The market outlook for 2016 presents significant challenges and opportunities we have not seen for 40 years.

Since I began work on creating our first bullion fund in 1998, I have generally restricted my commentary to using precious metals for strategic portfolio allocation. Everyone agrees that investment portfolios should be diversified. Since gold is the most non-correlated asset class to traditional financial assets it provides important portfolio diversification. A strategic allocation of at least 10 percent reduces portfolio risk and improves returns over the long term.

This year I’d like to discuss a tactical opportunity, a market disparity that exists because of an artificial low in the gold price, and an unsustainable high in financial assets. Everybody understands buy low and sell high. The opportunity for 2016 is to sell high, buy low.

Many Canadians have profited by investing in U.S. equities since 2009 and, since 2011, they have also received a 32 percent bonus, because the Canadian dollar declined against the U.S. dollar. However, this rise in equities was largely a result of the U.S. Federal Reserve increasing its balance sheet.

The monetary policy of low interest rates resulted in trillions of dollars in stock buy-backs and mergers, using low-cost borrowed money. These monetary policies on the part of the world’s central banks have caused bubbles in stocks, bonds, real estate, art, and exotic cars. These are not likely to continue higher in 2016, and the risk of a major correction looms. In 2000, we had the tech sell-off that no one expected. Eight years later, we had the subprime sell-off that no one expected. In 2016, another eight years later, we will likely have an equity sell-off as global economies contract, and geopolitical tensions rise.

While it is clear that the global economy is contracting and there are numerous vulnerabilities, several valuation methodologies summarize current market fundamentals and provide an excellent indicator of future trends. They are the Buffet Indicator, the Shiller PE Ratio, and the Tobin Q Ratio.

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