Remember that social studies project from middle school? The teacher split the class into groups. You landed in a team of slackers, nobody did their part. In the end, you were left holding the bag as the project started to crumble. This was the first time you experienced counterparty risk.

Nearly all financial instruments carry counterparty risk. When you engage in a contract with another group (“party”) you always face the risk of the other side failing to meet their obligations. Stocks, bonds, derivatives and options all carry this risk because there is always a chance that the other side will default. In such a scenario a company may file for bankruptcy.

There is a spectrum to risk. Investors can rely on various ratings and figures to help them gauge where an investment falls on this scale. However, even this system can breakdown. The most recent and painful example was the 2008 financial crisis. Well-respected rating agencies like Moody’s, Fitch and S&P all gave the highest possible rating (AAA) to mortgage-backed securities made up of subprime loans. These wildly optimistic ratings were not just a failure of the agency’s rating models. In many cases bond issuers paid the agencies. Some have highlighted this practice as an example of collusion. Investors, misled by these ratings, lost billions.  

So, where is the market today?

Some believe today’s stock market is characterized by heightened counterparty risk given the outsized valuations amid constantly rising stock prices. Recently, The World Bank showed that the total U.S. stock market is valued at 150% of annual gross domestic product. This figure is far north of the historical measurement. Moreover, the figure bears an uncomfortable resemblance to the state of the market in 2000 prior to a sharp drop in values. What does an investor do? Where do they go?

Gold offers a rare departure from this inherent problem in investing because it carries no counterparty risk. When you own the physical asset of a rare, precious metal, you own something that isn’t in the hands of rating agencies. There is no threat of unscrupulous CEOs or backroom dealings that leave the investor out in the cold.

As we’ve discussed before, it’s important for investors to remember that counterparty risk does not go away when you own gold ETFs. “Physical gold is a tangible asset. Paper gold is a financial instrument,” astutely remarks Business Insider. They continue, “You must rely on another party – known to you or not- to make good on the investment. With a gold ETF, you are dependent upon, among other things, management prowess, fund structure, chain of custody, operational integrity, regulatory oversight and delivery protocols.” That’s a long list for an investor seeking a haven investment.  

If there’s one party you want to skip once and awhile it’s the counterparty.

Some measured exposure to counterparty risk is an acceptable characteristic of a diverse portfolio. However, all investors need to ask themselves if they’re comfortable with all of their holdings being subject to this darker side of the market.

Although all three benchmark US stock indices retreated minimally on Friday, last week was another record setting week for the markets. Since July 7^th, Emini Nasdaq 100 futures did not have a single down day, until Friday. Along with the Emini S&P 500 futures, this marked an awe-inspiring consecutive 10-day winning streak for the two index futures.

According to data from FactSet, this impressive day-after-day market climb hasn’t happened since February 24^th, 2015. Thursday marked the Nasdaq’s 41^st record high of 2017. The Nasdaq made a fresh new all-time high at $5,932.61 and the S&P 500 went into uncharted territory to print as high as $2,477.62.

Analysts attributed Friday’s very minor decline to profit taking. Stocks have had an incredible run and have broken more records this year than in the past decade, so minor declines seemed appropriate at some point. All three market indices closed well within 1% of their respective records on Friday.

Referring to the minor sell-off on Friday, Bruce Bittles, the chief investment strategist at RW Baird & Co., noted how “we had a nice build up in the market with the S&P 500 hitting a record and the market typically does not go up in a straight line.” Or does it? Stocks didn’t exactly crash down on Friday. Compared to the amount of gains in the market last week, Friday’s decline is a drop in the bucket.

“When you see 10 straight days of gains, you can expect a little pullback in the short term, but the breadth we saw in the Nasdaq over the rally speaks very well for what can happen down the road,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services.

Much of last week’s market gains were driven by upbeat earnings reports, positive economic data, and weakness in the US dollar.

Technology giants Microsoft and Apple, trading under ticker symbols, MSFT and AAPL, respectively, contributed to much of the Nasdaq and S&P 10-day winning streak. Microsoft hit a new all-time of high $74.30 on Thursday when it released earnings showing larger than expected cloud computing demand. Most of the gains were given up on Friday, however.

On the currency front, continuing weakness in the US dollar was not only a boon for US stocks, because they became cheaper for foreign buyers, but the weak dollar also helped everyone’s favorite precious metal – gold.

Gold logged its highest settlement in over a month as it rose $9.40 to settle at $1,254.90 per ounce on Friday. This is the highest settlement for the yellow metal since June 23^rd. When included with last week’s rally of 1.5%, this is an impressive winning streak for gold. Besides the weakening dollar and the possibility of a slower than expected rate hike schedule, lingering political uncertainty in the Trump administration helped gold settle higher as well.

What the market has in store for the rest of this week is anyone’s guess. After making new all-time high after all-time high, will it ever stop? The answer is unknown, but what doesn’t seem to be changing anytime soon is the fundamental thesis to own best precious metal in the world.

Since 1975, Blanchard has successfully helped over 450,000 clients invest wisely in precious metals and rare coins. As always, our team of experts are here to help you make the right decisions and capitalize on opportunities in the precious metals market.

Call us today at 800-880-4653

Recently, John Reade, the Chief Market Strategist and Head of Research at the World Gold Council offered interesting insights on how gold research differs from strategy. Reade clarified that researchers are simply using all available data to understand the current state of the market. Examples include an analysis of supply and demand, mining operations or an individual countries market share.

