In a Stock Market Crash – Gold the Only Asset to Turn to
The Dow Jones suffered its biggest one-day drop since August on Tuesday, falling 363 points. The Dow has lost 540 points in two days, the biggest decline since September 2016.
According to analysts quoted by CNN, fear of a tanking bond market is one of the main factors behind the stock market dip.
The bond market has been selling off lately. That’s raising fears that the era of extremely low bond rates — which has been very good to the stock market — could soon be over.”
CNBC had a similar take, calling the selloff “a tantrum over rising interest rates.” Leuthold Group chief investment strategist James Paulsen told CNBC high valuations have made the market vulnerable. Rising interest rates adds pressure because investors now have alternatives in the higher-yielding bond market.
When you get a market that’s facing several challenges, it’s vulnerable, and anything can be the straw that broke the camel’s back.”
Bond yields are inversely correlated with bond prices. As interest rates rise, bond prices fall. Ten-year bond yields hit their highest level since July 2014 last week. Peter Schiff talked about the bond yields in his podcast, saying he thinks they could pretty quickly climb to 4% in the near-future. That doesn’t bode well considering the current market environment.
The last time we had a 4% yield on the 10-year was before the 2008 financial crisis. Basically, that was the yield that broke the camel’s back. Remember, the financial crisis was triggered by rising interest rates on the debt that had been accumulated in the years prior as a result of Alan Greenspan keeping interest rates at 1% for a year-and-a-half and then slowly raising them back up over the course of another year-and-a-half. So, as the Fed was moving interest rates up at a measured pace, by the time they got to the point where rates had gone back up to about 5%, the yield on the 10-year was about 4%. That’s about as high as it was able to go. Then the market all fell apart.”
Investors and analysts don’t seem too concerned about the current stock sell-off, generally categorizing it as a necessary market correction. Remarks to CNBC by a technical analyst at Ari Wald were typical. He called the dip a “run of the mill, brief pullback that’s limited to 3 to 5 percent.” Nevertheless, could the current volatility be a canary in the coal mine?
On Tuesday, the CBOE Volatility Index (VIX), commonly referred to as the “fear gauge,” peaked at 15.42. It climbed nearly five points over a five-day period and hit its highest level since Q4 2016.
So, when you have this kind of stock market volatility, where do you want to hide?
CNBC did an analysis of exchange-traded funds to determine which ones did best when the VIX increased five points within a five-day period. This has occurred 59 times in the last decade. It found that gold and bonds were the best performers.
Gold outperformed in times of rising volatility. Both the iShares Gold Trust and the SPDR Gold Trust rose 0.9% on average during a five-point gain in the VIX in five days.”
Bonds fared even better in the CNBC analysis. But as Peter said after Treasury Secretary Mnuchin talked up a weak dollar as good for America, bonds may not be the place to be right now. Peter said the real impact of a weakening dollar would be felt in the bond market, which is already showing signs of trouble.
Basically, what the Treasury secretary was doing by basically saying we have a weak dollar policy was telling everybody around the world, ‘Do not buy our bonds!’ Well, he’s the guy that’s supposed to be selling those bonds. Did he not get that memo?”
Peter said the fact that the dollar and bond prices are falling together is a very, very bad sign that everybody is ignoring. The bond yields aren’t high enough to offset the losses in the foreign exchange.
So, whether the recent drop in the stock market is the start of air coming out of the big, fat, ugly bubble, or just a prelude of things to come, now is a good time to consider buying gold. – Peter Schiff
Hedge Your Bitcoin Position With Gold
The price of Bitcoin fell below $10,000 this week. It rallied once again and pushed back above that key level, but turmoil continues to plague the world of cryptocurrencies.
We’ve been advising a diversified approach to crypto investing. Recently, Franco-Nevada president and CEO made a similar recommendation.
If you need to hedge your Bitcoin position, buy gold.”
And now might not be a bad time to hedge.
There continues to be news of government regulatory crackdowns on Bitcoin and other cryptos. As CNBC reported, South Korea’s Financial Service Commission confirmed new measures, such as bans on anonymous trading accounts, had been implemented. Meanwhile, the US Securities and Exchange Commission also announced Tuesday that is has obtained a court order to freeze the assets of an initial coin offering claiming to have raised $600 million.
Adding further turmoil to the crypto world, last week, hackers stole some $350 million worth of cryptocurrency from the Coincheck exchange.
Harquail also serves as chairman of the World Gold Council. Last week, the WGC issued a report making the case that cryptocurrencies are no substitute for gold. The organization isn’t necessarily negative on cryptos. Its analysts simply argue that while they have some similarities, gold and cryptocurrencies are very different.
In an interview with Mining Journal, Harquail called Bitcoin a “risk-on” investment. Gold provides a counterbalance.
For investors looking to protect their capital, gold is the ultimate ‘risk-off’ holding. It has low to negative correlations to other investment classes. Gold can improve risk-adjusted returns within a broader portfolio.”
In other words, gold can provide excellent balance to cryptocurrencies. Diversifying a crypto portfolio with precious metals can help mitigate some of the potential downsides and put investors in an overall stronger financial position. – Peter Schiff
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