Gold

Regaining its Lost Luster?

Dow/Gold Ratio as of 10/22/18

20.6 to 1

Gold Is Becoming Cool Again

The sentiment shift is still subtle, but it’s both real and widespread. After a few years of being ignored and/or dismissed as basically useless, gold is cool again, attracting positive press and increasing accumulation by big investors. 

Notice the WSJ appealing to investor animal spirits by touting the benefits of gold miner leverage: “Gold-miner stocks allow investors to double down on bets the gold price will rise. These companies have higher fixed-investment costs and can become much more profitable when gold prices climb. Many of these companies pay out hefty dividends, too.” 

This is the kind of thing that hasn’t been said of gold miners for a long time, because when the metal’s price is declining extreme leverage works in reverse to crush earnings. Now, however, the other, happier edge of the leverage sword is starting to cut. 

If history is any guide, end-of-cycle dynamics should now take over, with rising volatility sending capital pouring out of “risk-on” assets and into safe havens. So expect a lot more media accounts explaining the advantages of sound money and the benefits of miner leverage.

DYI:  Stocks measured strictly by the Dow/Gold Ratio are both historically in equilibrium.  The Dow Jones nor gold are neither overvalued nor undervalued [again measured only by the Dow/Gold Ratio].  Of course when stocks are measured by dividend yield or Shiller PE stocks are wildly over priced.  Gold is simply at fair value making it difficult to determine long term direction.  When stocks were riding high – and gold on the give-away-table back in the late 1990’s [see Dow/Gold Ratio chart above] making a prediction for advancing prices was easy.  Back then you were shooting fish in a barrel AND you would have had a few years to build a position in the miners and physical gold as well.

That was then this is now 

Today anything is possible especially with world wide central banks willing to prime the pump at a moments notice to jack up asset prices.  So…DYI’s model portfolio reflects this conundrum as our averaging formula states a 37% allocation to gold miners.

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 10/1/18

Active Allocation Bands (excluding cash) 0% to 50%

55% - Cash -Short Term Bond Index - VBIRX

37% -Gold- Global Capital Cycles Fund - VGPMX

 8% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

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DYI