Why Long-Term Investors Should Look Into Gold

As we enter a new decade we are compelled to point out what, in our opinion, is the “Lost Decade” of the United States. The financial media, brokerage houses and advisors have done a good job promoting the opportunity of owning US Equities, and as a result the average investor continues to wait and hope that their cookie cutter, simplistic investment strategies will provide for their future.

The reality is that investors have been severely punished for “buying” and “holding” US equities over the past decade.  The following chart illustrates the “nominal” performance of the Dow Jones from January 2000 to October 2009.

The next chart illustrates the Dow Jones performance when it is adjusted for the government’s measure of inflation, the questionable Consumer Price Index (CPI).

The next chart illustrates the performance of the Dow Jones when it is compared to a more stable measuring stick; gold.

To the average investor this insight should be devastating to say the least.  In the world of investing, ten years should be considered “long term” and investors should not be okay with this kind of performance.

Conventional thought suggests that an investor can expect an 8% annual return from the broad stock market over the “long term”.  The following chart compares this expectation versus the reality.

Contrary to historical evidence many professionals have insisted that the market always rises at 8% per year over the “long term”.  Unfortunately this past decade was a tough learning experience for many investors as capital fled the stock market and entered the hard asset market.

The point of this article is not to win an argument about Gold being a better investment than Stocks.  We do not favor one asset class over another asset class.  Instead we are trying to illustrate that markets are cyclical and not linear.  No market goes straight up or straight down.  There are times that it makes sense to invest more heavily in the general stock market and there are times that it makes sense to invest more heavily in hard assets.  Unfortunately the average investor has been led to believe that one investing strategy could be used regardless of market conditions.

From 2000 - 2010 the place to invest has been hard assets and during this time it was wise to limit exposure to the general stock market.

These long term market trends tend to last a very long time and we expect this trend to continue into the next decade.  However, no market goes straight up or straight down.  We expect that there will be times that the US Stock market and even the US dollar will outperform gold and other commodities.  We expect that many investors will foolishly cash in their stocks and then buy into a frenzied hard asset market only to be disappointed when they once again miss the trend change.  Ultimately, we expect a parabolic, mega spike in precious metals that rivals the 2000 Nasdaq mania.  However, it is our opinion that this market mega blow off will happen many years down a very bumpy road.

Going into 2010 we caution long time, hardened stock investors not to wait another decade to decide that commodities are a wise investment.  At the same time we caution long time, hardened commodities investors not to expect a straight up, one direction bull market.  Both of these investment views are likely a recipe for disappointment.