Talking with our customers here at U.S. Money Reserve, we find that two topics seem to keep coming up—inflation, which we’ve talked about at length here, and the recent events in the Middle East. In both cases, I get the sense that many are “waiting for the other shoe to drop” before making moves in relation to their portfolios.
They’re not alone. According to an August 19, 2021, article by MarketWatch, Citigroup analysts are warning that “The Street [Wall Street] is too complacent.” That complacency may have led to what CNN called “increased worries that stocks may soon experience a so-called correction” on August 18, 2021. Those worries were echoed by the Citigroup analysts, who said that a stock market pullback of 10% in the near term “seems quite reasonable.”
Knowing this information, let’s take a look at the current situations in both Afghanistan and the United States and see whether cooling our heels is really the right move to be making.
Currently, the events in Afghanistan have left the U.S. markets largely unaffected, but that could soon change.
A large part of gold’s demand comes from its history as a safe-haven asset. When Americans become concerned over potential economic instability, geopolitical tensions, or market bubbles, they turn to the precious metal for its ability to retain its buying power over time. In other words, it’s not the geopolitical tensions themselves that directly impact the price of gold, but rather the responses to those geopolitical tensions.
As MarketWatch reported on August 23, 2021, “Global financial markets have been largely unmoved by developments in Afghanistan, but the chaotic U.S. exit from the country is heightening underlying geopolitical risks.” Several days earlier, on August 15, MarketWatch pointed out that military conflict itself doesn’t always impact stocks and that “the context and economic and market environments are often…bigger driver[s].” So once again it’s not about the events themselves but the circumstances surrounding those events that would impact the markets—and thus the price of gold.
Some are also worried that the amount of physical gold held by Afghanistan could disrupt the precious metals market. But as Bloomberg pointed out on August 18, 2021, much of that gold sits not in Afghanistan, but in the United States—and the U.S. has frozen the assets of Afghanistan’s central bank until the situation there becomes clearer.
The point is this: When it comes to the Afghanistan issue alone, there may be no “other shoe”—but it adds to a list of growing economic concerns. It may not be the “straw that breaks the camel’s back,” but it is a reminder of how important it is to periodically reexamine our portfolios and ensure that we feel comfortable with our asset mix should a tipping point someday arrive.
Inflation is another major area of concern—one that some experts believe could impact markets sooner rather than later.
On August 17, 2021, Kitco reported that “gold is currently being driven by macro data, the U.S. dollar price action, and market expectations around the Federal Reserve’s tapering announcement.” MarketWatch reported on August 24 that Mike Loewengart, managing director of investment strategy at E*TRADE, stated that “inflation is pretty hard to ignore…. So it’s no surprise that [individuals] are taking inflation seriously when it comes to their portfolios.” And according to a warning from Deutsche Bank economists, as reported by CNBC on June 7, 2021, “Inflation may look like a problem that will go away, but is more likely to persist and lead to a crisis in the years ahead.”
Inflation is a real issue that may impact the markets in the near future. Partly because of the current state of U.S. inflation, MarketWatch reported on August 19, 2021, that Goldman Sachs Group economists lowered their forecast for third-quarter U.S. growth from 9% all the way to 5.5%. Now take into account the fact that an uptick in the rate of inflation would reduce the spending power of cash and other paper-based assets, and you have to wonder: What exactly is the “other shoe” that folks are waiting on?
According to a recent CNBC article from August 19, 2021, “Leigh Goehring, managing partner at Goehring & Rozencwajg, said while the U.S. has inflation, it doesn’t yet have inflationary psychology, where consumers tend to spend more quickly with the belief that prices are rising.”
If you’re waiting for the writing on the wall before looking into precious metals—you may have just walked right past it.
When it comes to diversifying your portfolio, I believe it’s better to act than react.
Our customers share many concerns over the state of the economy and the future of their portfolios—but they’re unsure of what the latest news means or when they should act. That’s why I wanted to take this week’s Gold News & Views to discuss these important topics. Even if the markets aren’t currently making big moves, it doesn’t mean that waiting is the best strategy. Instead, you could be looking for time-tested hedges against inflation or other market factors that concern you, as well as exploring diversification options that could further shield your portfolio from market risks.
Think of it this way: Would you rather have bought gold in 2006, right before the Great Recession, when gold was trading at an average of around $604/oz.—or in 2010, after the Great Recession, when gold prices averaged around $1,420/oz.? Buying at either time would have helped you see gains in your portfolio, but buying beforehand would have been a far more proactive (and beneficial) choice—while the “wait and see” choice may have resulted in you missing out on significant growth opportunities.
I’m not here to provide financial advice or tell you how exactly to diversify your portfolio. Each person’s financial situation is unique, and decisions regarding your portfolio should be made with care. But make no mistake: A calm marketplace today does not mean a calm marketplace six months or a year or even 10 years from now. Thus, “waiting for the other shoe to drop” could instead leave you wondering why you didn’t act sooner.