Gold
Get’s its Mojo Back!
“Much of what is going on right now recalls the early 1970s,” writes Martin Wolf in a Financial Times editorial, “an amoral US president (then Richard Nixon) determined to achieve re-election, pressured the Federal Reserve chairman (then Arthur Burns) to deliver an economic boom. He also launched a trade war, via devaluation and protection. A decade of global disorder ensued. This sounds rather familiar, does it not? In the late 1960s, few expected the inflation of the 1970s.” The few who did, though, profited enormously by purchasing gold at $35 prior to the devaluation and holding it through the tumultuous decade that followed. Gold rose nearly 25 times.
Though almost no one expects an uptrend of that magnitude for gold in the 2020s, Forex Live‘s Adam Button offers a framework by which gold might return to the record highs of 2011. “If the choice is between gold or a bond that yields 5% that’s one thing but the balance changes when it’s gold versus something that yields nothing,” he says. “Add on the chance of more QE, a currency war or a real war and gold looks better and better. It’s not going to be a straight line but we’re back in an easing cycle. The last easing cycle ended with gold at $1900. If central bank easing unfolds as expected, we will get back there. If there’s a recession or war, it will go even higher.”
PIMCO, the bond fund, has developed an analytical tool that tracks “the relationship between gold prices and interest-rate yields,” writes Lauren Silva Laughlin in the Wall Street Journal’s Heard on the Street column. “[It] concludes that for every 1 percentage point decline in inflation-adjusted yields, gold prices should move up by roughly 30%. In that light, the recent jump in gold prices looks fairly tame. Since the end of October, inflation-adjusted yields on 10-year Treasurys have fallen roughly 0.9 percentage point, while gold is only up about 13%, PIMCO notes. The fund manager figures gold should have risen 20% to 30% in total based on the yield movement.” At the end of October gold was trading at $1215 per ounce. For gold to reflect PIMCO’s projected gains, it would need to be priced in the $1450 – $1575 range.
DYI: As the chart above shows gold
bottomed back in July of 1999 at $256.20 as stock markets around the world ramrodded
to obscene levels.
As of 7/9/19 Shiller PE is
30.39
Any
one who knew about valuations would have systematically sold off stock
positions all through the late 1990’s nailing down profits. Those who understood the Dow to Gold Ratio [see below] would have known that gold and the precious metals mining companies were on the
give-away-table setting up for massive bull market for both.
As of 7/10/19 Dow/Gold Ratio
19 to 1
That
was then today is now. Depending how you
calculate your average – DYI averages from 1913 – gold in relationship to stocks
is a bit of a bargain. The above chart
averages their entire chart thus having Dow/Gold right at average or fair value. Be as that may be DYI using our averaging
formula has our position at 32% of the portfolio. This is an excellent course of action
especially with stocks at such extreme valuations and the Dow/Gold Ratio at a
reasonable cost.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 07/1/19
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
DYI
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