Ever since the financial crisis the stock market has displayed a strong technical pattern — gradually reaching higher highs. Much of the debacle about Europe’s debt crisis and the U.S. fiscal cliff seem to have fizzled out. Quantitative easing has left us with a bloated stock market that has risen for 10 years, bypassing any ‘normal’ sell-by-date, and a debt level far bigger than before 2008.
We all thought that a correction was over-due, that problems with corporate debt in emerging markets or the massive size of the Chinese shadow banking scheme being uncovered, or emerging market currency crises would trigger a news crash.
But now it looks like what will push us over the cliff is politics! A politically created US trade war mostly with China, and in EU the Italians deliberately creating a un-allowed deficit. Maybe currently even the Saudi’s problems pushing the oil price up comes into factor.
Many investors are victims of something called “recency bias”. This term, in an investment sense, explains the behavior to extrapolate the most recent stock market performance for future performance. In plain English, this means that if the stock market has risen, then investors tend to assume that the market will continue to rise. Oh boy, have they been right! Clearly we know this is not the applicability of the recency term rather the free money been poured into the markets. If stocks on the other hand have declined, then the opposite would apply. We are in for a correction shortly, and if it goes, it might extend long.
But hey corrections are healthy right?
So, does that mean that everything will be fine and dandy after the correction, that we can forget about the behavior that led us into the 2008–2011 mess in the first place. Well that mess has continued, debt has skyrocketed and the tools we have been using in the past are completely depleted. Perhaps the central bankers have found a new magical recipe for a continuous and sustainable growth, but it looks like this is not the case.
The real question is what to do next??
The sustainability of today’s stock market performance is over. After the gold rally that run into 2013 many investors had been selling gold to invest in stocks. Although it was not necessarily a bad idea to have exposure to the stock market, as it worked out perfectly and diversification is good, selling off precious metals to invest in more risky assets currently at all time highs would potentially set us up for serious wealth destruction in the future. This is starting now, making the opposite sounds better.
Much of today’s stock rally has been a direct result of the stimulus efforts of central banks around the world. To support this methodology, in the U.S. they have even explicitly stated that rising stock- and housing markets would create a “wealth effect” that will boost consumption and thus be positive for the economy. This basically is true for the upper level, but not for the bigger crowd.
On top of this came the Trump effect and looser tax policies for corporations has put markets on fire!
Now asset prices have been rising sharply as result of it. The rich became richer. Much of the “growth” was driven by institutions and banks, which have easy access to loans. Individuals on the other hand still have difficulties in gaining access to big capital — but this party won’t last forever. Eventually the dam will burst and when it does inflation rates will soar. Neither bonds nor stocks perform well in such an environment. In that situation you will want to own gold. Obtaining gold is getting easier, with startups like Aurus that allow people to own gold with the gold backed cryptocurrency.
Don’t be a buyer when you need or have to — you want to be a buyer when you still have a choice. That way you won’t have to pay premiums that are sky high and you also ensure that you get as many ounces as possible for your fiat currency.
If you feel like playing the stock market then by all means do and find bargains– but don’t mistake the artificial rally we are seeing with anything close to sustainable growth. You don’t want to get caught when the trend reverses.
So, don’t sell your gold now. Use the current drops in prices to continue adding to your holdings by buying gold bullion when opportunities like this arise.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am a co-Founder of the company "Aurus" mentioned in the article.