As stocks faced a near 1600-point correction, Frank Holmes reminds us of his time-proven advice to hold 10% of one's portfolio in gold.
After a prolonged record-breaking performance, the stock market was finally taken down a notch by the near-1600-point correction that started earlier this month. As panic spread among investors, gold emerged as the standout asset for the duration of the scare.
Frank Holmes recently wrote in a Forbes article that gold's performance against plunging stocks is expected, but no less impressive, and reinforces his time-proven advice that investors should hold 10% of their portfolio in gold.
As the downturn continued, all of the major averages turned negative for the year, with the Dow experiencing its sharpest daily decline ever. The article writes that the CBOE Volatility Index, sometimes referred to as the "fear index", also spiked to its highest point on record, an increase of almost 100%. Given the severity of the drop, experts scrambled to understand what caused it and whether it was a one-off scenario, with explanations ranging from overbought conditions to recessionary concerns.
As opposed to worries that the economy is struggling, Holmes believes the selloff might have been caused by the earlier report from the Labor Department, which showed the highest wage growth since the financial crisis. This added fuel to ongoing concerns that inflation is building up after a lengthy absence, a notion Holmes supports.
The article notes that all of the major indices, such as the consumer price index (CPI) and its alternate version, show that inflation is trending upwards. An inflationary environment wreaks havoc on traditional havens such as Treasury yields and even cash, leaving gold as one of the few assets investors can turn to.
Holmes says that inflation expectations have already given gold a leg up, which could be just the start if the cost of living shoots up. Analysts at BCA Research agree, adding that gold will serve as an important hedge when the stock market turns bearish in the second half of 2019.
Holmes, however, believes gold bulls might not need to wait that long given the amount of volatility and fear already seen in the markets. Despite reassurances that the fall in equities was a momentary lapse, the flight to gold shows that investors are keenly aware of the stock market's propped-up position.
Even with all of its gains, Holmes points out that the ever-steady gold continues to outperform the equity market by a large margin in the 20-year period. Since its untethering from the dollar in 1971, the metal has also beaten out every other asset class, including cash, commodities and bonds, over multiple time periods. The article states that these statistics exemplify gold's low or negative correlation to other assets and show that the metal allows investors to turn a profit in a wide variety of situations.
