Are you ready for October?

Crash month. It’s right around the corner. October often triggers fear and panic among investors as memories of the 1929 and 1987 market crashes come alive.

Indeed, history is littered with downright scary moves in October.

Remember the 554-point drop on October 27, 1997? Don’t forget Friday the 13th in 1989. More recently, the Dow crashed 18.2% in October 2008 (1,874 points).

Investors are rightly concerned that the recent tech-led retreat in the stock market signals an end to that sector’s outperformance. With the S&P 500 trading around its pre-pandemic levels, the idea that valuations of “risky” assets are now unsustainably high is understandable.

Risks Ahead – Buckle Up Your Portfolio

Looking ahead over the next several months, many risks abound, including a possible increase in COVID-19 cases, heightened US-China tensions, and election uncertainty.

Just as a pilot warns his passengers that turbulence lies ahead, investors should be warned that more stock market volatility is coming.

Now is the time to ‘buckle up’ your portfolio and consider increasing your exposure to tangible assets to smooth volatility and protect and preserve your wealth.

Election Jitters

Less than 50 days remain until Election Day. Voters are beginning to cast votes in some early voting states to choose the next president and determine who will control Congress. Election jitters will dominate financial markets in the weeks ahead.

Confusion over Timing of Coronavirus Vaccines

Big pharma continues to move at a furious pace, racing to roll out a vaccine to halt the deadly Covid-19 virus. American citizens received mixed messages on general availability. CDC Director Robert Redfield told ABC News that “…I think we’re probably looking at late second quarter, third quarter 2021”, compared to President Trump’s assertion that the country will have enough vaccine doses for all Americans in April.

New Covid-19 cases have generally stabilized with a majority of U.S. states reporting daily case growth under 1.0%. However, Wisconsin is an outlier as new Covid cases are spiking there.

Technology is New Geopolitical Battlefield

U.S. – Chinese tensions remain high.

Last week, the US Commerce Department began banning downloads and updates of Chinese technology companies TikTok and WeChat apps. The Trump Administration took this action because it says “the Chinese Communist Party (CCP) has demonstrated the means and motives to use these apps to threaten the national security, foreign policy, and the economy of the U.S.”

Federal Reserve Makes History

At last week’s Federal Reserve meeting, the central bank came right out and said it expects to keep interest rates at 0% through the end of 2023.

That’s right. The Fed is not even thinking about raising interest rates for four years.

Gold and silver thrive and climb in zero interest rate environments and the Fed is guaranteeing that until the end of 2023.

For precious metals investors, that is excellent news. It’s no surprise that gold climbed higher after Fed officials met last week.

Bottom line: The Fed is holding course with its unprecedented display of monetary firepower, providing massive liquidity to the economy and marketplace.

However, monetary policy cannot solve the underlying cause of the recession – the pandemic and the Covid-19 virus.

Investors Pessimistic About Challenges Ahead

The economy continues to weigh on investors’ outlook, with more saying they are pessimistic (47%) about economic growth over the next 12 months than optimistic (40%), according to a new The Wells Fargo/Gallup Investor and Retirement Optimism Index released last week.

Most investors believe economic downturn is ahead, dismissing talks of V-shaped recovery.

In terms of an economic recovery, two-thirds of investors believe the road to recovery will be far from smooth. 40% of investors believe the economy will have multiple downturns before a recovery will take place, while another 23% believe the economy will have at least one other significant downturn before recovering — a so-called W-shaped recovery, the survey found.

Investors fear COVID-19 and the presidential election

Of the various challenges that could affect the stock market this year, investors worry most about the coronavirus (40% are very worried). The November election ranks a close second, at 36%, and the federal budget deficit third, at 32%, the survey also found.

Prepare Now

Investors can expect financial market volatility to remain high amid a backdrop of rising uncertainty.

Don’t count on fiscal help from Capitol Hill to support the economic recovery. With each passing day, the probability for another round of emergency stimulus falls, as lawmakers remain at an impasse. While some economic measures are improving, the risk of jeopardizing the recovery from reduced fiscal support is growing.

Gold is Range Bound

Gold investors may need to be patient as the market continues to consolidate in a neutral, sideways short-term trend. The long-term gold trend continues to point solidly higher.

The market had an incredible run throughout 2020 thus far. But, rest assured, the Fed is creating one of the most bullish backdrops for gold prices we’ve seen in modern history. Major Wall Street banks are forecasting gold $3,000.

Lloyd Blankfein, former chairman and chief executive officer at Goldman Sachs, shed light on the outlook for gold last week in a virtual fireside chat hosted by CME Group.

