Stocks have been a terrible investment over the past decade and
they are about to get worse. Gold has been one of the best if not the best
investment over the past decade and is about to get better. When you examine
investments via relative merits, Gold has trounced general equities. Gold has
also trounced paper cash, regardless of the fiat currency held, as well as
real estate and commodities over the past decade.
Despite this vast outperformance and the fact that Gold is safe
and retains its value over the long term, it continues to be a relatively
shunned asset class. This is bullish and will help sustain the "wall of
worry" that continues to drive the current secular Gold bull market. The
Dow to Gold ratio is a
key concept in my investment strategy. Although I also like to take risks
trading, my core investment and savings continue to be held in physical Gold.
Expressed as a reverse ratio (i.e. Gold price divided by the Dow Jones
Industrial Average or Gold to Dow ratio), Gold is about to continue its trend
of outperforming the stock market. This trend began at the turn of the
century and has a ways to go in terms of price action. The Dow to Gold ratio
will reach 2 and may even go below 1 before this secular stock bear market is
over.
Some may argue that the US Dollar will outperform Gold in a
deflationary environment, but that has not been the case since the current
cyclical bear market began in October of 2007 or since the current secular
bear market began in 2000. Things could change of course and the timeframe
one selects will certainly alter the comparison. But the time frame I am
interested in relates to the long term Dow to Gold ratio, which is what I am
using to make my long-term decisions related to my core physical Gold
holdings (and no, I am not talking about fraudulent paper proxies like the
GLD ETF).
I would not advise selling Gold until the Dow to Gold ratio has
reached 2 and I personally may wait to see if it goes even lower. Looking at
a long-term ratio chart of the Gold to Dow ratio indicates a pending bull
move is coming in this ratio, which means that Gold will be outperforming the
Dow Jones again. I suspect the move in this ratio chart will be dramatic
given the unfolding events in the economy boiling under the surface and the
current stages of the respective Gold bull and stock bear markets. Here's the
current Gold to Dow chart (15 year weekly log-scale chart up thru Friday's
close):
Now, I am still expecting one more short-term break lower in
Gold and Gold stocks this month, which will be a buying opportunity for
investors. However, looking at the more intermediate to long-term time frame,
there is no change to the trade of the decade. The trade of the decade is to
sell general stocks and buy Gold. Even if Gold fails to make spectacular
gains, it will continue to rise relative to stocks and provide the holder an
ability to buy far more stocks at a future date.
Currently, the Dow to Gold ratio is approaching 10. Since this
ratio will get to 2 or lower, Gold will continue to become much more valuable
relative to general equities. With history as a guide, the final stage of
collapse in the Dow to Gold ratio towards parity won't take long. Trade in
your general equities for Gold while there's still time, as this fall
promises to be exciting in a bad way for equity holders
Adam Brochert
GoldVersusPaper
|