The only thing that glitters right now is gold prices. U.S. stocks are getting hammered. Federal Reserve Chair Janet Yellen is not exactly cheery about the outlook of the U.S economy. This is in spite of the Fed raising its key lending rate in December for the first time in nearly a decade. Tanking stocks and a dovish Janet Yellen have provided a serious boost for precious metals like gold and silver, as well as gold and silver mining companies.
Yellen’s Dovish Tone Helps Gold Prices
In her most recent sermon from Capitol Hill, Fed Chair Janet Yellen hinted that future interest rate hikes might be on hold as global stocks continue to tumble, especially since the beginning of the year.
Yellen believes that the U.S.—the world’s biggest economy—could be causing collateral damage to growing weakness in almost every developed and emerging economy, particularly China, Japan, Germany, France, the rest of the eurozone, Russia, Canada, and the list goes on.
Since the U.S. is not an economic island and S&P 500-listed companies are increasingly relying on sales from outside the U.S. (47.82% in 2014), this is troubling news. Weak fourth-quarter earnings coming out of Wall Street have, as one would expect, put a serious crimp in growth prospects here in the U.S.
It even has Wall Street CEOs finally considering there may be a real possibility that the U.S. could slip into a recession in 2016. It also means that the Federal Reserve might not be in such a hurry to follow December’s rate hike any time soon.
Why? Because a rate hike could very well put the brakes on an already weak economy—an economy most of the world is expecting to carry it through the next downturn. But that would be a little presumptuous.
To put that into perspective, after years of double-digit gains, U.S. stocks are getting hammered in 2016. The S&P 500 is down 11.0% so far this year and is approaching the 1,800 mark. If it dips below that tested level, all bets are off. The Dow Jones Industrial Average has lost 10.5% of its value since the start of the year, and the Russell 2000 Small Cap Index is down a staggering 16.0%.
You know what’s up? Precious metals like silver and gold. Trading near $1,200 an ounce, gold is up almost 13.0% this year, followed by silver, which is up almost 11.0% at $15.50 an ounce.
Gold Miners to the Rescue
The outlook for the U.S. and global economy is not good. And earnings season is testament to this. As a result, investors should expect stocks to go lower from here. Yes, the dead cat will bounce, but that’s about it.
And the stock market may very well continue to tank until the Federal Reserve steps in to take drastic measures. This might not include negative interest rates since Janet Yellen isn’t sure whether that’s a legal maneuver or not.
One financial strategy that the Federal Reserve LOVES though is quantitative easing (QE). While QE4 may not happen in the next month or two—what with the central bank just having hiked its rates in December—it may very well be forced into this position.
One wonders why, since the first three rounds of QE did nothing but inflate the stock market. Still, it needs to look like it’s doing something. And America’s favorite Sugar Mama isn’t afraid to pull the trigger on QE4.
The lead up to a possible fourth round of QE will continue to drive precious metals like silver and gold considerably higher. For those who do not have the money or space in their vault for physical silver and gold, you might want to consider well-run silver and gold miners.
They may include Agnico Eagle Mines Ltd (NYSE:AEM, TSE:AEM), New Gold Inc. (TSE:NGD), Goldcorp Inc. (NYSE:GG, TSE:G), Coeur Mining Inc (NYSE:CDE), and Pan American Silver Corp. (NASDAQ:PAAS, TSE:PAA).
Still, you can’t put all your investments in one basket. Should QE4 become a reality, it will send stocks soaring and precious metals crashing. But that’s the joy of the stock market—playing the cycles.
Those who don’t start preparing now could be kicking themselves later.