Weekly Market Update by Retirement Lifestyle Advocates
Stocks rallied last week while precious metals pulled back some after their recent breakout above price resistance.
US Treasuries were largely unchanged and the Dow to Gold ratio moved up rather sharply and now stands at more than 19.
If you’ve been a long-time reader of “Portfolio Watch”, you know that our ultimate forecast for this ratio is less than 2, more likely 1. A move in the ratio of that magnitude would mean monster moves down for stocks and intense upward moves for gold.
While, admittedly, that forecast seems hard to believe given current circumstances, keep in mind it is a long-term forecast. Moves of that magnitude typically don’t happen quickly.
Chart One is a long-term chart of the Dow to Gold ratio. Notice from the chart that it goes back in time about 120 years. The movement of this ratio both up and down is dramatic only over a long time frame. Movement from month-to-month and year-to-year is sometimes hardly noticeable.
It’s important to note that our forecast is for the long term. It’s also essential to point out, as we often do, that the ‘what’ is easier to predict than the ‘when’.
However, given the fundamentals that exist in stocks and in gold as well as the world economy, over the longer term, we are confident in our forecast.
That’s why last week after the big breakout in gold prices occurred and a pullback began, we wrote this:
This breakout in gold prices was on good volume so we expect that over the long term it will likely continue. Often, when prices breakout above a price resistance line, they pull back to that level before the rally continues.
If any of our readers are considering accumulating gold, it might be a good strategy to buy this pullback.
While space constraints here do not allow for anything even close to a full discussion and analysis of our forecast, we thought it would be helpful to give your come of the essentials here.
As far as gold is concerned, here are some recent notable changes, some of which we have reported to you in “Portfolio Watch”:
- The Bank of International Settlements, essentially the rulemaking body of world central banks changed the rules regarding accounting for gold holdings by central banks. After marking the bank’s gold holdings to market, which means adjusting the value of the holdings for the current market price of gold, gold holdings do not have to be discounted. This puts gold holdings by central banks on par with their cash holdings. Gold is now an acceptable reserve asset for banks to hold along with cash and sovereign debt instruments. That essentially, in an indirect way, makes gold money again!
- Central banks, presumably at least partially because of this accounting change, accumulated gold at a much faster pace in 2018 than in 2017. Central bank gold purchases were 74% higher in 2018 than in 2017.
- There are also rumblings that Russia is working to develop a crypto-currency that will be gold backed. Russia has been accumulating a lot of gold, perhaps adding validity to this possibility.
- There is evidence that gold prices have been at least partially suppressed. Both Deutsche Bank and Merrill Lynch have paid fines for allegedly manipulating the gold market.
- After attempting to ‘normalize’ interest rates, the Fed is now again turning more dovish. It appears the Fed will be returning to more easing a.k.a. money printing. That will be bullish for gold.
As far as stocks are concerned, here are a few bullet points of which you should be aware:
- Much of the stock market’s gains over the past couple of years can be attributed to stock buybacks by corporations. This may be coming to an end. “Market Watch” reported that last quarter, for the first time in 7 quarters, corporate share repurchases declined. (Source: https://www.cnbc.com/2019/07/03/stock-buybacks-declined-last-quarter-but-not-time-to-panic-yet.html)
- The current bull market which began in March 2009, is the longest bull market in history. At the very least, the present bull market is stale.
- The present value of the Cyclically Adjusted Price Earnings Ratio has only been higher one other time in history, that was just prior to the tech stock bubble burst.
- When looking at the stock market’s valuation and comparing it to US economic output as measured by Gross Domestic Product, we are on par with the highly elevated levels of stocks in 2000.
What do all these facts mean?
Perhaps nothing in the immediate future. The Fed’s more dovish approach could mean higher stock prices dead ahead.
But long term, there are significant, looming problems with debt worldwide in both the private sector and with public debt.
High levels of debt in the private sector are deflationary which is often bad news for stock investors and real estate investors.
On the other hand, high levels of government debt often lead to money creation since the alternatives are raising taxes and cutting spending, both politically unpopular choices.
In the current political cycle, there are few, if any, candidates that are even talking about the debt, yet over the long term, it is unarguably the biggest threat to economic and financial health in our view.
That being the case, it stands to reason that money creation will at some future point continue in earnest, which will be inflationary and good news for gold and likely other tangible assets as well.
That’s why we advocate a two-bucket approach to managing assets. Some assets protected from the deflationary outcomes and some assets protected from inflationary outcomes. Both will ultimately have to occur, but the when and in what order is much harder to predict.
If you’ve not yet analyzed your risk in both of these areas, you’d be prudent to do so.
This week, on the Retirement Lifestyle Advocates’ Radio Program, we re-broadcast a ‘best of’ program with Professor Kotlikoff on maximizing Social Security.
We discuss recent Social Security maximization changes with the Professor on this broadcast.
If you missed it the first time, you can catch it now. The interview is now posted at www.RetirementLifestyleAdvocates.com.
Hope your 4th of July holiday week was safe and memorable.
“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”