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With Stocks At Highs Time to Invest In Gold Is Now

The stock market seems like it is invincible right now.  The S&P 500 keeps pushing new all time highs, closing at 2,137.16 today on July 11th 2016.  Meanwhile, price to earnings ratios (p/e) keep pushing the bounds of reasonable valuations, about 24 right now for the S&P,  as we brace for our 5th consecutive quarter of declines in corporate earnings.  So stock prices are going up while earnings are falling?…

This Is What Happens While Stocks Reach Highs

Unreasonable valuations have always preceded big drops in the market.  Right now, optimism for stocks is extremely high while earnings keep quietly sinking.  The optimism in stocks is not completely unfounded, as valuations are being pushed to extremes by a few factors.

  • Brexit- Great Britain exiting the European Union has spawned concerns about the future economic stability of Europe.  These fears about the European economy (and currency) means money from Europe will continue to flood into the US and buy dollar denominated assets.
  • The European Central Bank Will Keep Stimulus Flowing- At this point there is a lot of doubt that it will do much to bolster corporate earnings, but it is sure to keep pushing real inflation.  More reason to invest in the dollar.
  • Uncertainty in China and Japan- Asian economies are also going through a bit of a tough time.  After years of unbridled growth, China is finally seeing some consequences for their uncontrolled and unsustainable practices.  Asian investors are flocking to buy US stocks and real estate.  Anyone trying to buy a condo in Boston or New York right now understands how this has affected home prices in cities.
  • Good Feeling Spurs Continued Momentum- Lastly every time the US market has seen a little correction, buyers have swooped in to support prices.  The good times won’t last forever, but right now everyone forgot what it feels like to lose money in a crash and no one is looking to get out of stocks.  The central bank is keeping interest rates low, so for now everyone is still pedal to the metal in stocks.

So the moral of all this is that stocks don’t keep going up for no reason, there are plenty of “good” reasons why people feel better about investing in the US stock market than they do in other places.  There’s only one problem though, we are nearing the end of a cycle, and as it always is, the end will be painful for many.

7 Years

Stocks historically run in 7 year cycles.  You can go back 100 years and see this cycle play out time and time again.  We have been in a bull market since 2009, exactly 7 years.  Will stocks start to go down again this year?  Who knows, but we can be comfortable saying the end of the run is not in the distant future.  Another way to look at it is, you will be able to buy stocks for these prices again in the future, you do not need to have a fear of missing out.

Meanwhile, Central Banks are Printing Money

On the other side of the equation, central banks the world over keep printing money.  The European Central Bank has promised to support the Union by providing stimulus (read inflationary measures), Japan has said that they will work to de-value the Yen, and Japanese investors are flocking into gold.  Meanwhile, even though the dollar remains strong relative to other currencies, interest rates kept near 0 for years is starting to drive inflationary pressures within the United States, so the rate of a dollars buying power is dropping right as asset prices are probably about to drop.   This is a bad combination for investors.

The Solution Can Be Gold

One solution, and one that we are obviously a huge proponent of here, is for investors to move a portion of their investments into precious metals, including gold, silver, and platinum.  Gold historically goes up when the stock market goes down, and also goes up when inflation picks up.  From a rational perspective, these are the two things most likely to happen in the marketplace in the near future.

gold price chart 15

Buy Gold in Cash or Use a Retirement Account

A cost effective way to invest in Gold is to purchase it with your IRA or 401K.  While you can obviously allocate a portion of your cash, or sell nonqualified assets to purchase gold (and pay taxes on any gains from the sale) a good way to avoid any tax penalties is to move a portion of your retirement account into physical gold.  Its a tax free rollover, its a good way to make a long term investment, and your getting real gold from it instead of some hokey fund that has only been around for a couple years.

We Prefer Physical Gold

The distinction between physical gold and a gold fund is also important.  During volatile times, a gold fund will not be able to keep up with the inflows and outflows of money, and may not exactly match the price or the true value of metals as they increase quickly.  If you ever needed it because of extreme turmoil in currencies, banking, or markets, you would also be unable to extract any value from a gold fund (basically its worthless if you can’t get either the real gold or your cash out).  If you own actual gold, you know you will always have a market to sell it.  While it is an unlikely scenario today that it would be necessary for you to take physical possession, there are many examples in recent history when it became critical.  We can imagine during a time of war for instance you may be happy you have it.


So stocks are at or near highs now, inflation can’t help but pick up as central banks keep vowing to flow stimulus dollars into the economy, and gold is a relative bargain.  Investing at times like this makes all the difference between making a huge gain or missing the boat.