A Golden Hedge for Volatility

What a difference a week makes. Two weeks ago the air was one with despair. Stocks bonds, the dollar, Bitcoin…all were crashing down around us. Then the stock market put up its best week since 2013, the dollar bounced, and all must be fine in the world again, right? Well, not so quickly.

The bounce in stocks wasn’t that tough to foresee. Volatility, which is the best measure of reversals, had spiked faster than ever in its history. Meanwhile, it’s not like the economy is showing any signs of strain. No, stocks were oversold in a big way (for the short-term) and a bounce was foreseeable.

However, there are now cracks in the facade. Don’t let the rebound fool you; things are not the same today as they were two weeks ago. At that time I wrote that investors should expect an increase in volatility. It certainly happened and I think it’s here to stay.

Along with volatility we have the beginnings of a potentially major bear market in bonds, along with continual downward pressure on the US Dollar. This is going to make it increasingly difficult for stocks to have a sustainable rally.

I don’t think all stocks are about to get hit. The economy is strong and earnings are solid. But, it’s turning from a bull market into a stock picker’s market. At Tailwinds we have a number of very attractive stocks with decent valuations and great growth prospects; I’m still very excited for 2018 as I look at the Select Portfolio.

However, if you’re looking for a bull market, I’m thinking you need to look beyond stocks. In this time of increased uncertainty in many of the major asset classes, one area continues to look more attractive on a daily basis. Precious metals, and gold in particular, are poised to outperform and make a very good hedge against weak bond, dollar and stock markets.

When I last wrote about gold, almost a year ago to the day, I suggested that my well-timed gold trade should be held for the longer term due to weakness in the dollar and bond market. Since then, gold has been in an established uptrend. I expect this to continue.

The performance since February of gold did trail that of another group in an uptrend, mainly stocks. As you can see, they were pretty well correlated, with stocks the better gainer.

However, stocks haven’t come close to rallying back to their highs, while gold looks poised to do so soon; possibly this week. In fact, over the past month, gold has significantly outperformed stocks.

I don’t consider myself the voice of doom and gloom. However, history has repeatedly demonstrated that no asset class is one-directional. Stocks have been in a very long-term bull market. It will end.

Is this the end for stocks? I don’t know, but we are certainly closer to the end than the beginning, right? Meanwhile, there is a subtle, almost unnoticed, bull market happening in gold.

Would I throw all my money in there? Heck no. But, maybe a little to hedge out the increased volatility in other asset classes? Sounds like a golden idea to me.

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