Volatility came roaring back to the market this year. The S&P 500 has fallen more than 15% since the start of January. Many analysts cite the Fed’s decision to raise rates as the major contributor to this drop.

This move means that the flow of cheap money is slowing significantly. The result is a higher cost of doing business.

Meanwhile, many investors who long believed that stock valuations were unreasonably high are starting to see their fears confirmed. More people are looking to different asset classes as a means for preserving wealth as equities drop in value and investor sentiment dampens.

Doing so is especially important in a rising cost environment. As inflation exceed 8% more Americans are considering ways to buoy the spending power of their dollar as gas, groceries, and housing costs all rise.

This setting has prompted renewed interest in gold. “Historically gold has outperformed equities by an even larger magnitude when volatility is rising from an already elevated level,” explained CFA Russ Koesterich at BlackRock.

This same body of research concluded that changes in the VIX, often called the “fear index,” explains almost 20% of the difference between the return offered by gold and the S&P 500.

Put another way, during months of rising volatility in the S&P 500 gold outperformed the market by approximately 2% on average. Moreover, this relationship becomes even more stark when the VIX rises above 20. During these times, gold outperformed the S&P 500 by an average of about 5%.

Today the VIX is at more than 29.

This research confirms the long-held notion that gold can have a stabilizing effect on a portfolio because its correlation to equities is low. In fact, the correlation between gold and equities is lower than that of the correlation between the stock market and REITs, private equity, and hedge funds.

The low correlation between gold and US stocks was evident during other periods of upheaval including the Long-Term Capital Management crisis, the September 11th terrorist attacks, the 2008 Global Financial Crisis, and Brexit, during which gold climbed 9.8% and global equities fell 1.2%.

The volatility in today’s market is unlikely to decrease any time soon. Investors and markets are concerned with the war in Ukraine, rising COVID transmission in China, more interest rate hikes to come, and of course the highest inflation we have experienced in more than forty years.

Solving many of these structural problems will take time. Companies will need to shore up their operations as a safeguard against existing and future supply chain disruptions. The global food system will need to adjust to the lack of agricultural products, namely wheat, coming from Ukraine. Additionally, investors will need to wait out the inflation problem.

In the meantime, gold offers a hedge against uncertainty.

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Students of market history know that it’s not a question of will there be another financial crisis – but when will it occur and what will be the trigger. History is littered with market bubbles that burst and the crises that followed.

Walter Bagehot, editor of the Economist between 1860 and 1877, once stated that financial panics develop when the “blind capital” of the public floods into unwise speculative investments. Today’s cryptocurrency market collapse could be a prime example of that. Going farther back in recent history – the 2001 dot.com crash emerged after the public chased after and bought a variety of new technology companies that had zero profits – only potential.

Then of course, the 1929 stock market crash and subsequent Great Depression looms large in the economic history books. The stock market was booming in the late 1920’s as new companies embraced the technologies of the day including radios, aluminum and airplanes. Yet, few of these companies had a performance track record or dividend payments. However, speculators fueled by the fear of missing out (FOMO) drove the market ever higher. In October 1929, the speculative rally began to unravel with a nearly 25% drop in the Dow.

By November, the Dow had crashed 45%. In the wake of the 1929 market crash, banks failed and America entered an economic Depression that lasted ten years.

History shows that bubbles and crises are repeating patterns

From the Dutch Tulip mania in 1637 to the South Seas Bubble in the UK in 1720 to the more recent 1987 Black Monday stock market crash and the 2008 Global Financial Crisis, they are easy to find.

Sometimes crises are triggered by Black Swan events that you simply couldn’t see coming. Other times, crises build up over time, quietly in the background. That is what we are seeing today.

America is slowing but surely grinding toward a major debt-inspired fiscal crisis

Many can see it coming and some ring warning bells. But, our nation’s debt feels so esoteric, so vastly huge that it becomes meaningless to the average American.

A recent Wall Street Journal article headlined: CBO Sounds a Warning of American Fiscal Ruin is another attempt to highlight this ticking time bomb that lurks behind the scenes of our daily lives.

Our nation’s national debt recently passed the $30 trillion mark, according to Treasury.gov

See Total Public Debt Outstanding here. The debt load simply keeps climbing.

So what could lie ahead? The non-partisan Congressional Budget Office (CBO) warned in a new report that you may face two scenarios in the years ahead.

Spoiler alert. Neither scenario is pretty. Get ready for higher taxes and lower benefits.

“The first would gradually raise personal income-tax rates in equal proportion across the income spectrum. The second would gradually reduce benefit payments for Social Security, Medicare, Medicaid, and ObamaCare. The budget gnomes analyzed each scenario with three different starting dates, with fiscal tightening beginning in 2026, 2031 or 2036,” according to the Wall Street Journal article.

No surprise: the longer your representatives in Congress take to deal with this situations, the larger the tax increases and benefit reductions will be needed, the CBO said.

While higher taxes and lower Social Security and Medicare benefits sound bad, the alternative is even worse.

A debt-driven U.S. fiscal crisis in the future has the possibility of completely upending our way of life, our markets, interest rates, the dollar and our financial system as you know it.