“It has been so long since these metals have played a role in financial markets as a store of value,” he said. “But if there was ever a time where they would, it would be now.”

Answering Your Questions

Recently, a reader asked:  “What will silver be worth if gold peaks at $3,000?”

Great question! The simple answer is $42.05-$50.00 an ounce.

Here’s how that is calculated:

Gold and silver tend to climb together, of course.  Bigger picture, silver prices have more to go. In fact, Bank of America predicts that silver could hit $35 an ounce in 2021 and $50 an ounce over the medium term.

A simple back of the envelope calculation shows that if gold increases from its recent high to $3,000 that would mark a 45% gain from that level.

Projecting that 45% gain onto silver from its recent high equals a silver price of $42.05 per ounce.

However. History has shown that silver tends to climb at a faster percentage pace than gold. Silver has always outperformed gold and the percentage gains were stronger, according to research by CPM Group.

That is why a silver price target at $50 an ounce or more can easily be projected with gold at $3,000. That also matches Bank of America’s medium term forecast for silver prices.

Please keep your questions coming!

Until next week…

Regards,

David

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High-flying tech stocks fall fast.

Warning: volatility lies ahead!

Football is back, children are in school (or on Zoom classes), a chill is felt in the morning air and in some parts of the country the leaves are beginning to turn yellow, red and brown in Mother Nature’s stunning fall display.

Yet, despite this small sense of the new normal, the stock market cratered last week in a topsy-turvy week in which investors dumped high-flying tech stocks like Apple, Facebook and Amazon.

Indeed, the S&P 500 and the tech-heavy Nasdaq Composite fell 4.8% and 7.2% over the past two weeks.

Is this volatility a hint of what’s to come over the next six weeks?

You bet it is.

The classic herd mentality drove stocks higher in recent months.

Guess what?

The herd is changing direction.

Remember that big wave of new Millennial day traders who got into stock trading during the pandemic? They place orders on their phones, just like they would order takeout food. They are learning a hard lesson – the equity market goes down too.

There is an old Wall Street saying: Stocks take the stairs up and the elevator down. That is why they call them stock market crashes.

Markets nervous about election

As the U.S. presidential election edges closer, the polls are tightening between incumbent Donald Trump and challenger Joe Biden. All across the country, voting commissioners are already facing lawsuits about technicalities, mail-in voting postmark dates and other challenges to voting in the midst of the Covid-19 pandemic.

This will be the most hotly contested and highly partisan presidential election in decades.

And, financial markets are getting nervous.

Just look at last week’s market action. This is only the beginning. In the meantime, the traditional role of bonds in a portfolio continues to wane in today’s world of zero and negative interest rates.

The decreasing value of bonds

As the markets and economy head into a challenging period, investors around the globe are rethinking the traditional role of bonds in a diversified portfolio – that has been, in part, behind the historic rush into gold and silver in 2020.

In fact, the 10-year Treasury bond’s real yield, which includes inflation – now stands at -43 basis points.

In simple terms, yes, that does mean you lose money for every dollar you invest in a U.S. government bond. With inflation, you are losing nearly 50 cents on every dollar invested in a 10-year note.

No surprise that major investment firms are now calling gold a ‘bond alternative.’ Not only are investors able to hedge against inflation, but also capture precious metal price appreciation.

Speaking of inflation…

The inflation trend is rising

Have you noticed? Prices for the things you buy are going up.

The consumer price index rose 0.4% in August, the Labor Department reported last week. That comes after the CPI also advanced 0.6% in June and July.

Here’s what the experts are saying about inflation…

“This inflation outbreak will test the resolve of Fed officials who say they are not all concerned about inflation and will continue to pour gas on the fire with the QE of $80 billion monthly purchases of Treasury securities and they won’t rein in the economy with interest rate hikes,” Chris Rupkey warned last week. He is chief financial economist at MUFG, a global financial group.

“More recently there has been a lot more upward pressure on prices than we would have expected…With goods production continuing to lag behind the rebound in spending, those problems are only going to become more acute over the next few months, pushing core inflation higher,” according to Paul Ashworth, Chief North American Economist at Capital Economics.

Indeed, Jason Fertitta, head of registered investment advisor Americana Partners, said that in light of all the easy money central banks are pumping into the global economy, there is a case for investors to increase their exposure to real assets.  “My biggest concern is that the levers the Federal Reserve is having to pull to keep this market going is very experimental, and we don’t know when inflation is coming,” he told Barron’s. “We have to put in some assets that could benefit from inflation. Real assets historically were a small part of the portfolio, and we are certainly open to that being a larger piece.”

