o3 BLOG | Investing

Stock Market Crash 2022 — How to Prepare for a Market Downturn

March 30, 2022

O3 Mining

Stock Market Crash 2022 — In the back of every investor’s mind is that one throbbing question: what happens if we experience a stock market crash? While it’s common for the stock market to undergo periods of fluctuation, full-blown stock market crashes are highly unlikely — there have been few periods in history where such catastrophes have occurred. Still, you can never say never, so preparing for all outcomes is simply prudent financial practice. If you’re looking for a way to hedge against economic crises, gold stocks are an excellent way to hold your position. The typical assumption is that gold and metal prices would fall, but does it hold up? 

We’ve come up with a few reasons why gold stocks and investing in gold mining companies are safe amid political uncertainty, economic downturn, a stock market crash, and climate change. But first, to understand why they have been considered safe havens, it’s essential to understand the key drivers of price. 

 

Key Drivers of Gold Prices

Supply, demand, and investor behaviour are key drivers of gold prices. Since gold often moves higher when economic conditions worsen, the commodity is heavily relied on as an efficient tool for diversifying a portfolio. Here’s why: 

 

1. Supply and Demand 

The number of people who want to invest in precious metals like gold is continuously growing, especially in uncertainty. With a global pandemic and geopolitical war in full swing, investors are looking at gold stocks to diversify their portfolios. 

2. Financial Policies 

Interest rates and other financial policy decision-making also play a crucial role in raising gold prices. If the opportunity cost is low, more investors will look to gold as a haven for their investment. In contrast, investors are more likely to invest in the equities market if the opportunity cost is high. 

3. The U.S. Dollar 

As the U.S. dollar weakens, the demand for gold increases — it’s that simple. When the inflation rates skyrocket and the currency’s value falls, most other investment opportunities fail to generate inflation-beating returns. That’s why most investors start to invest in gold when inflation increases.

4. Climate change 

Climate-related events in rural countries can also fuel demand in a country. When the harvest is good, farmers use their earnings to purchase the precious metal to create assets.

5. Russia-Ukraine Conflict and Market Uncertainty
Since mid February, it seems impossible to discuss the stock market’s health without discussing the Russia-Ukraine conflict. However, according to reports, Leonid Slutsky, a member of Russia’s negotiating delegation with Ukraine, stated that there has been “significant progress” in the two sides’ peace talks.

 

This glimmer of hope aided in lowering the price of oil recently. At time of writing, WTI crude oil fell 7% to just over $101 per barrel. It has now fallen from a multiyear high of $130 reached a week ago. The fear for markets is that if the conflict between Russia and Ukraine continues, Western nations will sanction Russian oil — the US has already imposed restrictions on Russian oil imports — dramatically reducing global supply. This would only exacerbate the burdensome inflation that has befallen consumers.

 

As the Ruble continues to drop, experts believe that Russia’s economy will lose all progress made over the past 30 years. As macroeconomic uncertainty across all markets remains high, the broader stock market remains vulnerable to sell-offs. While there is hope of a resolution coming from Russia and Ukraine, there is no concrete evidence of that happening. In addition, the Federal Reserve will announce its interest rate decision this week. Markets expect the Fed to raise the benchmark lending rate by a quarter-point, but they will be watching to see if the central bank signals a more aggressive rate-hiking path in the future. A more aggressive Fed could result in even slower economic growth.

 

Gold Price Shines Through

Amid the global crisis, gold investment products have benefited from a short due, largely because of supply chain issues, global inflation, and rising energy prices. Experts who closely follow the market believe that the haven of gold bullion and stocks has pushed gold prices. The impact of the invasion in Eastern Europe, and stagnation in the equity markets will continue to spur a rise in years to come. 

 

Bottom Line

Many experts think gold will even pick up steam and top a new record high later this year amid political uncertainty and the threat of a pandemic still looming. This sentiment seems very likely as rising concerns mount about global interest rates and the uncertainty surrounding oil prices if tensions between Russia and Ukraine don’t abate. For many investors, this year’s goal is to accumulate high-quality junior gold mining stocks to put yourself in a position to capitalize on the next big breakout. 

 

Sources:

https://o3mining.com/articles/stock-market-crash-2021/

https://o3mining.com/articles/best-reasons-to-invest-in-gold-in-2021/

https://time.com/nextadvisor/investing/stock-market-rattled-by-russia-ukraine/

https://sprott.com/insights/in-gold-we-trust-report-2021-monetary-climate-change/

 

To learn how O3 Mining can add long-term value to your portfolio, contact us today.

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