Stocks or Precious Metals: Which Makes More Sense to Invest in Now?

By Peter Ginelli  ---  Originally published in The Market Oracle  ---

"Buy low, sell high," is the most fundamental principal of a great investment strategy in any sector. A deviation from this core principal can be truly costly and downright dangerous. 

One might wonder, why state something so obvious as that! This is because many investors wait till it is too late, and a market is in its final stages of a bull market before they finally convince themselves to get in, and by then they are sitting on a ticking time bomb, ready to explode. 

The flip side of this, are the investors who let greed keep them trapped in an aged bull market and wait till it is too late before a crash wipes out their entire life savings.

Both these groups usually lose a tremendous amount of money, but for different reasons. The first group is paralyzed by fear, the second group is blinded by greed. 

The first group's fear is based on, "What if I get in the market and it doesn't go up, or worse yet, it drops." The second group's greed is based on "What if I get out and miss out on gaining even more profit."

Legendary Wall Street analyst, the late great Richard Russell once said, "I have never seen a market top or bottom-seeker who found it." 

Although both these groups have somewhat rational reasons for their investment psychology and behavior, what they don't take into account, is the cyclical history and fundamentals of every market. So here is a crash course that might be helpful for everyone.

The average cyclical age of a bull market is typically 5-8 years, during which a market continues to climb in a positive trend. This does not mean during that period there are no pullbacks. It only means year over year, the market continues to gain value.

On the other hand, the average cyclical age of a bear market is typically 2-4 years, during which the market continues its downward trend. Again, this does not mean the market does not experience periodic short term mini-rallies in the process of its continuous decline year over year. 

Now that we have established the groundworks, let's have a look at the stocks versus the precious metals and examine which makes most sense to be invested in now.

On one hand we have the equities market that has now entered its 8th year of a bull market, which is considered very mature in age, even though its foundation has been extremely shaky since it was manufactured by easy money policies put in place by the FED after the financial crisis in 2008. 

And on the other hand you have the precious metals market which concluded a 3 year bear market in December of 2015 after gold bottomed out at $1050 and silver at $13.21. Then in 2016, gold and silver began a new cyclical bull market when gold finished the year up at 9% with silver up 16%. 

Having explained all this, common knowledge and wisdom would suggest that investors should now sell their stocks at the top of this mature 8 year old bull market which could crash at any time, and enter near the bottom of precious metals bull market, still in its infancy. But once again some investors are paralyzed by what I described as greed and fear, the two biggest destructive forces of wealth. These investors will once again learn their lesson the hard way, by staying in the stock market until a massive crash wipes out their entire life savings, while missing the new bull market in gold and silver until it has matured in age and has grown too expensive to benefit them. 

In speaking to some potential investors, I have heard many reasons as to why they have been ignoring the precious metals as a means of diversification in their portfolio, ranging from "gold and silver have never really gone anywhere," to "there is no inflation in sight to create a rally in precious metals." So let's examine both those issues.

As for inflation, what most people don't understand, is that inflation shows up where the excess money goes. In the past 8 years, since the financial crisis of 2008, the FED printed trillions of dollars in an attempt to boost the economy. However, instead of injecting that liquidity directly into the economy, they gave the money to the banks. The idea behind the mindset was that the banks would lend these trillions of dollars to investors at near zero rate, investors in turn borrow it and invest and the economy would begin to grow once again. However what the FED overlooked was that banks are not charity organization and would never risk lending that money at zero rate for no return. So instead banks took the money and kep some of it in their reserve while putting the rest in risky assets like the equity markets where they could at least get some return on their risks and overcome the impact of the crash they had just suffered after the subprime mortgage debacle. 

Again, inflation shows up where the money goes. Most of those trillions of dollars wound up in the stock market, both by banks as well as companies borrowing at zero rate and buying back their own stocks. As a result, we are seeing massively inflated stock prices which by all historical standards is grossly overvalued. Meantime in the real economy the consumer spending dropped to historic lows as the American people stopped spending money, worried if they will keep their jobs or homes in a rapidly sinking economy. Worried people don't spend money. They save, save, save! And that's exactly what they did

Now however that we have president Trump at the helm, whether you like him or not, according to many polls, the consumer confidence among the American people is once again at historic highs. Therefore the consumer spending is expected to jump. Add to that, the hundreds of billions of dollars that are reportedly flowing into our economy from overseas by foreign investors, and add yet again, the trillion dollar spending package Trump has proposed to fix the country's infrastructure and you will see inflation like we have not seen since the late 70's. This also should explain why the FED is suddenly so eager to raise rates as they have done so, twice in 3 months, with one more hike expected next week. They realize the coming inflation could really hurt our low growth economy and are trying to get ahead of it. Whether or not they will succeed, remains to be seen. But I wouldn't put my money on it. 

As to the second concern about gold and silver not having gone anywhere Let's have a look at how they have performed against the stock market, both long and medium term. 

Below you can see two tables on how gold and silver have done against the stock markets both in the medium term (From 2001 through now,) and also long term (From 1970 through each market's all time high.) As I have said in the past, number don't lie, they tell the whole story.

Here is something to wrap your head around: Imagine you had put $20,000 in the stock market on December 31, 2001 and another $20,000 in gold and silver.  

Here is what your investment would have grown to today:

Gold:           $92,230

Silver:         $76,224

Dow:            $42,323

S&P 500:    $42,491

 

One final thought, your $20,000 investment in each of these markets from 1970 through each market's all time high would have grown as followed:

 

Gold:          $989,202

Silver:        $522,764

Dow:           $522,002

S&P 500:  $524,516

But once again, don't forget one little detail in all this; the Dow is now at the end of its latest bull market, when gold and silver are in the beginning of a new one.

Peter Ginelli

I have been actively involved in market research and analysis for over a decade. My opinions are based on extensive research from various sources including the latest world geopolitical and geo-economics events and best available information and data available. My professional background is primarily in the precious metals market place which include but not limited to research and analysis of daily news events at LCI and how they may affect the precious metals market.

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