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business newsWill Gold, Miners Fall If Stock Market Sells Off?
There's no reason to think that gold and miners should sell off if stocks do -- but they might -- so be prepared.
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Toby writes:
Am I correct in thinking, if we have a big market sell-off, that gold-silver, the miners will go right along with the rest of the very overpriced market? I know they will come roaring back when we get QE3, but how much pain should we go through?
I probably get asked a variation of this question once every two days and have for years, so hopefully I can answer it once and for all. What Toby is asking is, will gold and miners be sold (i.e., will they be collateral damage) if the stock market sells off?
First of all, we must note that these are markets and anything is possible, and in a liquidity crisis most everything gets sold. But remember, not every stock sell-off is a liquidity crisis (2008 was an extreme version of one). Stocks and gold have no real reason to be correlated.
Gold isn't a risk on/off idea, an investment in gold is a statement about a lack of confidence in currencies and central banks, for the most part. Those would not really be reasons to buy stocks, hence the lack of logical correlation. All the worlds’ currencies are essentially worthless, though a few are far better than others, thus even when the dollar rallies (a favorite risk-off explanation) people whose main currency isn't the dollar might want to buy gold (if the dollar rallies as the euro is being vaporized and you live in Europe and don't like the dollar, why wouldn't you buy gold?).
People the world over are generally under-invested in gold and over-invested in paper, so I see buyers at the margin everywhere and at all times. HOWEVER, gold is a market like everything else and it has its violent corrections, which are hard to anticipate (miners are a derivative of gold and have extra baggage, making them even a bit harder to predict). What all this means is there is no reason to think that gold and miners should sell off if stocks do, BUT THEY MIGHT. You must decide what you think about all of this and plot a course of action that makes sense to you.
One of these days gold (and miners) will really go wild as more people understand why they need it. Will that happen soon? I can't say, but it may not be easy to spot in advance and I don't intend to miss it. I hope that helps.
Lastly, I wouldn't get short stocks to try to protect my gold as that could easily backfire. If your gold position scares you and you have too much, you just have to reduce it, and be willing to have it go up with your having a smaller position, if that is what happens.
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