It’s going to get volatile sooner or later

Strap yourselves in, the markets are going on a rollercoaster ride. And depending on your appetite for risk you should prepare your portfolios accordingly.

If you want to protect what you have, the sign posts to the safe havens haven’t changed and are easy to read.

If you want to try and ride the volatility and believe you have the know-how to profit from it, then take a deep breath and start reading between the lines of news stories. There’s no roadmap for this because the outcome is far from certain.

The ongoing chess match between two superpowers has reached a critical point, and control of the Arab states is set to be redefined according to whose plans play out the most successfully with Syria as the focal point.

From 2012, former US President Barack Obama argued that the US shouldn’t intervene in Syria’s civil war, wary of the anti-US atmosphere resulting from conflicts in Iraq and Afghanistan.

Russian President Vladimir Putin stepped in and directed the Syrian conflict in favor of Russia, Iran and the Assad regime at the expense of the US and its Arab, Israeli and Turkish allies.

Perhaps it was payback for Washington meddling in Serbia and Bosnia in the 1990s.

Turkey, a long time US ally, now seems to be aligning themselves closer to Russia. The King of Saudi Arabia has just made the first ever state visit to Russia in a prologue to billions of dollars’ worth of deals between the two nations.

If Russia continue unchecked they’ll have a greater influence on the Middle East than the US, and that’s a situation the Americans cannot allow to happen — they’ll have to react — and that’s the big unknown. How they react and the outcomes that result are going to cause volatility in the markets.

So how does a trader prepare — or take advantage — of this upcoming situation?

Expect the currency markets and the price of oil to experience the highest levels of volatility in the wake of an escalation of conflict in the Middle East — especially in European stock markets. But other commodities will also experience volatility.

Significant movement in the VIX (Volatility Index) — also known as the fear index — reflects the market participants perception about the market’s future volatility.

The safe havens, like Gold and other precious metals, tend to do well during periods of extreme volatility.

It’s no coincidence that Russia has been stockpiling gold for years, and despite official figures no-one really knows how much they are holding because they’ve also been mining gold at a far greater intensity in recent years.

Gold is the insurance policy countries take out when currencies are set to fall, China has also followed Russia’s lead on gold and this could be very significant if the US dollar loses its status as the leading reserve currency.

Those hoping that Cryptocurrencies can step into the breach and restore calm to volatile currency markets need to bear in mind that their very existence is still precarious. If it doesn’t yet have the backing of the central banks it’s hard to envisage a reality where it is taken up in a significant enough volume to be able to provide buoyancy to free-falling currencies. This could explain why China has blocked Cryptocurrencies — perhaps it has designs to take over from the USD as the leading reserve currency.

As ever, the financial institutions will play a significant role in how the markets react.

New money has been pumped into economies at unprecedented levels in recent years in an effort to promote sustainable growth. But at the same time world debt has increased to a point where a significant crash is no longer being talked about in terms of ‘when’ and not ‘if’.

Why? Because world debt has increased to a point where it can no longer be paid off. It’s at $65 trillion and climbing.

If you were to ask a real estate agent to put a value on the value of all the land in the world today, based on current market values, it wouldn’t come anywhere near the figure of debt that countries have accumulated.

And what happens when what you own is worth less than what you owe and you can’t pay it back? The bank forecloses.

This will translate into an economic crash of proportions that have not been witnessed before. Years of depression will follow, as global economies effectively press the reset button to bring debt back to manageable proportions.

It’s time to prepare for the volatility, it’s coming.

Originally published at www.fxbtrading.com on October 6, 2017.