A while back I stated in an interview that I wouldn’t be shocked to see stock markets decline 25% and gold increase 50% by October. That made a lot of headlines because evidently there are a lot of people out there who think the economy is doing great and think that stock market values will continue to increase forever. They must have drunk the Kool-Aid from the punch bowl that the Federal Reserve has once again placed in front of people to try to stimulate the economy. Only now the Fed is once again going to try to remove the punch bowl, which will leave a lot of people with some pretty severe hangovers.
Stock Market Crashes Are Severe
A stock market decrease of 25% shouldn’t be shocking because it’s not unusual for financial crises, and we definitely will have a crisis on our hands. Things are already looking shaky for the economy, as GDP growth has been subpar and the labor market continues to see tepid wage growth despite a supposedly low unemployment rate. Something’s not quite right with the economy, yet stock markets continue to push to new highs.
When stock markets get overheated, their bubbles burst dramatically. The Dow Jones average peaked at over 13,000 points in May of 2008, then declined 17% by October. Near the end of November, it had declined over 40% from its peak. The stock market crash in 2002 also saw major losses, with a nearly 30% decline between May and October of 2002.
The current stock bubble is being blown even bigger because of the Federal Reserve’s loose monetary policy. The Dow is up almost 5,000 points from where it was at the beginning of 2016 and is clearly in bubble territory. The bubble may even grow further before it finally bursts, but a correction of 5,000 points over a period of several months would be neither unreasonable nor unprecedented. It may not happen this year, but if it does it wouldn’t be surprising.
Gold Has Room to Run
Gold increasing by 50% isn’t out of the realm of possibility either. Gold is still tremendously undervalued. It doesn’t help matters that governments use their vast gold reserves to try to manipulate the gold market to push prices lower. They can’t stand the fact that people still put their trust in gold rather than fiat currencies, and they have worked for decades to try to destroy public confidence in gold, to no avail. Too many people understand the importance of gold as a store of wealth.
Besides, if gold were to increase 50% it still wouldn’t reach its all-time high price, so that increase would really just be gold getting back to where it should be. I think gold will probably reach even higher than that once the fiat money system comes crashing down. Experiments with fiat money systems throughout history have always ended badly, and ours is no different. When paper currencies fail, it’s inevitable that gold and silver reassert their role as money.
The Crash and Its Consequences
Pretty much everyone who has paid attention to stock markets knows that they are in a bubble. A 30% increase in a year-and-a-half might be understandable if the markets were recovering from a major drop. But coming as an increase on top of already-high prices means that stocks are bound to suffer a major correction. The catalyst will likely be the Federal Reserve’s monetary policy actions. The Fed created the bubble in the first place, and it is the Fed’s policies that will end them. Many Fed policymakers don’t think that there is a bubble and some don’t even think that there’s a way to tell when bubbles occur.
It’s clear to anyone who understands Austrian economics that another financial crisis and severe recession is on the way. The economy is fundamentally unsound and still hasn’t fully recovered from the last financial crisis. It’s only the Fed’s easy money that is giving the illusion of prosperity, but that won’t last. Those who are heavily invested in stocks and bonds, particularly those who buy in near the top, will lose a great deal of money when the stock markets crash. Those who have protected themselves by shifting assets into gold and silver will be in a uch better position to ride out the worst effects of the crash.