Gold – An Investor’s Safe Haven During Market Declines
I like reading through the news app on my phone off and on throughout the week as a way to step back from my spreadsheets and research papers and tune into what is going on in society and what the large news outlets are touting at the moment. One prominent message kept sticking out at me: Big banks are expecting a plunge in the stock market.
There was an analyst from RBS who told clients to “sell everything.”
Wells Fargo expects another 10% to 20% plunge in stocks.
Even legendary bond investor Jeffrey Gundlach, founder of DoubleLine Capital, believes this is a time when you “protect your capital.”
Oddly enough, this is one time I somewhat agree with these analysts, except now’s not the time to sell everything, but to be strategic with what you buy.
And we have an opportunity today to make more than 50% during a stock market meltdown…
Before I get into the opportunity, let me explain why I believe stocks are on the cusp of a crash that will likely be worse than the 2008 financial debacle, but it won’t hit every aspect of the stock market evenly.
There will be sectors that plummet, some stocks will fall to zero, while others will thrive, like the opportunity today — we may even see another bounce in the market before shares fall off the cliff.
But that’s exactly why I’m not recommending a typical blue-chip U.S. stock. Instead, we are going to go into one of the only safe havens during a market meltdown: gold.
A Safe Haven From Market Meltdowns
Gold is a commodity that has no industrial uses. It doesn’t generate any sort of yield. It’s the type of asset you buy just to store in a vault. Yet it’s one of the only assets that holds its value when the markets take a whopping.
Take a look at this chart to see what I mean:
As you can tell, gold was a clear outperformer from 2007 through 2009. The price of gold climbed roughly 70%, while the broader market, as indicated by the S&P 500, tumbled as much as 50%.
That’s a stark difference; one that’s worth paying attention to as we approach what I believe will be another significant market pullback.
If the market crashes due to one of any number of possibilities — we enter a recession, the global asset bubble pops or the Fed tightens too quickly — I am certain we would see a similar reaction in gold, because as I mentioned above, gold doesn’t offer much. But it does provide a store of value and acts as a safe haven during a market meltdown.
When volatility spikes like it did in 2008, investors flock to something relatively safe. Bonds do well during this time too, but gold offers a higher upside reward.
Other than owning the physical bullion, there is another way to benefit that will likely give you more bang for your buck: Barrick Gold Corp. (NYSE: ABX).
A Good Bargain
Barrick Gold, the largest gold mining company in the world, also pays a slight 0.9% dividend yield. Shares of the beloved miner have plummeted nearly 80% since peaking in late 2010.
The company currently doesn’t have a price-to-earnings multiple, considering its earnings are negative. But it has gone through a series of cost cuts that will help it return to profitability as early as this year.
And right now, analysts are expecting an earnings multiple of 23 times 2016 expected earnings — not bad considering its competitors are fetching on average 57 times this year’s earnings. That means Barrick Gold’s shares could more than double and still be modestly valued amongst its peers even though Barrick is a superior company.
The company has diligently reduced debt. And while it has slashed its dividend to $0.02 a quarter last year from $0.05 a quarter, I would expect to see that lifted once gold rises, leaving investors with a 3% dividend yield — which is significant from a gold mining stock.
Grab the shares at any point below $10. The security could easily approach $20 in quick fashion just by being valued on par with its peers.
Own this and don’t worry about a stock market meltdown. It’s actually good for gold.
Editor, Pure Income