There are two overarching reasons to be concerned about the stock market right now: Stock valuations are alarmingly high, yet volatility is eerily low. When this has been the case in the past, these two trends reversed course, with stocks falling and volatility rising.
It's possible that stocks will keep rising to infinity, though that doesn't seem probable. Stocks could rise if tax reform is passed, but at some point, stocks will correct. And when they do, at least according to the head of JPMorgan Chase's (NYSE: JPM) investment bank, the correction will be acute.
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Savvy investors should take note of these trends when buying their next stock, favoring safe stocks over speculative ones -- or, rather, stocks that could help to hedge against a drop in the market. Which stocks fit the bill? In this environment, I would argue that three of the safest stocks to buy right now are all tied to the price of gold. This includes:
- SPDR Gold Shares (NYSEMKT: GLD) is a trust that is designed to track the price of gold.
- Barrick Gold Corp. (NYSE: ABX) is a leading producer of gold and copper.
- Yamana Gold (NYSE: AUY) is also a gold miner, though it is meaningfully smaller than Barrick Gold.
Which of these three gold stocks you buy depends on your risk tolerance. The SPDR Gold Shares trust is the least volatile, followed by Barrick Gold, the largest of the two miners, and Yamana Gold, the smallest miner of the two.
According to my colleague Reuben Gregg Brewer:
I am aware that anyone who claims that gold is a prudent investment can be categorized as an alarmist who has succumbed to emotions and naivety. Lest you think I fall into those categories, it's worth noting that I would not be alone.
Among others who think similarly is Ray Dalio, the chairman and chief investment officer of Bridgewater Associates, the world's largest hedge fund. Dalio is one of the most revered and successful hedge fund managers in the world, if not the most revered and successful given the size of Bridgewater.
Dalio has been arguing all year that the market could be in for a nasty correction, along the lines of 1937. That was the year the U.S. economy plunged back into the Great Depression after seven years of turmoil and recovery.
"I believe that ... politics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes but in a manner that is broadly similar to 1937," Dalio wrote on August 21.
It was earlier that month that Dalio recommended that investors allocate 5% to 10% of their portfolios to gold-related investments (emphasis added):
And most recently, last month, Dalio expanded on his thoughts on one of the underlying trends in the economy that has him worried: income inequality (emphasis added):
Is it possible that someone as successful and committed to stripping emotions out of decision making as Dalio is could be succumbing to naivety and emotions? Yes. But it's also possible that he isn't. And given Dalio's track record, his thoughts on this should, at the very least, be taken into consideration by investors.
It's for this reason that I believe three of the safest stocks to buy right now are the SPDR Gold Shares trust, Barrick Gold, and Yamana Gold. Adding one or more of these to your portfolio will offer a hedge against the possibility that Dalio is right.
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