Why Metals Are A Smart Play Given The Current Market Outlook

This article originally appeared on AdvisorPerspectives.com

As we inch closer and closer to what might be the end of the longest business cycle in history, investors everywhere are looking for a safe harbor in which to protect their assets. It's true that the global economy —not to mention the United States—finds itself in treacherous waters. As the U.S. economy moves closer to a period of stagflation and recession, allocating investments into precious metals may be an effective safeguard against the possibility of large investment losses.

Economic Outlook: Bracing for Turbulence

Turn on the media outlet of your choice, and you'll undoubtedly see stories about inflation, which reached a 40-year high of 8.5% during Q1 of this year. While inflation may be the talk of the town dominating the time and attention of investors everywhere, the USA's rapidly decelerating economic growth may indeed be the key economic driver over the next few quarters. When the dust clears, our GDP growth is likely to be much lower than originally projected.

Couple a possible growth scare with aggressive fed rate hikes over the next few months and the stock market is primed to enter bear market territory. While far from a reason to panic, this "perfect storm" of negative economic factors, so to speak, has created a risk-off environment where investors need to take extra caution. Given the market's current timbre, investing as much as 10% of your portfolio into precious metals is an excellent way to hedge against economic turbulence while ultimately positioning yourself to come through a looming recession intact or even ahead.

Gold as a Hedge Against Inflation

There is something inherently valuable about gold. Mankind has revered gold —and to a lesser extent silver, platinum, and palladium— for centuries. Throughout history, gold ownership has been synonymous with wealth, prosperity, and power. While gold has slowly matured from a bartering tool into an investment vehicle, it has invariably remained a symbol of wealth and highly desired nonetheless. And it might just be the best way to protect your portfolio against probable market disruptions ahead.

One of the main reasons that gold performs so well is that it functions both as a commodity input in the industrial complex, but also as a universally recognized store of value. If you were to look at the overall return on investment for gold over the last 40 years, you'd see a steady upward trend (overall) averaging a 10.6% return. While it’s true that on a long enough timeline stocks have generated a slightly higher ROI, during stagflationary and disinflationary environments, which may lay ahead, stocks historically suffer their largest losses while gold has generally outperformed the stock market as a whole.

In a bull market, like the one we've enjoyed for the last few years with consistently strong GDP growth, investing in stocks is the superior choice. However, in a developing bear market with rapidly decelerating GDP growth, rising interest rates and persistently high inflation, investors would be wise to play defense, precious metals have empirically proven to be an effective safe harbor in similar economic environments

Gold, Precious Metals, and Geopolitical Crisis

Financial markets do not exist in a vacuum. Shifts in the value of financial assets are also impacted by be geopolitical events.

Sanctions against Russia are predictably creating havoc within global individual economies. As inflation has crept upwards, the value of the dollar has decreased. In other words, a dollar doesn't buy as much as it did this time last year. When the Fed announced the rate hike last month, throwing a wrench into the speed of our economy's growth, the value of gold dropped, but it didn't plummet. In fact, the price of gold only fell 0.3% during the ensuing market turbulence, to settle at $1,915 per ounce before rebounding in subsequent weeks. This is emblematic of the precious metal's resilience during a bear market and slowing economy, and it demonstrates gold's ability to weather the storm virtually unscathed.

Gaining Ground in a Bear Market

Q2 and Q3 look to be a period of pronounced economic uncertainty. Tensions across the globe, coupled with a stressed global supply chain in a post-pandemic world may very well serve as the catalyst that launches us into an era of stagflation not seen since the 1970s. Wise investors have one of two choices: do nothing, ride the wave, and hope for a strong recovery when a new business cycle begins, or proactively position their portfolios to protect wealth with larger investments in precious metals like gold. From my point of view, given the significant headwinds global stock markets face, now is the time to own gold and other precious metals and wait for the opportunity to buy stocks lower.