St. LOUIS (ResourceInvestor.com) -- At the Precious Metals & Mining On-line Forum today, Elliot H. Gue, Editor of EnergyStrategist.com, examined the returns of stocks vs. commodities through historical bull cycles, offering listeners a picture of where the market stands now and in future. But be aware, the Dow/gold ratio may shock you.
According to Gue, many market analysts have adopted a “by and hold” philosophy when investing in a diversified portfolio. However, most recent history cannot really be used to judge where we’re going in the market, he began.
Stocks
From 1921 to 1951, the returns from the Dow were a little under 4% annualized. According to Gue, these numbers aren’t just representative of the crash in the market since the return on Dow was actually negative from 1965-1980.
The Dow didn’t actually surpass its high in 1929 until the mid-1950s. If you look at S&P, it traded basically up and down from 1965 to 1979, ending only marginally higher in 1979.
“Again, not a great example of ‘buy and hold’ at work,” he added. “Even though we hear a lot of these quotes on how the long-term return on stocks is something like 12%, that’s not true if you look at it from a rolling basis.”
If say the average person has about 30 years left for retirement, the returns for that person could be far less if it is during the wrong 30 years, Gue added.
“But even though stocks don’t necessarily always produce the returns we’ve been lead to expect … there’s always a bull market out there somewhere,” said Gue.
Commodities
The trick is to be able to identify the secular uptrends in a bull market and be able to ride them in these periods, according to Gue.
“Try to identify what is working, what is going up, and really ride those trends for all that they are worth,” said Gue.
But from 1965 to 1980, commodities were outperforming all other markets, much like today. During this period, gold stocks saw nearly a 1,400% gain in total, almost 20% a year, while the S&P gained only 1.62%.
“Gold actually did better in the late 1960s and throughout the 1970s - that 15-year period - than stocks did in the 1990s on an annualized basis,” he said.
Even though the S&P, stocks and financial assets in general did not perform well during this period, commodities and gold were winners, Gue said. However, from 1980 to 1999, the opposite was true, as most of us already know.
But now gold and commodities are once again beating the S&P, with the base metals and precious metals hitting all-time and multi-year highs. From 2000 to 2005, the spot price of gold has gained roughly 12.42% a year while the S&P has gained merely 0.40%.
“What I think we’re seeing here is a shift back to the commodities cycle,” said Gue. “Commodities, gold, energy, etcetera, will outperform looking forward over the next period.”
Stocks vs. Commodities
According to Gue, most of these cycles tend to be long term, 20 or more years. He believes we’re in the very early stages, maybe the first five to seven years of a major commodities uptrend, which could last well into the next decade.
“If you can hitch your trailer to a major secular trend like that, you can certainly outperform the stock market over the coming 15 years or so,” he added.
Gue noted instability in the global economy as a major driver of gold and precious metals at present, with the U.S. as the main driver.
According to Gue, the U.S. consumer debt service ratio, the ratio between paying off debt and simply paying the interest, is at all-time highs. This is a combination of a larger amount of debt along with the increasing interest rates, he said.
“The world is relying on the U.S. for growth,” said Gue, adding that many countries need the U.S. consumers to keep taking on debt to spend more on goods.
In addition, the U.S. trade gap is rapidly growing. The U.S. is importing a lot more than it exports, which fosters more debt for consumers, Gue said.
“It’s just that kind of instability that makes investors run for the safety of gold, which has been a traditional store of wealth for many, many centuries,” said Gue.
Another threat to the global economy is the slowing of the housing market. According to Gue, consumers have been borrowing money against their homes to continue spending. But existing home sales have gone negative this year, something we haven’t seen since 2000, he said.
“I believe that will probably filter through into at least a slowing in price appreciation in the U.S. housing market if not somewhat of a pull-back,” he said.
Dow/Gold Ratio
According to Gue, it took a record level of 40+ ounces of gold to by the Dow in 2000, while we’re now at about 19. But we’re still a long way from the mid to low single digit number we normally see at the end of the bull cycles, he added.
Gue calculated a ratio of 3 for illustration purposes, adding “this might sound crazy”:
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Dow at 11,000 = gold at $3,668
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Dow at 9,000 = gold at $3,000
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Dow at 7,000 = gold at $2,333
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Dow at 5,000 = gold at $1,667
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Dow at 3,000 = gold at $1,000
“No matter which way you want to look it, for the ratio to get down to that normal bottoming level, you’re looking at gold going a lot higher than the current $600 level,” he said.
From 1980-2000, the Dow rallied by 1,368%. In comparison, a 1,368% rally for gold during this time implies $3,500. This was not too far off from the gold rally in the 1970s and 80s when it went from $35.90 to $800 – a 2,200% jump.
Conclusion
“Stocks aren’t necessary that attractive here on a valuation term,” said Gue. Gold is “one of the areas where I can see investors seeing very outsized returns over the next 10-15 years.”
Economic imbalances globally will give gold that final push to go a lot higher, added Gue.
“I do believe we’re moving into a commodities cycle and the third leg of this of course is that economic instability is the reason why people will make a run for precious metals and gold as a store of wealth,” concluded Gue.
Metal Price Activity
Gold for June delivery closed down $1.20 at $600.10 an ounce on the New York Mercantile Exchange, coming back from a low of $594 an ounce.
Copper closed up 4.4 cents at $2.8155 a pound, after setting a fresh record of $2.819 a pound.
May silver futures closed up 19.2 cents at $12.855 an ounce.
July platinum lost $11.80 to $1,098 and June palladium was off 45 cents at $349.50 an ounce Thursday.
