Wall Street Lets Out Sigh of Relief, Uncertainties Persist

After a surge in volatility to start the week, markets have regained their composure – at least for the time being.

On Monday, the VIX volatility index surged to its highest level since the 2020 pandemic panic. The red alert on this indicator of investor fear coincided with a steep selloff in stocks.

Investors were worried that the Federal Reserve is behind the curve on interest rate cuts as the economy shows signs of deteriorating. Many on Wall Street are clamoring for the central bank to take emergency action before its next scheduled policy meeting in September.

A benign report on weekly jobless claims helped ease investors nerves and kick off a sharp stock market rally on Thursday. Precious metals markets also gained on the day.

For the week, gold is down a slight 0.4% to bring spot prices to $2,444 an ounce. Silver shows a weekly loss of about a $1 or 3.6% to trade at $27.72 an ounce. Platinum is off 3.5% to come in at $935. And finally, palladium is rebounding 1.5% this week to trade at $942 per ounce as of this Friday midday recording.

The question for investors is whether the panic that briefly gripped markets this week is over and done.

Wall Street bulls would certainly like to believe so. But there are plenty of threats out there that could incite new waves of selling pressure.

In addition to the possibility of downbeat reports on the economy, geopolitical threats could roil markets at any time. For one, the ongoing Russia-Ukraine war could escalate into a nuclear conflict. For another, a war in the Middle East involving Israel and Iran could jeopardize global oil supplies.

Iran has reportedly threatened former President Donald Trump with assassination. That’s just one of many possible triggering events for political instability in the United States. Another is a compromised election or disputed result that calls into question the peaceful transfer of power.

The newly rebranded Democrat ticket of Kamala Harris and Tim Walz has seen a surge in support from billionaire financiers and Hollywood elites. Democrat activists are suddenly far more energized than they ever were for Joe Biden.

That all means the upcoming election is shaping up to be very intensely fought and very close.

Wall Street hates uncertainty. And the less certain investors are that a clear, undisputed winner will emerge after Election Day, the more volatility could ramp up when it draws nearer.

The conventional wisdom among financial advisors who work for big banks and brokerage firms is that bonds and cash instruments represent safety. While they do tend to be less volatile than stocks, fixed income instruments are far from safe if long-term preservation of capital is the goal.

Bonds carry not only credit risk but also inflation risk. Even if the U.S. Treasury Department never formally defaults on its debt obligations, it could still default in a stealthier, sneakier way. It could pay all the interest it owes in nominal terms while devaluing the currency in which its debt is denominated at a much higher rate.

Negative real returns on bonds and cash isn’t just a risk. It’s an overwhelming likelihood. The only tool the government has to sustain an otherwise unsustainable level of debt on its books is to inflate the currency supply and drive down the real value of what it owes.

Inflation-resistant assets such as precious metals are essential for safety-minded investors to hold.

Of course, some in the retail financial industry will say you shouldn’t own gold or silver because they are too volatile. It’s true that metals markets can make big moves, both up and down. But their potential to respond positively to stresses in the currency, or the financial system, or in geopolitics is an attribute that few other assets can offer.

When equities suffer from fear-induced volatility, gold can sometimes actually benefit from it.

Over the very long run, investors can be confident that gold will retain its purchasing power regardless of market conditions. The chances of fiat debt instruments retaining their purchasing power over the course of an investor’s lifetime are slim to none.

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