The Approaching Selloff

Recent reports among high level investors indicate a growing concern about lower stock market valuations before year-end in 2020.  Besides what we already know about recent market highs and expanding federal debt, geopolitical challenges seem to be the concern of the day.  One of the characteristics of the last worldwide financial crisis involved the inter connectivity of economies and markets around the world.  Some strategies thought to dissipate and lessen risk seemed instead to spread and increase risks, to far flung corners of the world.  This report issued by the World Economic Forum back in March specified several conditions affecting markets, some of which have gotten more intense since then.  While the Average American may not be familiar with such reports, the wealthy and their advisors are.  Famous wealth managers are increasingly recommending investors allocate some of their portfolio to Gold and Silver.

One of the things used to propel the market higher in the recent past has been reports of an upcoming trade deal with China.  Signs of market weakness have been turned around by either a Tweet from the President, or an appearance by Larry Kudlow, talking up an impending trade deal with China.  There is a childhood story you may remember about the “Boy Who Cried Wolf”, which we could adapt to “The President Who Cried Trade Deal”.  It looks increasingly as if a comprehensive trade deal is off the table for the immediate future, with conflicting information about even small aspects of trade.  This has been talked about so much, that investors may find it hard to believe if and when it does come to pass.  Just as reports of a trade deal helped the markets propel higher, negative reports have begun to push the market lower.

Among the geopolitical challenges right now are the massive protests that have gripped major cities worldwide.  Across South America, Africa, the Caribbean, Europe, the Middle East, and the Far East, there is massive unrest in what are often considered leaderless movements of disgruntled citizens.  Some have sought to draw parallels between the conditions that have festered in each region which have led to these protests.  While each situation is unique, there does appear to be common themes of excessive government corruption and lack of economic opportunity for ordinary citizens.  Some of this unrest is related to distrust of local currencies, which have begun to devalue against the US Dollar and Gold.  It is one reason why Gold has reached new all-time highs in 73 currencies world-wide.

While unrest is bad for business, war can be terrible.  And with rockets raining down on Israel in between retaliatory strikes against Syrian and Iranian assets, some fear this could lead to a much broader conflict.  Such a conflict could potentially involve larger powers such as the United States, Russia, and China.  This is because over 1/2 of the world’s oil reserves are in the region, with nearly 1/4 of world oil output shipped through the Strait of Hormuz annually.  Most of the oil shipped through the region is heading for China, and any conflict with Iran threatens oil transit through the Strait.  Any disruption in the oil markets will mean higher world oil prices, which often correlates to lower stock prices, and higher values for precious metals.

We have written before about how US economic sanctions can sometimes harm the United States, when used too frequently.  Today the effects have gone even further in the wrong direction, by helping nations the sanctions were intended to harm.  Asset managers in the United States have begun snapping up Russian bonds and securities, not only due to their growth potential, but also to their perceived safety.  Russia’s economy has become largely de-dollarized, due to many years of US-imposed economic sanctions.  While owning few US Treasuries, Russia has become largely debt-free, while increasing their Gold reserves.  With negative interest rates throughout Europe, and a burgeoning debt in the United States, Russia seems relatively safe to some.

Technical Signals Flashing Red

Aside from the conditions discussed above and a myriad of others we haven’t, there are also technical market signals that indicate a downturn in the stock market might be imminent.  Two such signals are the “Hindenburg Omen” and the “Titanic Syndrome”.  Both of them have been triggered recently, at the same time.  Other technical measurements currently indicate that stocks are “overbought”, with a rating of 99 on a scale of 100.  While the timing of a market downturn cannot be known with certainty, the combination of such indicators suggest it may be sooner rather than later.

To be sure, many have grown their net worth (in part) by investing in the stock market.  For those with funds invested in the market the last few years, now may be a good time to lock in some gains.  As discussed here, “No one ever goes broke from taking a profit”.  The next question becomes, what to do with the proceeds?  It is wise to periodically transfer assets that have risen in value, to assets poised to rise further.  With stocks at near all-time highs, and interest rates near all-time lows, it is a great time to consider adding to precious metals.  Gold and Silver are trading near production costs, which has historically provided an approximate floor to downside risk.  With fewer ounces of mineable Gold and Silver available at current prices, all-in costs to mine the metals are unlikely to drop further.

Even in times of continued stock market growth, we have shown how Gold and Silver have performed favorably compared to stocks, over time.  It is also likely that we will move into recession, based upon indicators such as the yield curve inversion we wrote about last month.  Whether the recession coincides with the decline in the stock market remains to be seen, but they usually overlap one another.  We expect to see higher Gold and Silver bullion prices from here.  One way to further diversify your success in the precious metals arena is by considering investment grade coins.  During lackluster periods, the performance of investment grade coins has been over 10x the performance of bullion, as illustrated here.

In any event, we hope you will consider removing some risk from your financial future.  When it comes to an “overbought” stock market, it is better to exit a few months early than a few days too late.