Expecting a Market Downturn? Make Sure You’re Following the “Noah Rule”

In his letter to Berkshire Hathaway shareholders for fiscal year 2001, Warren Buffett made one of his now-famous pronouncements:  “Predicting rain doesn’t count, building an ark does.”

Buffett admitted to forecasting some of the market turmoil during the year, which was exacerbated by 9/11, and yet he failed to convert thought into action. Thus, he violated what some investors now call “the Noah rule,” named for the ancient prophet who saved himself, his family and a few million animals by building a ship in anticipation of a great flood.

Predicting a major economic or financial event—whether that’s a recession, market downturn or even your own retirement—requires that you also take action. Otherwise your prediction was meaningless. This is why I’m always recommending that investors have a 10 percent weighting in gold, split evenly between physical bullion and gold mining equities, which have historically performed well in times of great volatility.

It’s also important to save and invest every single month, particularly in high-quality companies that are not only paying dividends but also growing those dividends.

This should be as automatic, consistent and pain free as brushing your teeth. After all, what prevents us from getting a mouth full of cavities is not the one or two visits to the dentist every year—it’s the everyday, “boring” act of brushing and flossing. Growing your wealth should be just as incremental and steady, and I’m proud to offer investors an automatic investment plan that uses the advantages of dollar-cost averaging—a strategy that lets you invest a fixed amount in a specific investment at regular intervals.

Alarming Number of Americans Unprepared for Retirement. Are You?

Unfortunately, an alarming number of Americans aren’t saving for retirement. They may have “predicted the rain,” but for whatever reason—and there are many we could point to—they haven’t gotten around to “building the ark.”

Earlier in the year, I shared a Bankrate survey with you that showed that one in five working Americans have nothing saved for retirement. And according to the Federal Reserve’s Survey of Household Economics and Decision Making, four in 10 Americans are so short on cash right now that they wouldn’t be able to afford a $400 “emergency expense.”

This is despite a stellar jobs market and booming stock market.

So who’s saving in America, and who isn’t? A recent report by Bloomberg’s Aaron Brown tackles this very question by breaking down U.S. households into 10 separate income brackets. Unsurprisingly, it’s the earners at the top who are able to save the most, with the very highest earners’ net worth growing an average $51,000 on an annual basis. Households in the bottom decile, meanwhile, end up losing an average $300 year-over-year, as they must borrow or sell assets to support spending.

This group is most vulnerable and “will face problems in the next recession,” Brown writes, adding that “they may find it difficult to climb to financial security.”

What can be done about this to ensure more people are able to save and invest for when the “rain” starts to fall?

Interestingly, Brown makes the case that expanding entitlement programs isn’t the answer. Nor is a wealth tax such as what presidential contender Elizabeth Warren has proposed.

“The U.S. already redistributes enough income to allow low-income households to spend more per earner on average” than many higher-income households, Brown says.

Instead, a “better path to reducing economic insecurity” would be to shore up government pensions and Social Security, among other strategies.

Singapore: A Masterclass in Fiscal Responsibility

Brown’s idea is incredibly similar to what Singapore already does, starting with the Central Provident Fund (CPF)—a sort of Social Security-401(k) hybrid that all Singaporeans are required to participate in. The CPF not only provides participants with retirement earnings but can also be withdrawn before retirement for specific housing and medical expenses. Both employees and employers are responsible for making contributions—20 percent of income on average for the former, 17 percent for the later—which are then invested to earn about 5 percent annually.

The CPF program, launched in the mid-1950s, is often cited for helping residents of the Asian city-state become among the world’s most fiscally responsible. Compared to people in most other developed countries, Singaporeans save a much larger portion of their earnings as a percent of GDP.

A recent study, in fact, found that six in 10 Singapore millennials—those aged 25 to 34—currently save over 20 percent of their salary. Most are not just adequately prepared for retirement, but they’re even more prepared for retirement than their middle-aged counterparts, according to the study.

Again, Singapore has managed to do this without levying huge taxes to support entitlements.

Personal income is taxed progressively between 2 percent and 22 percent, and because there’s no capital gains tax, dividends paid by Singapore-resident companies are completely tax-free.

Corporations pay a reasonable 17 percent on average, and there’s no payroll tax.

What this means is that Singapore’s tax revenue as a percent of gross domestic product (GDP) stands at only 14.1 percent, about two and a half times lower than the OECD average of 34.2 percent.

Some might initially think that lower taxes would result in a lower standard of living, with crumbling infrastructure and services, and yet Singapore’s infrastructure is regularly regarded as the best in the world, with the World Economic Forum (WEF) ranking it first in quality of roads, railroad density and efficiency of air transport and seaport services. The city-state came in first overall in the WEF’s Global Competitiveness Report 2019, followed by the U.S. Hong Kong, the Netherlands and Switzerland rounded out the top five.

