How I’m protecting my portfolio from a stock market crash in 2022

I am investing in this asset class to protect my portfolio from high inflation, slower growth, or a stock market crash this year.

Gold bullion on a chart

Image source: Getty Images.

Since COVID-19 sent markets into free fall in March 2020, the level of government support globally has produced mounting debt. The size of the current debt piles in the UK have not been witnessed since World War II. The current macroeconomic outlook, with supply shocks, war, and heavy debt burdens has many worried about a stock market crash. These factors could create a lasting bull market for precious metals like gold and silver.

How financial crises are dealt with

During a financial crisis, once an economy enters a downturn, what typically happens is that the country’s central bank will reduce interest rates. This encourages the population to take on debt and spend more, and the economy recovers over the next few years.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

As the economy recovers, the central bank can then raise interest rates again, in preparation for the next crisis. Then the cycle repeats. However, over recent years, central banks have not been able to raise interest rates to the same levels as before. As a result, we have experienced ever-lower interest rates.

Too much debt to handle

We are now in a debt trap, with global debt-to-GDP at 360%. As central banks raise interest rates, they increase the likelihood of causing a recession. This is because higher rates would hurt consumers, who will struggle to pay for other goods as their debt repayments rise.

However, because of the high inflation rates witnessed globally over the last year, central banks have no choice but to raise rates in order to reduce demand and tame inflation. This rise in rates is causing a collapse in the bond market and house prices already (due to higher mortgage rates), and stock markets are now following.

Perfect for precious metals

Generally, precious metals perform well when real rates are negative – this means when inflation is higher than interest rates, as is the case in western nations today. Since many of the issues involving inflation are on the supply side, central banks can do little to reduce it. The only option for central banks is to try and ‘thread the needle’ – that is, raise rates enough to limit demand, without tipping the economy into a recession. This will be extremely difficult to achieve.  

During times of stagflation (slower growth and higher inflation), physical assets typically perform best, which could be seen in the last bout of stagflation in the 1970s. Corn prices nearly tripled. Wheat prices quadrupled. Does this sound familiar today? Gold was priced at $36.56 per ounce in 1970 and by late 1979, was over $400 per ounce. Silver performed even better, rising from less than $2 in 1970 to more than $30 at the end of 1979.

The benefits of precious metals in my portfolio are twofold: (i) they protect against currency debasement (or inflation) and do especially well during financial repression or stagflation; and (ii) they provide diversification benefits, as their performance tends to be uncorrelated to many other asset classes and does well when uncertainty arises in financial markets.

Due to the current macroeconomic uncertainty, I believe that precious metals are a good way to diversify my portfolio. Therefore, I am buying WisdomTree Physical Gold and WisdomTree Physical Silver for my portfolio.

6 shares that we think could be the biggest winners of the stock market crash

The hotshot analysts at The Motley Fool UK’s flagship share-tipping service Share Advisor have just unveiled what they think could be the six best buys for investors right now.

And while timing isn't everything, the average return of their previous stock picks shows that it could pay to get in early on their best ideas – particularly in this current climate!

What’s more, all six ‘Best Buys Now’ are available to access right now, in just a few clicks.

All you need is an email address to get started

Peter McMullan owns shares in WisdomTree Physical Silver. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

More on Investing Articles

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

2 undervalued passive income stocks I’d buy today with £1,000

Falling stock prices are pushing up dividend yields. As a result, our author is looking for undervalued passive income stocks…

Read more »

Close-up of British bank notes
Investing Articles

2 cheap dividend shares I’d buy in a heartbeat

Our writer picks a pair of FTSE 100 dividend shares he would consider for his portfolio, that he thinks look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

With £500, I’d use the Warren Buffett method to find cheap shares

The legendary investor Warren Buffett has become a billionaire by following some key investment principles. Our writer explains why he…

Read more »

Man in a clothing store in a medical mask because of a coronovirus.
Investing Articles

Down 81%, are boohoo shares set for an explosive comeback?

boohoo shares have been falling rapidly. But could interest from a billion-dollar hedge fund cause a turnaround in 2022?

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

The Tullow Oil (TLW) share price jumps after losses! Is now the time to buy?

The Tullow Oil (TLW) share price ticked upwards on Thursday morning after falling nearly 30% over the last month. So,…

Read more »

Female analyst sat at desk looking at pie charts on paper
Investing Articles

Is the Lloyds share price about to dip below 40p?

The Lloyds share price has been trading below 50p for the better part of the year. But could the stock…

Read more »

Cheerful young businesspeople with laptop working in office
Investing Articles

2 beaten-down FTSE 250 shares I’m buying and holding for the long term

Andrew Woods explains why he's adding two FTSE 250 shares to his portfolio in the middle of a market sell-off.

Read more »

Female analyst sat at desk looking at pie charts on paper
Investing Articles

The Legal & General (LGEN) share price jumps 3%! Am I too late to buy?

The Legal & General (LGEN) share price soared in early trading on Thursday as the company registered a good start…

Read more »