Many investors hold gold and silver to hedge against various economic crises. But does this hedge hold up during stock market crashes? Knowing what effect a market plunge and subsequent dollar collapse will have on silver and gold is vital to making investment decisions now and then deciding what course to take should a major recession or depression occur.
It’s a common assumption that gold and silver prices will fall right along with the market. And if that’s the case, wouldn’t it be better to wait to buy them until after the dust settles? But suppose that the investors have it right and that their precious metals do retain their value — or even gain value. During a depression, is it better to hold gold or silver? In other words, which one is going to give you the best chance of weathering the storm?
Before formulating a strategy, let’s first look at price data from past stock market crashes… and see what it can tell us that might influence investment decisions.
To help answer the questions posed above, I looked at past stock market crashes and measured gold and silver’s performance during each of them to see if there are any historical tendencies. The following table shows the eight biggest declines in the S&P 500 since 1976 and how gold and silver prices responded to each.[Note: Green signifies the value rose when the S&P crashed, red means it fell more than the S&P, and yellow denotes it fell but less than or the same as the S&P.]
What Happens to Gold and Silver During Stock Market Crashes
There are some reasonable conclusions we can draw from this historical data.
Does gold go up if a stock plunge occurs? In recent times, the answer has usually been, “Yes!” Notice this was regardless of whether the crash was short-lived or stretched over a couple years. Gold even climbed in the biggest crash of them all: the 56 percent decline that lasted two full years in the early 2000s. It seems clear that we should not assume gold will fall in a stock market crash — the exact opposite has occurred much more often.
You’ll recall that gold did fall in the initial shock of the 2008 financial crisis. This recent, albeit memorable, instance is perhaps why many investors think gold will drop when the stock market does. But while the S&P continued to decline, gold rebounded and ended the year up 5.5 percent. Over the total 18-month stock market selloff, gold rose more than 25 percent. The lesson here is that, even if gold initially declines during a stock market collapse, one should not assume it’s down for the count. In fact, history says it might be a great buying opportunity.
Gold rose more than 2,300 percent from its low in 1970 to the 1980 peak. So it isn’t terribly surprising that it fell with the broader stock market at that point. In recent years, the situation has been the exact opposite. Gold endured a 45 percent decline from its 2011 peak to its 2016 low, which was one of its worst bear markets in modern history. At the same time, this isn’t entirely a shock either, given its quick gains during the 2008 crisis and the 2011 crash.
In fact, it rose in only one of the S&P selloffs and was basically flat in another one. This is likely due to silver’s high industrial use (about 56% of total supply) and that stock market selloffs are usually associated with a poor or deteriorating economy. However, you’ll see that silver fell less than the S&P in all but one crash. This is significant because silver’s high volatility would normally cause it to fall more. Also notice that silver’s biggest rise (+15% in the 1970s) took place amidst its biggest bull market in history. It also ended flat by the end of the financial crisis in early 2009, which was its second-biggest bull market. In other words, we have historical precedence that silver could do well in a stock market crash if it is already in a bull market. Otherwise, it could struggle.
The overall message from history is this:
• Odds are high that gold won’t fall during a stock market crash, and in fact, it will likely rise instead. Silver might depend on whether it’s in a bull market.
So, why does gold behave this way?
The reason gold tends to be resilient during stock market crashes is that the two are negatively correlated. In other words, when one goes up, the other tends to go down.
This makes sense when you think about it. Stocks benefit from economic growth and stability while gold benefits from economic distress and crisis. If the stock market falls, fear is usually high, and investors typically seek out the safe haven of gold. If stocks are rockin’ and rollin’, the perceived need for gold from mainstream investors is low.
Historical data backs up this theory of negative correlation between gold and stocks. This chart shows the correlation of gold to other common asset classes. The zero line means gold does the opposite of that investment half of the time. If the line is below zero, gold moves in the opposite direction of that investment more often than with it; if it’s above zero, it moves with that investment more often than against it.
Stocks Have a Negative Correlation to Gold
You can see that, on average, when the stock market crashes (U.S. Equities on the chart), gold has historically risen more than declined. Gold has also historically outperformed the cash sitting in your bank account or money market fund. Even real estate values follow gold only a little more than half the time.
This is the practical conclusion for investors:
This doesn’t mean gold will automatically rise with every downtick in the stock market. In the biggest crashes, though, history says gold is more likely to be sought as a safe haven. So if you think the economy is likely to be robust, you may want to own less gold than usual. If you think the economy is headed for weakness, then you may want more gold than usual. And if you think the economy is headed for a period of upheaval, you may want to own a lot.
