Market crashes are by their nature, unpredictable. During the last financial crisis, many knew what was going on, but were spruiked by market leaders into the belief that everything was normal, and growth was occurring via normal market demand, rather than by knowingly inflating a market bubble which would eventually become unsustainable and burst.
When markets crash, it usually comes as a shock to most people, but not all people, and for markets to take a plunge off Mount Kilimanjaro, something unusual, but not unexpected happens for the chain reaction to begin.
The point is that markets are never stable and in most case scenarios there are 3 sets of constant market players, those who lead markets, those who follow markets and those who react to markets, the last of which just happens to be the biggest category.
Market leaders are the ones rolling the dice, they are making the calls to those who follow markets, hoping they will indeed respond to their call, to do this, they need to have followers believe that a positive outcome is almost entirely assured.
In the latest GFC, we seen the call become so great, that market reactors also came flowing in, and demand grew from the closely aligned reactionaries, the sideline investor, to the heavily removed reactionaries, normal everyday people. All came flooding in looking to make an entry in a market they poorly understood, poorly researched, yet strongly believed would be a growing trend almost indefinitely into the future. Whenever any market enters this stage of demand, warning bells should be ringing to those with experience.
The precious metals markets often follow a similar trend, however the role they play is entirely different. The precious metals markets are actually where people should be turning to, especially when a market is driven to the point where everyday people, with little to no market understanding, believe strongly that indefinite growth is not only achievable, but must be acted upon to secure future wealth.
You see, precious metals are, both historically and today, held as an investment against bubbles and inflation, they help to protect against the impact of bad market outcomes, and looking back historically during a crisis, gold in particular has an inverse relationship (in most situations) with all other market crisis, be it commodity or currency.
Holding physical gold and silver, is like a security account against bad economic situations, while all other investments take a dive, gold usually gains upon, or at least retains, it’s prior value. Gold should be seen not as an investment, but as an insurance policy.
When all others go running to a particular commodity or industry due to belief in ever-sustainable growth, picking up some gold and silver bullion is often the best method to protect your savings and other investments going forward.
When markets take a plunge, the precious metals market rises to the occasion and give investors the financial reprieve they need to take much of the burden off the damage the market has inflicted on their portfolios. The gains from their precious metals investments can then be used to to counter other negative effects going forward.
When gold falls off a cliff however, most investors are usually left bewildered, as there is a multitude of reasons as to why gold prices fall, including political upheavals that could upstart revolutions, or at least shift demand in important economy sectors, or the election of an unpopular leader, or even a nation’s decision to leave a group that was founded on economic platforms such as the BREXIT from the European Union. This is largely due to the fact that despite the gold standard being obsolete on paper, gold is still held globally as real money, or rather money that matters.
Because of this, not all bad political or sector based market outcomes result in gold prices rising, rather gold is more often than not based around a wide and common view of the financial markets as a whole, not specifically regionally. Also rarely is heavy gold buying associated with a predictive future economic event, although this type of buying does make up a lot of the retail sectors bullion purchases, the entire gold market as a whole rarely sees a shift until the worst has already happened.
Confidence in paper currency has however eroded over the years, especially if we look at the value of currencies over the last few decades in comparison to golds value over this time.
This diminishing confidence in currency is often a result of, or a consequence of, a period of constant global inflation. As such, this drives more people into investments based not around savings, but around stocks, businesses and commodities, this is a key reason people are largely left in a lurch as to why markets crash, or even sky-rocket causing gold instead to crash.
The string of questions and theories that follow suit, after incidences such as these, often do nothing more but create more turmoil, to the point where speculations about dark forces manipulating the global economy or dollar protectionism start emerging.
If a seasoned investor is asked about such things, you may rest assured that his or her answer would most likely be, nobody (not even the Feds), actually really know why markets crash specifically, everybody has an idea about why it crashed, but nothing is ever concrete.
More often than not, there are no perfect explanations when it comes to the state of the markets, and as the saying goes – there is no such thing as a perfect zero.