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Getting Off the Emotional Financial Markets' Roller Coaster Ride



For some time now, many major financial markets (both equity and bond markets) around the world have been in bubble territory.

With the start of the New Year 2018, the US equity markets went into overdrive, and rose at an even faster pace. However, since the beginning of February the USA's financial markets have begun to falter, with some very heavy daily declines, which has caused many other major global markets in bubble territory to also buckle and decline. 

It is increasingly recognised, that in various ways, the major Central Banks have been active in supporting the financial markets. However, it appears to have become increasingly difficult for the major Central Banks to maintain those markets at such elevated levels, and they may have to let nature take its course. Ergo, there is a very real possibility of an imminent major correction in many of the major financial markets.

We are now close to the point where there is a real danger of momentum picking up to the downside, feeding on an increasing sense of panic by investors, who want to get out. Some analysts speculate that the USA's equity markets could decline as much as 40% before finding strong support.

Even if the major Central Banks are able to slow, halt, or even reverse, the recent decline in financial markets, there is little doubt that they are overdue a substantial correction, and at the very least face the prospect of significantly increased volatility.

In such conditions it is very easy for investors to find themselves in a major emotional rollercoaster, which could lead to ill-advised knee jerk panic decisions.   

As such, it makes sense to avoid the emotional pitfall of being sucked into the minutiae of day to day events and action. It makes more sense to focus on the big picture, which will help smooth out the emotional ups and downs. What follows is a very brief and simplistic view of the big picture, as the writer sees it…

Political and Geopolitical Uncertainty

Personally, the writer finds Trump to be an enigma, who nonetheless is infinitely preferable to the Deep State's favourite, Hilary Clinton, particularly as there is an increasing body of evidence to suggest her involvement in pervasive corruption, both political and financial.

With the recent release of the infamous 4 page FISA memo, Trump now appears to have the necessary ammunition to go on the offensive against the Deep State which many reports suggest is both evil and immoral, with their own hidden agenda, which is not necessarily in the public's interest. 

The USA's Deep State is not omniscient, and like bullies, when punched on the nose, will tend to cut and run. Hopefully the justice system will be seen to work, with those found guilty ending up in jail, even if they are senior politicians or major corporate CEOs. Perhaps that is wishful thinking, but only time will tell. 

It is important not to lose sight of the fact that many nations have their own version of the USA's Deep State. This is not just a USA problem. However, if the USA's Deep State falls, like dominoes, so will most of the other national Deep Sates, as they are so interlinked, as outlined in the writer's book: FROM WEST TO EAST – The Greatest Transfer of Power and Wealth in the History of Mankind (Read the prologue).

The possible eventual failure of the various Deep States around the world would, in the writer's opinion, herald a dramatic reduction in the current increasing geopolitical tensions. Such an event would allow nations to focus on agreeing to draw up, and implement, long overdue and sweeping reforms to address the root causes, as well as the symptoms, of the problems being faced by the international financial system, as well as allowing for emphasis to be placed upon nations engaging in free trade and commerce, rather than war. 

However, in the meantime, the public will have to live with increased geopolitical tensions with the ever present danger of the regional 'proxy' wars escalating to the point where the major powers end up engaging in direct military conflict, with all the attendant ramifications.

Economies

China's 'One Belt One Road' initiatives have the potential to provide huge economic impetus for the world at large, not just Eurasia, in the event of reduced geopolitical tensions.

The US dollar is fragile and losing its appeal due to combination of factors beyond that of the poorly performing US economy. These factors include, but are not limited to, the Chinese-Russian bloc's policy to reduce their dependence on the US dollar, as well as the gradual shift by oil producers in their increased willingness to sell oil for currencies other than the US dollar. In the writer's opinion, the decline in the US dollar has a long way to go.

The major economies of the world are saddled with increasingly unsustainable debt at national, corporate and personal levels, which is having an increasing drag on economic growth.

Financial Markets

Many of the world's major financial markets are in nose bleed bubble territory, and are very vulnerable to a major correction. 

Even a modest increase in interest rates could cause serious debt defaults and precipitate a financial crisis along with an economic recession/depression of such proportions that it would make the 2008 crisis look like a stroll in the park on a pleasant summer's day.

The financial markets are so interconnected they too are also like dominoes, in that when one major market topples, contagion will ensure that most other markets will quickly follow suit., with the fallout being multiplied by many factors by the triggering of the approximate US dollar one Quadrillion mountain of financial derivatives. Only time will tell when, but to use an American expression, it looks like we are now in the 9th inning.

Precious Metals

The precious metals sector is so beaten down, it is an excellent investment opportunity in and of itself, as well as providing an investment portfolio hedge in the increasingly likely event of a major financial and economic crisis in the foreseeable future.

For example the current gold price is only approximately 58% above its peak 1980 price level, whilst silver is approximately 66% below its peak 1980 price level.

The current silver price makes silver the most undervalued financial asset in the world, notwithstanding that it has had 17 consecutive years of supply deficit totalling some 1.8 Billion ounces!

Whilst the mining shares included within the Philadelphia Gold and Silver (XUA) precious metals mining shares index are at the time of writing 16% below the index's value of 100 at the time of the index launch in 1984!

Precious metals price suppression has been endemic for so long, that many investors think that that the Central and Bullion banks are capable of suppressing those prices ad infinitum. But there are clear signs that they appear to be losing control, so much so, that eastern nations, sovereign wealth funds and even some Central banks are now buying any dips in the gold price.

The seemingly orchestrated waterfall declines in gold and silver, that occur on a regular basis in the precious metals sector in recent years, for no apparent reason, are becoming progressively shallower and shorter lived. The reason for that is, the supply of physical precious metal bullion is increasingly strained, a situation exacerbated by noteworthy declines in global gold and silver production. These declines in global production of precious metals are expected to increase with the passage of time. 

The writing is on the wall for much higher prices in the precious metals sector.

Both China and Russia have repeatedly stated that they wish to see gold re-introduced into the international financial system in a key role.

History has shown that when there is a major loss of lose confidence in the general financial markets, that has traditionally resulted in a marked increase for precious metals and the related mining shares with substantial price increases not being uncommon.

When investors lose faith in the general financial markets the small precious metals sector will experience a tsunami of demand that will take most financial analysts completely by surprise, and will very likely be well beyond that imagined even by ardent advocates of gold and silver.

In Summary

The major financial markets are in nose bleed bubble territory, whilst the precious metals sector prices are currently in the dumpster. When the abovementioned financial market bubbles burst, it is very likely that the increase in demand for precious metals will most likely be so large as to overwhelm the market's ability to meet the potential demand for the physical bullion, bearing in mind the already strained supply lines. The related precious metals mining sector has such a small total market capitalisation, that the share prices could well be bid up to extraordinarily high levels in a very short period of time.

All of the above suggests to the writer, that before there is a major loss of confidence in the general financial markets, it makes a great deal of sense for investors to consider allocating a suitable percentage of their investment portfolios to the precious metals sector, sufficient to attain peace of mind, particularly whilst prices in the precious metals sector are currently low. 

By adopting such a strategy it should enable investors to more calmly observe the day to day action in the increasingly turbulent general financial markets, allowing investment decisions to be made with dispassionate objectivity, as events unfold, with the comfort of knowing that their the precious metals sector of their portfolio affords them the luxury of insurance which brings peace of mind.

Article by: James S Gibson

Date of article: 16 February 2018

Please note that none of the content within any articles on the GoldVu website are offered as investment advice and should not be construed as such.

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