Gold or stocks: what to hold during the Great Correction
Gold or stocks?
Gold will go up another $300 next year, says Goldman Sachs. Bloomberg reports:
Gold rose 27 percent this year, heading for a 10th consecutive annual advance. Investors are seeking hard assets as governments and central banks led by the Federal Reserve pump more than $2 trillion into the world financial system.
Gold will reach $1,690 an ounce in 12 months, from $1,390 now, and probably peak the following year, Goldman estimates. Gold in exchange-traded products backed by the metal reached a record 2,105 metric tons on Oct. 14 and holdings were last at 2,093 tons, according to data compiled by Bloomberg. That鈥檚 equal to about nine years of US mine output.
Hey, making money is easy. Gold goes up every year. If you believe Goldman it will go up another 20% next year.
But if you believe Goldman, you鈥檒l make money in stocks too. Here鈥檚 another Bloomberg report:
The benchmark gauge for American equities will rise 11 percent to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.鈥檚 David Kostin, the most accurate US strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011.
Market analysts say earnings will hit record highs, keeping valuations below historical averages at the same time government spending aids the economy. Reaching their average forecast for 2011 would give the index annualized gains of 15 percent over three years, twice the rate anticipated by Pacific Investment Management Co.鈥檚 new normal theory that anticipates deficits and increased regulation will limit returns.
Kostin, Goldman Sachs鈥� New York-based strategist who said last year the S&P 500 would end 2010 at 1,250, wrote in a note Dec. 6 that below-average bond yields help create a 鈥渟uperb backdrop鈥� for equities. He expects the S&P 500 to finish 2011 at 1,450, the second most-bullish call among 11 firms surveyed.
So, Dear Reader, you have a choice. Gold or stocks? Goldman says you鈥檒l make money no matter which one you choose.
We鈥檙e not so sure. The way we look at it, we鈥檙e still in a Great Correction. Trouble is, if you read the newspapers you鈥檇 barely realize it. The financial press says the economy is 鈥渞ecovering.鈥� The analysts are calling for higher asset prices. Advisors are overwhelmingly bullish. And shoppers are said to be going back to the malls that once knew them.
And what鈥檚 this? Outstanding consumer credit 鈥� the key measure of leverage in a society 鈥� went up in September and October. The economy isn鈥檛 de-leveraging. It鈥檚 adding debt, not subtracting it!
But hold on. If you look at the composition of the 鈥渃onsumer鈥� credit figures, you discover that:
1) The total credit numbers are actually going down; it鈥檚 the adjustments that make them appear higher
2) The positive (increasing credit) numbers come from government-supported credit (such as student loans)
3) Take out the government-backed debt and you will see an impressive collapse of credit
The Great Correction is real. It鈥檚 a fact of life. And it won鈥檛 go away anytime soon.
So, what will it be? Gold or stocks?
We鈥檒l take gold.
Stocks are a bet on an improving economy 鈥� on growth鈥n profits鈥n prosperity.
If we鈥檙e really in a Great Correction, it could be many years before the economy begins to grow again.
But isn鈥檛 the economy recovering? What, are you kidding? There are 15 million people without jobs. If the economy continues to 鈥済row鈥� at these rates, they鈥檒l never find work again. Every month, the workforce grows with the population. The number of new jobs barely keeps up.
In order to get a real recovery, the economy will have to grow much more strongly. And that isn鈥檛 very likely, not as long as so many people are reducing their debt levels and saving for their retirements.
Sooner or later, investors are probably going to realize that the economy isn鈥檛 really recovering. They鈥檝e gone for a dozen years with no net gains from stocks. They鈥檙e bound to give up, sooner or later. Once they see that this economy will not make their stocks more valuable they鈥檒l begin to shift their focus from capital gains to income. They鈥檒l look for dividends.
But at current stock prices, investors are lucky to get a dividend yield of 2%. Not enough to compensate them for giving up their money. They鈥檒l want 3% to 5%. And in order to get that level of dividends stock prices will have to go much lower 鈥� down by as much as 60% or so.
Could gold go down too? Yes. And it probably would 鈥� if the feds would permit the economy to de-leverage in an orderly way. Instead, they鈥檙e fighting it鈥igging in their heels鈥nd holding onto the furniture to try to avoid getting dragged along.
They鈥檝e tried monetary policy. They鈥檝e tried traditional fiscal policy. Nothing worked. So, now they鈥檙e trying QE2.
Will that do the trick? No. If you could really make people more prosperous by printing money, would be a lot more popular than it is now.
Of course, it won鈥檛 鈥渨ork.鈥� But the feds have already shown that they have no intention of giving up. Obama appointed a bi-partisan panel to figure out how to reduce the deficit. The panel made some modest proposals. And both Congress and Obama himself rejected them. If there is to be de-leveraging of the public sector, it will be over their dead bodies.
Which is the way we鈥檇 like to have it.
But it won鈥檛 happen soon. Instead, they鈥檒l continue on this route until they can鈥檛 go any further. The Fed has already printed up $1.3 trillion trying to avoid the correction. And they鈥檙e now working on another $600 billion.
And when that doesn鈥檛 work, they鈥檒l probably print up some more鈥�
鈥nd they鈥檒l keep printing (why would they stop?)鈥�
鈥ntil the whole system blows up.
THAT鈥橲 when you鈥檒l be glad you bought gold rather than stocks.
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