It’s Time to Hold More Cash

– Bank of America advises owning gold– Markets in “Twilight Zone” transition period– Fed policy normalisation poses risks– Own gold and cash to protect against “cleansing drop in asset prices”– Data show markets disconnected from reality– Fragile system vulnerable to shock– Gold is hedge against systemic risks

Gold is a regarded as a hedge against market turbulence by Bank of America who, in a note to clients, advised holding gold and paper currency at this time.

Bloomberg report that Bank of America Merrill Lynch describe the markets as being in a “Twilight Zone” – the zone between the end of QE and the Fed beginning to raise rates to try to bring normality back into the markets.

The note highlights two problems with raising rates which are prolonging this sojourn in the Twilight Zone. The first is that the real economy in the U.S. is not currently strong enough to withstand a rise in interest rates.

The second is that raising rates could cause a shock to the markets and the economy as the practically free money juicing the markets comes at a more realistic cost and some government, corporate and household debts become unserviceable.

For these reasons, Bank of America believe that the Fed is far from taking action to return the markets to normality and “the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes.”

To deal with this they advocate adding gold to one’s portfolio along with higher levels of cash. Citing factors such as liquidity, profits, technological disruption, regulation, and income inequality they say there exists a potential for a “cleansing drop in asset prices.”

The note also indicates that data shows that the stock markets in the U.S. are somewhat disconnected from reality. While investors are apparently optimistic there is a large amount of cash “on the sidelines”. Their chart shows that the high levels of cash currently in reserve actually correspond to periods of extreme pessimism in recent years.

They note the anomaly of near record high stock prices while equity funds haemorrhage cash. “U.S. equity funds have suffered $100 billion of outflows in 2015 while the S&P 500 is near all-time highs”. They put the outflow down to U.S. investors putting cash into European and Japanese equities.

On the other hand, “buying from those not captured in flow data (sovereign wealth funds, pension funds and central banks) could be what’s giving U.S. equity indices a boost.”

The note concludes that the outlook for the markets over the summer is not favorable,

“The summer months offer a lose-lose proposition for risk assets: either the macro improves and the Fed gets to hike, which will at least temporarily cause volatility; or more ominously for consensus positioning, the macro does not recover, in which case EPS downgrades drag risk-assets lower.”

For a host of disparate reasons we cover here consistently – ranging from geopolitical tensions and currency wars to gargantuan unpayable debt and other macro-economic fundamentals – we believe the entire interconnected global economic, financial and monetary systems to be extremely fragile.

As policy makers lurch from crisis to crisis it seems certain that, at some point, their ability to control the outcome of a particular shock will be wanting. History shows that crises usually spring from seemingly minor events. A correction in the stock markets – should it occur – may turn out to be a “cleansing”. But it may precipitate a larger, unforeseen crisis given the fragile state of the system.

In the event of such a crisis – and given the insane levels of debt now extant across the globe there is potential for a serious crisis – physical gold stored outside of the banking system will perform its time-honored function of protecting wealth.

We offer clients fully, segregated accounts with the most reliable vaults in the world in safe jurisdictions such as Switzerland and Singapore.

Reprinted with permission from GoldCore.