Strategist, however, take analysis and run with it. “A strategist tries to think about how these moving parts fit together and which elements will change going forward,” remarked Reade. A researcher is delving into the delicious steak dinner while the strategist is thinking about dessert.

The distinction is important because it underscores the inherent uncertainty behind market prognostication. Moreover, it elucidates the symbiosis between the two roles. Research has little value without the ability to synthesize the findings. At the same time, a strategist is only as good as their basis of research. Of course, more research is not necessarily the answer.

“What I look at now is quite different from what I looked at 20 years ago, and different again from 10 and five years ago,” Reade continues. To effectively leverage the power of research a strategist need to become adept at distilling what matters from the “static.” Author and statistician Nate Silver explored this topic in depth with his New York Times best-selling book The Signal and the Noise.

In his book Silver takes issue with assumptions that rely too heavily on the clean, sterilized conditions of models that fail to factor for the differing levels of importance among the data used. That is, a strategist must understand what set of characteristics are more important among the group. Knowing where the signal lies reveals what data points can be safely muted. Yet, to find the needle you need the entire haystack. Therefore, greater historical data offers the promise of more needles.    

Reade’s comments seem to echo Silver’s devotion to using a substantial set of measurements for isolating more accurate predictions. “This is another way in which strategy is different from research: the frequency of observations is higher, ideally in real time,” explains Reade. In following this practice, Reade outlines his data pools explaining that he looks at data from four key areas. Reade follows purchase levels, interest rates, macro-economic data and commodities like oil and even other precious metals.

Of course, while his process is enlightening, most of us simply want to know what the picture will be when all the puzzle pieces are together. After citing that long-term, real interest rates are low and that geopolitical risk is high Reade asserts that this “combined with concerns about the global economy will, in my view, likely see investors interested in gold.”

Being a good strategist starts with being a good researcher. Yet, a solid bank of data is only the beginning. The real trick is pulling what is germane to your question from the heap of otherwise unimportant, unintelligible “noise.”

Be a researcher first, then a strategist and finally an investor.  

For what has occurred dozens of times so far in 2017, the stock market made another all-time high last week. Emini S&P 500 futures traded as high as $2,461.25 on Friday, with Mini Dow Jones Industrial Average futures making a fresh high of $21,628.

Markets seemed to love Fed Chair Janet Yellen’s dovish testimony last week that interest rate hikes might actually come slower than previously anticipated. This is partially due to the Fed interpreting retail sales and consumer sentiment data that came in below analyst’s projections.

For last week, all three major indices closed largely higher, marking the second positive weekly close in a row. Although the Nasdaq 100 did not make a new all-time high last week, it has almost fully recovered from the infamous and mysterious tech sell-off a few weeks ago.

Interestingly enough, the financial sector was the only declining sector in the S&P 500 on Friday. Despite JP Morgan (JPM) reporting positive Q2 earnings-per-share of $182, well above the projected consensus of $1.59, bank stocks, as a whole, didn’t exactly rally on the bullish news. Other consumer banking giants, like Wells Fargo (WFC) and Citigroup (C), strangely declined on upbeat earnings.

The energy sector contributed to much of last week’s gains in the overall stock market, as crude oil futures for August delivery were up more than 5% for the week. Reports of a possible setback in Nigerian crude supplies coupled with a recent forecast from the US Energy Information Administration calling for higher oil demand in 2017 drove prices noticeably higher.

Meanwhile, gold prices settled at the highest level in a month as the possibility of future interest rate hikes dwindled due to the aforementioned softer-than-expected economic data. Gold futures for August delivery climbed as much as $10.70, or 0.88% on Friday and ultimately settled at $1,227.50 an ounce.

Suffice it to say that economic data ruled the markets last week, as gold, crude oil, and stocks were all positively influenced.

Much of the buzz last week on Wall Street seemed to be focused on the CEO of JP Morgan, Jamie Dimon, and his unusual and expletive diatribe regarding the lack of growth in America when compared to other countries. During the earnings conference call for JPM, Dimon stated his frustration for US economic growth policies as a whole.

“I was just in France. I was recently in Argentina. I was in Israel. I was in Ireland. We met with the Prime Minister of India and China. It’s amazing to me that every single one of those countries understands that practical policies that promote business and growth is good for the average citizens of those countries for jobs and wages,” Dimon said to analysts and investors on the conference call.

He noted how growth policies in the US are not a republican or democratic issue. Rather, he noted how infrastructure and regulatory reform are the key to providing the much needed jolt to the US economy that would likely spur more growth in the stock market.

Later on this week, there is a Bank of Japan announcement on Wednesday, a European Central Bank announcement on Thursday, and a smorgasbord of earnings announcements as earnings season is officially in full swing. Another banking giant, Bank of America (BAC), is reporting earnings later this week and the current at-the-money option straddle is anticipating price movement in the stock, up or down, of 3.4%. Similarly, Johnson & Johnson (JNJ) is priced for a 2.4% move up or down. Both stocks are large components in the S&P 500.

Blanchard has successfully helped over 450,000 clients invest wisely in precious metals and rare coins throughout all of the ups and downs in the market. As always, our team of experts are here to help you make the right decisions and capitalize on opportunities in the precious metals market. Call us today at 800-880-4653.