The Gold Stock Secular Bull Market
Secular bull markets last a decade or two and are the reason for the old adage of "buy and hold." From 1982 to 2000, there was little to be gained for most investors by trading stocks as the market did so well over that period you could just buy the Dow Jones and watch your wealth grow. From 2000 until now, however, the general U.S. Stock market has been in a secular bear market and profits have been ephemeral. The 2003 to 2007 bull market was in fact a mirage of inflation and rapid credit expansion (i.e. severe U.S. Dollar debasement).
Such debasement becomes apparent when the Dow Jones is priced in ounces of Gold, as Gold is the oldest and most stable form of money humans have discovered to date, with an historical record of thousands of years of use as a currency. Paper fiat currencies (i.e. currencies backed by nothing but promises and government decree) have a lifetime usually measured in decades. As an example, the Euro is looked at as a major and stable international currency and yet has only been in existence for about 10 years! The U.S. Dollar changed from a true Gold-backed currency in the early 1900s to a watered-down quasi-Gold-backed currency in 1933, to a currency backed by nothing in the early 1970s.
Discerning the value of things requires a more stable measuring stick and though far from perfect, Gold fits that bill better than any currently used currency. As the chart below (stolen from the fine site www.goldmoney.com) demonstrates, the Dow Jones fluctuates significantly in value when priced in Gold. Counter to conventional "wisdom" and financial teachings, this chart makes buying and holding general stocks for the long haul seem kind of silly unless you are born in the right decade, since we all have finite life spans.
For example, someone who started working and saving in 1940 would find that 40 years later, in the year 1980, the Dow was actually worth less than 40 years earlier when priced in Gold. This, of course ignores dividends, which are not a trivial part of long-term returns, but I think the point is a good one: buy and hold only works some of the time and you better be holding the right asset class!
And don't get me wrong - the same "buy and hold doesn't always work" statement can be used for Gold, real estate and oil and other commodities. This is a natural long-term cyclical phenomenon that all asset classes go through. In fact, the Dow to Gold ratio (i.e. the "price" of the Dow Jones divided by the price of an ounce of Gold in U.S. Dollars) is a measure of investor sentiment. This ratio swings between financial assets (i.e. stocks) being in favor (i.e. ratio is going higher) and out of favor (i.e. ratio going lower).
When the ratio is declining, it means that Gold and its leveraged counterpart Gold stocks are outperforming general stock market indices like the Dow Jones or S&P 500. There has been a confirmed secular trend change on long-term charts that is not yet close to being completed and that change presents a significant opportunity for long-term steady investment profits.
Take a look at the long-term chart above again and notice how the long-term trend is now down for the Dow to Gold ratio (it is even further down than this slightly out of date suggests as the Dow to Gold ratio was just below 9 at Friday's close). To display the same recent ratio data in another form, below is a 29 year monthly log-scale chart of the Gold price divided by the Dow Jones to display the data in a more bullish light for the Gold sector (i.e. the Gold to Dow ratio):
The clean long-term trend line break is now well established and we are headed back up the opposite way until we get back to near the top seen in 1980. This could happen at a Gold price of $2000/ounce or $10,000/ounce, but I think something closer to the former is more likely if the current deflationary forces continue. The point is that Gold will outperform the general stock market indices and thus stocks are not worth the risk. When burying pieces of metal in the backyard provides a similar or better return compared with stocks, it is time to buy a shovel and some pieces of metal (at least then you know what you're getting yourself into unlike most Lehman Brothers or Citigroup investors!).
But I want to focus on the Gold miners, as I think they are set to outperform the Dow Jones, S&P 500 and the Gold price for at least the next 5 years. Here is a similar ratio chart of the $XAU (i.e. the Philadelphia Gold & Silver Index), which is an index of blue chip large Gold mining stocks, divided by the S&P over the past 25 years (monthly plot on a log scale):
Now keep in mind that the $XAU represents the "boring" large cap/blue chip miners. Once the big stocks get moving, the medium and small caps stocks will follow and provide even larger, although riskier, gains. Gold stocks have already been moving up since the Panic of 2008 November stock market lows and most Gold stocks have gained well over 100% and many over 200% since these lows. Senior gold stocks, as well as general stocks like those in the S&P, are near an intermediate term top.
Once this top is reached, a correction will occur that should provide yet another good long-term buying opportunity later this year for new money looking to buy Gold stocks. I believe another general stock market plunge is imminent and that newer lows are ahead for the S&P 500 well before 2009 ends. Gold stocks, on the other hand, will simply be making a correction and won't be making lower lows again for several years.
The Gold stock secular bull market has begun and it promises to be a good one. Those willing to risk their savings in the stock market who are not experienced traders should put their money to work buying a basket of Gold mining stocks and should avoid "regular stocks" for the next few years. The time to buy for the current spring intermediate-term bull move in Gold stocks has passed, but a new buying opportunity will be upon us this summer. Patience will be a profitable virtue in this sector for years to come.