Gold consolidates

The gold market traded quietly last week – as it continues to build value around the $1,950 an ounce level. The gold market is trading well above its 200-day moving average (now around $1,700 an ounce), which is a technical signal that the rising trend in gold remains healthy and strong.

Gold is consolidating its incredible gains throughout the first eight months of 2020 –and gathering strength for its next leg higher with the next big price target at $3,000 an ounce, according to recent Bank of America forecasts.

Fed Meeting This Week

The Federal Reserve meets this Wednesday in its first meeting since its policy shift to a more flexible average inflation target. Investors are waiting for more clarity on this new policy and for how many years U.S. interest rates will remain at zero.

Current expectations are that zero interest rates are here to stay until at least 2023.

We will update you on important developments from the Fed this week. Stay tuned. In the meantime, please call a Blanchard portfolio manager at any time to discuss opportunities, wealth preservation and accumulation strategies in these interesting times.

Stay well. Until next week…

Regards,

David

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Trust in Money.

As summer winds down, the case for gold diversification grows stronger every day.

Wells Fargo’s Head of Real Asset Strategy John LaForge outlined in a research note to clients on Aug. 24 the factors that drove gold up 35% in 2020.

They are:

• low long-term interest rates
• excessive global money printing
• a weakening U.S. dollar

The fourth reason he states might be shocking to some: distrust in the global monetary system.

Here’s what Wells Fargo research said:

“Trust in money, over the very long-term, has been a fickle thing. No paper money has survived time, while gold has. Gold is history’s trusted ‘store of value.’ Trust is particularly important when we are talking about money. This is why gold, throughout much of history, has been tied to money. If history tells us anything, it is that money is only worth what someone else is willing to give you for it. If it can’t be trusted to have value, what was once money can become worthless. It seems that recent generations know little about gold and its historical role. Gold was ditched by the West as money about 100 years ago, in favor of trusting governments and institutions. The monetary system is working today, and it is largely trusted. With that said, the recent rise in gold prices and cryptocurrencies may be a sign that a small but growing contingent is questioning the world’s monetary system.”

This follows Goldman’s Sachs recent warning that the dollar is in danger of losing its status as the world’s reserve currency.

Also – notably – in early August, Russia and China revealed a new partnership – a “financial alliance” to reduce their dependence on the U.S. dollar.

These developments make the case for portfolio diversification to gold even stronger. Many investors are now increasing their allocations to gold…have you considered if you are properly protected and hedged?

Fed Announces Landmark Policy Decision to Allow More Inflation

Last week, the Federal Reserve made history by changing its long-standing practice to head off higher inflation.

Chair Jerome Powell announced that the Fed is adopting a “flexible form of average inflation targeting.”

Simply put, the policy will mean low (zero) interest rates for longer – and the central bank will now not focus on controlling upticks in inflation.

One must question the value of zero interest rate policies here in the U.S. After all, zero interest rate policies failed to deliver economic prosperity in Japan and Europe over all these years. Why will the U.S. be different?

Here’s what Paul Ashworth, Chief North American Economist at Capital Economics said about that:

“We do wonder whether the modern-day Fed is at risk of repeating the “anguish of central banking”, as originally described by ex-Fed Chair Arthur Burns in his infamous speech in the late 1970s. Burns’ argument was that he and other central bankers had the tools to control inflation in the 1960s and 1970s, but chose not to do so because “the Fed was itself caught up in the philosophic and political currents that were transforming American life and culture.” As Burns learned to his cost in the 1970s, the less focus the modern-day Fed puts on controlling inflation, the bigger the risk is that inflation will eventually get out of control.”

Gold, of course, is a historical inflation hedge, just another reason for gold ownership now.

Gold Holds Above 200-day Moving Average

In the midst of all this, gold traded quietly last week – a much needed breather from the runaway bull market that drove gold to a record high at $2,070 earlier this month. A short-term neutral range is developing as gold builds value between the $1,910 and $1,980 an ounce level.

Significantly, gold continues to trade well above its 200-day moving average (at $1,680) – which is a positive bellwether for the long-term trend – and confirms the long-term trend points higher.

As we close out summer, we leave you with this thought:

A U.S. dollar is an IOU from the Federal Reserve Bank. It’s a promissory note that doesn’t actually promise anything. It’s not backed by gold or silver. − P. J. O’Rourke

In Gold We Trust.

Regards,

David

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