Tags: tale | two | shutdowns | trump | government | own | gold

Investors Should Own Gold for Protection From Market Fear

Investors Should Own Gold for Protection From Market Fear
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By    |   Friday, 26 January 2018 09:44 AM

What a difference a few years can make. The U.S. government faced a three-day shutdown earlier this week, after negotiations to kick the can down the road a few months once again passed.

This is all kabuki theater, of course. It doesn’t really matter much in your day to day life. It’s not like you can suddenly go on a crime spree or the roads disappear because the government isn’t fully funded. Even worse, a government shutdown doesn’t even shut down much. Most of the government, including numerous services that would be better provided by the private sector anyway, is still running.

The market sees through this, and barring some major change, it will probably ignore other government shutdowns in the future as well.

It hasn’t always been this way.

In 2011, when a government shutdown loomed, stocks panicked with a double-digit decline. Gold leapt higher, hitting its 2011 bull market peak of $1,900 per ounce along the way. There was palpable fear.

Today, with scandal after scandal hitting headlines, it’s just one more piece of news. And as with past shutdowns, it actually costs more to have a proverbial shutdown than it does to keep things running.

Sure, some government employees aren’t at work while this is going on— some 800,000 of them by estimates. But they’ll get back pay once the shutdown ends. In short, they’ll get paid for all the work they’re not doing now. It begs the question of what taxpayers get from these 800,000 employees when they do come into work to draw a paycheck.

Politics is a pendulum. In 2011, the pendulum had moved pretty far towards government intervention. During the financial crisis in 2007-2008, the government moved quickly to throw money at the problem rather than let the market sort it out, with nearly $800 in direct bailout money and multiple years of trillion-dollar deficits.

The Federal Reserve made history by cutting interest rates to zero and giving the banks interest on excess reserves they parked with them. And by cutting rates that far, the total cost of the federal government financiering its burgeoning debt load actually fell between 2007 and 2010.

We’re still dealing with the hangover from this monetary narcotic binge. And the regulatory binge of the early Obama era, including the poorly-written and vaguely-construed attempt at financial reform. It’s no wonder markets were panicking. The political pendulum seemed to continue sweeping leftward into a regulatory and punitive environment for investors.

Today, the pendulum has made a starkly rightward shift. Tax reform focused on the corporate level is proving to be a shot in the arm—and many companies have unexpectedly announced plans to provide raises and/or bonuses for workers. Interest rates are gradually rising, but at a rate that the market can accommodate.

And as for businesses, the era of punishing innovation is over. The Trump Presidency managed to remove 22 regulations for every new one added in 2017—a huge delivery above and beyond the promise to remove 2 for 1. We’re finding out that the economy can get along just fine without as many onerous rules and regulations, thank you very much.

With that in mind, and with the political pendulum working towards getting the government off people’s backs, investors likely won’t see a big political-related selloff.

That’s good news if you don’t like selloffs. It’s bad news if you want a selloff so you can pick up some bargains. If we do see a further decline in stocks from here on political grounds, it’s likely a buying opportunity. Markets tend to quickly snap back from political fears, but buying some call options on a market index can give you some leverage to profit from a short-term political move like that.

Gold looks attractive as well. While traditionally a fear barometer, I don’t think that’s the case right now. However, in the past two years, after getting as low as $1,050 per ounce, the metal has moved up to around $1,330.

It’s this kind of long, slow move upwards in the commodity market that presages a bigger rally later. That’s the kind of move that is for fundamental rather than political reasons. But a real bout of fear in the markets could work to send gold higher.

Personally, I’d prefer to buy the metal when it’s under $1,300 per ounce. But buying gold stocks, which are leveraged to the price of gold, could do well whether government shutdowns put some fear into the markets or not.

Finally, I’d argue that, with fewer taxes and regulations on the horizon for the next few years, a bad day in the market is an opportunity to buy into the technology space. There’s always a risk of investing in new technology that it won’t take off or a competitor will sweep in. But this highly volatile space tends to offer the best opportunity to grow your wealth over time. Rather than ignore the big swings in the space, buy and add on downswings.

Owning something like gold to protect you during periods of market fear can be useful. But that usefulness is limited, as markets tend to spend most of their time rallying. That’s why you should use any fear-based pullback as an opportunity to buy other assets on the cheap as well.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2021 Newsmax Finance. All rights reserved.

Owning something like gold to protect you during periods of market fear can be useful. But that usefulness is limited, as markets tend to spend most of their time rallying. That’s why you should use any fear-based pullback as an opportunity to buy other assets on the cheap as well.
tale, two, shutdowns, trump, government, own, gold
Friday, 26 January 2018 09:44 AM
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