There’s one more possibility we have to consider…
It’s not always easy to predict if stocks will fall off a cliff. So what if they don’t? Or what if the market is just flat for a long period of time? You might think that’s unlikely, given the number of risks inherent in our economic, financial, and monetary systems today. But look at the 1970s — it had three recessions, an oil embargo, interest rates that hit 20 percent and the Soviet invasion of Afghanistan. Here’s how the S&P performed, along with how gold performed.
Gold Rose 2328% Trough to Peak While the S&P 500 Was Flat
The S&P basically went nowhere during the entire decade of the 1970s. After 10, years it was up a measly 14.3 percent (excluding dividends). Gold, on the other hand, posted an incredible return. It rose from $35 per ounce in 1970 to its January 1980 peak of $850, a whopping 2,328 percent.
In other words, gold’s biggest bull market in modern history occurred while the stock market was essentially flat. That’s because the catalysts for higher gold were unrelated to the stock market — they were more about the economic and inflationary issues occurring at the time. We have to allow for the possibility that this happens again and that citizens are drawn to gold for reasons unrelated to the performance of the S&P.
Anything can happen when markets are hit with extraordinary volatility. But regardless of what stocks might do, is it wise to be without a meaningful amount of physical gold and silver in light of all the risks we face today? I don’t think so.
Perhaps the ideal solution is to have a stash of cash ready to deploy if we get another big decline in precious metals — but to also have a stash of bullion already set aside in case the next crisis sends gold off to the races.
Original by – Jeff Clark, Senior Analyst, GoldSilver
Not sure if you can afford to invest in property? Here are some creative strategies to reduce the capital requirements needed to get you started.
Investing in property is invaluable, offering long-term rewards and is still regarded as one of the safest permanent investments. Most people would like to diversify their property portfolio but think they won’t be able to afford it or that they will not have the money for a deposit.
“Purchasing investment properties can be capital intensive, but there are ways to reduce the capital requirements by approaching the investment in an informed manner.” says Craig Hutchison, CEO Engel & Völkers Southern Africa.
When it comes to property investment, there are many strategies to adopt, depending on your personal situation and goals. We look at a few creative ways to approach your real estate investments:
• Partnerships: a typical way of obtaining financing.
It is the way many young real estate entrepreneurs go about financing their projects. By finding investors who can put the money up and split the profits on the upside. This also limits your risk and makes the money go further.
Private Lenders: a less risky alternative to a better cashflow.
This is because you can often arrange the terms of repayment with the private party. They can be anyone such as a friend or business acquaintance. The loan’s terms are agreed upon by the two parties, which can make purchasing a property with little or no money a likely possibility.
• Rent-to-own or lease with an option to buy.
This option is especially great when considering how to buy first rental property. If you have a lease-option for 5 years, at the end of that time, you will need to purchase the house and can get a bank loan then. Meanwhile, you can use the time to fix your credit and/or save for a down payment. Some contracts may put some or all of the rental amount towards the deposit.
Read more: Rent to buy, can it work for you?
• Use a home equity line of credit from another property:
If you have equity in another property, you could use that as a deposit on purchasing another investment property.
• Borrow against your own home:
Some people in this situation choose to extend their mortgage to release the cash to invest elsewhere. Some financial institutions will be happy for you to borrow more against your house in order to invest in property. Once you are able to buy an investment property, you can refinance it in one year.
• Rent rooms in your home:
If you own your own home, you can raise money by renting out a spare room. If you’re willing to put in more work, you’ll get higher returns by renting your room through a short-term lettings agency. The profits can be very high if you live in an area with decent tourist, student or business demand.
• Borrow money for a deposit from a relative:
If you are fortunate to have a relative with some extra funding and you really know your stuff and can produce a compelling business case, it might be worth a shot, asking them for funding towards/for a deposit to purchase the property.
• Invest with friends:
If your friends or business partners are also have a passion for property, you could always invest together. If you do decide to invest with someone you know, make sure you’re 100% aligned, discuss what you want to do, and all those scenarios that could go wrong. Plan what will happen if someone wants to sell and the other doesn’t – or one person needs their money back unexpectedly, and get it all down in writing.
