When There’s Stock Market Volatility, Gold Is the Place to Hide

When There’s Stock Market Volatility, Gold Is the Place to Hide from Schiff Gold

The Dow Jones suffered its biggest one-day drop since August on Tuesday, falling 363 points. The Dow has lost 540 points in two days, the biggest decline since September 2016.

According to analysts quoted by CNN, fear of a tanking bond market is one of the main factors behind the stock market dip.

The bond market has been selling off lately. That’s raising fears that the era of extremely low bond rates — which has been very good to the stock market — could soon be over.”

CNBC had a similar take, calling the selloff “a tantrum over rising interest rates.” Leuthold Group chief investment strategist James Paulsen told CNBC high valuations have made the market vulnerable. Rising interest rates adds pressure because investors now have alternatives in the higher-yielding bond market.

When you get a market that’s facing several challenges, it’s vulnerable, and anything can be the straw that broke the camel’s back.”

Bond yields are inversely correlated with bond prices. As interest rates rise, bond prices fall. Ten-year bond yields hit their highest level since July 2014 last week. Peter Schiff talked about the bond yields in his podcast, saying he thinks they could pretty quickly climb to 4% in the near-future. That doesn’t bode well considering the current market environment.

The last time we had a 4% yield on the 10-year was before the 2008 financial crisis. Basically, that was the yield that broke the camel’s back. Remember, the financial crisis was triggered by rising interest rates on the debt that had been accumulated in the years prior as a result of Alan Greenspan keeping interest rates at 1% for a year-and-a-half and then slowly raising them back up over the course of another year-and-a-half. So, as the Fed was moving interest rates up at a measured pace, by the time they got to the point where rates had gone back up to about 5%, the yield on the 10-year was about 4%. That’s about as high as it was able to go. Then the market all fell apart.”

Investors and analysts don’t seem too concerned about the current stock sell-off, generally categorizing it as a necessary market correction. Remarks to CNBC by a technical analyst at Ari Wald were typical. He called the dip a “run of the mill, brief pullback that’s limited to 3 to 5 percent.” Nevertheless, could the current volatility be a canary in the coal mine?

On Tuesday, the CBOE Volatility Index (VIX), commonly referred to as the “fear gauge,” peaked at 15.42. It climbed nearly five points over a five-day period and hit its highest level since Q4 2016.

So, when you have this kind of stock market volatility, where do you want to hide?

Gold.

CNBC did an analysis of exchange-traded funds to determine which ones did best when the VIX increased five points within a five-day period. This has occurred 59 times in the last decade. It found that gold and bonds were the best performers.

Gold outperformed in times of rising volatility. Both the iShares Gold Trust and the SPDR Gold Trust rose 0.9% on average during a five-point gain in the VIX in five days.”

Bonds fared even better in the CNBC analysis. But as Peter said after Treasury Secretary Mnuchin talked up a weak dollar as good for America, bonds may not be the place to be right now. Peter said the real impact of a weakening dollar would be felt in the bond market, which is already showing signs of trouble.

Basically, what the Treasury secretary was doing by basically saying we have a weak dollar policy was telling everybody around the world, ‘Do not buy our bonds!’ Well, he’s the guy that’s supposed to be selling those bonds. Did he not get that memo?”

Peter said the fact that the dollar and bond prices are falling together is a very, very bad sign that everybody is ignoring. The bond yields aren’t high enough to offset the losses in the foreign exchange.

So, whether the recent drop in the stock market is the start of air coming out of the big, fat, ugly bubble, or just a prelude of things to come, now is a good time to consider buying gold.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.