Last Decade: Buy Gold, This Decade: Buy Energy

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It’s not technically a new decade yet. But if the trade of the last decade was to sell stocks and buy gold, then maybe the best trade for the next ten years is to sell bonds and buy energy. Gas, coal, oil, conventional, unconventional, renewable, alternative. You have a whole portfolio of choices.

By the way, last year at the Agora Wealth Symposium in Vancouver, one of our colleagues took the stage to point out that your editor was complete moron. In this particular case, it was for being bullish on gold.

He said that gold hadn’t done much adjusted for inflation since 1980. What’s more, he said, its worth less, adjusted for inflation that it was twenty years ago. How, he speculated, could anyone take the advice to buy gold seriously when it had performed so abysmally?

Well here are the facts. The gold price bottomed in October of 2000 at $263.80. At that time, the S&P 500 traded at 1,379. Since then, the S&P 500 has fallen by 31% (closing yesterday at 942.43) while the gold price is up 262% to $956.

We’ve asked Kris Sayce to bring this small fact to the attention of our colleague when he attends this year’s Vancouver show next month. The theme of this year’s show is “Ten Years of Reckoning,” celebrating the tenth anniversary of the Daily Reckoning. Kris will be spearheading the Australian delegation. More details on that later this month.

In any event, it seems pretty obvious, that for the last ten years anyway, selling stocks and buying gold would have been a good trade/strategy. Stocks ended an 18-year bull market in 2000 and gold ended a 20-year bear market. One asset class was at a cyclical low. The other was at a cyclical high. In fact, you might even say that one was at a generational low and the other was at a generational high.

Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the “high-low” strategy.

This time around, though, we would add energy stocks to the mix, along with gold. Crude oil climbed to an eight-month high over $70 yesterday. Bloomberg says the weakness in the U.S. dollar is, “bolstering the appeal of energy as an alternative investment.” Sell bonds, buy energy. Pretty simple.

There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long-run, it’s the smaller-than-expected oil supply growth that will drive the market.

By the way, some Diggers and Drillers subscribers have wondered exactly which of our energy recommendations come from our “Long Aftershock” scenario. We’ll make sure to specify which oil and energy stocks we had in mind in tomorrow’s weekly e-mail update (for subscribers only).

One thing Kris will probably be making clear to U.S. dollar-based investors is just how relatively attractive Australia’s position is in the developed world. “Even as Australia’s challenges increase, it will still be the envy of the developed world,” writes William Pesek at Bloomberg. “Even in its worst moments… Australia is among the least unsightly economies anywhere,” he adds rather optimistically. We’ll see about that.

Finally, we meant to write a bit about other possibilities in China today. That is, we were going to explore collapse scenarios (financial, political, and societal). But we did not realise it would be ambitious to try that in a few hundred words. So look for something more considered later this week in the essay spot.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. The author says “The gold price bottomed in October of 2000 at $263.80. At that time, the S&P 500 traded at 1,379. Since then, the S&P 500 has fallen by 31% (closing yesterday at 942.43) while the gold price is up 262% to $956.”

    That’s nice. Now some AUD based “lies, damned lies and statistics” since 2000: The All Ords is up 33%. A “balanced” Super Fund is up 44%. Oil is up 50%. Established detached housing is up 110%. Gold is up 130%. (But Super has tax advantages going out. And established detached housing paid rent and could be negatively geared and gold didn’t and couldn’t.)

    Without splitting hairs, for the average passive investor, DR did just fine – Gold was one of the better AUD investments – Over the timeframe DR has chosen to use.

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  2. China dream comes China nightmare

    “The world’s longest wall was built as a defence, with construction starting as early as the 7th century BC, when China was divided into several states” (Peter Goff, Telegraph, London, Party animals driving China up the wall, smh.com.au, August 12, 2005).

    Below is a 2008 post to this site in this regard:

    With all the false-hype about China it is good to be reminded about another false-hype nearly twenty years ago.

    Susan Walker, of Elliott Wave recalled:

    “1989: Japan is in the midst of a multi-year boom in housing and economic growth, the Nikkei 225 has soared to never-before-seen nosebleed heights above the 30,000 level, and, in the ultimate display of East meets Western standards of wealth, Mitsubishi has just purchased New York’s Rockefeller Center.

    “The land of the rising sun WAS the ultimate cover story: “Japan: From Superrich to Superpower” (Time) — AND — “Money Boom For Japan: Gilded Age Of Riches” (LA Times)

    “In a matter of months, the Nikkei would enter a 14-year long bear market that slashed 80% off its value to a two-decade low. During this period, Japan’s housing bubble would burst, crashing land prices, public debt would soar to 140% of GDP, the economy would undergo its longest and deepest slump since World War II, and the flight of the soaring stock market would be replaced by the “plight of the suicidal salarymen.” (The Guardian)” (“Nikkei: In The Mood For Love?”, elliottwave.com, April 16, 2008).

    The China Dream will eventually turn into the China Nightmare. The Chinese financial system will collapse and the economy will descend into anarchy and civil war leading most likely to balkanization.

    Andy Xie, formerly of Morgan Stanley observed that:

    “In 751 AD China lost a battle at Talas against an Arab army. Historians view that as the turning point in the religious direction of the region. This event, however, was not so important in itself. China had vast resources at its disposal and could return to reverse the situation. What was important was that China deteriorated into chaos because of a rebellion by a key general and the ensuing wars so weakened the country that it could not influence the events in central Asia for centuries.

    “As an aside, this historical episode illustrates the relative weakness of the Chinese system. China depends on power concentration for internal stability and, by extension, beyond. When the center is destabilized, everything else suffers.” (“China: The New Silk Road”, morganstanley.com, August 22, 2005).

