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Fear a market meltdown in 2019? You’ll probably want to own some of this

Image source: Getty Images.

With only a few trading days left until the festive break, there’s surely little chance of markets giving some comfort back to those who have likely seen any profits generated earlier in the year evaporate over the last few months. After the highs of the summer, it really does look like 2018 will end very much on a down note for investors.

Without wishing to depress anyone further, I’m inclined to think that there’s more chance of markets continuing to fall than rising next year. Here’s why.

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Dark clouds forming

For one, the yield curve is getting very close to inverting. What does that mean in plain English? Simply that holders are close to getting a better rate of interest on short-term (two-year) as opposed to long-term (10-year) US government bonds. Given that lending your money out for longer should see you better compensated, that’s not a great sign. Rather ominously, this kind of behaviour in the bond markets has been a reliable indicator of a forthcoming recession in the US since the 1950s.

But this isn’t the only reason things could get worse before they improve. With Brexit still up in the air, corporate debt levels worse than they were in 2008 and the trade war between the US and China rumbling on, there’s every chance that indices such as the (already cheap) FTSE 100 could sink further in 2019.

Now, if recessions and/or more volatility really are on the way, I think making some kind of investment in gold might be prudent. 

Why gold?

While nothing can be guaranteed, history shows that the shiny stuff tends to be negatively correlated with stocks in particular. In other words, when one goes up in value, the other tends to fall. That’s worth thinking about if you’re looking to hedge your exposure to equities rather than selling out of them completely. 

Other positives to owning gold include that it’s tangible, easy to understand, there’s little chance of it being stolen (compared to something like Bitcoin) and it will always be in demand.  

So how do you buy it?

Aside from hoarding gold bars under your mattress (which is both impractical and potentially very uncomfortable), there are two ways of getting exposure.

The first, arguably riskier, option is to buy shares in a miner. Up until recently, the ideal candidate was FTSE 100 giant Randgold Resources. However, its merger with Barrick Gold means that the company will shortly de-list from the London Stock Exchange (although you can always buy the combined group’s shares in the US), leaving only a lot of high-risk, low-liquidity, small- and micro-cap explorers as alternatives. If you’re committed to going down this route, a fund that invests in a lot of the market minnows could be a safer bet.

The second option — buying into a low-cost passive fund that tracks the gold spot price — could suit the vast majority of Foolish readers. The iShares Physical Gold ETC is an example of this. Just don’t expect any dividends.

Bottom line

Regardless of whether you choose to buy gold or not, the importance of spreading your capital across assets can’t be overstated. While many market meltdowns and corrections should be expected over a long investing career, a prudent approach to investing will at the very least allow you to sleep at night. 

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Paul Summers has no position in any of the shares mentioned. 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.

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