I first wrote about gold in early July at WSJ.com. I took a lot of heat then but the jury is still out. In fact, since July 9, stocks and gold have performed almost exactly the same. But with stocks trading at record low multiples over earnings (versus bond yields) and with gold at an all time high I can think of 11 straightforward reasons why the Gold Bubble is going to burst and stocks are the primary place one should put their money.
- It has very few industrial uses. Almost every industrial use of gold is also an industrial use of silver. Since silver is much cheaper than gold you can imagine that people would rather use silver than gold for industrial purposes. It's no suprise that silver has outperformed gold this past year despite all the media fuss about gold.
- Gold has no dividend yield. Buy a stock that consistently increases its dividend and eventually the dividend alone will pay back your investment. How about the world's largest store, which is already benefiting from an improving economy plus globalization which allows it to bring down prices and increase margins. Walmart (WMT) increased its dividend by 11% this year. It's been increasing dividends every year since 1974. Or Becton Dickinson (BDX), the medical supplies company, which has raised its dividend every year since 1973. This is a Warren Buffett holding and is probably a bet on the massive demographic trend of aging baby boomers needing more medical care as they grow older. They don't need more gold. They need more medical care.
- Gold has no earnings yield. With corporate profits growing nine quarters in a row (what more proof do people need that the economy has been improving) ultimately it's better to buy stocks with improving earnings yields. How about buying companies with actual innovative products that consumers will keep on buying for years, driving up earnings even more. Apple (AAPL), Google (GOOG), eBay (EBAY), Cisco (CSCO), all solidly increasing earnings.
- The US should start selling its gold to pay down its debt. I'm not making a judgement here. It's just inevitable with gold prices this high that the US government, which wants to drive people into stocks anyway, will start pushing down gold prices by selling its stash.
- Interest rates are at zero and the Fed is printing money. Eventually interest rates will begin to go up as the economy firms (which it will do at even the slightest hint of re-inflation), driving up the value of the dollar. Gold will collapse at that moment.
- John Paulson and George Soros, plus billions of dollars worth of their followers, have plowed $10s of billions into Gold in the past few months. OK, that type of buying won't last forever and is probably already finished. Soros has even begun reducing his position in the gold ETF, GLD. He also reduced his position in Novagold (NG)
- 2006, 2007, and 2008 world gold production was down (decreasing supply while demand was increasing due to the financial crisis and weak dollar). In 2009, guess what? Gold production was up 10% year over year. And production is not going down anytime soon for a simple reason. There's a new sheriff in town. China, in 2005, produced 224mt (supplying 8.9% of the world's gold production) making it the #4 producer. In 2009, they produced 313mt, 12% of the world's production, and was by far the #1 producer (next in line was Australia at 277mt). The main producers of gold are trying to make money hand over fist with prices so high. They will keep increasing supply until the price goes down.
- Gold sentiment is at an all-time bullish high. For the first time ever, gold ATM machines are dispensing bars of bullion. The first ones opened up in Abu Dhabi, Munich, and Madrid. Next in line are Boca Raton and Las Vegas in the US. What are you going to do with all that gold? Bury it in your backyard? Have no fear. Here are 5 obnoxious uses for gold
- Whenever we see gold sentiment at the levels in the below chart (click to enlarge):
prices tend to pull back, at least in the short-term.
Assets in the GLD ETF, the ETF which tracks gold, are also reaching a level usually associated with a top (click to enlarge):
(Hat tip to Trader's Narrative for this statistic).
- Warren Buffett is not always right. But when it comes to long-term investment predictions there is probably nobody better than him in the world. Here's what Buffett recently said about gold in an interview with Ben Stein: " "Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?" "