Majority of CFOs Believe a Recession Will Strike in 2020

But back to the idea of preparing for rain. The latest quarterly release of the Duke University/CFO Global Business Outlook shows that a majority (52 percent) of chief financial officers (CFOs) in the U.S. believe a recession will strike in 2020. Fifty-six percent say they’re already taking steps to prepare for a downturn, including raising cash levels and reducing debt.

This is in line with investor behavior right now. So far this year, investors have pulled as much as $135.5 billion from U.S. equity-focused mutual funds and ETFs. That’s the biggest 12-month withdrawal on record going back to 1992, even as stocks have had a phenomenal year, increasing 26 percent.

A lot of this money has turned up in “safe haven” investments such as bonds and money market funds, but as I said earlier in the week, with yields so low right now, investors might be better served by overweighting gold.

Besides, I think a lot of investors will end up regretting not participating in this market, which has largely shrugged off the political noise and responded positively to the news that the U.S. and China have finally reached a major agreement in their ongoing trade spat.

On a final note, I’d like to share with you a table that illustrates just how rare down years have been in the S&P 500. In only 10 out of the past 40 years, or 25 percent of the time, stocks ended in the red for the year, and of those instances, only four had losses greater than 10 percent. Three quarters of the time, the market was up for the year, with healthy returns of between 10 percent and 30 percent occurring about half the time.

A recession or market pullback always seems to be right around the corner, but it’s worth remembering that, historically and statistically, stocks have gone up far more often than they’ve gone down. The amount of money that’s been taken off the table this year may be overdone, not to mention premature.

To explore how to fund your financial goals affordably, I invite you to discover our ABC Investment Plan!

4 Reasons Why We Believe In Royalty Companies View the Slideshow

Gold Market

This week spot gold closed at $1,476.33, up $16.16 per ounce, or 1.11 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 2.51 percent. The S&P/TSX Venture Index came in up just 0.50 percent. The U.S. Trade-Weighted Dollar fell 0.52 percent.

Date Event Survey Actual Prior
Dec-10 Germany ZEW Survey Current Situation -22.0 -19.9 -24.7
Dec-10 Germany ZEW Survey Expectations 0.3 10.7 -2.1
Dec-11 CPI YoY 2.0% 2.1% 1.8%
Dec-11 FOMC Rate Decision (Upper Bound) 1.75% 1.75% 1.75%
Dec-12 Germany CPI YoY 1.1% 1.1% 1.1%
Dec-12 ECB Main Refinancing Rate 0.000% 0.000% 0.000%
Dec-12 PPI Final Demand YoY 1.3% 1.1% 1.1%
Dec-12 Initial Jobless Claims 214k 252k 203k
Dec-15 China Retail Sales YoY 7.6% 7.2%
Dec-17 Housing Starts 1342k 1314k
Dec-18 Eurozone CPI Core YoY 1.3% 1.3%
Dec-19 Initial Jobless Claims 225k 252k
Dec-20 GDP Annualized QoQ 2.1% 2.1%


  • The best performing metal this week was platinum, up 3.57 percent as money managers increased their bullish outlook and took their net long position to a 22-month high. Gold traders remained bullish on the price outlook for bullion even amid trade optimism early in the week, according to the weekly Bloomberg survey. Turkey’s gold reserves rose $348 million from the previous week and are up 38 percent year-over-year. Turkey is taking big steps to increase gold consumption. The nation’s Treasury is writing changes that would allow the certification and standardization of scrap of unregistered gold people might carry when they enter the country, reports Bloomberg. Turkey is a top consumer and its jewelry industry was one of the few to report an uptick in demand for the yellow metal last quarter.
  • Gold has remained resilient this week in the face of many developments that could have rocked the price. Bullion rose after the Federal Reserve signaled it would keep U.S. interest rates on hold, then rose again after jobless claims rose. Gold fell on Thursday after the initial U.S.-China trade deal was announced, but held its own on Friday after weighing the impact of a weaker dollar, reports Bloomberg. Michael McCarthy, chief market strategist at CMC Markets, said in an interview that there are “two currents that are pushing and pulling gold at the money” – the trade war breakthrough and a weaker U.S. dollar.
  • Palladium continues to soar and is headed for $2,000 an ounce. The precious metal is now more expensive than gold has ever been, surpassing bullion’s $1,921 record. Palladium is surging in response to power cuts to South African miners, the second larger supplier. Platinum is also seeing a boost from the mine shutdowns, as South Africa is the number one supplier. South Africa’s mining index hit an 11-year high due to gains in producers. Platinum miners have risen 199 percent year-to-date while gold producers are up 98 percent year-to-date, according to Bloomberg.


