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It's more subtle and sophisticated than "buy
Gold and get rich." But in the end, not much. Traders and speculators
are always looking for the edge - much like the hares racing the tortoise.
But the tortoise method of investing for this secular cycle is important and
should comprise a significant portion of one's portfolio regardless of your
preferred time horizon when investing and/or speculating/trading. After all,
when MF Global can happen in one of the so-called safe haven countries (i.e.
the USA), then isn't a component of safety without counter party risk
important? Holding paper fiat currency and stuffing it under the mattress
requires infinite faith that the apparatchiks and central bankstaz
pulling the strings will not fall into the trap of human nature that has
plagued every currency, including those backed by Gold, since currencies were
first invented. I am speaking of debasement and debauchery.
And understand that currency under the mattress and certificates of
confiscation (i.e. government bonds) may outperform equities and real estate
as general investment sectors over the remainder of the cycle. I am not sure
and I don't care, as this is a game I am not willing to play with my
hard-earned capital.
The bottom line is this: the charts and secular trends scream that we are in
a secular private sector credit contraction, also known as a depression in
impolite company. For uttering the word "depression" is an
admission of failure and we all know that confidence must be maintained,
regardless of reality. Close your eyes, stamp your feet and repeat after the
apparatchik: "Remain calm. All is well."
Here is the skinny on the secular trend for at least the next few years and
potentially a decade or more: it's actually pretty easy. Hard assets, using
general commodities as a proxy, have been and will continue to outperform
financial assets such as common stocks, corporate bonds and real estate
(individual specific opportunities and travesties aside, as I am speaking in
broad sector-type terms). Additionally, Gold will continue to outperform
general commodities and will continue to rise relative to all major paper
currencies (i.e. outperform paper cash, as "hard" cash is preferred
to paper promises in our current secular environment).
Don't believe me? Look at the charts! First up, the ratio of commodities,
using the CCI Commodities Index (i.e. $CCI, which is more balanced than the
oil-heavy CRB Index) relative to the Global Dow Jones Stock Index (i.e. $DJW,
a less-than-perfect proxy for global equities). Here is a 20 year monthly
chart of the $CCI:$DJW thru today's close:
Next up, the Gold ($GOLD) to commodities ratio chart (i.e. $GOLD:$CCI) over
the same period of time using the same monthly log-scale format thru today's
close:
That's it. The only subtlety comes in because of the issue of
"nominal" versus "relative" return. In other words, if
Gold goes to $700 US/oz from here and general
commodities and the global stock market indices go to zero or near zero, you
may show a "loss" on paper, but will gain immensely in relative
wealth and won't have to pay capital gains tax. This is the scenario Robert Prechter of Elliott Wave fame envisions. In this
scenario, just hold paper US cash and do better than everyone else. I think
Gold is the perfect hedge, as it has already proven that it can hold its
value this cycle even in severe deflation. Remember 2008? Everyone talks
about how Gold dropped from $1000 US/oz down to
$700/oz but they always fail to mention that by
February of 2009 Gold was back at $1000/oz while
the stock market continued to fall! In other words, Gold was flat, just like
US Dollar cash was flat. To say that the US Dollar index rose more than Gold
is only relevant to traders playing in the currency markets. Holding paper
cash and physical Gold netted the exact same return during the worst
deflationary wave of this generation: 0%.
And then what happened after the dust settled in March of 2009? Did physical
Gold double in value or did paper cash under the mattress? 'Nuff said. Those who say 2008 can't happen again are
wrong, but they usually miss the point. Gold hedges against this outcome
while providing upside potential if a repeat of 2008 doesn't occur, while
paper US Dollars hedge against a repeat 2008 outcome with no upside potential
on the other side of the deflationary wave and further loss of purchasing
power if 2008 doesn't repeat. Paperbugs,
wake up!
Bottom line: ask the Greek people. Their stock market ($ATG) is now down
about 90% from the 2000 peak, which is slightly worse than the 89% loss in
the Dow Jones from 1929-1932. A deflationary-type stock market collapse by
any reasonable standard applied. Did people in Greece earn a better return
holding paper Euro notes or paper US Dollars (or short-term government debt
denominated in these currencies) since 2000 or better holding Gold? Again, 'nuff said.
Gold stocks are a hybrid. Gold they are not, despite what bulls say (and what
I used to believe before I took the time to investigate the actual facts
market history provides for those interested). Gold plus counter party,
business and political risk is not the same as unencumbered physical Gold held
outside the banking system However, the potential speculative gains in Gold
stocks are significant. This is one of the areas I focus on in my subscription service.
Once a core position of physical metal is secured, then speculation with a
portion of one's capital may be appropriate for those seeking higher returns.
So, knowing these secular trends have existed is one thing, but when will
they end? Well, the usual sign posts are not archaic relics to be laughed at
and degraded as CNBC likes to do. When the dividend yield on general common
stocks reaches greater than 6% on average, then perhaps it will be time to
start looking to trade some metal for some paper. And when my favorite
secular ratio, the Dow to Gold ratio,
hits 2 (and we may well go below 1 this cycle) then it may be time to start
trading Gold for paper.
Until then, I'll stick with the secular theme that has worked wonders so far.
History is repeating right in front of our eyes. This time won't be any
different. My advice is to buy physical Gold, hold it outside the banking
system, and enjoy the fireworks with your wealth intact (and likely
increased) and your purchasing power enhanced.
For those crazy enough to speculate in this environment, consider my low cost
subscription service. My subscribers and I are
currently short emerging markets and waiting for a bottom in the precious
metals sector to start speculating in Gold stocks from the bull side.
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