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LAWRIE WILLIAMS: Bitcoin and global equities weaken.  What now for gold and silver?

21 Jan 2022

Despite numerous recommendations on the web promising huge rises in bitcoin, recent days have seen cryptocurrencies fall quite dramatically,  The most visible cryptos – BTC and ETH – have, at the time of writing, fallen below $39,000 and $2,900 respectively after hitting around $67,000 and $4,800 as recently as only a couple of months ago.  Global equities have also been falling, with the Dow Jones Industrial Index, for example, falling around 5% over the past few days.  Gold and silver have seen prices surge, though, but have been marked down a little this morning in European trade, although are making something of a partial recovery again as I write.  Is this the shape of things to come?

For some time now, many commentators have been predicting an equity market crash.  This may already be beginning, although it is almost certainly too early to suggest the kind of prolonged deep downturn these analysts have been suggesting.  But perhaps the writing is on the wall!  For some time the equity markets and bitcoin had been something of a sure thing in terms of investment growth, blown up by global central bank largesse to try and ward off the potential economic ravages of the Covid-19 pandemic.  The U.S., which tends to set the global market tone, has been pre-eminent in this having run up trillions of dollars in debt through its Federal Reserve Bank (Fed) easing programmes.  This has, unsurprisingly to most economists, initiated an inflationary surge which may now be getting out of hand.

As a result, the Fed is promising a programme of tightening, involving an end to its bond buying programmes, followed by increasing interest rates to try and stave off future inflationary pressures.  Markets are thus beginning to run scared that the gravy train is about to end and that prediction from a number of ‘expert observers’ that we are due for a mega-crash in equity prices may just be beginning to come true.  Parallels with the great Wall Street crash of 1929 are beginning to be evident and such generated nervousness could easily develop into a panic – although it is certainly too early to say if this is indeed happening.  The trouble facing equity investors is that once such a panic has ensued it is usually too late prices collapse rapidly and it may then be too late to protect built-up wealth accumulated during the good times.

That can lead to an extremely rapid downwards spiral in equity prices unless one can protect one’s gains by switching all, or part, of one’s investments to safe haven assets which may not be adversely affected by an equity market meltdown, or by purchasing power-deterioration due to ongoing inflation.  Gold and silver have been among these historical safe haven assets, and moving at least a proportion of one’s investments into these, and maybe into associated stocks, could turn out to be a wealth life-saver.  Even if a crash does not happen this would probably be a wise investment choice as gold and silver tend to hold their value regardless, and will also help protect against the threat caused by high inflation levels.

We have continually stressed in past articles the value of holding assets like gold and silver in a negative real interest rate environment and real rates are certainly vey negative at the moment, and look likely to remain so for the foreseeable future.  Gold and silver do not generate interest, but even a zero rate is a positive investment parameter when inflationary pressures are driving held wealth downwards in value.  Even if the equity and bitcoin crash scenario is not yet forthcoming, it is better to be too early, rather than too late, in taking these kinds of wealth protection measures.

21 Jan 2022 | Categories: Gold, Silver, US, FOMC, Bitcoin

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