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Smart Money Turns to Precious Metals Safe Harbor

Smart Money Turns to Precious Metals Safe Harbor

November 02, 2020667 view(s)

Jenga is a game of luck and skill, whereby a tower of wood bricks grows taller as it grows more unstable. As blocks are pulled out of the foundation and stacked on top, the entire structure becomes one step closer to crashing down. The goal of the game is to not be the last person playing, before the tower falls. Similarly, the foundations of our financial system have become more unstable, even as market valuations have climbed higher. Rarely has the imbalance been greater between economic health, and stock market levels. Thankfully, precious metals continue to provide a secure place to harbor our savings from the tempestuous financial winds howling today.

Indications of a Possible Crash

There are indicators that are causing concern about a stock market “crash” within the next 6 months, that haven’t been seen since significant previous drops. Looking back to when George Washington was President, the stock market opened in 1793. Since that time, there have been 2 other times in history when the market was as far over the trend line as it is currently (see chart below). The first time this occurred was before the Bear Market of 1973-74, and it happened again just before the dot com bubble burst about 20 years ago. Today the market would need to drop about 40%, to be in line with historical norms. Even when allowing for the approximate 1500 point drop in the last 5 days, historical data implies there is much further to go before reaching a reasonable level.

When we look at stock market levels following the last two periods of returning to trend, it took about 10-15 years for the market to recover in a sustainable way. While there were outlier years with a temporary run back up, it was 1985 (after the bear market of ‘73-‘74) and 2015 (after dot com crash of ‘00-‘01), before the markets resumed a sustainable upward climb beyond the previous highs. There is nothing that indicates how long a recovery might take in a future crash, or precisely when the crash will officially begin. But if history is any guide, investors should be careful given current market levels and conditions. Personal circumstances do not show up on historical charts and graphs. Consider how your situation could be affected if it took 10-15 years to make up losses that may occur over the next year, and respond accordingly.

Another indicator called the “Crash Confidence Index”, is a psychological survey about how fearful people are that a 1929 or 1987 style market crash will occur in the next 6 months. The readings inferred from this index indicate that confidence is currently at historic lows. What this implies is that people believe there will be a significant market crash within the next 6 months, and are more certain of it than at any other time. This could play into a self-fulfilling prophecy, whereby people selling stocks to avoid an approaching stock market crash, create the crash they fear, or make an existing crash worse.

Finally, the Cyclically Adjusted Price Earnings (CAPE) ratio is a measurement of stock market valuation that uses 10-years of earnings data to smooth out short term anomalies. The CAPE ratio (sometimes called Shiller PE) is reading at levels that haven’t been seen since before the 1929 market crash, and before the bursting of the dot com bubble. As you may recall, many companies did not survive those events, and some that did took several years before their stock prices recovered. It is one thing to read about these statistics online or in the news. But it is quite another to have your retirement income or plans upended by these events. Fortunately, bad news we read about does not have to impact us directly, when we take proper steps to protect our families and ourselves.

Hardly anyone can predict precisely when a negative market event will occur, nor what exactly might trigger such an event. But something most of us can and should do is consider our personal circumstances, and how such an event would affect our quality of life now or in the future. Then, when signs are present (as they are today) that indicate trouble is on the horizon, we can take appropriate steps to minimize the impact to ourselves or the people we love. Right now appears to be one of those times. So what can be done during times like this?

Practical Solutions Involving Precious Metals

As we have discussed previously in this blog, or in more detail in The 7.0% Solution, there is a two-pronged strategy that we have seen used successfully in environments like today. On the one hand, we need to limit losses. A loss of 30% in the stock market requires a gain of 42% to recover. A loss of 50% requires a gain of 100% to recover. For example, $1,000,000 minus 50% equals $500,000. To get back to $1,000,000 requires a 100% return on the remaining $500,000. It often takes far longer to make up the losses than it took to lose them. This can be illustrated in the periods mentioned in the 3rd paragraph of this article, when it took 10-15 years to recover from the losses incurred. While it may not always take that long, those in or near retirement do not have the luxury of waiting to find out.

You can limit losses through the use of a special type of insured annuity that is often recommended today by top economists, as a bond replacement. The performance often mimics the bond performance of yesteryear, when interest rates were higher, but with principal protection. But what about growth, or purchasing power protection? This is where precious metals really shine. By adding a Gold or Silver component to your portfolio, it is possible to enjoy 10-15 years of growth, instead of 10-15 years of waiting to earn back stock market losses.

During both the stock market rout of 1973-74, and the dot com bubble burst of 2000-01, Gold climbed in Dollar price. More importantly, during the recovery period in which stock investors tried to recover their losses just to break even, the owners of Gold saw their assets quadruple in price (see chart above). Obviously we do not know how long the next crash will take to recover, nor precisely how high Gold or Silver will climb during and after the mayhem. But if history and the actions of large investors are any guide, now would be an opportune time to consider liquidating assets preparing to drop precipitously, and purchase assets with a 5,000 year history of proven performance. Feel free to call the number at the top of this screen to get started.

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Bill StackbyBill Stack
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