Kennouth Investments

Is the Gold Rush Still a Rush?  The Money-Makers, Last Week

            With the major U.S. indices down roughly 1.5% to 2% this week and the big sell-off on Thursday, it can be frustrating and difficult to be willing to hold or buy stocks.  But there are a select amount of stocks and ETFs investors or traders can buy that would’ve brought in sizeable profits over the past five sessions.  With the U.S. market still up more than 15% year-to-date, the price of gold has dropped more than 18% in the same time period, which very possibly positions gold at lucrative prices.  Given the anticipated Fed reduction of bond purchases and the recent rise in bond yields, the market could very well be saying the U.S. economy is becoming more predictable, stable, and most importantly, growing.  While the rise in bond yields typically causes more volatility in the stock market, once adjusted to more favorable economic conditions, equities should see the same type of growth as they have the previous six months.  During the short, volatility-increased adjustment process to achieve that growth, two of three circumstances must occur in conjunction with the quantitative easing pullback: further productivity and/or employment progress, a continual rise in bond rates, and a substantial rise in gold and silver prices, at worst stabilize.  Damaging as the bear advance was to the bulls this past week, they were able to find refuge in stocks like Barrick Gold (ABX) and Anglogold Ashanti (AU), as well as ETFs such as the iShares Gold Trust (IAU), iShares Silver Trust (SLV), and the ever risky Direxion Fund triple-leveraged ETF, NUGT.

It isn’t worthwhile to dwell too much time to the first two previously mentioned circumstances, however, those two factors are critical to a bull market.  But, I do prefer to compare the ‘80s market to today’s economic state; well, the time period just before that period’s bull market substantiated, that is.   Prior to that promising period, America was rehabilitating from multiple problems: the Vietnam War (global stability), Watergate (political trust and stability), and in general, the future of America’s economic, social and military credibilities, exemplified by the OPEC oil crisis, the still on-going civil rights crises, and the unfortunate Iranian hostage situation, accompanied with that country’s revolution.  These history making events, however, only supplanted the naturally bullish atmosphere of the Reagan administration.

America was in a very uncertain state.  While the Vietnam War in some ways promoted job growth and GDP growth due to America’s fertile ground for its industrial-military complex, the U.S. economy (and to an extent, the average American populace), was unable to adapt to post-Vietnam War crises.  This would explain our reactions to the late ‘60s to ‘70s volatility in the markets, which was accompanied by a fair and reasonable correction cycle to the majority of the stock indices and a rise of more than 600 basis points on the 10-Year Treasury Yield from 1969 to 1981.  So what does this mean?  Due to increased socio-economic volatility, a large amount of investors trended to transfer their portfolio exposures from stocks to fixed-income investments, like the 10-year Treasury, or bought gold and silver, both of which peaked in the early eighties, right before the Dow Jones Industrial Average grew more than 1000% in seventeen years, from 1982 to 1999.  With improving economic conditions, the beginnings of new fiscal policies of “trickle down” economics, and a sustained effort by the American government and populace to grow the economy by building the middle class, it’s only natural to reason why the bond rate dropped (but at reasonable levels), the declines in the price of gold, and the huge rise in stocks.

      But gold never fell without a fight.  Two times after its drop from the 1980 peak, gold experienced climbs of about 30%.  Now while it can be very profitable to buy gold to achieve these gains, it’s very risky, so use caution when buying gold or gold related products right now.  If 30% should be used as a reference target point for the gold ETF, IAU, for example, a 30% increase from its June low would bring it to around $15.20.  And in the short-term, IAU has broken through a major trend-line and its moving averages have been moving very bullishly as well, by bouncing off critical levels and the 9-day MA staying above the 13-day MA.  

     With the draw down in troops overseas (and therefore less spending by the government, in virtually all sectors) , atypical but necessary fiscal policies like quantitative easing, that policy's effect of raising (or perhaps manipulating) the return in the bond yield's interest rate to the previous two decades levels, and the decline in the unemployment rate, the similarities between today’s market and the stock market just before the ‘80s bull market are very numerous.    Because of these factors, and while we've been told for the past decade gold is the greatest safe haven, for a long-term investment, I think your money is best left in stocks. 

Chart is courtesy of TDAmeritrade’s software thinkorswim.

Sources:

http://www.macrotrends.net/1333/gold-and-silver-prices-100-year-historical-chart

Disclaimer: Trading stocks has extremely high risks, and should not be taken to lightly without a thorough understanding. This is written from a purely commentary point of view and is not meant to suggest buying, selling, or holding a stock. All traders must do their own research prior to investing. We (Kennouth Investments, Research and Learning) are unaffiliated with all of the companies that are mentioned on this blog, and can't be held responsible for any losses that may occur. Invest at your own risk.