• An instalment sale:
Is an agreement, documented in a water-tight contract between a buyer and a seller that the buyer will pay off the purchase price in monthly instalments within 5 years. This enables a buyer to acquire a property by paying the seller in more than two instalments (in usual bank-financed transactions there are two instalments: the deposit and the final settlement amount) and over a period longer than one year, but not longer than five years. Once a buyer and a seller have agreed on a price, the payment arrangements and the terms and conditions, a special purchase contract is drawn up by attorneys that specialise in ALA transactions, which meets all the requirements of the ALA to ensure the transaction is legal and protects the interests of all parties.
Only a handful of investors will make it past their first investment whilst climbing the property ladder even though their intentions were to make it big in real estate.
“Establishing and expanding your property portfolio needs to be done with careful forethought to ensure you get the most out of it” Craig concluded.
If your closet is bulging, your basement is cluttered and you can’t seem to save money, it’s time for a little minimalism — especially when it comes to your finances.
Use less. Spend less. Accumulate less. That’s what minimalistic money management looks like — and it leads to more money, more fulfilment, more clarity and better organization. It’s also better for the environment and your mental health.
Tidy up your financial clutter
Do you have accounts scattered across several banks and dozens of different money managers? Streamline your account structure.
In the majority of cases, Canadians need one chequing account (where your paycheques go into and bills are withdrawn from), one emergency savings account (don’t link this to your debit card so you won’t accidentally spend it), one general savings account (this is for short-term purchases like vacations or a car repair), two credit cards (one is a primary and the other is a backup, which should be from a different provider), an RRSP and a TFSA.
Having too many accounts is confusing and gets difficult to track. It also means you’re paying unnecessary fees, and scattered investments tend not to be optimized to your risk profile and overall goals — which means you’re not going to achieve your full investment growth potential.
Spend with intention
If your money seems to be evaporating into thin air every month, it’s time to pull back on your spending. More than likely you’ve got too many transactions running through your accounts for things you probably don’t need. Get organized by drafting up a budget (how you intend to spend). Cut your daily shopping trips down to one planned-out event per week, which means you’ll need to use a checklist. Keep a tally of your spending so that as you close out each day, you know exactly how much you spent that day. Intentional spending triggers the financial awareness you’re going to need in order to break overspending habits.
Purge your space and sell what you’re not using
Having more things doesn’t make you more powerful, smarter, a better person or more popular. In fact, it can have the opposite effect, and it’s financially unhealthy.
Make space in your life for financial abundance by clearing out the physical clutter in your living space. By selling your goods online or through a consignment shop, you’ll make money that can be put toward savings. If it doesn’t sell, donate it to a local charity. Many even have a pickup service.
So, dig out that old exercise bike, humidifier, area rug, patio set and toboggan, and list it all for sale. If you’re not sure whether to purge something, I recommend asking yourself “have I used this in the past twelve months?” If the answer is “no,” it’s got to go.
Minimize your advice circle
Having too many people weighing in on your financial plans is not optimal, especially if they aren’t qualified. Your dream team should include a financial planner who focuses on building a realistic financial plan based on growing net worth throughout the long-term; an insurance agent who can advise on how to best protect your assets and family in case something derails your plans (damage, illness or death); an accountant, if your finances are complicated, to focus on tax-reduction and preparation strategies; and a lawyer — whom you hopefully won’t need often — to advise on wills, property transactions, prenuptials, trusts, estates and other legal matters that might surface.
It will take a bit of effort to minimize your finances in the beginning, but I guarantee it: Less confusion and complexity in your finances will eventually lead to better financial health.
The process of delivering and tracking gold is suspected to go through some substantial changes soon. Most of these changes pertain to the incorporation of the innovative blockchain technology. This is the same technology that powers the equally innovative creation of cryptocurrencies. Both of these creations are making headway in other industries, like mortgages and competitive gaming.
In simple terms, blockchain is a ledger that functions like an online journal that is impossible to tamper with. The ‘blocks’ are pieces of data and the ‘chain’ is the public ledger itself. As soon as something is added to the ‘chain’, the information remains there for public consumption from then on.
Already there are a substantial amount of companies that want to utilize this technology to secure gold transactions. Among them is Emergent Technologies Holdings, which is developing a blockchain that tracks the origin of gold. What’s more, it can track where it is going. On top of this, the company is introducing a digital token, going by the name of G-Coin. This is a digital title of ownership specifically for physical gold that EmTech’s blockchain is tracking.
“Think of it as blockchain logging every stage, from mining to end market to digital wallets.”
