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.

Next Gold Bull Market Driven by Stock Correction says Sprott CEO

Weaker-than-expected economy could be the perfect catalyst for next gold bull market.

Central banks from around the world have grown bolder in their approach, with many of them embarking on a course of tightening monetary policy for the first time in recent memory. Aside from the U.S. Federal Reserve's much-publicized rate hiking, the Bank of Canada recently raised rates for the first time since 2010, and the European Central Bank indicated that it might follow suit.

According to Sprott Inc. CEO Peter Grosskopf, however, the banks are operating on overly optimistic economic forecasts and will not be able to hike rates as quickly as expected. "We think the underlying economies and the strength of the economies can be debated," Grosskopf explained. "If you look at the underlying statistics, it's a lot less evident that the economy is strong."

Grosskopf believes this will provide the next leg up for the yellow metal, with weaker-than-expected economic growth leading to the stock correction that many are expecting. This risk-heavy environment would act as a perfect catalyst for the next gold bull market.

"The next move on gold will be driven by an equity market correction," Grosskopf told Bloomberg in an interview. "It's a pretty safe bet that if equity markets start to look volatile and dangerous then a lot of money will flow into gold as a hedge to that."

Sprott USA chairman Whitney George agrees that it's dangerous for central banks to hike in unison amid low inflation. He expects this to not only put pressure on the stock market but to also negatively affect the currencies of the countries involved.

"When you look at the history of the last 20 years, every time central banks have decided it was time to take the punch bowl away we've had quite a dislocation," says George.
Grosskopf, whose firm is in the midst of returning to a precious metals-oriented investment strategy, feels that investors have been lulled into a false sense of security, resulting in a reduction of their gold positions.

These investors are sure to flock back to the safety of the yellow metal as soon as they think trouble is brewing, allowing gold to reach new heights. According to the firm's strategists, gold has the potential to rally past $1,400 by year's end.

"People haven't placed a high priority on having a hedge because the punch bowl seemed to be relatively full," said Grosskopf. "Gold is vastly under-invested by most investors, so it's got a lot of growth ahead of it."