Time to Get Defensive If You’re in the Stock Market

by Mike Gleason, Money Metals:

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll welcome back our good friend David Morgan of the The Morgan Report. David has some interesting things to say about the dollar, shares his research on the inverse correlation between stocks and metals and gives us his thoughts on when he expects to see gold and silver finally breakout. Don’t miss another wonderful interview with the Silver Guru, David Morgan, coming up after this week’s market update.

As trading for the third quarter winds down today, investors should prepare to face some new headwinds in the fourth quarter.

Beginning in October, the Federal Reserve will engage in so-called Quantitative Tightening. The Fed will allow some of its bond holdings to leave its balance sheet as they mature.

It may not sound too dramatic. But over the next year hundreds of billions of dollars will effectively be pulled out of the financial system. That could have dramatic consequences.

Nobody knows for sure what level of stimulus withdrawal will finally cause the stock market to break down from its long uptrend. But there’s no doubt that Fed stimulus has been a big contributor to its rise since 2009. Take away the punch bowl and the party can’t be expected to last much longer.

The S&P 500 index did close Thursday at yet another slight new record high. So in spite of the coming threats of Quantitative Tightening and a likely rate hike in December, stock market investors are as complacent as ever.

They will eventually pay a price for their complacency. Bull market gains that take years to accumulate can be wiped out in a fraction of that time during a stock market crash.

Major crashes tend to occur every few years. The last one was the financial crisis of 2008. Before that we had the tech wreck of 2002. In 1998, long-term capital management triggered a mini crash that nearly got out of hand. And of course in October 1987, the market crashed seemingly in an instant, without warning or reason.

It’s prudent to get defensive in your investments, even if you’re too early. Better to miss out on a few more points of upside in an overextended market than to be caught unprepared and undiversified when it finally takes a big plunge.

Plus, when you diversify into alternative assets such as physical precious metals, you aren’t just sitting on the sidelines. You are invested in markets that have tremendous upside potential in their own right, regardless of which direction the stock market heads. On that note, be sure to stick around for my interview with David Morgan coming up shortly as he will shed some light on what happens to metals when we get those corrections in the equity markets.

Over the past three weeks, metals markets have pulled back. Gold prices currently check in at $1,285 per ounce, down 1.0% for the week. Silver shows a weekly drop of 1.2% to bring spot prices to $16.84. Platinum is down 1.7% to trade at $921, while palladium is up 1.4% to $938 an ounce as of this Friday morning recording.

Yes, this week the per ounce price of palladium surpassed platinum for the first time in 16 years. Congratulations to Money Metals writer and regular podcast guest David Smith, who predicted palladium would return to a 1:1 ratio with platinum way back when palladium was trading at about half the price of its sister metal.

It remains to be seen if platinum will return to a 1:1 ratio with gold and eventually get back to a more historically normal premium. Platinum prices have traded at a discount to gold for going on three years now. That’s very abnormal and David Morgan will have some comments on that as well in my interview with him this week.

We can’t rule out the possibility that platinum may be down for the count, never to return to its glory days. But it’s probably still too early to bet against several decades of cyclical history.

Silver bugs might argue that even if platinum prices recover to historic norms, silver has superior upside potential and has more utility as money. They have a point. Silver is a money metal while platinum and palladium are niche industrial metals used mostly in the automotive industry.

We have always urged precious metals investors to first acquire a foundational position in gold and silverbullion before venturing into platinum or more speculative metals such as rhodium. There’s a time and a place in life for speculation, whether in metals or in stocks. But there’s never a good time to completely abandon a long-term diversified investment strategy in favor of chasing a hot market.

Regardless of what October and the rest of the fourth quarter bring, don’t let market movements tempt you out, or scare you out, of your core positions.

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