Recently we’ve seen the markets gyrate significantly and now it’s time for you to get some gold in your portfolio, if you haven’t already.
Gold was trending lower over the last month, but that will turn around as the Federal Reserve starts pushing to raise rates and stock and bond market volatility amp up.
These two issues will be the key developments in this upcoming quarter of the year.
First, the Fed wants to raise rates based on some imaginary numbers it is looking at. A new Census Bureau report said that the average wage was up significantly in 2015 and fewer people were living in poverty.
The only problem is, workers’ annual wages are still below what they were before the Great Recession and there are more people in poverty than during the same period. Basically, income was up but it doesn’t mean much. Yet the Fed is buying into this nonsense. And that will lead to significant market volatility.
Remember, the summer is an exceptionally mellow time for the market in general. Add to that a central bank dominated market which has severely lowered volatility. The traders have been playing the game the central banks have dealt and that was a low-volatility game.
Now, the Fed wants to raise rates while the rest of the world is still trying to find more money to pump into their markets.
Here is the concerned echoed by one of my favorite market commentators, Landon Whaley at The Whaley Report:
Specifically, commodity traders and guys who run “volatility targeting” or “risk parity” strategies have used this environment to increase their leverage to record levels. These guys are holding extremely long positions in the Dow and the Nasdaq, while they are holding an all-time record short position in volatility.
So these professional money managers are betting everything they have, and then some, that this low volatility environment is going to continue…
We are entering a six-week stretch that is all but guaranteed to have more volatility than we’ve seen recently.
From a seasonal perspective, volatility normally increases by 30-40 percent in September and October, each year. Intuitively, this makes sense given … the Summer doldrums of trading.
This year, we get the added volatility bonus of a couple of critical recent central bank meetings… and we still have the Fed and BOJ. What could possibly go wrong?
I’ll give you the answer to his question: a lot.
If the traders are wrong and the market sells off and volatility takes off, the markets are going to go nuts. If they’re right, volatility will still increase but traders will be buying into a rising market.
Either way, gold is the smart choice.
Here’s Whaley on the issue:
Gold checks several boxes as we enter the Fed’s decision. Fundamentally, gold wins in either Fed scenario.
If the Fed raises rates in September, it will increase the divergence between the Fed’s policy and the rest of the world, and it will accelerate the U.S. entering a recession. Both of these outcomes are pro-gold.
If the Fed is smart and doesn’t raise rates, it’ll send the market a dovish signal and that, too, is bullish for gold. The other box gold checks is its relationship to volatility.
Gold has been positively correlated to volatility over multiple durations for the last three years. If volatility increases, there is a good chance that gold’s price goes with it. If not, you get a replay of last Friday when gold lost just a fraction of what most of the other financial markets loss. Either way, not a bad outcome.
Don’t be a victim here. Clear the decks of all but the stocks you think will be the most solid, sit on cash and put some of it to work in gold.
You can invest in gold to try and profit from the gains and protect your portfolio from the downside, or you can of course buy physical gold for wealth protection. I am not the biggest fan of “financialized” gold, or gold you own on paper but don’t take delivery of. We’ve just seen how banks can refuse to deliver physical gold to you, as Deutsche Bank did to some of its customers.
The bank didn’t even answer why it would not deliver the gold, so make sure you have the physical gold you buy delivered into your possession. For privacy, remember that bars of gold have to be assessed or receive a certificate of authenticity, and they are hard to barter with, so stick with non-numismatic coins as a store of value.
— GS Early