The euphoria of today’s stock market is simply not supported by any realistic economic foundation. A majority of any group of analysts you could sit down with would tell you that today’s market is utterly overbought, nevertheless the buying continues and new highs are being achieved near daily. For the past several years, the monumental growth of passive investment vehicles, like mutual funds and ETF’s, have fueled a “proportionate” market increase that has sent the volatility index into a catatonic stupor. This stupor has been interpreted by investors to mean that there is no longer a volatility danger, but in fact, it has raised the potential for a complete collapse to exponential levels.
The increase has become proportionate, because money flowing into the passive indexed funds has to be allocated proportionately. Heavy weight stocks have to get the lion’s share and therefore move the entire index higher. The stock value of an individual company then becomes melded into the S & P Index, for example. Stocks that investors would normally pass on or short instead get lifted with the rising investment tide. Good, bad, or ugly considerations are replaced with a go, go, go euphoria. As long as the euphoria persists, the buying will continue and the market will continue to rise. But with today’s nanosecond trading technology and massive block trading groups, the potential for a cataclysmic reversal becomes immediate and precipitous.
Essentially, the S&P 500 itself has been made into a massive mutual fund. Different components may be selected, but just as an example, the Vanguard family of passive indexed funds owns more than a 5% share in 491 of the stocks contained in the S&P 500. The broad coverage of such funds opens the door for individual investors who can successfully maneuver the course of individually successful stocks, but the major caveat is the potential for the entire market to go south without warning or time to respond. In this day and age, stops are an outdated and ineffective tool.
There’s a reason to participate in the market, but to do so without a safety net of gold and other physical precious metal ownership is gambling, not investing. Physical precious metal ownership is money and has been for thousands of years. Precious metal ETF’s are no more “money” than the dollar, deutsche mark (circa 1930), or any other fiat currency. Physical precious metals are today’s greatest financial protection from any type of economic cataclysm. Today’s lower prices are just another great reason to stock up, now.