The novel coronavirus outbreak that first emerged in Wuhan, China, last year has brought the world economy to a standstill.
Reeling from lockdown measures that have brought nearly all economic activity to a halt, economies around the world are struggling to navigate the novel waters they now find themselves treading and, among them, stock traders, savers, and investors are looking once again for a safe haven investment.
But, interestingly enough, gold and silver prices are fluctuating without reference to what is going on in the stock market and wider economy. Indeed, the abnormally buoyant market has many securities professionals worried that a new type of asset bubble is emerging and it is one puffed up by foolhardy investor confidence – or even speculation.
In fact, one of the same trends that has seen bankrupt stocks like Hertz rally could be setting its eyes on precious metal stocks next and the impact this could have on investing might mean we are in for a wild ride over the next several months.
What trend are we talking about specifically?
And does it explain the somewhat tepid movement we have seen in gold and silver prices lately?
As we opined in the beginning, and as is widely known market lore, gold and silver tend to rally when the rest of the market begins to flag.
Often this is because gold and silver are seen as being inherently worth something on their own as a means of barter.
Think of it like an old school version of bitcoin and all of the other cryptocurrencies that are all the rage these days: Gold and Silver are safe havens from capricious governments and spendthrift administrations.
“With record global debt to GDP, historic US equity valuations, and new fiat money printing around the globe, the macro environment is incredibly bullish for precious metals today,” Crescat Capital highlights.
It is a shelter against inflation and further deterioration in the value of one’s investment. All of this still largely holds true, so why aren’t we seeing spikes in the values of gold and silver like we saw during the 2008 financial crisis?
“Markets driven by euphoria never end well. The US stock market today is in la-la land. It is discounting a new expansion phase of the economy at the same time as a major recession has only just begun. Since the March lows, investors have turned overwhelmingly bullish. They are trusting that central banks’ liquidity will miraculously create economic growth rather than just temporarily ease the pain of declining gross domestic incomes and crushing debt burdens. This delusional thinking is induced by the intense but short acting dopamine response to Fed money printing but completely ignores how business cycles work. Government money printing has failed miserably, repeatedly, throughout history at eliminating recessions,” Crescat Capital’s report reads.
Interestingly enough, as Crescat Capital points out, an abnormally enthusiastic market seems to think it has already suffered the worst in terms of the economic impact of COVID-19 and the “buying the dip” mentality has turned into an inflated market bubble fueled by speculation made easier and more accessible by apps such as Robinhood.
If you have paid any attention to investment news over the past several weeks, you may recall that bankrupt companies like Hertz were experiencing wild fluctuations in the values of their stock. This is because Robinhood traders, armed with savings and stimulus cash to spend, have engaged in large scale pump-and-dump operations on these stocks. How this works is that these traders are moving in and buying large amounts of shares at once, the pump up part of the equation, only to dump them and feast off of the arbitrage. Naturally, in this financial game of musical chairs, there are people who are left holding the bag at the end of the song. Fitting every bit the bill of speculation, these same traders are impacting various sectors in different ways with behavior that is decidedly short-term and inherently flawed, even dangerous.
What this overvalued stock situation presents for the savvy investor, however, is an opportunity to buy historically cheap precious metals stocks.
Crescat Capital highlights this unique historical opportunity in their latest report, writing: “We are confident that a critical mass of investors will soon realize there is an alternative to buying over-valued US stocks with abysmal growth and profitability outlooks. Those who care about fundamentals can buy historically inexpensive precious metals instead with outstanding macro supply and demand drivers, especially for gold and silver mining companies. We believe we are in the early innings of a major new bull market for precious metals as a non-correlated macro asset class. There is good reason why gold and silver have served as hard money around the world for thousands of years. It is the same reason gold remains the most ubiquitous global central bank reserve asset on the planet. We expect the world’s sovereign treasury departments acting in their national interests to provide strong demand for gold in the current global economic downturn. Treasury departments must consider the value of owning government obligations of highly indebted economies with fiat money printing presses compared to the value of gold today.”
In sum, though the dynamics of trading have changed, it looks like this market downturn presents the same opportunities as many others in the past.
Investors looking to preserve their capital and even grow it while other stock values are detached from reality might find an excellent opportunity in precious metals right now, specifically but not limited to gold and silver.
One issue that awaits further analysis is just how much more capital apps like Robinhood and the like have introduced to the market. Given the current distorting effect that seems to be having on some stocks, analysis on how the market is moving and where investors might want to consider heading is similarly blurred by this new phenomenon.
Yet, as MarketWatch points out, the phenomenon might be new, but its behavior is quite well understood within the dynamics of market bubbles and overt speculation.