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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The bull market in stocks and commodities is no longer in force using basic chart analysis.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.
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11 comments:
Adam,
Would you mind commenting on this article??? Thanks! Bryan
http://finance.yahoo.com/news/1000oz-Gold-New-Reality-or-etfguide-475225903.html?x=0&.v=1
Bryan-
My comments - this puts out many of the superficial comments on Gold, and several are wrong or misleading. The "$850 in 1980" one is a classic. How about the 40,000 Nikkei stock average in 1990 (we're at 10,000 nearly 20 years later!).
Gold is rising in all currencies if you look over the past 10 years and it hasn't broken trend in any of them. The chart in that article is horribly misleading and dishonest - extrapolating long-term trends based on a 3 month chart is beyond silly. Gold is a "hold" in U.S. Dollar terms but a strong buy in Euro terms right now.
"Dollar down, Gold up" and vice versa works until it doesn't. Gold and the Dollar can rise together.
Gold is certainly at risk of a correction at any time. It is a long-term investment for me and I don't use paper ETFs to trade Gold - I buy and hold it.
I agree that the Dollar is about to or already has started an intermediate-term rally. Going long the Dollar here is a decent trade if you are a trader. The U.S. Dollar is a horrible long-term investment.
Gold has been correcting in the $700-$1000 range for 1.5 years now, so it overdue for a punch to new all-time highs, since it is still in a long-term secular bull market while the Dollar is simply looking to make a countertrend bounce (albeit potentially a big one).
I am not bullish on commodities, I am bullish on Gold as an international, debt-free currency. What could be a safer place to put some money over the long term when the entire financial system is now suspect? It's all about confidence. If you think sunny skies are ahead and a new secular bull market in stocks has started, I can't help you!
Once the Dow to Gold ratio hits the 1-2 range, I'll stop being a Gold bull and will wade through the ashes and buy other asset classes (like stocks and real estate) with my Gold.
Long-term cycles: wash, rinse, repeat. Human nature hasn't changed and neither have the long-term cycles. Gold is the go to asset class for now, but it won't be forever. No one can accurately predict the short or intermediate term. Any surprises in Gold should be to the upside, since it is still in a bull market.
I agree with you Adam. Your long term chart is much more convincing. Also I have my doubts whether GLD has the gold it says it has. The general public are not yet in the market, so it is nowhere near a top.
I know you yourself are deflationist, but I find JS's argument for hyper-inflation very convincing. Hyper inflation basically stems from a loss of confidence in the currency and we are seeing that world-wide. Also the current strength in the SPX could maybe the symptom of hyperinflation starting to get a toe hold. Have you listened to JS here ? http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2009/9/25_Jim_Sinclair.html
Try again !
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2009/9/25_Jim_Sinclair.html
Doesn't want to do it !
Go to
http://www.kingworldnews.com
and navigate
Josh-
Yeah, I've heard the interview. Thanks for the link (not sure why this blog program won't let links be typed properly - oh, well).
The deflation/hyperinflation debate is not as mutually exclusive as people like to believe. Even Prechter concurs that after deflation we may go into hyperinflation. As deflationary forces intensify, central bankstas/governments get desperate to inflate and they can cause a collapse in confidence in the currency through their action. We could also see a one-time devaluation of the U.S. Dollar relative to a new international currency to "balance" things out a little and spur a little more inflation.
The bottom line is that I am married to my Gold thesis, but life is not so simple/black or white as "deflation or inflation." A little of both perhaps? Even if one is a hyperinflationist (which I think is a ways off, for sure, when interest rates are near zero), I propose that Gold will outperform oil and base metals (due to economic weakness) in the next wave of any proposed commodity cycle and will keep pace with food. The one fly in the ointment is silver. If we are going into hyperinflation, then I am underweighted silver (silver underperforms Gold during deflation).
Until current sentiment changes-
and credit markets come back--
Until debt to cash levels come down--to at least 15-1
Until unemployment is no longer a problem--
How--can we possibly have Inflation-let alone hyper-inflation?
Until money has velocity--
Extreme velocity-in the case of hyper-inflation--there will be no inflation--
Currency's shouldn't collapse in deflation--but they can--
If confidence is lost in any paper currency and sentiment shifts-
The currency will collapse--
used-
Yes. Essentially deflation in extremis morphs into a hyperinflation because confidence is lost. In Exter's liquidity pyramid, Gold is the base with fiat paper money one level above the Gold base. If everyone burrows down into the Gold base/bunker, this is theoretically hyperinflation as it implies a complete loss of faith in paper money/currency.
This April 7th video will get goldbugs drooling-
Two reasons--
#2 reason--What Ian Gordon says about dow/gold ratio--
#1 reason--Merideth Whitney is there-not sure-she even mentions gold (<:
http://watch.bnn.ca/the-close/april-2009/the-close-april-7-2009/#clip158793
A lot of the differences in people's opinions about inflation/deflation can be correlated with how well people understand the concept of velocity of money.
If you think of velocity as a measure for how often people spend one bill in the same year then you'll be in the inflation camp.
If you think of velocity as a money multiplier linked to financial innovation and liquidity, you'll be in the deflation camp.
Hyperinflation is a different animal altogether. For people to refuse a currency it means they must be willing to break legal tender laws in the face of threatened legal and police action. We aren't there yet by a long shot. The USA is in a somewhat unique situation since they can lose their reserve status. This would hurt the currency, but it wouldn't be hyperinflation - you'd still have 300 million Americans bound to the US dollar by legal tender laws.
I appreciate your insight and also think that gold is one of the few investment alternatives that will continue to provide good returns given the poor and unstable economic environment we are in. I recently read some good articles at http://www.goldalert.com about the policies of the central banks around the world and potential effects on fiat currencies, gold, and particular mining companies with leverage to the gold price. There are many unintended consequences of the Fed's efforts to avoid deflation that the world is going to have to deal with soon, in my opinion.
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