The US stock and commodity markets crashed by almost 10% during the last week with a 5% drop happening yesterday. Indian markets have also dropped by over 1200 points (Sensex) in less than 10 days. What lies ahead?
Why are Markets Falling?
Since the year 2000 we have seen that there is a definite link between markets across the world. This has happened with the accelerated push for globalization, where investors have the option (which the financial institutions use to the hilt) to invest in most of the markets across the world.
This means that any market can be affected by the happenings of any other market. The present fall in the markets across the world is due to one such prime reason and many smaller reasons.
The Prime Reason – USA’s Debt Crisis
Though USA’s Government got the nod to borrow more, they have also been forced to cut their expenses . The very fact that the so far unassailable US Government was brought to the brink of a loan default on its debt commitments twice within a year gives the shivers to the global investors. With no other currency available in large enough quantities as an alternative investment, many countries’ Central Banks are forced to helplessly see their foreign exchange reserves go down, unable to do anything about it!
Also, there are no signs of USA’s economy making a come back in the immediate future. With a size close to 25% of the global economy, this is a worry for investors across the world. This has created a situation where people wish to shift their investments to safer havens away from the bond and stock markets.
Safer Havens?
At present the only safe option to invest seems to be the lustrous metal gold. This due to the fact that most of the other commodities are linked to industrial production, which is on the downward trend. Gold on the other hand is the only commodity or metal that has the least proportional usage in industry when compared with personal consumption. This can be seen with the metal reaching all time high prices.
Stock Market Investments
Is it a good time to enter the stock market with the prices going down? Does one cut down on the purchase prices allotted for stock in the portfolio?
At present it may be better to get out of the market than averaging or looking for fresh exposure. Going by the trend of the markets there is likely to be a sharp drop before the next bottom. A conservative investor may look for a 10% further fall in the market. It will be prudent to wait for such a time to re-enter the stock markets.
Till that time it will be a much better option to park funds in gold either in the physical form (bars or World Gold Council coins) or in the ETF form.