My contrarian instincts tell me a major correction for the market looms large. President Trump’s recent comments regarding North Korea escalate the risk of an exogenous event occurring rather than de-escalate it.
This escalation along with several other negative catalysts could cause a major correction to the sky high market. I am laser focused on what this may mean for my portfolio. Contemplating the consequences of these recent developments, I have decided to up my allocation to gold via the GLD once again.
Why the GLD?
In 2004, the launch of the SPDR Gold Trust (NYSEARCA: GLD) leveled the playing field of gold investing by allowing for a less expensive option than buying the physical metal. I use this investment vehicle as a supplement to my physical holdings when I feel gold’s price is set to rise. I increased my position based on this on July 15th. GLD is up 5% over the past few weeks. In the following sections, I make the case it’s time to buy GLD.
Geopolitical risk not priced in
Geopolitical tensions have increased since President Trump was elected. What’s more, they seem to have increased exponentially in just the last few days. The market showed the first sign of waking from its stupor when President Trump threatened North Korea with “fire and fury.” What’s more, North Korea immediately came out and stated it is targeting Guam for attack.
All this leads me to believe we may be heading for some type of negative geopolitical event. I consider the GLD as good hedge against the blue chips in my portfolio. What’s more, the GLD looks primed for a breakout technically.
GLD on the cusp of a breakout?
GLD recently fulfilled the golden cross and is trading above both its 50 and 200 SMAs.
Furthermore, GLD has been in an uptrend since the start of the year rising nearly 10%.
Nevertheless, GLD is currently banging up against major resistance at the $122 mark. The rally in GLD has also been driven by weakness in the US dollar.
USD Vs. Gold
As a dollar denominated commodity, gold, and subsequently GLD, rises as the dollar drops in value.
I submit this is only the tip of the iceberg. I think the election of Trump equates to a major geopolitical paradigm shift in foreign policy that has not been priced in. I submit the odds of a geopolitical event have increased greatly on Tuesday. This may lead to a return of using GLD as a safe haven play. Over the past few years, the markets have become dangerously desensitized to geopolitical unrest and terror attacks.
This time it’s different
I remember a time when the markets reacted to terror attacks and North Korean saber rattling. Now, it barely even makes the news and certainly doesn’t move the markets. I recently heard a pundit on CMNBC state that “this time it’s different,” and the markets will continue to shrug off the recent tumult with North Korea and the continuing issues with Syria and Iran. Those words struck a chord with me. As one of my investment role models and investing icon, Sir John Templeton famous stated:
“The four most expensive words in the English language are “this time it’s different.”
I submit this time it won’t be different.
The bigger they are the harder they fall
What’s more, we may be set up to have one of the worst corrections of all time with the markets trading at such unprecedented levels.
The recent bull-run in the stock market has pushed unprecedented levels on an inflation adjusted basis.
S&P 500 inflation adjusted
Furthermore, valuations are also at record highs.
S&P 500 Shiller P/E ratio
The final point I would like to put forth is the fact all these developments will serve to rein in the Fed. I posit the odds of another interest rate hike in 2017 have dropped substantially in the last few days.
Interest rate hikes on hold
The Fed chair’s decision to not increase the trajectory of rising rates incited a strong bid for commodities and foreign currencies after leaving the forecasts for future rate hikes in 2017 at two. I believe the Fed is playing it safe by maintaining such a dovish stance. This happens every time. The Fed always seems to tighten or loosen interest rates for long after they should have stopped.
This leaves the door open for inflation to spike. Basically, the Fed would rather fight off rising inflation in the future than be blamed for crashing the markets now. Fortunately, GLD provides an ideal hedge.
The Bottom Line
The markets are trading at all-time highs just as uncertainty and geopolitical risk have spiked. Moreover, market participants have been lulled into a false sense of security over the last few years. Complacency now rules the day. The Fed’s put on the market has kept volatility levels at all-time lows.
I say the worm has turned and it’s not too late to buy GLD as a hedge against inflation and a negative geopolitical event. I always hold approximately 5% of my portfolio in precious metals. At times like these I increase that allocation to as much as 10%. Those are my thoughts on the matter. I look forward to reading yours. Please use this information as a starting point for your own due diligence and always consult a financial adviser prior to making any investment decisions.
Your input is required!
The true value of my article is derived from the prescient insights made in the comments section by Seeking Alpha members. Do you believe the market is heading for a correction? Is GLD a good hedge against one if it occurs? Thank you in advance for your participation.
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Disclosure: I am/we are long GLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.