The Tortoise (Gold) or the Hare (SP-500)… Who Will Win?

This article was originally published for RC Peck’s Fearless Wealth Newsletter in January 2007.

I’m writing today about two charts: the S&P500 and gold. I think the real story is not being told on the CNBC’s of the world. The market is going up right now, but if looked at since 2000 it hasn’t grown at all.

Gold, on the other hand, has done a lot of good for (gold owners) us over the past seven years, and it’s still getting a bad rap. Let’s see what’s happening today.

THE STOCK MARKET (SP-500)

The S&P500 set an all time high of 1553 points on March 24, 2000, and since then, a period of seven years (6.75 to be exact) it’s down 7.35%.

Note that a 91-day treasury bill earning 3% a year would have beaten the SP-500 with zero risk over the past seven years. What this means is there is still a lot of risk in the market, even though the market is heading higher. Stick with me.

On March 11, 2003 the SP-500 was at 769 points, and since then the market has increased 73% to get us to where we are today (SP-500 at 1413 points on January 4th 2007). As shown in the chart below, the SP-500 is in a very strong up-trend, and has broken out of and above the trend line.

This is a very bullish signal, and (as you already know), the market is always right. If you already own the SP-500 then your job is to be patient. If you don’t already own the SP-500, you have two choices: 1) Wait for a 7% to 10% pull back, and then add a position or 2) dollar-cost average into the SP-500 over the next three months.

I must admit that the strength the market is showing right now is very impressive. We are at war, the dollar is falling, housing is about to collapse, government spending is [still] out of control (the military budget will be $560 billion for 2007) and as a nation we spend more then we save.

The only thing I can think of that is driving this move is the Federal Reserve’s increase of the money supply.

Historically, when the Federal Reserve increases the money supply (and the velocity of money stays high), stocks go up. The Fed has been increasing the money supply so much that the Fed stopped publishing the metric that shows the increase (called M3).

I guess they were afraid to let people know just how much they are flooding the world with dollars. When there are more dollars in the world, each dollar is worth less, right? Yes. Let’s now turn our attention to something that increases when the value of the dollar decreases: gold.

GOLD

Gold sure created excitement this past year for investors. At the end of 2006 gold was $632 an ounce, or 21% above its opening price of $522 an ounce on January 3, 2006.

Even though gold has been going sideways (see chart below) since its May 12 high, I strongly believe gold will be worth north of $1833 in the next five years.

My prediction of $1833 an ounce is based on gold’s January 21, 1980 high of $850, adjusted for inflation of 3% per annum.

There are three reasons you will want to have gold in your portfolio:

  1. Gold is trending up. In fact, during the same seven-year period, when the SP-500 grew by negative 7.35%, gold increased by 118%;
  2. Gold is a great hedge against the U.S. dollar, wars, uncertainty, inflation and a housing slump; and
  3. Gold holds its value. On January 1, 1976 gold was worth $135 an ounce and a dollar was worth a dollar. Today, 30 years later, gold is worth about $600 an ounce and a dollar is worth $.25. In other words, gold went up 500% and the dollar went down 75%. I think this says it all.

Gold Chart 06-07

Some of you may be satisfied with how your money has grown. If you are, then keep doing what you are doing. For those of you who would like different results, you will be amazed at how one or two small shifts can get you what you want.

Now is the time to make those shifts, so that when you look back to the beginning of 2007 you will see what smart planning has done for your portfolio.

Have an amazing 2007 and even if we do not do business this year I look forward in helping you protect and grow your money.

Here’s to being 5% in gold and setting a stop loss on your stock positions.

We are growing wealth together,
RC’s Signature

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