Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

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