The financial markets have entered a wild period of extremely high volatility in the final months of 2018. A rare “perfect storm” hit investors as stocks, commodities, and bonds all tumbled in unison for the first time in decades. The economic picture is confusing, as this downward spiral comes atypically in a time when unemployment is low and other baseline economic indicators look favorable. How investors react in periods of extreme volatility can have an outsized impact on the overall performance of their portfolios. Although no one can predict what any given market is going to do, Pease & Curren is here to help with a discussion of what is driving the volatility, and pointers for how precious metals related businesses and business owners can weather the economic cyclone.
EXECUTIVE SUMMARY
Pease & Curren recommends that precious metals businesses and business owners:
- Invest liberally in their own businesses;
- Avoid deviating from a well thought out investment strategy due to volatility;
- Avoid hoarding precious metals scrap; and
- Continually evaluate their investments to ensure that they are truly diverse.
Read below for the basis behind these recommendations.
POLITICAL INSTABLITY DRIVES MARKET UNCERTAINTY
How can markets be so unstable when the underlying economic news about employment and output is so good? One answer is that many recent government actions, though motivated by important political concerns, have been a drag on the economy.
- Brexit Chaos Has Driven Uncertainty in the European Markets: The United Kingdom’s planned withdrawal from the European Union was largely motivated by British desire to decrease immigration and achieve maximum political self-determination. But the European Union is perhaps most importantly a trade bloc, and Brexit is expected to have large economic effects. More recently, the UK and the EU have struggled to come to an agreement on the terms of the UK’s withdrawal and its continuing relationship with Europe. Theresa May recently failed to secure legislative approval for an agreement she had tentatively struck with EU negotiators, leading to heated scenes in Parliament . Legally, if no agreement is reached, the UK is scheduled to leave the EU at 11 am local time on March 29, 2019. The “no deal” Brexit scenario would throw the UK’s economy into chaos as the country would suddenly have no trade agreement with the rest of the continent, and the effects would ripple worldwide. Europe’s highest court surprisingly introduced another the possibility that there would be no Brexit at all , by rendering a decision stating that the UK could unilaterally renounce its intention to withdraw from the bloc at any time before March 29th, and keep its membership. Although political institutions on both sides will probably avoid the crippling “no deal” scenario, the complete lack of clarity about what rules will govern business and trade in the UK come March has already hurt the European economy by making it impossible for firms to plan investments across the British Channel.
- The Federal Reserve is Raising Rates: The recent economic boom was in part driven by the Federal Reserve’s policy of lending money to financial institutions at extremely low interest rates. This generous policy was a legacy of the financial crisis of 2008. Banks passed the savings on to businesses and consumer borrowers, making it easier for businesses to invest and consumers to take out home mortgages and car loans. As the economic downturn gave way to better times, the Fed has become concerned that its low rates could drive inflation and has begun to raise them. As these actions have dampened market enthusiasm, President Trump has broken the taboo against Presidents attacking the Federal Reserve. He has even publicly floated the idea of canning the Federal Reserve chairman, although it is unclear that he has that power and such a move is almost certain to provoke litigation. The prospect of U.S. economic policy being decided in a courtroom has scared investors and driven stock market decline.
- The Federal Government is Shut Down: Legislators and President Trump have failed to reach consensus on a budget to fund the government, causing a Federal government shutdown in time for Christmas. This means that “non-essential” Federal offices and services are closed and nearly a million Federal workers went unpaid over the holidays. (Crucially, the NORAD Santa Tracker remained online on Christmas Eve). The impasse has shown little sign of abating as President Trump has demanded that any budget include funding for a wall on the Mexican border , a prospect that Democrats view as not only wasteful but morally wrong.
- The Prospect of a Trade War with China Looms: President Trump has demanded trade concessions with China under the threat of imposing large tariffs on Chinese goods. Although the President believes that over the long term his strategy will promote U.S. manufacturing, in the short to medium term this type of conflict is likely to be economically disruptive. Although they are intended to promote U.S. businesses at the expense of foreign competitors, at bottom tariffs are taxes, and they will raise the cost of doing business and have a drag on the economy. Moreover, two can play at that game: international governments are likely to respond to U.S. tariffs by enacting tariffs of their own, harming U.S. businesses that export goods to those countries. In early December, the two sides agreed to negotiate for ninety days before ratcheting up the “trade war”. Paradoxically, in the meantime, trade with China increased as U.S. companies rush to purchase Chinese goods before any trade war makes them more expensive.
WHAT YOU CAN DO AMID ALL THE UNCERTAINTY
The Best Investment May be In Your Own Business: Especially with all of the major investment classes in turmoil, it can feel like there is nothing for an investor to do. One thing to remember is that the investments that the financial press discusses, such as stocks and bonds, are just those investments that are available publicly to one and all. This overlooks important investments that may be available to different people. One example is that for many talented people, their education might be the best investment they can make. For jewelry and pawnshop owners, the best investment available to you may be in your own business. After all, you work night and day because you expect your business to give you a higher return on your investment than you can get anywhere else. With markets going out of control, putting your money into new inventory, infrastructure, or expanding your pawn shop’s loan portfolio are ever-more attractive.
Stay the Course: In times of high volatility, it can be important to stick to a well-thought out investment strategy. Wild upswings and downswings are often in response to news that markets have not fully digested or analyzed, and as a clearer picture emerges, prices often return to the mean. Panicked decisions in response to market downturns usually lead investors to sell low and later buy high after they realize that they really should be in the market. For example, after taking punishing losses leading up to Christmas, the DOW rose by record amounts on December 26th. If you had panicked and sold, you missed this rally.
Now is No Time to Hoard Precious Metal Scrap: Here at Pease & Curren, we often hear that our customers are “waiting for [X precious metals price] to refine”, a comment that makes us cringe. It is impossible to predict when a metal is going to hit a certain price, and it is unclear what other opportunities will be missed in the meantime that may have yielded a much higher return. It is a truism that a metal is at a certain price today because half of investors think it is going to go up, and half think it is going to go down. Moreover, when the metal hits the desired price, any reputable refiner will require a certain lead time before scrap can be converted into cash, and especially with all of this volatility, you may miss your market. Even if you think that a metal is going up, refining now and holding the metals on consignment or having them returned to you in commodity form will improve your liquidity and allow you to sell quickly when the time is right.
Check in and Make Sure You are Diverse: Even though we have seen that all asset classes can go down in strange economic times, this is quite rare. The extreme rarity of this scenario is why a diverse array of investment assets is seen less risky than putting all your eggs in one basket. Investors holding only stocks and bonds may have overlooked precious metals, which can cut your investment risk by rising in value during troubling economic times. Conversely, precious metals businesses that do not attend to their scrap and accumulate large amounts may also be accidentally neglecting diversity by foregoing opportunities to invest in long-term high yield assets like stocks, bonds, and their own businesses.
