Are You Diversified with Gold?
Investors should diversify away from the U.S. dollar and increase their exposure to other safe holdings, Especially gold, according to a report from JP Morgan. In a recent market note, the bank stated that it sees the U.S. dollar losing its world dominance as the world's currency and continuing to being devalued.
"There is nothing to suggest the dollar dominance should remain in forever," the note said. "The sturdy international currency has changed many times throughout history, going back thousands of years as the world's economic center has shifted."
JP Morgan attributed the dollar's decline to China's emerging role as an economic power, a trend that can be traced back to after the Second World War, as China "has been at the epicenter of [a] recent economic shift driven by the country's strong growth and commitment to domestic reforms."
This region's future growth will lead to fewer USD transactions, ultimately "eroding the dollar's 'reserves,'" and further devaluating the greenback. "In the coming years, we think the world economy will transition from U.S. and USD dominance toward a system where Asia wields holds all the chips. "In currency space, this means the USD will likely lose value compared to a basket of other currencies, including precious commodities like gold."
Recent data on currency reserve holdings revealed that central banks were increasingly diversifying away from the U.S. dollar, increasing their gold reserves at a record pace while also selling their dollars and buying euros, Cohen pointed out.
"To us, this makes sense: gold is a stable source of value with thousands of years of trust among humans supporting it," he said.
The bank stated that the current economic environment suggests portfolios should allocate more diversified exposure to other G10 currencies, currencies in Asia, and gold. Monday's market sell-off might have been just the beginning, and a 'Lehman-like' market collapse could be just around the corner.
Stocks plummeted on Monday, seeing the worst day of the year as the Dow closed more than 700 points down, the S&P 500 lost 3%, and the Nasdaq Composite was down 3.5%.
With the equity market rebounding on Tuesday, investors should not rule out a repeat of what just happened but at a much bigger scale.
"At this point, we think it would be a mistake to dismiss the possibility of a Lehman-like shock as a mere tail risk," "We would add here that the second wave may well hit harder than the first, like an aftershock that eclipses the initial earthquake."
The current trend in the stock market is very similar to just before the 2008 Lehman Brothers collapse, Takada pointed out.
"The pattern in U.S. stock market sentiment has come to even more closely resemble the picture of opinion on the eve of the 2008 Lehman Brothers collapse that marked the onset of the global financial crisis.
We have mainly gathered our analysis of the "deterioration in supply-demand for equities and a sharp downward break in fundamentals."
The timing of such a significant collapse could be as soon as late August or early September, and I would take advantage of this rebound in the stock market before that time and see this should serve as an opportunity to sell.
Kitco's senior technical analyst Jim Wyckoff also reminded investors on Tuesday that stock market volatility is historically more significant in September and October.
"Remember that September and October are historically the more turbulent months of the year are right around the corner, this all plays out for a very bullish scenario for gold and silver markets," Wyckoff wrote.