Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Gold and Wealth Preservation 2011

Commodities / Gold and Silver 2011 Jan 28, 2011 - 12:51 PM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleCall it "diversification" or "insurance", but gold tends to do badly when other assets go up...

JUST SO WE'RE straight, nothing is certain to work, not forever. Not cash, bonds, stocks, real estate, commodities or gold bullion.


Whatever your finance advisor, economics professor, banker or coin dealer might tell you, no single asset class - bought today - can promise to hold or grow its value, year after year, until precisely the day when you need to sell it and spend. That's why the investment industry invented "diversification" in the name of spreading your risk. It wasn't just so investment bankers could fill you with the latest sure thing.

Buying hard assets, for instance, now looks a smart move in hindsight. But precious metals and commodities all failed right through the 1980s and '90s, even as inflation - their perfect backdrop, you'd think - continued running near peacetime records.

Between 1980 and 2000, residential real estate more than held its value, US stocks outpaced the cost of living 13 times over, Treasury bonds averaged 8% real total returns per year, and even cash-in-the-bank doubled its purchasing power. But commodities (on the CRB index) more than halved before you adjust for inflation. By the start of 2000, gold's real value had slumped to one-fifth of what it was worth two decades before.

The last 11 years stand in sharp contrast, of course. Because just as in the 1970s - and all across the rich West - investors and savers have watched the price of natural resources rise (three-fold on the CRB index, in fact) as gold has risen year after year after year. Housing, on the other hand, first doubled then bust, stocks have gone nowhere (two slumps aside; dividends included) and the real returns paid to cash have long since sunk below zero.

Treasury bonds, however, remain a puzzle. Because they've continued to rise, extending their bull run to almost three decades. Cue Klingon-type furrows on the sharpest of brows...

"There is something remarkable about this combination. You would expect the performance of gold and Treasury bonds to be inversely correlated," said The Economist's ButtonWood column last summer. "Owning gold is traditionally seen as offering protection against inflation. And inflation is very bad news for owners of government bonds."

What gives? Both gold and major-government bonds, guessed The Economist, are "safe havens". But the crisis of 2007-9 can't explain this decade-long puzzle. Central banks are also pushing down yields, the magazine added, "artificially" keeping Treasury bonds high via quantitative easing as gold (apparently) flashes red on inflation. But again, gold and bonds were both rising before Ben Bernanke wheeled out his printing press. So the simplest solution? Investors always knew central banks would resort to inflation, but not until the threat of deflation made buying bonds all along look smart as well.

"The direction of official policy (low rates, quantitative easing, big deficits) looks inflationary, but the economic fundamentals (a big output gap, sluggish credit growth) look deflationary," said The Economist, citing the Bank Credit Analyst's own fix for the quandary.

"Investors who buy both Treasury bonds and gold are just hedging their bets."

Here at the start of 2011, gold has recorded 10 years running of real annual gains. T-bonds have been rising pretty much for three decades. Are the two buyers really the same person? In that little circle of London hedge fund johnnies I'm privy to, yes; long bonds and long gold has been a winning trade for one friend since 2002. But most gold buyers I speak to (and I speak to a few here at BullionVault) would rather chew glass than "hedge" their gold with Uncle Sam's debt. And besides, our iron law of investing - that nothing keeps working forever - says one half or both is going to lose favor sooner or later.

10-Year Treasury Constant Maturity Rate

Whether or not investors fear (or love) inflation, bond yields fall when prices rise. And so, thanks to ever-lower interest rates since 1982, bonds have been rising for a generation today.

Gold Prices

Gold, on the other hand, pays you nothing. And after a 20-year bear market, it's now been rising since 2001 - and really got started in 2005 - when those same falling interest rates started to look too paltry to a handful of buyers.

Whatever comes next, it won't come from a change in gold bullion. Sitting there at No.79 in the Periodic Table, the damn stuff can't rust, let alone pay you more (or less) in interest or dividends. So the end of gold's current bull run will only come from a change in what investors make elsewhere.

Bonds remain a conundrum, for at least as long as gold keeps on rising. But what about housing? Nobody wants it and there's a glut of supply...which in a world of tight credit might just sound like "contrarian bargain" if you down enough schnapps. So what about stocks, then? Everyone thinks they're sure to keep rising. Everyone except for the misery guts. "Dylan Grice [at Société Générale] notes that if you look at the cyclically-adjusted price/earnings ratio (or Cape - basically a 10-year moving average of the price/earnings ratio) for the S&P 500 today, you will find it is in the top quintile of its historical range," writes Merryn Somerset Webb in the FT.

"Indeed, Andrew Smithers of Smithers & Co. puts it so high that he considers the US market to be around 70% overvalued. This tells us - on Grice's numbers at least - that the 10-year returns from here are likely to average around 1.4% a year."

Another 10 years of misery in stocks, of course, would surely trigger the same Death of Equities fever which swept global stock markets (and pretty much marked the bottom) as gold's last bull market peaked in the late 1970s. But those depths of fear and loathing remains a long way off today, and while there's no guarantee gold will wait for equities to bottom before turning lower, it tends to do badly when other assets go up.

Call it "diversification" or "insurance". As we saw at the top, gold tends to rise strongly when other things fail.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules