U.S. Investors are on edge following last week’s and yesterday's sell-off in stocks around the globe. The carnage impacted equity markets in Asia, Europe, and the U.S.
Interestingly, the U.S. dollar also weakened. And bonds and gold are getting most of the safe-haven buying.
People are starting to wonder what the central planners might do in response, or if they may be losing control altogether. It must be discouraging for Chinese officials to see selling continue in stocks despite threats to throw people in jail for dumping shares.
Central planners in Washington and New York likely share the frustration of their Chinese counterparts. They have long been promising an end to the ultra-loose monetary policy that is now nearly a decade old, but these stimulus-addicted markets aren’t cooperating!
The probability of U.S. interest rate hikes this fall is now falling a rock. We are once again hearing the familiar call from Keynesian economists, including Paul Krugman, for more stimulus and debt.
They acknowledge the trillions already printed and borrowed haven’t worked, but say it is only because it wasn’t nearly enough.
The Dow Jones index has fallen over 1,000 points in the last few days. At the same time, gold has risen about 4%.
Gold futures had not been benefitting from safe-haven buying in recent months, but that’s changed in recent days as confidence in worldwide equity markets and the dollar has waned.
Should Investors Wait for Even Lower Gold Prices… or Jump In Now?
Looking at 2015 overall, precious metals have not fared well. Many people are hesitate to make their first precious metals purchase with the fear prices will fall further.
It’s certainly true that metals recently have not, for the most part, functioned as an attractive alternative to these conventional assets.
That’s largely because gold and silver prices are set in paper futures markets. And these markets are prone to all the same weaknesses: high-frequency trading, bankers manipulating markets in order to cheat their brokerage clients, central bank interventions and extraordinary leverage.
In other words, prices set there do not fully reflect supply and demand in the real world.
It is understandably tempting to wait for even lower prices before buying. But with price discovery as broken as it is, relying on price charts alone to make investment decisions is unwise. The shakier financial markets get, the wiser it looks to diversify out of paper assets including dollars, stocks and bonds.
Investors should consider what’s going on in the physical market for gold and silver coins, rounds, and bars. The fundamentals in the physical market paint a radically different picture than the paper and electronic markets do.
While a handful of traders may be selling half the annual world production of silver short on the COMEX and other futures exchanges, there is record buying in the physical market.
Mints and refiners are already unable to keep up with demand. This at a time when, according to CNBC and some of the financial press, gold is no more useful than a stupid “pet rock.” What will happen when mainstream sentiment starts to shift, and some of those “paper bugs” become “gold bugs”?
Investors shouldn’t let a fixation on trying to pick the bottom in prices distract them from the more important mission — diversifying out of paper assets.
We believe those that currently own little or no gold or silver are taking a huge risk by not fixing that problem immediately. Such folks don’t have the luxury of timing the market. Investors aren’t going to get advance warning of the next crisis in financial markets. When it happens, most will be caught short.
And by the time it is clear metal prices have bottomed in the paper futures markets, it may be hard, if not impossible, to get actual physical metal.