Top Investor Safe Havens for Protection Against Collapsing Economic Growth
Troubles in the global economy look to be strengthening, suggesting an economic slowdown may be following. Not only are the major economic hubs of the global economy showing signs of stress—something I have mentioned in these pages many times before—but we see demand slowing down as well.
The Baltic Dry Index (BDI) gives us a general idea about how the demand in the global economy looks. At the very core, this index tracks the shipping price of raw materials. If the shipping prices increase, it suggests there’s increased demand in the global economy. If they decline, it’s not really a good sign. Please look at the chart of the BDI below.
Chart courtesy of www.StockCharts.com
The BDI is outright collapsing. Since the beginning of the year, the BDI has declined more than 42%. This shouldn’t be taken lightly because it suggests demand in the global economy is slowing down very quickly. Looking at the average change in the BDI in January since 2003, this decline in 2014 is the second-biggest on record—in 2012, the BDI collapsed 58% in January.
Another indicator of demand in the global economy I look at is the Chinese economy. It has been known as the manufacturing hub of the world, and the country exports a significant amount of its goods to the world. If we see manufacturing activity in that country slow down, it gives us a hint that a global economic slowdown may be following.
Consider this: In January, the HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI)—an indicator of manufacturing activity in China—plunged to a six-month low. It was registered at 49.6 in January compared to 50.5 in December. (Source: “HSBC Flash China Manufacturing PMI,” Markit, January 23, 2014.) Any reading on the PMI below 50 signals a contraction in the manufacturing sector. It showed new export orders decreasing at a faster rate in January, too.
What does this mean for American investors?
If the global economy does cave under these pressures and we see an economic slowdown, then it wouldn’t be a surprise to see the equity markets in the countries where troubles are brewing come down a little further. Those markets may not be a smart buy now—but if they decline, they might create some opportunities.
In the meantime, as this situation develops, investors may seek out a hedge against uncertainty, such as gold stocks, which have been the best-performing sector so far this year. One way investors can use gold to hedge against uncertainty may be through an exchange-traded fund (ETF), such as Market Vectors Gold Miners ETF (NYSEArca/GDX).