Gold Is Beating Stocks: It’s Going to Get Ugly
by Jason Simpkins
So far this year, gold has gained more than 8%. By comparison, the S&P 500 index has climbed less than 7%.
That’s not typical.
And it’s not a well-publicized fact, is it?
It seems like more analysts are talking about the eighth anniversary of the bull market in stocks, which we hit in March.
Well, let me share another interesting fact with you…
The average lifespan of a bull market is 57 months. Again, this one is now on its 98th month.
It’s the second-longest bull market in history, trailing only the 113 months that spanned from October 1990 to March 2000.
You might remember how that one ended — with the tech bubble bursting.
Indeed, after a decade-long run that broke new record highs, the NASDAQ Composite lost 78% of its value. It plunged from 5,046.86 to 1,114.11, burning millions of everyday investors in the process.
That’s how bull markets work. They go out with a bang; not a whimper.
Like an incandescent light bulb, they glow brightest just before suddenly blowing out.
Perhaps that’s why so many investors are jumping ship…
In late February, institutional investors had 100% of their portfolios in stocks. Just two months later, that’s down to just 70%. That means institutional investors are selling into the bull market — not buying.
Similarly, global investment management company BlackRock reported record-high withdrawals of $288 billion from its U.S. stock funds in 2016. That tops even the $218 billion that fled funds back in 2008.
Conversely, Bank of America Merrill Lynch last year reported its longest run of gold fund inflows since 2009.
That’s in line with data from the World Gold Council, which said gold investment demand hit record levels in the first six months of 2016 — 16% higher than the previous record, which also came in the first half of 2009.
It’s also in line with what many of the world’s biggest investors are doing.
- Warren Buffett has retreated to a cash position. He’s now sitting on $72 billion in cash. Doing so actually costs the billionaire investing legend $29 million every single day. But he’s doing it all the same, because the market isn’t a safe bet anymore.
- Carl Icahn, who’s been acting as a shadow advisor to President Trump, recently increased his short positions by 600%. He’s betting as much as $4.3 million that the stock market will plunge sharply and suddenly.
- George Soros recently made a $2.2 billion bet that the market will collapse, while at the same time putting $123 million into gold.
- Stanley Druckenmiller, the hedge fund billionaire and legendary investor, has put more than $320 million of his own money into gold.
- David Einhorn has allocated 10% of his $11 billion Greenlight Capital portfolio to gold.
- And Barry Rosenstein, the New York financier, has put $5.9 million into gold.
So what does the big money know that the average investor doesn’t?
The case for gold is obvious.
The Case For Gold
It starts with the stock market.
As I pointed out earlier, this bull market is getting long in the tooth. Any child born on the day it began is in the second grade today.
Now, to be clear, bull markets don’t die of old age. But they do die. And this one isn’t any different. Sooner, rather than later, it’s going to go under.
And again, as I pointed out earlier, they don’t go down gently. They fall hard.
The 2007/08 bear market erased half of the S&P 500’s value. So, too, did the bear market of 1973/74.
The tech bubble crash that torched nearly 80% of the NASDAQ’s value shook 37% from the S&P 500, as well.
Going back to 1929, the average bear market has lasted eight months and typically vaporized 33% of the market’s value.
So what’s going to save this one?
Look around and tell me what about the global economy warrants a record-high valuation in stocks?
There’s nothing to it. This bull market has grown hollow and stale.
Gold, on the other hand, is a different story.
Like stocks, gold had a magnificent run. But unlike stocks, it came back down to Earth. Gold hit a record high in 2011, topping $1,900 per ounce. Then, it entered a bear market of its own, falling just below $1,050 per ounce in late 2015.
The purge was necessary. It forced high-cost producers and over-leveraged companies out of the market. It left remaining miners leaner and more profitable. And it gave survivors the chance to absorb fallen competitors.
That hasn’t happened in other industries. They’re still fat and bloated. Corporate debt is at a record high. But that debt hasn’t been reinvested in business; it’s gone into dividends and share buybacks. It’s lining the pockets of board members and CEOs. That’s suppressed salaries and wages, and weakened consumption.
Corporate profits are down, as a result, and stocks are overvalued.
Not gold though.
It’s rebounded to $1,230 per ounce, and its outlook is strong.
Remember, gold performs well in times of uncertainty. And times are uncertain, indeed.
- China’s growth has gone from red hot to ice cold. Policymakers in Beijing are just trying to stay afloat. And North Korea sits on its doorstep, having gone completely rogue.
- Europe is a mess. Central banks there have turned interest rates negative in a desperate bid to kick-start the flailing economy. The Brexit is coming fast, and other nations could follow suit.
- The United States, meanwhile, clearly isn’t the economic engine it once was. In addition to corporate atrophy, our government is dysfunctional and its policies inadequate, if not destructive. Government debt is soaring. U.S. stocks have already priced in a massive tax cut and fiscal stimulus, but neither of those things are likely to come to fruition.
Gold is in the position of power here, not stocks.
When you get down to it, it’s all about the cycle. This is what happens time and again. Stocks soar to record highs and investors pile in. They reap huge rewards and convince themselves the good times will never end. Gold suffers.
Then catastrophe hits. The bull market collapses, investors panic, and gold soars.
The pendulum always swings back.
Now it’s happening again. And it’s just the start. So get ahead of the curve if you haven’t already.
Buy gold now. By the time the bear comes it’ll be too late.
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