Blockchain technology is in the midst of completely reinventing both gold and diamond industries. On the whole, these industries contain complex ecosystems that rely heavily on supply chains. This is where cargo typically passes through an array of geographical locations before ultimately reaching its destination.
Since its inception, this technology has been responsible for the avoidance of corruption. Moreover, it improves the overall quality by way of tracking valuable assets at every milestone throughout their journey.
By effectively encoding gold in blockchains with digital methods, central banks and private holders alike will benefit from the process. They are able to account for every portion of the asset during its delivery. Those who are experts in this technology claim that blockchains have the potential to overthrow the current banking system. This is due to traditional banks essentially being the gatekeepers of these ledgers. Blockchains are capable of allowing both transaction participants to update the data on the ledger without middlemen involvement.
Gold, as we know it, is one of the most valuable and expensive resources that exist in the world. It possesses substantial trade and intrinsic value and its price per ounce is currently over $1,480. Central banks employ the use of a “trust” system for every instance in which foreign central banks store gold. As popular a method as it is, it is not the most reliable; especially when storing such a valuable asset as gold. As a case in point, the central bank of Germany couldn’t immediately repatriate some of its precious metals from the U.S. back in 2013.
With the use of blockchain technology, the act of storing and tracking gold would comparatively be more secure. Should Emergent Technologies prove to be successful with its incorporation of blockchain into gold delivery, the trust system could become archaic.
Admittedly, they are not the first company that was hoping to use blockchain technology as a means to track gold. Regardless of that, Emergent Technologies claims that their particular approach is “fundamentally different.” This is largely due to the core focus of their mission is to track gold that is “responsibly-sourced.”
Mitch Davis, the Chief Commercial Officer at EmTech, clarifies that notable characteristic of the company fully embracing that specific gold. To elaborate, where there is a noticeable increase in the demand and premiums for gold mined under such practices. This is something that is easier said than done, though. Making a guarantee that gold is what it claims to be – in the imposed quantity and quality – is difficult. Moreover, it’s hard to make sure that it is mined and perfected in a way that conforms with strict standards. Specifically, that of human rights, environmental, industrial, financial, and legal standards.
Among the many companies that are jumping on this bandwagon is Britain’s Royal Mint. It is starting to allow businesses and investors to buy and sell digital tokens that are representing gold through blockchain transactions. The primary intent of the Mint is to make gold into a more attractive investment. They plan to do this by making trading a lot easier and cheaper, especially when you compare it to alternatives. Such alternate methods include exchange-traded funds (ETFs) or directly purchasing and storing gold bullion.
The Royal Mint is responsible for manufacturing the U.K.’s currency. On top of that, it also sells bullion, commemorative coins, and an array of other products. By utilizing its new blockchain system, the Mint aims to make gold transactions easier by having them be more transparent. What’s more, it hopes to make these transactions economical.
The development of this new system was a collaborative effort with the Chicago Mercantile Exchange. In addition, there was also the application of technology deriving from two blockchain startups. This brand new system transacts blockchain tokens that go by the name of ‘Royal Mint Gold’ (RMG). Each one of these tokens is a digital representation of one gram of actual gold in storage at the Mint’s facilities.
The Mint states that the price of RMG will closely track the spot price of gold. At the time of this writing, this spot price is roughly $48 per gram. Pre-launch reports from last year imply that the Mint could potentially create up to $1 billion in tokens.
Investors will have the ability to buy and sell RMG digital tokens by way of an institutional trading platform. Furthermore, the official recording of these trades will be as blockchain transactions.
According to the Mint, transactions that occur in its blockchain system will offer a variety of advantages. Moreover, these advantages will be comparatively more beneficial than other gold trading methods. For instance, it claims that there are no annual fees for being the owner of RMG tokens. This is noteworthy especially when you compare it to annual fees of 0.25-0.5% for gold ETFs. Relating to that, there are also the annual fees for secure storage for gold bars of roughly 0.12-0.25%. That will translate into a higher return on investment for RMG. The reason for this is that, as time goes on, the compounding effect of fees gradually diminish the overall return.
With the use of RMG, traders are also able to purchase smaller amounts of gold in blockchain transactions. In addition, there is the available real-time pricing that exists during exchange opening hours. The Mint says that, unlike shares in a gold ETF, RMG is exchangeable for physical gold. Be that as it may, there will be a “fabrication charge” for anything that’s smaller than a 400-ounce gold bar.
