Crashes like this one are fire sale scenarios. Everything goes.
For the most part, it doesn’t matter how cheap or insulated the asset is. Even hedges like gold and silver get sold. Panic rules the day.
This is the stage where leverage unwinds, and it does so violently. In other words, all the people who were long stocks on margin (debt) either sell or get liquidated. Price becomes irrelevant. Getting out is the only thing that matters.
Those who owned 2x and 3x long ETFs sell in a panic. All of this leverage unwinding has a cascading effect across markets. The whole way down, algorithmic (software-based) traders are magnifying the moves.
I expect the broad stock market to temporarily bounce once the bulk of leverage has been flushed out of the system. But the larger downtrend should last for a while longer. As we have pointed out ad nauseam, American stocks remain wildly overvalued and could have much further to fall (see a list of our recent warnings at the bottom of this letter).
During this initial crash phase, our goal as investors should be to sort through the rubble and find ways to put cash to work in investments which benefit from the new conditions (bearish ones).
The prime choice, naturally, remains gold and silver.
Steel Yourself with Precious Metals
Crashes are distressing, but as investors we must buck up and adapt.These are moments which can make or break a portfolio’s performance.
Many of you are probably already invested in precious metals. Bravo, they’ve performed well over the past few years and we expect that trend to continue.
But for those of you looking to start or add to gold and silver positions (as I am), we mentioned on Thursday that a buying opportunity would likely appear soon. Well, that didn’t take long.
As I write this on Friday April 4th, gold is down about 2.5%. Meanwhile silver is down a whopping 8%, after a roughly 7% selloff yesterday.
This is a fairly typical reaction to a market collapse. Gold and silver often sell off along with stocks in the initial phases of a crash. They get caught up in the downward momentum. Silver, being far more volatile, takes the brunt.
If the stock market downturn continues, gold and silver typically come roaring back and outperform for years to come (more on this in my October piece, The Gold Bull Cycle Has Just Begun). In short, his selloff is a gift for long-term investors.
Why do gold and silver tend to outperform during stock bear markets? Simple. The Federal Reserve tends to print gobs of money during such times. In the near future I fully expect lower interest rates and a huge, unprecedented round of QE and stimulus checks.
Times are about to get tough. Do you think President Trump will stand by and watch as Americans struggle to buy groceries? No. I expect his team to send out stimulus checks endorsed by DJT himself, possibly by the end of this year.
When the monetary easing and stimulus begins, gold and silver stand to benefit the most. These metals have served as safe havens and hedges for many thousands of years, and will continue to play that role going forward.
Additionally, I think Trump and Bessent want a weaker dollar and lower interest rates. This would boost America’s re-shoring efforts, along with U.S. exports. As an unintended side effect, precious metals would likely rise along with money printing.
How and What to Buy?
Gold and silver could fall further in the days to come, but I started putting cash to work in the sector today, buying the Sprott Physical Silver Trust (PSLV) and Newmont (NEM), a large gold miner which was down by 8.3% on the day and is absurdly cheap with gold still north of $3,000/oz.
Miners tend to lag behind physical markets, but if and when a sector rotation out of tech and into hard assets (like miners) begins, the moves can be absolutely explosive. I continue to position for this probability.
As I mentioned back in January, I currently have about 17% of total assets in cash, and am looking to put a decent portion of that to work in precious metals over the rest of this year. It’ll be a mix of spot metal exposure (via physical and ETFs) and miners. Likely around 2/3rds of that will go into physical metals and 1/3rd into miners. Split equally between gold and silver, in both cases. However, those who want less risk should tilt more heavily towards gold.
If you just want the safety of gold bullion, there’s nothing wrong with simply buying the Sprott Physical Gold Trust (PHYS), or coins and bars if you prefer. That’s the safest and simplest way to play it.
But for those of us with a longer time horizon, and more risk tolerance, silver and high quality miners offer irresistible upside. And days like today, when they’re getting absolutely smashed and it seems like there’s no hope, are an excellent time to start buying.
To be clear, I’m not saying anyone should go all-in right now. Raise cash if we get a bounce in stocks, spread your gold/silver buys out over time, and try to go long when everything seems like it’s going to zero. That’s no easy task, but it sure does pay off in the long run.
I hope you’re all doing OK. It’s been a rough week.
