by 2050.

3. Radical Fed policy could kill the business cycle: When the Fed raises rates and reduces its balance sheet, recessions follow. As the Fed unwinds its $4.5 trillion balance sheet, investors face serious risks. In the past 100 years, 16 out of 19 Fed rate hikes ended in recession. According to Holmes, business cycles do not end accidentally, but they are killed by the Fed.


Gold rose last week after North Korean officials announced plans for a new test soon of a missile capable of reaching the U.S.’s West Coast. The U.S. administration hinted that some sort of strike against North Korea could be eminent.

RBC Wealth Management managing director George Gero says this saber rattling could help gold as investors seek to diversify against risk. He believes gold should rise long-term due to this extreme uncertainty about what can happen with North Korea going forward.

At the same time, India’s famous gold buying season is upon us. Demand for gold in India remains robust due to fresh buying by jewelers to meet higher festival demand. In addition, healthy demand from Indian manufacturers and coin makers also support silver.

In the physical markets, Chinese buyers returned in full force after the Golden Week holiday. Precious metals like gold and silver have long been favored by both India and China and both are massive markets that provide key support for bullion over time.


Frank Holmes has issued a dire warning: the massive mountains of U.S. and global debt threaten the integrity of all paper-based assets.

In addition, Holmes thinks Fed tightening could result in another 2008 financial crisis. Possible? Perhaps, and certainly enough reason to consider how you might prepare just in case.

This is an ideal time to consider physical gold for your IRA. Have you devoted a portion of your retirement account to safe-haven assets?

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