The director of new business for the Royal Mint, David Janczewski, states the following:
“While things have improved in terms of gold trading over the centuries, it’s our view that it still remains difficult and relatively expensive as a commodity to invest in … Gold is known in the industry as a negative-return investment … What we’re trying to do with the announcement of Royal Mint Gold – or RMG – is to really address this issue and offer a better way to invest in solid digital gold.”
The London Bullion Market Association (LBMA), an over-the-counter market for trading gold and silver, made an announcement during October of last year. The core focus of its plan would be to revamp and improve transparency within the industry. They aim to do this with the incorporation of blockchain technology.
The technology has the potential to help expel unsatisfactory metals from the global supply chain. To be specific, metals that are “illegally mined or traded or used to finance conflict.” Evidently, this is a prominent industry-wide issue. To better explain this, there was an incident with three NTR Metals employees back in March of 2017. There were accusations from the FBI that they were importing up to $3.6 billion worth of gold from South American countries. They were refining it, selling it, and then sending the earnings back to “drug traffickers.”
So, in March of 2018, the LBMA took the initiative and asked for proposals. Those who were asked consisted of all 144 of the association’s members. These members would include the largest gold refiners, banks, and dealers in the world. With these proposals, they could determine how to track gold from mines to its final destination. Doing so will allow them to effectively prevent any instance gold bar counterfeit.
The association would later receive 26 proposals, all coming “from companies ranging from startups to major technology firms.” Sakhila Mirza, LBMA’s executive board director, did not disclose any specific names beyond that of IBM. The association, in general, is steadfast on not insisting on the utilization of blockchain technology. However, roughly 20 of the 26 responses were apparently open to the use of the technology in their project drafts.
The LBMA is planning to layout guidelines that will authorize and monitor technology providers. Mirza adds that:
“We need to set up criteria and standards that help us understand what is a credible blockchain solution … Once those have been appropriately established, the result would be a selection of service providers that meet the minimum standards.”
Last year, there were reports that JPMorgan, the most valuable bank by market capitalization, is joining in on this trend. As America’s largest bank, it’s using its enterprise version of the Ethereum blockchain that supports smart contracts – ‘Quorum’ – to tokenize gold bars.
The first announcement of Quorum was back in October of 2016 as part of the Ethereum Enterprise Alliance (EEA). The U.S. bank came forward with an innovative blockchain-powered system. The intent of this system is to reduce the mandatory number of parties to validate global payments. By doing this, they can cut transaction times “from weeks to hours.”
The transition took place just one month following the CEO of JPMorgan, Jamie Dimon, famously calling Bitcoin “a fraud.” What’s more, Dimon was of the belief that it “won’t end well.” This was a comment that he would later add to, saying that he does not care about the cryptocurrency. Though, he made sure to mention that “blockchain is real.”
During the Sibos conference in Sydney, JPMorgan made mention of the concept of “tokenizing” assets. The company’s head of blockchain initiatives, Umar Farooq, would further elaborate on the idea:
“They wrap a gold bar into a tamper-proof case electronically tagged, and they can track the gold bar from the mine to endpoint – with the use case being, if you know it’s a socially responsible mine, someone will be willing to pay a higher spread on that gold versus if you don’t know where it comes from. Diamonds are another example.”
During the course of 2018, leaders in the gold and diamond industry were partnering with IBM to develop a blockchain network. With this new network, they could trace the origin of any piece of jewelry. In late April of that year, a consortium of jewelry industry heads made an announcement about the TrustChain initiative.
“The TrustChain Initiative is a partnership of precious metals refiner Asahi Refining, jewelry retailer Helzberg Diamonds, precious metals supplier LeachGarner, jewelry manufacturer The Richline Group, and independent verification service UL. The measure aims to provide increased transparency across the supply chain.”
This initiative draws its foundation from the IBM Blockchain Platform and the Hyperledger Project. Its design allows it to verify and track diamonds and precious metals from their origin to their retail location. It provides its users with an array of features, which include verification of process and “third-party oversight.” Moreover, it provides digital and physical product validation. Overall, its objective is to make sure that customers’ jewelry purchases are properly sourced.
Upon applying this technology, these companies have the potential to carry out various tasks. They can digitize processes and establish an unchangeable record of transactions within the network. Furthermore, they would be capable of enabling access to trusted data in real-time.
The number of companies incorporating blockchain technology into their gold tracking systems is continuously growing. With other precious metals like diamonds receiving the same treatment, it seems like more instances of blockchain usage are on the horizon.