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Precious Metals Vs. The S&P 500

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Includes: AAAU, AGQ, BAR, CEF, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLDM, GLDW, GLL, GLTR, IAU, IAUF, OUNZ, PALL, PHYS, PLTM, PPLT, PSLV, PTM, QGLDX, SGOL, SIVR, SLV, SLVO, SPPP, UBG, UGL, UGLDF, USLVF, USV, ZSL
by: Bob Kirtley
Bob Kirtley
Long/Short Equity, Precious Metals, gold, mid-cap
Summary

The S&P 500 has been in the ascendancy for approximately ten years and is due for a correction.

Gold, silver and their associated stocks represent a tiny portion of the investment space, so it won’t take a lot of new capital to give it a real boost.

Good quality stocks will do well but they appear to fairly priced so you may have to look hard at the small caps in order to identify a real mover.

If you have not acquired any physical gold or silver, then do so as soon as you can.

Preamble

Rotation in the stock market isn't new investors have been switching from sector to another since the markets were formed. The S&P 500 has been in the ascendancy for approximately ten years and is due for a correction. The question for those involved is where to go next and there are many opportunities available to them. To name just a few there is land, property, art, antiques, autos, jewelry, gold and silver, etc. Some of these alternative investments are already considered to be in a bubble apart from gold and silver which is a sector that has taken a beaten over the last few years.

This article will try to compare the two in terms of their pros and cons.

The S&P 500

The S&P 500 has done really well, corrected and bounced back to achieve an all time high. It also has momentum behind it which could carry it to higher ground. The central banks have turned away from tighter monetary policy in favor of a more accommodative stance.

Mario Draghi head of the European Central Bank has indicated that there will be a new package of monetary stimulus to boost the flagging Eurozone economy. This package will consist of rate cuts and of asset purchases before he retires from his post in October 2019. The Federal Reserve will almost certainly announce a rate cut when they meet on the 30th and 31st July with the possibility of two more rate cuts before the end of the year.

More money in the system available at a cheaper rate will provide investors with the funds required to make further investments. Some will continue to invest in the S&P 500 as it is more of the same and is familiar to them. Others will be looking to diversify as they don't want all their eggs in one basket.

The S&P 500 could make gains from here given the new stimuli, however, once capital starts to flow out of the market the herd mentality will take over and the move to the exit in order to lock in profits could be dramatic.

A Chart of the S&P 500

The SPX has set a new record, but a long overdue correction is a threat to any further progress.

The technical indicators are still in the overbought zone but appear to be rolling over as this rally runs out of steam.

The Precious Metal Sector

Gold, silver and their associated stocks represent a tiny portion of the investment space, so it won't take a lot of new capital to give it a real boost.

When central bankers cut interest rates it makes holding actual cash less attractive as the returns are miserly. As investors dispose of paper currency it becomes less valuable as the number of sellers increases this in turn reduces the value of those currencies.

Despite modern technology there are no big discoveries of gold or silver so it is becoming increasingly difficult to see where the supply will come from as the demand picks up. However, modern technology has brought us the Internet and communications worldwide can made at great speed. Investment or speculation is no longer the preserve of the few, trades can be executed by a multitude of people at the very same time increasing the rapidity of price action. The audience for the preservation of wealth has never been greater and when they recognize that gold and silver have entered a new Bull Market this tiny sector of the market will sprint to higher ground at a speed never seen before.

A Two-year chart of Gold

The technical indicators are overbought, and a pullback was to be expected. Gold has rallied on increased volume and is set to go much higher with numerous corrections along the way.

Conclusion

The S&P 500 will correct causing investment funds to seek another home and the precious metals space will attract enough of those funds to sustain the rally for the next few years.

The new stimuli administered by the central bankers will have an impact in the short term only. The bankers are more or less out of gun powder and may revert to more Quantitative Easing, if that happens then gold will make new all-time highs.

If you have not acquired any physical gold or silver, then do so as soon as you can.

Good quality stocks will do well but they appear to fairly priced so you may have to look hard at the small caps in order to identify a real mover.

Options trading could change your life, for better or worse as they say, but they are not for those of a nervous disposition.

Go gently.

Your comments are very much appreciated as they do help to add some semblance of balance when debating a market sector which is in a state of flux.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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