A Simpleton’s Trade: Sell US Stocks and Buy Gold

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The yen is falling. It’s down 5% against the dollar since November. Investors are finally noticing. With a deficit of 50% of GDP, the Japanese government walks where angels fear to tread. Americans aren’t far behind. To make a long story short, our money is on the angels.

Only an economist would dare to look 10 years ahead. Only a fool would put money on it. Today, we do both. But our new “Trade of the Decade,” is not so much a look into the future as it is a look at the past.

Ten years ago, your humble correspondent offered his first ‘Trade of the Decade.’ He should have stopped there, for the trade was a big success. It was a simpleton’s trade: Sell US stocks/buy gold. That was in the year 2000. At that time, US stocks had been going up for the previous 18 years, multiplying investors’ money 11 times. By then, stocks had been going up for so long that the memory of man ranneth not to the contrary. Investors’ imaginations saw no alternative. Stocks for the Long Run was the title of a popular book. It was also an investment formula that seemed unbeatable.

Alas, the formula proved beatable. It was time for stocks to go the other way. The first decade of the 21st century proved to be the worst time to hold stocks since the ’30s. Net returns were negative – especially when adjusted for inflation. Adjusted to the CPI, the Dow ended the decade down 40%.

The other side of the trade – the buy side – was just as simpleminded. Gold hit a high over $800 in 1980. Then, it slipped for the next 20 years. It didn’t come to rest until September 1999 at $260. That was the famous “Brown Bottom” in the yellow metal…when the then chancellor of the exchequer, Gordon Brown, sold Britain’s gold at the lowest price in two decades. (To bring readers up to date, now Mr. Brown applies his vision and energy to Britain’s economic recovery efforts.)

Gold is real money. But in the years when gold was being beaten down, other forms of money were running wild. Financial assets mushroomed all over the globe. A whole new ‘shadow banking’ system emerged…with new financial instruments, representing trillions…no, hundreds of trillions…of dollars. Prices on everything were soaring – equity, debt, real property. It did not take a genius to see that gold would have to catch up, sooner or later. As it turned out, no major asset class did better. Gold finished every single year higher than the year before. It doubled. Then, it doubled again.

What made the trade a success was neither clairvoyance nor omniscience; it was merely an observation known as ‘regression to the mean.’ The word ‘normal’ has been in the dictionary for a long time. It must be there for a reason. What it describes is where things tend to go when they’ve gotten out of whack. Regression to the mean is so powerful, no one escapes it. For every decade of walking around time, a person spends a million years dead. Over a century, practically every human regresses to the grave. So, what is so abnormal now that regression to the mean is as certain as death?

Almost all investments are expensive by most historical measures. But if all go down, what will they go down against? Money! That’s why real money – gold – is likely to go up again in the next 10 years. But gold is not cheap. It rose nearly 400% over the last 10 years and now is fairly priced. Gold in the treasure trove found in England last year is worth today about the same thing it was when it was buried 12 centuries ago. It cannot regress to the mean; it is already there.

On the buy side, we are looking for an investment that is despised…not one that is admired. And so, back to Japan, where equities peaked out in 1990 and have been going down ever since. While the Japanese government wanders among the stars, the private sector has dropped back to the ground. Or beneath it. Tokyo-listed stocks have lost 75% of their value, wiping out an entire generation worth of growth. Many Japanese companies sell for less than the value of their current net assets.

And now, after twenty years, Japan’s private businesses are finally benefiting from the stimulus programs. The government will go broke, but by destroying its own credit, Japan cuts the value of the yen and boosts profits for its exporters. Toyota’s local labor costs – in dollar terms – fell 5% in the last three months. And by the time the catastrophe is complete, Japan’s businesses could be the most competitive in the world. One way or another, 10 years from now, we’ll wager that Japanese stocks will be higher…if only relative to the rest of the world’s equities.

But of all the whack that investments might be out of, US Treasury debt stands above them all. For the last 27 years, the US government’s cost of borrowing has gone down. But while bond yields declined, the quantity of US debt exploded. Official, on-the-books debt trebled. Include off the books, unfunded financial obligations and the total reaches $118 trillion – 8 times GDP. And now the explosions come every month. As the depression continues, US deficit-financing needs could rise to $150 billion every 30 days. So far, the bond market has absorbed the shocks with good grace. But sometime in the next 10 years, the angels are bound to be proven right.

Sell US Treasury bonds. Buy Japanese stocks.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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19 Comments on "A Simpleton’s Trade: Sell US Stocks and Buy Gold"

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Lachlan
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I don’t think your last decades recommendation is fully played out yet Bill. Sell more stocks and buy more gold for mine.
Interesting article for stock bulls to read.
http://www.youtube.com/watch?v=cQyBG6dhY
Hope that link works but if not its the Charles Biderman, Bloomberg story on Youtube if ya can Google.

