Stocks Crater as Gold Soars
We all knew 2016 wasn’t going to be a great year for equities but the depth and severity of the losses during just this first trading week of the year are epic, even by bear market standards. Thursday is another bloody day on world markets as China halted trading when its market hit a seven percent loss after just fifteen minutes of trading. This was the second time in just a week that the newly implemented circuit breakers, meant to limit daily losses on Chinese markets, have kicked in to stop trading. European markets followed China lower, losing more than three percent and U.S. markets are next. The word “bloodbath” doesn’t even begin to cover the carnage.
It wasn’t all bad news for precious metals investors as gold prices spiked in response to the devastation in equity markets. Gold was up $9.53 in early trading as prices vaulted over $1,100.00 an ounce.
Why Gold and Oil Are Different
Lower commodity prices have had an impact on gold and oil, though for different reasons. Gold has been reacting primarily to the strength of the U.S. dollar. In other words, gold prices are low because dollar prices are high. At this moment our strong dollars are able to buy more gold and prices adjust accordingly. That same process started the dip in oil prices but this week saw gold and oil diverge as Saudi Arabia continues to pump more oil, even in the face of a massive global oversupply.
Who Could See that Coming?
As with many financial crises, it wasn’t that hard to see this one shaping up. Gains in the stock market have been fueled by companies borrowing money and using it to buy back their own stock. That led to a combination of inflated stock prices coupled with a lot of corporate debt. The trigger for the collapse was the Federal Reserve finally raising interest rates just as the meltdown in the Chinese stock market began. The combination was a one-two punch to global equity markets, which have been reeling ever since.
Billionaire Gold Buyers
Some big players on Wall Street bought into gold just before the recent run-up in prices. Stanley Druckenmiller, who managed investments for George Soros, has been rumored to be heavily buying gold with his own money. Also heavy into gold were Ray Dalio and John Paulson. In financial circles it’s not uncommon to hear people talk about the “smart money” being in this or that. It turns out the smart money has been quietly moving into gold for some time. When someone who’s already rich puts a billion dollars in gold, it’s time to pay attention.
Not the Only Ones
If the sales of gold and silver coins are any indication, billionaires aren’t the only ones loading up on precious metals. Sales of gold coins issued by the U.S. Mint were up fifty-three percent to top 801,000 ounces. Sales of Silver Eagles set a new record in 2015, with the Mint churning out more than forty-seven million of the high quality silver coins. Obviously quite a few people get it and that’s encouraging to see.
How Low Will They Go?
Equity markets have become the proverbial falling knife and trying to catch the bottom is a sucker’s bet. The Chinese stock market still has plenty of room to run on the downside and the valuations on U.S. equities have been vastly inflated for years. The next sign to watch for will be the now-increasing pace of layoffs as employers face a double squeeze from falling profits and declining share prices.
This bear storm has been building for quite a while, so don’t look for this bloodbath to end soon.
Trevor Gerszt, America’s Gold IRA Expert, is founder and CEO of Goldco Precious Metals, a privately held retirement services firm in Los Angeles specializing in wealth and asset protection. Trevor also holds a position on the Los Angeles Board of the Better Business Bureau.