Sell Gold, Buy Stocks

August 03, 2010

Jon Nadler is nuts if he thinks we should be putting 10 percent of our portfolios into gold.

In his recent interview with Olly Ludwig, Nadler lays out all the reasons why gold’s bull run is over. The market is terrible in
India
. Demand for luxury goods in the
United States
has dried up. We’ve been riding three years of extraordinary investment demand and 10 years of greater-than-average investment demand, and eventually that has to catch up to you.

And yet, at the close of the interview, he says, “I always say you need to have 10 percent [of your portfolio] in gold …”

But why?

I’ve admitted in the past to not “getting” gold. It’s a useless commodity whose relevance is in a 500-year decline.

Gold also has almost all of the hallmarks of a bubble right now:

All we need now is a major article in a popular weekly magazine like Newsweek to seal the deal. Oh wait, we’ve had that too.

But really, you don’t have to go that far. All you have to do is look at this chart.

 

S&P 500 vs. Gold  (since 1/1/00)

 

This is a chart of the S&P 500 (Total Return) vs. gold since Jan. 1, 2000. For the past 10 1/2 years, SPY is down about 6 percent, while spot gold is up 312 percent.

Sometimes investing is easy, and this is one of those cases. This is simply not sustainable. It will either revert to the mean or it’s the end of capitalism. I’m betting on the former.

Looking at that chart, you have to believe that 2010-2019 will be better than 2000-2009 for equities. There have been plenty of studies on long-term market performance to back me up on this, the best of which was probably the 2009 Equity Gilt study from Barclays. While not entirely positive, the Gilt study made one particularly relevant point: There have only been four decade-long periods where U.S. equities have delivered negative returns, which were the 10 years ending in 1937, 1938, 1939 and 2008 (2009 was not included in the study). In each case, the subsequent 10-year period was strongly positive, with equities delivering (on average) an 11 percent compound annual return.

Reversion to the mean. It’s simple, but it works.

And gold? I’m guessing that gold has had its run. Could it spike higher? Of course. But it has all the hallmarks of a bubble right now. Given that, and given all of Mr. Nadler’s bearish concerns, a 10 percent portfolio allocation seems unwise.

 

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