    Chinese saying “the hills are high and the emperor is far away”

    The anarchy and civil wars in China, after the collapse of the monarchy in the early twentieth century, is a type for the challenges after the collapse of the Communist Party in the early twenty-first century.

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  3. Ned S – all you can forget all the complicated movements in an out of small caps, gold, bonds etc. and just have put your money into BHP. Back in 2000 you could pick them up under $10, as of today they are $37.70. Return so far 377%…plus they have paid dividends. Where is that time machine parked!

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  4. Greg Atkinson – I can remember looking at BHP in 1998 at about $8.80 or $9.80 or whatever it was and being tempted; But manfully resiting. Seems a bit silly in hindsight!

    Some more blah, blah: Using a different timeframe to DR – 1986 ’til now. (1986 was when the ABS started recording house prices if I recall correctly?). And in AUD again:

    Gold is up 100%. Oil is up 340%. Established detached housing is up 340%. The All Ords is up 400%. For whatever those “fibs, bigger fibs and gratuitous fibs” may or may not mean.

    Watcher7 – I get the feeling that China is inclined to think along the lines of “When you are on a good thing stick to it” with a bit of potential for saying “Bugger this!” if the good thing isn’t quite looking so flash anymore?

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  5. Got those quick and dirty fibs wrong for 1986 ’til now – Looks more like the All Ords is up 275% or 175% (depending if one starts from January or from December?) and established detached housing is up 450% (?) – Said fibs reviewed in the cold sober darkness of the early morn. Apologies all.

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  6. Ned S – yes and when people talk about the All Ords they do not factor in dividends. The true view is shown by the All Ords Accumulation Index.

    The other thing about gold under your bed is you earn nothing from it while it sits there…zip. No dividends, no rental income, no distributions…nothing, until you sell.

    I guess you realise that the trick with investments performance is to pick the period that suits you :) If I tweak the BHP stock information for example I can show an even higher return by finding the lowest price back in 2002 and then adding in dividends…but what would be the point?

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  7. Dan: You should be aware that you are sending you “was I wrong about you” email to current subscribers. A bit rough perhaps but no hard feelings from me given that I have profited from some of your April and May oil and gas tips on D&D.

    Watcher: I have travelled about 8 years ago and discussed the significant political fractures within the country with a very informed source at that point in time. Subsequent to that the Bush administration exascerbated the already significant paranoia of the Central Committee. That said, Chinese balkanisation is now an extremely unlikely outcome although all that glitters is not gold. The financial nightmares in China will take several years to work through the system in my opinion.

    Coffee Addict
    June 11, 2009
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  8. I have minimal interest in what US markets have EVER gone up (or down) in USD terms – Convert it to AUD and it would be of more use to most Aussies I think.

    An example in relation to a more recent article – I think DR is “big and ugly enough” to take the criticism? – DR was talking about how poorly US Bond Prices performed since the start of the year.

    My comment – Since the start of this year gold in AUD is down 6.73% (which is getting close to cut one’s losses material for mine) while it is up in USD 8.35% (which is I’ve done very well for 6 months material). There would seem to be quite significant differences between the AUD and USD economies?

    Sources:
    http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
    and
    http://www.rba.gov.au/Statistics/HistoricalExchangeRates/index.html

    By all means tell me I made a mistake in the calcs if I did please. But either way, my point is that I’d really like seeing numbers crunched in AUD by DR in future. (Please!) Oz is sort of Yank – For better or for worse – But definitely not fully. And just could become way less Yank – Again for better or for worse – Over time.

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  9. Maybe that should be “sell real estate and buy energy”.
    Have now sold all of my real estate except my home.
    When I buy energy I focus on the low CO2 sources such as gas and renewable. Coal is a dinosaur of an energy source and is at considerable risk from CO2 new emission taxes.

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  10. WORLD NEEDS STIMULUS PACKAGE – NEW WORLD ORDER: The above ‘Invest in Gold’ (or silver)last century? – the Gold standard finished in the early 70’s and yes then commodities took over as shares/currency used to make consumables and military defences and people stuff…..housing bla bla….but does it not come down to investing in stable energy material systems. Eg stable nations with energy and materials.

    Look at Russia and Africa high energy material wealth – nothing short of econ disasters the Russians are drinking themselves to death and the Africans are dropping dead in the streets from aids….oh China is in Africa think they can tame Africa as a stable source of commodities, others have already tried…..

    Meanwhile back in China, it’s busy building a domesticated industrial base by giving its massive employed army the power to purchase things with $100/mth – China’s surplus wealth has been due to underpaid labour force……(thinking) they probably needed to pay their workforce less to have more money then to subsidise purchases for their people, to keep them employed, thus to prevent the current unemployed army – illogical.

    The stability of supply cannot be over estimated – Aus with high energy material per capita ratio has no developed industry and the lowish population is content in its unemployment and welfare with more room to import people to join the welfare industry. This is what Australia calls growth industry….to sequester Co2 into human carbon units and then tax the consumerism that drives the human growth.

    PROOF: NSW Govt is deliberating that its public service industry buy Aus and not Chinese, in order to grow more public servants. Australia mainly has service industry and not too much Aus food to feed these carbon units, we have to import the food – illogical.

    SOLUTION: provide world stimulus package by relegating Aus Commonwealth to Queensland and NSW and sell off remaining 2/3 to China and Japan. The world needs China and Japan nations, they don’t need Aus associated Terra Nullius fix.

    USA should broker the new deal.

    Charles Norville
    June 17, 2009
    Reply

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