  • The worst performing metal this week was gold, up 1.11 percent, despite an initial trade deal being announced. Gold fell on Thursday from a one-month high after President Trump said the U.S. was very close to a “big deal” with China, reports Bloomberg. Due to high prices for gold in India and an increase in import taxes, smuggling is on the rise. The India Gem and Jewellery Domestic Council said smuggled inflows of gold could increase 30 percent to 40 percent this year to 140 tons. Bloomberg reports that customs officials caught 30 passengers on one flight alone trying to smuggle 16.5 pounds of the precious metal into the country.
  • South African platinum-group metals output fell for a third straight month in October due to ongoing power outages. According to Statistics South Africa, output dropped 4.8 percent from a year earlier. Petra Diamonds began halting mining operations in the country after receiving a notice from the power company to reduce its power load. Bloomberg reports that both Impala Platinum Holdings and Sibanye Gold Ltd. were also impacted by government notices of power shutoffs.
  • Alamos Gold fired more than 200 workers at its Kirazli project in Turkey due to ongoing permit renewals.  Bloomberg reports that construction has been on hold at the project for about four months and that Alamos will reinstate the workers once mining permits are renewed.


  • Goldman Sachs said that investors should diversify their long-term bond holdings with gold due to “fear-driven demand” for the metal, reports Bloomberg. Analysts including Sabine Schels write in a note last Friday that “gold cannot fully replace government bonds in a portfolio, but the case to reallocate a portion of normal bond exposure to gold is as strong as ever.” Goldman’s Jeff Currie said in a Bloomberg TV interview this week that he likes “gold better than bonds because the bonds won’t reflect de-dollarization.” Mark Mobius said that if he were to invest $100,000 today, he would allocate 10 percent of it to physical gold. Citigroup is bullish that gold has room to grow due to little possibility that the Fed will raise interest rates in 2020. Russ Koesterich, portfolio manager at BlackRock, said in a Bloomberg interview that “any shocks to equities are likely to come from concerns over growth and, or geopolitics. In both scenarios, gold is likely to prove an effective hedge.”
  • Inflation could have room to grow in 2020 and some are calling it an underappreciated risk heading into 2020. Jason Bloom, an Invesco strategist, said he almost ran back to his desk to buy inflation-protected Treasuries after asking an audience of 150 advisors if they were worried about inflation and none of them said yes. Goldman says we could see a rise in inflation due to higher commodity prices from dropping inventories and low capital spending on new production. Jeff Currie, quoted earlier in this section, said in a Bloomberg interview that “we are finally cleaning up the excess of the industry, which is why we like being long.” Presidential candidate Elizabeth Warren said this week that she would install dovish policymakers at the Fed is she were to win the election.
  • In an example of a “smart” gold transaction, Barrick Gold sold an 83.25 percent stake in the Massawa project in Senegal to Teranga Gold for $430 million in cash and shares. Teranga’s flagship mine is just 25 kilometers from the Massawa project, making it a smart buy for Teranga with infrastructure and processing nearby, reports Bloomberg. Pending and completed gold M&A has reached around $33 million so far in 2019 – the highest amount since 2011. Metalla Royalty & Streaming Ltd. announced this week that it has applied to list its common shares on the New York Stock Exchange under the ticker symbol MTA. Metalla is a precious metals royalty and streaming company that has seen its share price increase significantly since the start of the year, along with the gold price.


  • Howie Lee, economist at Oversea-Chinese Banking Corp., said in a note that “we see little reason for gold to return above $1,500 an ounce.” They expect an improvement in global growth to push gold lower, potentially dropping to $1,400 an ounce in the fourth quarter next year. “Without further cuts on interest rates, gold lacks the impetus to rally higher.” Morgan Stanley is also cautious on gold due to improving global growth in 2020, reports Bloomberg. Analysts including Susan Bates wrote in a note that “a weakening U.S. dollar is likely to lend some support, and an uncertain trade outcome remains a key upside risk.” They forecast gold at $1,499 an ounce in 2020.
  • Bloomberg Economics tabulated that U.S. business debt exceeds household debt for the first time since 1991. Fed Chairman Jerome Powell noted in October that leverage at public and private business is historically high and they are monitoring it. What is out of step here is that with corporate debt ballooning, business investment has fallen for the past two quarters.  Almost like a Ponzi  type scenario: Borrow from Peter to pay Paul so you can buy back your stock to make the per-share metrics inflate or pay the shareholder a dividend from borrowed money.
  • More on South Africa’s power troubles… On Monday, Impala Platinum Holdings had just two hours to get thousands of workers back to the surface at its 1 kilometer deep shafts when the utility company announced power cuts. Eskom Holdings SOC Ltd., the state-owned utility, shut down South Africa’s key mining industry for a full 24 hours this week and the rolling blackouts threaten to tip the economy into recession, reports Bloomberg. Johan Theron, a spokesman for Impala, said “we can’t operate like this, but if we don’t cut the power, the national grid collapses.”

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 0.43 percent. The S&P 500 Stock Index rose 0.73 percent, while the Nasdaq Composite climbed 0.91 percent. The Russell 2000 small capitalization index gained 0.25 percent this week.
  • The Hang Seng Composite gained 3.92 percent this week; while Taiwan was up 2.74 percent and the KOSPI rose 4.25 percent.
  • The 10-year Treasury bond yield fell 2 basis points to 1.82 percent.


By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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