An alternative to uncertainty in global marketsJuly 10, 2015
Life can be tough as a contrarian. As the analyst covering the alternative asset classes and a personal investor in precious metals, I am a staunch proponent of the precious metals asset class even with its lackluster performance in recent years. However, given its historical performance and diversification characteristics, gold is a good thing to have during bear markets. Around the office it’s not uncommon to hear, “Hey Greg, buy any nifty animal pelts with your gold bullion today?” followed by some chuckles from my colleagues. That’s OK. I’ll let them have their laughs. It’s who laughs last that matters.
As I write this however, the people in Greece are not laughing. The fate of Greece is being discussed behind closed doors, and ATMs across the country have shut down, leaving the average Greek strapped for cash. However, potentially more ominous is the stock market crash in China. Many U.S. Investors fear that government intervention could do more to harm Chinese equities than good, and the spillover could potentially affect stocks and bonds throughout the world.
Here at home, I believe we contrarian investors make some valid points. The S&P 500 has consistently hit all-time record highs starting in early 2013 and the market is still rising. Right now might not be the best time to buy low and sell high. Taking a closer look at current market levels, according to a recent research piece by Goldman Sachs entitled “Top of Mind, Issue 35,” the S&P 500 is trading at a forward earnings multiple in the top 98th percentile. Record levels of margin debt on the NYSE points to more evidence that current equity prices may be in for a sharp decline. With an increasing amount of foreign direct investment in US markets, the US has become increasingly exposed to global risk factors. Investment portfolios could likely see increased downside volatility should investors rapidly unwind their highly leveraged positions due to some crisis abroad. As a potential shape of things to come, recent volatility in the Chinese markets seen on July 8th has further exacerbated volatility in domestic markets, causing meaningful decline across all three major indexes over the course of the day. This decline was coupled with a brief trading halt on the NYSE due to technical difficulties. Many investors have been forced to liquidate equity holdings in order to meet margin calls stemming from Chinese holdings.
As gloomy as the news may seem, there’s no need to be a pessimist. Investing in precious metals may be the solution in an overvalued environment. After all, since 1970, gold has not only outperformed the S&P 500 but has also been inversely correlated to the S&P 500 with a correlation coefficient of -0.262, giving gold excellent diversification qualities with respect to a traditional portfolio of stocks and bonds. When financial markets fall, investors have historically rushed to this asset class as a store of value. Considering recent events in the financial markets and the risks of decline and global market uncertainty, the time may be right for precious metals.
– Greg Fierros, Investment Research Analyst
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