Either Stocks Will Fall 37% Or Gold Will Rally 60%
Commodities / Gold & Silver 2009 May 31, 2009 - 01:02 PM GMTBy: Graham_Summers
How’s this for a bubble?
In 1965 one in ten Americans owned stocks. It took 25 years for stock ownership to double. And most of that growth came between 1983 and 1990 with the introduction of 401(k)s, IRAs and other stock-based retirement plans: suddenly anyone with a large scale employer could invest in stocks without having to open a brokerage account.
Thanks to the Internet and low fee online brokerage accounts, it only took seven more years for stock ownership to double AGAIN. Put another way, the rate at which new participants entered the market accelerated four fold between 1990 and 1999. At the end of the 20th century, 48% of US households owned stocks.
This is the one bubble no one talks about. The bubble in “investing in stocks.” Never before have so many Americans done this. It gave us one of the biggest bull markets in stock history: a mega-18 years run from 1982 to 2001. And it also means that stocks have got a long ways to fall to get back in line with their historic relationships to other asset classes.
Particularly gold.
A lot of commentators talk about how gold is near an all-time high and that stocks have fallen 50% making them cheap again. However from a long-term perspective, gold and stocks are nowhere near their normal relationship.
According to Dr Marc Faber, editor of the Gloom Boom Doom report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:
- 1900-1929: stocks outperform gold
- 1929-1932: gold outperforms stocks
- 1932-1966: stocks outperform gold
- 1966-1980: gold outperforms stocks
- 1980-2000: stocks outperform gold
- 2000-???: gold outperforms stocks
Overall, the median stock to gold ratio for the last 106 years was 5.4. In other words, throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.
Today, gold trades at $980. The DJIA trades at 8,500. This puts the ratio of gold to stocks at 8.6. Thus, the DJIA needs to fall to 5,292 (a 37% drop from today’s level), gold needs to rally to $1,574 (a 60% rally from today’s level), or some combination of the two, in order for gold to be appropriately priced relative to stocks.
When exactly this will happen is anyone’s guess. The gold vs. stocks trends over the last 106 years have ranged in length from three years to 29 years. However, judging from the Fed’s money printing and the recent action in gold, it’s quite possible we’ll see a mammoth run in the precious metal sometime in the next 18 months.
You should prepare your portfolio accordingly.
Good Investing!
Graham Summers
PS. I’ve prepared a FREE Special Report detailing three investments that will soar when the Second Round of the Financial Crisis hits. I call it the Financial Crisis Round Two Survival Kit. Swing by www.gainspainscapital.com/roundtwo.html to pick up your free copy today.
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
© 2009 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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