Monday, September 14, 2009

Liking Gold Long-Term Better Than Stocks

Peter Brimelow of MarketWatch has a nice review of the technicals and some fundamentals for gold in Gold through $1000, but not in the clear? A quick summary: India's buying, certain chart patterns are very strong, but:

. . . UBS's U.K.-based Reade published Saturday a very negative assessment of the Commodity Futures Trading Commission's Commitments of Traders report, which came out late Friday evening his time.

Reade warned that the net speculative long position in gold had shot up to a record high as of Tuesday. He argued that previously such jumps have been followed by sharp (5% average) declines.

His conclusion: "We recommend that nimble investors take profits."

From a longer-term perspective, yours truly has spent time evaluating a variety of proprietary and public charts and data on gold.

One of several observations: The average price per ounce of gold rose 5.57% per year between 1939 and 1979. Simply to keep that same 40-year compounded price growth from 1979 to 2019 would cause gold to reach $2657 per ounce, about a 10% per year compounded growth from now.

Other comparisons also lead to a $2000++ price target a number of years out, including very simply a gold:DJIA ratio of 1:5 or so even around today's Dow level, and of course much more if the Dow merely rises 3% a year for several years. (This ratio was 1:1 briefly in 1980 and was close to that in 1932-3.)

No guarantees!

Re stocks, more and more it appears that people are happy again. A savvy friend from the New York metro area described the mood as too complacent for his taste. Not only has not much truly improved in the economy, but Nobel-winning economist Joseph Stiglitz is on the warpath again, as covered in Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman. (The banks are now even bigger and reform efforts have not occurred, among other points he makes.) I have criticized Dr. Stiglitz before, but generally agree with these comments of his.

More market seers who have made a number of correct calls do not like what they see. An accessible website that issues monthly reports is Lamont Trading Advisors; here is a link to his last public report (more detailed information is provided to subscribers). The report begins as follows:

Speculative Disaster
By Paul Lamont
August 31, 2009


On February 28th in Panic Selling Will Lead to a Sharp Bounce we stated, "investors should be positioning themselves for a countertrend rally…We do not expect that this is the ultimate low, merely a level that will support a multi-month bounce. This reflationary bounce will be much stronger (and possibly last longer) than any other rally we have seen since October 2007. Its purpose is to put to rest the widespread fear currently in the market . . . This temporary bottom will support a sharp bounce into the fall."

Mr. Lamont, a market historian, was one of those who called the top at the correct early time and for the correct reason, and also made a beautifully-timed call to short Treasuries at their low in yield about 9 months ago and then covered the shorts near the top in yields.

Regular readers of EBR know that one analogy made here is to the end of the 2001 recession but a final market bottom not occurring much later, yet with a number of stocks breaking out to new highs in 2002; all in the context of a reflationary effort bullish for gold but (for some reason) a continuation of the long-term drop in Treasury yields.

We are now half a year from the March stock market bottom. In the half-year leading from early September to that March bottom, far more damage was done to stocks than accrued to their benefit from March 2009 till now. In other words, the down-move had more force than the up-move. Compare that to the 1981-2 recession and the 1982-3 stock market advance. Anyone could see that blast-off had been achieved.

Currently, the average S&P 500 stock is selling for close to 50X dividends. In 1930, many stocks were selling for 11X dividends (9% yields). People should have a return both of capital and on capital. The modern pricing of stocks asks investors/speculators to ignore this. The reason is to benefit insiders within the companies and in the financial community.

Caution continues to be advised in all investments; speculative trades are especially out of favor at EBR given the opacity of markets nowadays in the setting of the greatest financial abuses perhaps in history.

Copyright (C) Long Lake LLC 2009

No comments:

Post a Comment