Stock Market Fears Reinforce Gold According to Famed, Frank Holmes

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.

Seeking Alpha Writer Sees 2 Drivers That Could Send Gold Prices Higher

Gold prices could steadily rise in the short term and long term.

Seeking Alpha's Clif Droke sees two solid drivers that could send gold prices higher, one in the shorter term and one over the long-term.

The short term driver is a potential reignition of safe-haven demand due to a build-up of weakness in stocks.

Some have expressed concerns that the stock market's run is built on overly-optimistic projections, and the recent surge in 52-week lows posted by NYSE-listed stocks corroborates this. In this article, Droke expresses that the broad market faces internal selling pressure, and a continuation of this weakness could lead to a familiar flight to the safety of gold as stock market indices slump.

As his long-term driver, Droke points to an unusual combination of fear and inflation expectations. While these might not seem to go hand-in-hand, Droke argues that they have been the yellow metal's biggest backers since last year.

After a jump in prices brought on by the merciless campaigns of both presidential candidates, gold assumed a downwards trajectory when Donald Trump was elected in November. The "Trump bump" saw investors abandon safe-haven assets in order to load up on equities, riding on the promises of a stronger and more stable economy.

However, the article points out that this faith has since largely evaporated amid political concerns, including uncertainty over Trump's tax plan and its ability to stimulate the markets. A strong booster for gold on its own, political uncertainty in the U.S. is aided by inflation expectations, which Droke feels are significant enough to facilitate a gradual increase in gold prices.

While the markets aren't expecting high inflation in the near future, Droke reminds us that present-day inflation is still markedly higher than it was two years ago when deflation was on the horizon. Furthermore, signs such as a lessened appetite for money point to an upcoming increase in U.S. inflation.

Droke notes that the demand for money was at its highest immediately after the credit crash as the world economy looked to rebuild itself. Since then, economies around the world have improved, led by developed Asian countries – in turn, demand for money has subsided as investors braced for higher inflation, improving the outlook for gold over the longer term.

Despite recent dips, Droke points out that the gold price is far above its December 2015 lows and is closer to its 4-year high than it is to the low. Cracks in the equity market, concerns over the U.S. political situation and a rise in inflation expectations should provide ample support for the yellow metal moving forward.