A Time To Take Stock, Not To Buy Stocks

Jeff Nielson’s Gold Commentary

It has been a rough month to be a precious metals investor. However, irrespective of whether we are talking about markets or life in general, whenever we encounter any short-term turbulence, we need to step back and look at the big picture.

The main reason to do this is that, being human, these short-term events provoke our emotions: exuberance if our investments are suddenly rising, and fear or despair should they suddenly decline.

When this happens, many lose sight of the fact that short-term movements may have no relevance to a longer term trend, and certainly that short-term events are rarely the cause of those longer (and more stable) trends. Look at a one-week chart of the price of gold recently and one might be tempted to do their best impersonation of Chicken Little. However, look at a ten-year chart and the recent pull-back brings but two words to mind: “buying opportunity.”

Nielson Chart 3 – GOLD 10YR
Source: Kitco.com

Conversely, for those investors who prefer the perilous world of US equities, the Dow Jones Index has spent the last ten years “breaking 10,000” – having done so more than 25 times, most recently in 2009. One look at a ten-year chart of the Dow and I’m thinking that’s one heck of a merry-go-round.

DJIA 10YR
Source: Google Finance

And 10,000 on the Dow today is not what it was ten years ago. Rather, Washington’s Plunge Protection Team has used the printing press to keep the stock market afloat.

Take a look at the following chart of the Dow in terms of gold. Since gold doesn’t rise in value as much as keep its value versus falling fiat currencies, this chart gives a clear picture of how much purchasing power an investor would have lost buying the Dow in 2001.

Nielson Chart 2 – DOW GOLD 10YR MOD
Source: Fred’s Intelligent Bear Site

Obviously, gold has been the place to be for the last ten years, while Dow stocks have seen about as much appreciation as that car in your driveway.

Trends do change, however. So, the question becomes is there any reason for US investors to believe that the future will be significantly different for either gold or the Dow? In short, no.

While entire books could be written about all the bullish fundamentals currently favoring precious metals, two words will do: “competitive devaluation”. Prior to the “Crash of ’08”, the price of gold had nearly quadrupled versus our depreciating fiat currencies – while the price of silver quintupled! With most of the world’s governments now racing to drive down the value of their currencies, gold’s long-term performance should continue to improve going forward.

For US equity markets, the future is not nearly as bright. The “record earnings” that many large US corporations now boast about have come at the expense of stripping millions of American workers (and consumers) of their jobs. High profits overseas will continue to be offset by weak demand and shrinking profit margins domestically. Since US tax law discourages these firms from “repatriating” these overseas profits, I wouldn’t expect them to appear in the form of dividend checks to the American stockholder.

It is said in markets that “the trend is your friend.” This is abundantly true for gold investors, especially given the current price reduction.Meanwhile, US equity investors should be asking themselves,”With friends like these, who needs enemies?”