Saturday, September 26, 2009
Asset Class of the Decade: Gold
In the end as an investor, it's all about the scoreboard. For those who aren't traders, allocation to the correct asset classes is critical to long-term returns. Following are the returns for the S&P 500, the U.S. Dollar (using the Dollar Index as a proxy), Commodities (using the Continuous Commodity Index [$CCI] as a proxy) and Gold. These returns ignore dividends, yields, and expenses, which are important concepts over the long-term and make this a less than ideal comparison. You can plug in whatever figures you think are appropriate and make your own comparison(s) if you're so inclined.
How is it possible that a hunk of metal has returns comparable to the stock market over the past 15 years? Does this surprise you? Are you familiar with the Dow to Gold ratio as a long-term concept? If not, perhaps it is not too late to familiarize your self with this concept, especially since the Dow to Gold ratio will drop to 2 at a minimum and may well drop below 1 this cycle.
Here's an up-to-date log scale chart of the Dow to Gold ratio over the past 5 years:
The long-term chart (20 year log scale candlestick chart) of Gold shows a strong bull market with no trend line breaks over the past 8 years and with aligned and rising 50 and 200 week moving averages:
The bull market in stocks and commodities is no longer in force using basic chart analysis. Things are always subject to change, of course, but with a trailing P:E ratio of 150 (based on reported earnings, not the garbage operating earnings spewed by CNBC bulltards) and a very weak global economy, stocks and commodities will likely not resume a secular bull market any time soon. This is also the message in their long term charts (following are 20 year log scale charts of the S&P and everyone's favorite commodity, oil [$WTIC]):
Since the Dow to Gold ratio will get back to 2 (at a minimum), those who sell their general stocks and buy physical Gold will be able to trade their Gold for at least 5 times the number of stocks within the next decade. This is equivalent to a 400% gain in stocks over a decade or less without taking the risk of owning stocks! The Gold bull market is alive, well, and not close to being done in time or price.