Stock Selloff Boosting Gold

Stock Selloff Boosting Gold

The comments below are an edited and abridged synopsis of an article by Adam Hamilton

The stock-market selloff is persisting, fueling mounting worries among investors. The intensifying volatility and lack of a quick rebound higher is strangling euphoric sentiment, and reinforcing selling pressure. Scoffed at a few months ago, the notions that a young bear market is underway and a recession looms are gaining traction. The beneficiary of this ominous stock-market downturn will begold.

Gold has always been an essential asset class for prudently diversified investment portfolios. It tends to rally when stock markets weaken, offsetting some of the losses in stock-heavy portfolios. Gold acts like portfolio insurance, usually soaring when stock markets plunge. Throughout history, wise investors have 5%to 10% of their portfolios in gold.

But like insurance in general, the important role gold plays in portfolios is forgotten when it isn’t needed. Just a few months ago, the US stock marketsseemed invincible. The S&P 500 had powered 333.2% higher over 9.5 years bylate September. That made for the longest, and 2nd-largest, stock bull in US history, and investors were convinced that would last indefinitely.

The SPX had surged 9.6% year-to-date by that latest peak, while gold had slumped 7.3%. Thus investors felt no need to allocate capital to gold, and they were and are underinvested in it. This is especially true of US stock investors, who were wildly optimistic after years of big stock-market gains.