Here’s what the CBO report said:

“The likelihood of a fiscal crisis increases as federal debt continues to rise in relation to GDP, because mounting federal debt could erode investors’ confidence in the government’s fiscal position and result in a sharp reduction in their valuation of Treasury securities. In turn, investors would demand higher yields to purchase Treasury securities and thus drive up interest rates on federal debt. Additionally, concerns about the U.S. government’s fiscal position could lead to a sudden increase in inflation expectations, fear of a large decrease in the value of the U.S. dollar, or a loss of confidence in the federal government’s ability to repay its debt in full, all of which would make a fiscal crisis more likely.”

This crisis would be a dollar crisis

If that were to unfold, your dollars would decrease in value by an exponential basis. Think it won’t happen? How confident are you in your lawmakers in Washington D.C. to work together, across the aisle, in a collaborative manner – making compromises – to achieve a deal to stabilize the nation’s finances. Too many politicians today are willing to gamble with significant financial issues in order to create news that will go viral in a social media world.

Gold offers you protection, yet again

If this day comes, investors holding an allocation to gold will have diversification and protection from a collapse in the U.S. currency, the dollar. Gold and silver are monetary metals that are recognized and valued in every country on earth. While the policymakers in Washington play politics with your hard earned paper dollars, tangible asset investors have a strategy to shield a portion of their wealth by investing in good old fashioned hard currency – gold.

Investors diversify into precious metals for many reasons. The looming fiscal crisis is simply another one to add to your list.

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The rising price of oil is a concern for many Americans. The average price of a gallon of gasoline reached an all-time high just weeks ago.

Oil is becoming more expensive for three reasons.

1. Demand is rising as the economy continues to return to normal as the country learns to manage COVID.
2. The war in Ukraine has altered the supply chain. Energy companies like Shell, BP, and Exxon have all exited their energy deals with Russia. Meanwhile, President Biden has initiated a ban on Russian oil imports.
3. US oil producers are still hesitant to expand production. The number of oil rigs in the country has been dropping in recent years as the economics of oil production become less favorable. Getting new rigs built and up to production is time consuming and expensive.

While the reason for rising oil prices seems, clear one question remains: What does this mean for gold prices?

Research from Resources Policy shows that there has been a positive price correlation between the price of oil and the price of gold for more than 80% of the last 50 years. One possible reason for this correlation is uncertainty.

A disruption to the global oil supply tends to be the result of unforeseen events like war, geopolitical tensions, or a recession. During times of uncertainty investors often seek assets that offer a degree of protection from wild swings in investing markets. Gold serves this need because it is often considered a “haven” asset which is less influenced by interest rates, supply chain constraints, and counterparty risks.

Researchers sometimes call this correlation the “spillover effect” which occurs when “a large information shock increases the return correlation not just in the market in question, but also in other markets” according to a publication in Energy Research Letters.

Interestingly, the degree of the spillover effect can intensify during periods. For example, one body of research discovered “more pronounced volatility spillovers across commodity futures markets, including oil and gold, in post-crisis periods, including the global financial crisis…and two European debt crises.”

The research from the publication also shows that oil returns have been more volatile than gold returns which seems to reinforce the notion that gold is effective at preserving wealth during periods of upheaval.

The research also shows that the spillover effect has been more pronounced in the setting of the COVID pandemic.

In aggregate this data is a reminder that investors can mitigate the effects of global uncertainty by allocating a portion of their investable assets to gold. This strategy is likely even more effective when instability impacts the oil market because rising oil prices are so salient. Every American that fills their car with gasoline is aware – on a near daily basis – of the rising price of oil.

The degree and duration of uncertainty in the world is of course not something an investor can control. They can only prepare for it and react to it. Research like this is a reminder that often the best way to do so is with gold.

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Gold is already shining brightly in 2022, compared to other investment asset classes. Yet, new research reports from the Wells Fargo Investment Institute and BofA Global Research reveal that gold has more room to run on the upside.

Let’s take a quick look at recent market performance. Through late April, gold is up 6% year-to-date, while the S&P 500 is down 6%, and the tech-heavy NASDAQ is down over 13%. Ten year Treasury yields nudged up recently as bond prices fell, but still only return a 2.91% yield.

Hands down, gold is performing well this year. But, according to new research, the best may be yet to come for gold and silver.

The Wells Fargo Investment Institute couldn’t be clearer on gold: “We still like it,” John LaForge, head of real asset strategy wrote in an April 18 report to clients.

What does Wells Fargo’s LaForge see as appealing? First, the fundamentals for gold look strong, especially on the supply side, he notes.  Historically, when supply drops below the 5-year average (like it is right now), it has been a positive sign for gold prices ahead, opening the door to a multi-year gold price rally.

Second, as equity and fixed-income markets struggle in early 2022, Wells Fargo believes that “investors are actively looking for assets that can add diversification to portfolios.” They name gold as a store-of-value asset at the top of the list. Wells Fargo pegs a 2022 year-end gold price target in the $2,000-$2,100 range.

Analysts at Bank of America are also upbeat on the prospects for gold this year. According to a BofA Global Research report, the firm forecasts gold gains to $2,175 an ounce and silver to $30 an ounce.

What’s more? The recent retreat from above $2,000 offers investors a buying opportunity. “We like longs / buying dips near $1940/50 for tactical trades and if above $1888/oz for medium term trades,” the BofA Global Research report said.

Take a look at where gold is trading now. If you act quickly, there is still time to add to your tangible assets allocation at a price level that provides value and long-term price appreciation.

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