Here's Why Gold Outperforms Stocks During Times Of Market Weakness

December 26, 2016

US stocks have been on a massive bullish uptrend in the weeks following the presidential elections.  Yet, smart investors are diversifying their portfolios with safe haven investments such as gold. It would not be necessary to go into details of how Republican Donald Trump managed to defeat Democrat's Hillary Clinton, despite the fact that most polls forecasted Hillary's victory.

However, it is necessary to mention that pundits, analysts, and commentators have largely submitted that a surprise Trump victory will trigger a massive uncertainty that could push the economy to the brink of a collapse. Trump won the election and the sky didn’t not fall. In contrast, US equities have managed to score big gains with the Dow Jones Index making new record highs on the journey to 20,000.

Nonetheless, the underlying factors that caused market watchers to predict an economic doomsday in the event of a Trump presidency are still very much in place. Trump tends to be rash, tactless, and opinionated on many issues. However, Wall Street pays too much attention to the actions and inaction of the president; hence, pundits might be right after all that Trump will bring an unprecedented level of uncertainty to the market. This article explores why gold outperforms stocks in periods of economic weakness.

Why Gold Outperforms Stocks When Stocks Are Weak

Gold Is Tangible

There's nothing inherently wrong with stock investments. However, stocks are not tangible assets unless you own all of the company. Hence, when the stock market hits a rough patch, the losses are often sudden and devastating, because you'll start seeing zeros disappearing from the numbers showing the value of your portfolio. If the firm becomes insoluble before you were able to divest your stock, you might end up with a stock certificate that might not be worth the paper on which it was printed.

In contrast, gold is tangible and you can collect the physical forms of your gold bullion investments. Of course, it is often smart to keep your bullion investment safe with brokers. However, you can decide to keep the bullion in safekeeping yourself. Irrespective of how low gold falls in the global markets, you'll always own the bullion. Consequently, if you are patient enough, the bullion in safekeeping will eventually rise in value…and you'll be in a better position to recoup your losses.

Gold Is A Store Of Value

Another reason the gold price often records an impressive performance when the stock market is weak is that gold is a better store of wealth than stocks. In periods of economic turmoil, cash often becomes king because a thousand in hand might be more useful than millions in paper assets. Many people often try to sell their assets in order to raise cash when the economy is in chaos.

The problem however is that millions of people would be trying to sell their stocks all at the same time. Therefore, it is often very hard to convert stocks into cash when the equity markets are down. In fact, many shareholders often end up using their stocks as security to obtain loans when they find it hard to convert the stocks to cash.

Loan experts observe that the demand for securities-based line of credit (SBLOC) often rises when the stock market faces headwinds that make it hard for investors to book gains. Many investors often consider using their stock certificates as security for personal loans or other type of loans in order to raise funds to buy gold as a hedge against stock market volatility.

However, if you had originally invested in gold, your portfolio will be diversified enough to withstand sudden movements in the stock market. More so, you'll find it much easier to convert your bullion to cash - and you might not need to take a loan. Nonetheless, if you do decide to take a loan, it will be in your best interests to read some personal loans lender reviews in order to choose a reliable lender whose terms suit your needs.

Demand For Gold Has Strong Fundamentals

Gold tends to outperform stocks in periods of economic instability because its demand is backed by better fundamentals. Gold has practical uses for jewelry, mints and industrial applications. Hence, the demand for gold tends to be stable even when the economy is weak. When stocks are down, the value of your portfolio might crash and it might never rise again – some stocks that hit rock bottom during the 2008 global financial crisis are yet to return to their pre-economic meltdown prices today.

Most people buy stocks for investment purposes. Therefore, stocks tend to lose their shine when the markets are down because investors will be looking for safe havens in order to minimize their risk. In contrast, when the economy is in turmoil, investors will start buying up gold because it will do a better job at preserving their wealth. 

Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

Gold was first discovered in U.S. at the Reed farm in North Carolina in 1799, a 17-pound nugget.

Gold Eagle twitter                Like Gold Eagle on Facebook