Changing Fortunes: Why Stocks Are Set To Outperform Gold And Silver

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Includes: AGOL, DIA, GLD, IAU, IVV, QQQ, SIVR, SLV, SPY, VOO
by: BubbleBustInvesting

For more than three years, gold and silver have been enjoying a nice rally. The prices of both metals have been surging, as institutional and retail investors saw the two metals as safe heavens for the end of the world. In the meantime, stocks have been lagging far behind, barely rising for the last year: GLD is up 25 percent for the year, SLV up 10 percent, compared to 8 percent for QQQ and 4 percent for SPY.

In recent months, however, it is becoming more and more apparent that the end of the world isn't anywhere in the offing; and many of the factors that fueled the precious metals rally are no longer there or they don't carry as much weight as they used to: The dollar is rebounding, rather than collapsing, EU is still one piece, the American economy is rebounding, and the Chinese economy is slowing down. At the same time, stocks have been rebounding nicely, narrowing the gap with precious metals. Will this trend continue? Will stocks and precious metals switch fortunes?

It is hard to say. What we can say, however, is that in the long-term markets adjust: yesterday's winners become tomorrow's losers; and yesterday's losers become tomorrow's winners--This is also a view shared by Warren Buffett (NYSE:BRK.A) in an article published in Fortune Magazine. As we wrote in previous pieces, what is particularly encouraging for stocks is a rebound in the US economy that provides tailwinds for stocks that have been out of favor for years like homebuilders and financials. Another encouraging sign for stocks is that markets seem to become immune to news out of Europe---Volatility, for instance as measured by VXX has come down. What should investors do?

Take profits on gold and silver, build positions on homebuilders, and high quality companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN); and place contrarian bets on European stocks.

Disclosure: I am long QQQ, MSFT, AAPL.