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Gold is at a 17 year high. This is now starting to attract some attention, even though gold's already risen 88% over the past four and a half years -- in its strongest rise since the 1970s.
Nevertheless, many investors are unaware of this ongoing bull market rise. That's actually good because it means gold's bull market is still in its early stages. In other words, gold has a lot more upside potential.
What's driving gold?
Most important, a new investment era began in 1999 and this will be the key to successful investing in the years ahead. This new era is being fueled by massive government spending, the largest debts and deficits the world has ever known, the war on terror, record high oil prices, a 25-year high in commodity prices, growing uncertainty, and the booming growth and demand out of China and other emerging countries.
These factors provide a positive backdrop for gold and so does the weak U.S. dollar, which is poised to head even lower over time. The dollar, for instance, has already lost more than 90% of its purchasing power since 1913 and it's dropped 70% since the early 1970s when it stopped having a link to gold, becoming instead a floating paper currency. Throughout history, whenever a currency stopped having a link to gold it dropped, and the dollar has not been an exception.
On the other hand, gold is the ultimate currency and it always has been. From the Greeks to the Romans, currencies have come and gone and historically, not one paper currency has survived. But gold is real money and it's maintained its value over the centuries. In fact, it has a 5,000 year track record and no other investment can make that claim.
Gold's looking good
Looking at gold's technical big picture, you can see it's in a strong 35-year uptrend. A couple of years ago it broke above its downtrend since 1980 and it's now at a 17 year high and its next resistance is at $500. Once gold is able to rise above that level, it's off to the races as there will be no further resistance until gold reaches the 1980 top area.
If this seems extreme, a look at the Dow Jones Industrial Average compared to gold reinforces this outlook.
This chart goes back to 1919. When this ratio rises, the Dow Industrials are stronger than gold and when it declines gold is stronger than stocks. Note that a mega shift occurred in 1999 from financial assets to tangible assets. This was a big deal marking the new era that's been underway since then.
As you can see, these shifts don't happen often. This is only the third time this has happened since 1919 but when these shifts take place, the trend tends to last for years. That was certainly the case in the 1980s and 1990s when the Dow Industrials was stronger than gold, but that's now changed.
Gold has been stronger than stocks since 1999 and it still is. That is, the percentage gains have been greater in gold than in stocks. And since the ratio tends to swing to extremes once a shift occurs and it's still far from the lows, gold will likely continue to outperform stocks for years to come. This tells us the gold universe is where your primary investment focus should be in the years ahead.
What to do
If you're heavily invested in common stocks, we'd lighten up and at least balance it out with some gold investments. If you don't have any gold investments, we'd buy. And if you do have some gold, then hold onto it.
Gold is stable and it's an investment you'll want to hold for the long-term. Gold shares, stocks of gold producers, are more volatile than gold and while you can make a greater profit in them when gold is rising, they also tend to decline strongly during normal downward price corrections in gold. This makes gold shares more of a trader's market unless you're prepared to hold for the long-term and ride through steep corrections.
We like gold coins which can be purchased through reputable coin dealers. But for those who want a gold surrogate, there's always the streetTracks Gold and iShares Comex Gold exchange-traded funds, which move closely with the gold price. These can be purchased on the New York Stock Exchange and American Stock Exchange just like any other stock.
As this new era unfolds and becomes more obvious, gold is going to become more attractive and, unfortunately, stocks will be less attractive. So make some strategy changes now while it's still early and we don't think you'll regret it.
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