The global economy is undoubtedly heading for a slowdown. This may not necessarily be a reason to be concerned about downside risk in the general equity market since the market attempts to discount the future and may have already priced-in a recession. A reason for concern about downside risk in the stock market is if the recession is not widely recognized or if unexpected events play out, which most market participants do not see coming. Perhaps a slowdown in China or a sudden default in Greece would present that type of a scenario.
Although earnings forecasts reflect worry and pessimism over the next couple of months, most analysts are still very optimistic long-term, projecting growth in earnings over the next 12 months. If the analysts see that the market continues to deteriorate beyond their expectation, they will quickly change their market outlook and the stock market will plunge.
In an uncertain environment, certain assets perform better than others. Gold is an asset that has been considered a safe haven during economic upheaval. To a lesser extent, silver is also considered a safe haven and a monetary metal. These two metals are not exempt from a selloff along with the stock market and all other asset classes, but they will most likely be the first to rebound in a recession.
To understand the behavior of these two assets, it may help to look at past performance. The graph shows the performance of gold, silver, GDX (an index of 30 small, mid and large tier gold mining stocks), and the S&P 500 (SPY), during the last major correction in 2008.
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We can draw some parallels to 2008 to see what we might be facing in the months ahead. In 2008, gold and silver were first to correct, but the correction was quick and they quickly retraced their old highs. Gold made a 25% correction and reached a bottom in less than four months. Furthermore, it only took seven months for gold to make new highs after the correction.
Silver is both an industrial metal and a monetary metal and therefore more vulnerable to an economic slowdown. In 2008, silver lost half its value and found a bottom after less than 5 months. It then took 16 months for silver to make a new high and it proceeded on a very aggressive upward move afterwards.
Gold stocks are very volatile and they had a sharp selloff in 2008 losing 63% of their value, but they reached a bottom in only three and a half months. They were back making new highs 16 months after the correction.
The S&P 500 index, which represents the 500 largest publicly traded companies in the United States, lost 50% of its value. This index was last to bottom-out and it has still not been able to retrace its old high, 3 years after the 2008 stock market crash.
Gold isn’t considered a safe haven asset without a good reason. It was the asset that was the least affected by the 2008 selloff and the first to rebound. Gold and silver have both stood the test of time as a monetary metal and a safe haven investment and will in all likelihood continue to outperform the broader equity market.
iShares Silver Trust (SLV) is one of the most popular silver ETFs. The trust holds physical silver in a custodian bank, and is designed to reflect the price of silver on the market less expenses and liabilities. Although you are subject to the risk of relying on a custodian to hold your silver, this ETF is a very cost efficient instrument and an excellent trading vehicle.
SPDR Gold Trust (GLD) is one of the most popular gold ETFs. The trust holds physical gold in a custodian bank, and is designed to reflect the price of gold on the market less expenses and liabilities. Although you are subject to the risk of relying on a custodian to actually hold your gold, this ETF is a very cost efficient instrument and an excellent trading vehicle.
Market Vectors ETF Trust (GDX) attempts to replicate NYSE Arca Gold Miners Index. GDX represent a mix of 30 small, mid tier and large capitalization gold mining companies. GDX’s holdings include some of the biggest and best producers in the industry and they are far better positioned to withstand a downturn than many other gold mining companies.