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

Here are several economic-financial related charts and other data presentations. The first shows the current unemployment rate as compared to the (recently-derived) "baseline" case and "more adverse" (low probability event, allegedly, according to the Fed) for the national unemployment rate.

Whoops!

Here's another example of forecasters getting it very wrong, and recently, from the Philadelphia Fed:

First Quarter 2009 Survey of Professional Forecasters
Release Date: February 13, 2009 (click on the hyperlink, then click on "First Quarter 2009):

An upward revision to the forecast for the unemployment rate accompanies the outlook for economic growth. The forecasters predict that unemployment will rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Previously, unemployment was forecast to rise from 7.0 percent to 7.7 percent over the same period. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010. On the jobs front, the forecasters project job losses in the current quarter at a rate of 548,400 per month. They also see a reduction in jobs of 311,200 per month in the second quarter and 202,100 in the third quarter of 2009.

Both of the above were found at Mish's post from today.

Let us examine the facts. Also thanks to CR, consider Regulators Eye Pay Czar:

A Bankrate Inc. survey also released today showed 70% of survey respondents said they felt secure in their jobs despite the rising joblessness. Of those remaining at their jobs, 54% responded they’d received some sort of pay reduction: pay cut, reduced hours, reduced work days, suspended raises, bonuses or 401K match, or a combination of these.

So, the unemployment rate and pace of job losses are well above those projected just four months ago. Deflation in job benefits is proceeding. There is no inflation except in commodities, which are speculative.

Those seers such as Nouriel Roubini and Mish who stated in Q1 2009 that the economy would underperform the consensus forecast have been proven correct. The public is now probably more optimistic than the facts support. Others such as Robert Prechter and Paul Lamont who two or more years ago foresaw the recent, ongoing severe "debt deflation" and then a stock market pop upward beginning a few months ago are fearing a major new stock market downturn, perhaps after more optimism pushes stock prices up higher.

Amongst stocks, there are some that do not reflect the horrible bear market. Here are two charts that reflect successful businesses.

That the price of a security has fallen does not tell you that it has fallen too far. On the other hand, a security that has resisted the fall of most others tells you a lot. If its price has risen consistently over the years and has other fundamental characteristics that you like, it is not determinative as to whether one wants to own that security whether the prices of other securities are attractive.

Right now, the stocks of large consolidators such as Teva (generic pharmaceuticals) and deep discounters such as Ross Stores (clothing), the long term price charts of which are shown above, reflect businesses that are thriving and can continue to grow long-term in any economic environment (excluding complete and utter devastation). They pay dividends equal to money in the bank and have low double-digit price-earnings ratios. While their stock prices will certainly fall if the stock market makes new lows, over a full economic cycle, they are likely to be profitable investments and provide a different sort of hedge from inflation than gold.

Finally, regarding gold, I have previously commented on it as unexciting from a chart pattern. If an increasing percentage of the public remains sold on a Goldilocks scenario and continues to pay rising prices for risky assets, then the price of the perceived safe haven of gold is likely to suffer.

Short term, gold is unexciting at best.

Meanwhile, sentiment remains horrible or even beyond horrible for intermediate to long-term U. S. Treasury bonds. Yet a Goldilocks scenario for stocks has to imply diminishing counter-cyclical deficit spending and acceptable inflation, and thus cannot mean a durable bear market for Treasuries soon.

Copyright (C) Long Lake LLC

Wednesday Afternoon Market Update: Focus on Gold and Treasuries

During this period of price deflation and excess capacity of almost everything except fair treatment of the taxpayer out of Washington, the yield on long Treasuries has skyrocketed. This is now discounting inflation in the out years well above the (say) 3% rate that has existed on average since the formation of the Fed and institutionalization of inflation rather than price stability in this country. If Treasuries are not a buy, then nothing much else is except gold.

Spot gold itself is up 30% since its low of half a year ago at $720/oz. It has also potentially failed against the double top of last July and this February. This may be a bullish portent for Treasuries. The inflation-deflation adjusted (i.e. real) yield on Treasuries is as high as almost any yield that existed during tightening periods in the Volcker/Greenspan eras.

What may be happening in Treasuries and in the economy happened in the Great Depression. Let me refer you to Paul Lamont, a financial historian who has made some marvelous calls this cycle. On Jan. 5 of this year he published on the Web "The Haughty Bond", which pointed out:

The investment herd is currently engaged in a Bond buying frenzy. They believe that inflation will be low for an extended period. We agree. While we may have inflationary countertrend rises, overall we are in a deflationary environment where banks fail, assets fall and the economy deleverages. However as history shows, government bonds were sold in the deflationary spiral of 1930-32. The excuses were two fold: liquidity concerns and inflation fears. Banks sold bonds (their mortgages were frozen) to raise cash reserves in case depositors decided to withdraw funds. In addition, major government interventions at the time (sound familiar?) caused a fear of long term inflation. The dumping of Treasury Bonds finally stopped in June of 1932 (the same month as the stock market bottomed). So Bonds depreciated in the historic deflation of the early 1930’s, but is this relevant today?

The current bull market in Bonds has lasted since 1980. But only recently has the Treasury Bond market registered a record extreme in bullish consensus according to MBH Commodities' Daily Sentiment Index. Now for the first time in 28 years, 99% of traders believe the upward trend will continue. Remember when everyone thought real estate could only go up in value? At this point, the Treasury Bond market is swaggering around, certain of its own opinion that it cannot fall.

In this scenario, mortgage-backeds should be sold aggressively, as they have been far to strong vs. Treasuries, or held to term. Now that there has been an historic steepening of the Treasury yield curve with an equally historic percentage increase in yields of 85% (from 2 to 3.7%) in about 5 months in the 10 year T-bond, Lamont's analysis suggests that one can now buy intermediate to long-term Treasuries either to hold for the long term or to trade out of on price strength. This was the right strategy during the Great Depression until WW II inflation hit and remains a potentially potent risk-reward strategy for an appropriate portion of a portfolio today.

Copyright (C) Long Lake LLC 2009