Lachlan
Guest

So I’m linking illiterate. Tis about the rigging of stock markets.

Dan
Guest
Gold is gold, but houses are houses also. I managed to find the paper describing the Herengracht Index (1628-1973) showing how over almost four centuries house prices, adjusted for inflation, haven’t budged. “It can also be seen that inflation had a very limited influence on the value of real estate in the seventeenth, eighteenth and nineteenth centuries, and that a strong increase in nominal real estate values after the Second World War was to a large extent inflation-driven. … one can conclude that the buildings in the sample have kept their real value in the long run but have not… Read more »
Pete
Guest
Dan: “I think anything that has tangible value is a good buy” We prefer the tangibles, too, Dan. Over the years we’ve stashed nuggets and gold fillings*, etc., in the safe, waiting for the right time. We think it’s _now_. Time for us to sell. A year from now you can all razz me for selling too soon… . :) Greg has resisted the temptation to give me a burst for settling for a 600-point win in the ASX, when I could have scored another 1200 points! ;) We prefer the security of brick’n’colourbond; the certainty of fortnightly rent; the… Read more »
Lachlan
Guest

And dont forget farmland Dan. Looks cheap now and by the time the state/corporates finish they’re unofficial policy of ruining the sector so they can buy place up with their funny money it should all be worth a whole lot more.

Lachlan
Guest

OK they’re change to their

Pete
Guest
Have to agree, Lachlan. The only aspect I’d question* is in regard to cost/return ratio in the short term. Right now we’re holding one rental which is very promising in terms of (long-term) capital gain, but a poor short-term rental investment. We should sell it and use the cash to build two single-storey homes which would net us at least $300 more per week, total. The only reason it’s performing at all is that we have so much equity in it… . * We’ve never bought rural (only special rurals) so you may be right. It’s out of our specific… Read more »
Lachlan
Guest

“cost/return ratio in the short term” yeah true Biker. Adds to the contrarianess of it all though.

…is your home block a special rural then?

Dan
Guest

Lachlan, had a look at that youtube video (search terms: bloomberg, biderman, charles ). Definitely an elephant in the room re: stock market fixing, and it’s always annoying not to be a fly on the wall of those boardroom meetings. It’s not news though – the government/fed reserve are known to be actively managing the US stock markets to prevent natural events like crashes in times of absolutely no confidence, etc. I can fully understand why too (wrong though it is). That they would stage a hoax recovery without even making an attempt at subtlety is sadly predictable.

Lachlan
Guest

Yeah its predictable that a collapsing superpower would do anything to stay afloat. Pathetic but isn’t it. It seems to me that the issue is attracting more publicity now.

Ross
Guest
Zerohedge is squirrelling away on the plunge protection team’s actions on Wall St and they are worth following. The audit the fed bill may turn something up but with bankster backers Barney Frank & Chris Dodd purporting to back it it makes me wonder. With HFT regularly running up 3-4 stocks to being over 40% of the daily market; and with direct netting between the HFT market makers then reducing the monetary exchange for those trades to less than 5% of the day’s trading value, then I’m not so sure the extra smoking gun in govt direct buying intervention is… Read more »
Dan
Guest

Well the real richest people in the world are not individuals but families, and that kind of information is not published. As the video said, it could be anyone propping up the market, but it’s not ‘everyone’. There _are_ groups around with the kind of money needed for the current rally.

GB
Guest

i dont get why japan stocks are a good buy

i agree with the theory but its only good for people living in japan. If your stocks do go up then you may lose any gains when you expatriate the money back to australia – if japan’s government goes broke then the yen should slide heavily vs the aud

Pete
Guest

Lachlan: “…is your home block a special rural then?” Ten acres, two homes. Went through a stage where we owned four of these SRs: 10, 5 (big deep dam), 3 (nice house) and 7.5 (on the beach.) All the last three sold for well over double what we paid. They weren’t even advertised. Anything worthwhile over here now is a mil plus. We’ve moved on to rentals… .

Richo (the Second)
Guest

Buy $USD, short stocks, gold and silver.

Stillgotshoeson
Guest

bought 50000 more shares in a Gold Mining Company yesterday…

Ned S
Guest

Wow!!!

Was it a British gold mining company or a Thai one or a Dutch one I can’t help but wonder?

Yap, Yap! :)

Stillgotshoeson
Guest

Australian….

Firebug
Guest

Stillgotshoeson – Well done

Holding gold miners isn’t for the faint hearted, three cheers to the brave!

Let’s hope you’ll be richly rewarded in three to five years’ time

The reward may even be better if you can trad by picking the thoughs and peaks. Seems you have already bought at low

wpDiscuz
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