Choosing wisely when investing in different types of asset classes is fundamental to risk management. According to the S&P 500, the market has traded — reaching double-digit percentage gains — only three times consecutively in the past 100 years. Moreover, unusual equity flows, record margin debt levels, and low earning yields of stocks indicate that the market is expected to undergo a pullback in the near future.
Gold, on the other hand, has steadily built a base of support. A response from the Federal Reserve to contain the rapid increase in inflation coupled with political turmoil around the Russian/Ukrainian conflict could also bode well for gold investments. This post will provide valuable insights into how to leverage current economic imbalances by allocating capital to precious metal asset classes.
The Three Horsemen of the Stockopalypse
Three factors occurring simultaneously should serve as a warning of unsafe conditions ahead: unusual equity flows, record margin debt levels, and low earning yields. Let’s take a look at what these variables indicate for stock market trends ahead.
Unusual Equity Flows. Equity flows are the rate at which assets are drawn into global equity markets, or, global stocks. Recently, equity flows have rocked the boat of world financial markets. During the three weeks prior to March 23, 2022, investors had been on a selling trend of unloading stocks. The tide turned as investors shifted back to become net buyers, injecting global equity funds with $19.66 billion. All of this is riding in on the tail end of stimulus-related inflows to offset the economic impact of the COVID-19 pandemic. We are now watching equity levels begin to correct themselves, returning back to normal levels, or even a potential reversal.
Record Margin Debt Levels. Margin debt uses borrowed money as collateral for a loan to purchase more stock. There is a maximum amount that can be borrowed against any stock. If the stock drops in price, a “margin call” is issued. This will require the investor to deposit sufficient cash funds to raise the collateral to minimum levels against the loan. Often, stock must be sold to raise that cash, which puts further down-pressure on falling markets. The rebounding effects of uncharted record margin debt levels have started to reveal themselves in a declining stock market. It is possible that pullbacks caused by rapid growth in margin debt levels could exceed what we saw during the dot-com bubble burst of the early 2000s and the Great Recession stock market declines. Although margin debt itself is not usually a trigger for a stock decline, it does tend to amplify the effects of a rising or falling market. As a result, it may serve as a multiplier that sometimes turns a correction into a crash.
Low Earning Yields. Equity yields have not been as low as they are currently since the Great Recession. For yields to increase to average levels, either company earnings have to increase, or stock prices have to fall. With commodity price inflation rising faster than wages, it will be difficult for corporations to pass higher costs on to consumers. Lowered stock prices are a more likely outcome based on two similar occurrences in the last 150 years that have prefaced a pullback in market levels.
Luckily for us, precious metal assets like gold and silver appear to be receiving a tailwind of momentum in an upward direction. Apart from being associated with lower risks, precious metal investments have historically served as a hedge against inflation and are renowned in the market for their store of value.
Gold and Silver's Strength
The recent “growth” that investors have been enjoying may reveal itself only to be inflation or dollar devaluation. The past 100 years have been a testament to why you should invest in precious metals during inflation. Gold bars, gold coins, and other gold investments have been able to withstand centuries of economic and political turmoil. Because of its staying power, there is worldwide demand for physical gold— both from individuals and governments interested in owning precious metals to strengthen investment portfolios through diversification.
Rising precious metals prices for both gold and silver have demonstrated how this asset class continues to outperform other stock options and even Bitcoin. Increased gold imports from China have helped lift gold prices worldwide. In the face of inflation, as the value of the US dollar continues to depreciate, gold and silver act as safe-harbor investments.
Demand for physical metal is prompting warnings from national mints and the London Bullion Market Association (LBMA) noting that supplies of silver are getting tight. The LBMA has recently issued a special report on silver, which highlights the organization’s concerns and discusses the increased investment demand for the metal. While silver investment products place an indirect demand on physical silver, there is an increasing direct worldwide demand for physical silver, as well.
With the dollar growing weaker on the worldwide stage, it would behoove us to follow the example of others purchasing gold to protect ourselves. Consider rotating a portion of your assets out of the stock market and into precious metals to avoid significant losses and preserve your purchasing power.
The U.S. Gold Bureau: Your Reputable, Licensed Dealer
Investors wondering where to purchase precious metals need to look no further. The U.S. Gold Bureau's team of extensively-trained precious metals experts bring integrity and expertise to each step of the precious metals acquisition process.
We offer investors a variety of high-quality, investment-grade precious metals products to choose from. In addition to bullion bars and coins, we are listed as authorized bulk purchasers of numismatic coins approved by the U.S. Mint. We can guarantee the origin, originality, purity, and quality of each product we sell.
While the stock market is flashing warning signs that most of us have never seen in our lifetimes, there is little that the gold market has not endured in the last 5,000 years, and yet, it is still alive and well. Contact us today for more information on how you can invest in precious metals to weather the storm ahead.