DOW SLAMMED FRIDAY TO CLOSE DOWN 531 POINTS
The weakness in stocks since May became a rout on Friday with the DJIA plunging 531 points amid a broad based sell off including the S&P and the NASDAQ. International markets reflected the same flight from equities as well. The decline in the DJIA this week is the largest decline since September 2011. The year that gold and silver made all-time highs. This collapse in stock prices is a decline of more than ten per cent from the DOW high in May this year. Across the board, all the major US stock indexes were down over 3% in one day!
We wrote last week about the increasing volatility in stock and bond markets and Friday, the VIX hit an all-time high. For those not familiar with this index, here is the Chicago Board Options Exchange definition of the VIX:
“The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world’s premier barometer of investor sentiment and market volatility.”
In other words, volatility, the most widely accepted measure of investment risk has never been higher for stocks. Add to this financial maelstrom the collapse of the dollar this week and we are near a tipping point that could change the financial world as we know it.
The dollar plunged 220 basis points since its weekly high on Wednesday. This is the third largest decline in the history of this index and the largest decline since June 2007. We are in a de facto “currency war”. China is not the only country to devalue their currency against the dollar. This is happening with virtually every major currency in the world and all of the emerging economy currencies. A strong dollar reduces US competitiveness in world markets as other countries with weaker currencies cannot afford our goods and as we are seeing, our economy falters. To prevent a depression, the FED must act to weaken the dollar. This is a race to the bottom for currency valuations and these cycles do not end well. This will drive gold prices up.
We are entering a season of great financial uncertainty. The stock market returns based on easy money from the FED to the Wall Street crowd are over as the big money is fleeing to quality, driving stocks down, Treasury Note yields down and gold up!
JP MORGAN CHASE WARNS OF BOND CRISIS
Jamie Dimon, Chairman of JPM, in a letter to shareholders earlier this year warned of a developing liquidity crisis in government and corporate capital markets. To quote Jamie:
“Recent activity in the Treasury markets and the currency markets is a warning shot across the bow”…make it more likely that a crisis will cause more volatile market movements with a rapid decline in valuations even in what are very liquid markets”
When the selloff comes, bondholders will see the value of their bonds go down very rapidly. Be prepared ahead of time.
GOLD UP SHARPLY
Gold opened the week at $1,114 and has rallied strongly to $1,159 up 4%. So far in August, Goldman Sachs and HSBC have bought and taken physical delivery of 9.23 tons of gold bullion in their house accounts. That is $2.57 billion in gold at $1,159 an ounce. I cannot find a larger purchase of gold in one week by two private sector (non-government) entities in history. When you can buy an appreciating asset at or below the cost of production, as gold and silver are now priced, you buy.
Without exception, those of our clients who have bought gold and silver over the years in down markets and up markets have profited and more importantly, preserved their wealth and safeguarded their future against what we all know and agree is rapidly increasing financial uncertainty.
Going forward, the systemic risk of major market corrections and bank failures puts your money at greater risk than at any time since the great depression. The debt fueled economic contagion in Greece, Spain, Italy, France, and China is not isolated. As we have written before, we are in an interdependent “One World Economy”. The economy of China is the second largest economy in the world and the Chinese economy is collapsing along with their stock market. Do you think that the second largest economy in the world can collapse without drastically affecting our economy in the USA?
If you own stocks and bonds, where are they? They are only data entries on someone else’s computer. To have possession of gold and silver means:
- Direct control of your liquid assets
- Long term profit potential
- Protection against financial uncertainty
Call one of the precious metals experts at RME today to learn how you can protect your money from further market corrections. It sure is a scary time to have your investments exposed, and as always, gold is here to diversify and protect your portfolio. The call and the consultation is always free at RME, so I encourage you to give us a call to see what you can be proactively doing to secure your wealth.