One of the first things I learned about working in the financial markets was that you can make money whether a market is rising or falling. A corollary of this concept is that you should always have an asset you are looking to sell and an asset you are looking to buy. This was in the late 1980s and investors had recently learned a lot about why you should always have a selling plan after being caught in the Black Monday crash of 1987.
The stock broker who taught me this gem of knowledge used the context of equities. At the time she was recommending buying Microsoft and selling some now defunct medical company whose name I cannot remember but which had an untenable debt load and a technology which was about to be replaced.
I tend to take a bigger picture view and at the beginning of my own career in trading liquid assets a decade later (and upon reading Jim Rogers' excellent "Hot Commodities"), I decided that the biggest question is "Should one be primarily focused on stocks or commodities during a given epoch in investing?" Thus, in 2000 I shifted my focus from owning stocks to selling them. Then, in 2001, I began buying commodities. Since gold is the easiest commodity for most people to own, by 2002 with the beginning of my registration with the National Futures Association, I was saying without reservation "Sell stocks. Buy gold."
I have not changed my tune at all and anyone that has been listening and taking my advice has seen their investment grow by better than 500% since 2002 while stocks in general have traded in a range between their 2000 (and current) highs and, approximately, 60% lower. Yes, there have been setbacks along the way in raw material prices and gold is in one now. But look at the fundamentals of the situation:
First of all, buying commodities is not a "fear trade." It is an investment in the rebalancing of supplies of commodities that must take place following major economic growth cycles, which are funded through investments in stocks. The generational bull market in commodities in the late 1960s and 1970s allowed for new supplies of metals, energies, food and fibers to be developed as demand surged on the heels of the plastics and chemicals revolutions of the '50s and early '60s. Currently, we are witnessing the rebalancing of supplies in response to the surge in demand facilitated by the stock bull market of the 1980s and 1990s which financed innovation in, particularly, computing and Internet. Notably, these advances were a primary catalyst for the economic development of China and India; allowing a third of the world's population to join the modern world after nearly a century of backwardation.
The most obvious and widely understood example of this phenomenon is occurring in the Bakken shale oil fields of North Dakota. Since the price of crude bottomed at $10 per share in spring of 2002, the United States has gone from importing 2/3 of its oil to providing 2/3 of its own supplies. This could not and would not have occurred if the price of oil had failed to climb above $70 and hold. That is the average cost of production required for the very difficult extraction and delivery of Bakken crude.
Another important example is in copper production. When I first became a commodities broker, copper was trading for around 50 cents a pound. That was below the cost of production of mines at the time and it was certainly below any value where miners would be willing to increase supplies to meet the surging demand. Now, it is 17 cents over three dollars per pound and China is able to secure enough of the king of industrial metals to build the real estate and infrastructure required by its growing population of 1.3 billion souls.
How does this affect gold then? Many people say that the Metal of Kings does not have any value beyond its perceived luxury. This is false. Gold is money. Now, I can hear every economics professor I have ever heard speak beginning to make that sound reminiscent of a duck being slowly strangled, but I don't care about their superstitions. I have 5000 years of evidence that says gold is not only money but is also the best money because of its particular set of attributes, which can be neither changed nor copied. I set forth the complete case in my e-book "The Power of Gold" which is available on Amazon.com for a nominal fee. But to be brief, gold is money because it is a naturally occurring element (an atom) which is completely fungible (completely interchangeable), is scarce (but not too scarce), is extremely durable (does not react to any naturally occurring compound), is a portable store of wealth (one ounce of gold can be pounded out to cover 100 square feet with an impermeable barrier against all manner of oxidants, acids and bases), is extremely malleable (so that it can be formed into coins which are very difficult to counterfeit) and, yes, it is considered a luxury (so there is always a liquid market available).
And we need more money to represent all of the new wealth being created in the world by a population that has doubled to seven billion people since I was born in 1975. This is the fundamental you are investing in when you buy gold. Is that really something to fear? Hardly. Money is the root of all good, contrary to the claims of the mystics of mind and muscle who dominate our philosophic landscape today.
So, why now? Why is gold being valued higher and higher now while it was stagnant throughout the 1980s and 1990s? The answer is in two parts. First of all, if we had a proper monetary system, gold would not fluctuate in price at all. The dollar would be tied to a certain amount of gold and the price would stay there--just like it did for almost 200 years of this country's history. That's right, folks, to add to the absurdity of most economists' claims that gold is not money, their current experiment in falsehoods has lasted a total of 40 years, during which time we have seen the value of the dollar decimated and placed on the verge of collapse. If you had $100,000 in 1973 (the year we left the gold standard behind) you had a very decent retirement fund. By 1980, that was no longer the case and it is certainly not the case today.
The second part of the answer to the question "Why now?" is that the tradeoff between relative strength in commodities and stocks is just that--a trade-off. Stocks and commodities share a common pool of available investment funds. This is because they are the liquid assets--they can both be purchased and sold in a matter of moments on organized global exchange--which allows higher levels of risk to be taken on in exchange for potentially higher returns. While a rational investor might seek a single digit yearly return in comparatively safe real estate or bonds, they are seeking a double-digit yearly return on stocks and commodities. But they need to be able to change their position quickly as things progress.
Clearly, the big (read: smart) money has been moving into commodities and out of stocks since the turn of the millennium. The quickest route to discovering this is looking at the prices. While stocks are essentially flat, the prices of most raw materials have increased by hundreds of percentage points. A deeper--and more ominous for stock investors--view can be gained by examining the volume in exchange traded commodities and stock market futures contracts. The two charts below show that the number of contracts exchanged in the benchmark S&P 500 futures contract has fallen 80% since 2000 while the volume of gold has swelled by 400%. Real bull markets rise on expanding volume. Bear markets sink to their depths on shrinking volume until they are "left for dead."
Yes, gold is in a correction at present, but it represents a major discount to the fundamentals. Meanwhile, stocks are trading at huge premiums relative to historic valuations. In such a set of conditions, what would the astute investor do?
Now, I am not advocating shorting stocks now. Not yet. But there are going to be some great opportunities to do so as we move closer to the midterm political elections, which have become an unfortunate but important fundamental in investing today. You may watch future articles for suggestions on stocks to sell short (Hint: go for interest rate sensitive companies with high debt levels). But, meanwhile, I really suggest that you begin--or continue--reducing your exposure to the stock market and increasing your exposure to the commodities markets, particularly through physical gold. I recommend investing in Pre-1933 gold for a number of reasons that you could ask me about via e-mail at email@example.com
The SPDR Gold Trust (GLD) is another decent choice, although the caveat is that it is not deliverable. Supposedly, there is a convoluted path to take physical delivery from one's holdings in the fund, but it would clearly be simpler to sell GLD and buy physical if one wanted to take delivery.
I also trade futures contracts (which ARE deliverable) on a percentage of profits basis for a select group of investors who fit the definition of Qualified Eligible Persons (QEP). Let me make it clear that I DO NOT recommend investing in futures contracts on your own unless you have a great deal of experience with the proper use of leverage. Most people lose money in futures contracts because of over exposure. The leverage in futures markets is primarily useful for changing positions, as opposed to going 20:1 on a directional trade as many people do and generally to their own chagrin.
Now, here are those charts (notice the dramatically shrinking volume in the S&P 500 and rising volume in gold):
Additional disclosure: I currently own physical gold.