Give Us Back Our Gold!

“This is gold, Mr. Bond.  All my life I’ve been in love with its color … its brilliance, its divine heaviness.”

                                                   Auric Goldfinger

Gold prices recently hit a four-year low, while stock prices seem to hit a new record almost weekly.  So which is the better investment today?

Before answering that question, consider the latest worldwide trend.  “Repatriating” gold is becoming as fashionable as quantitative easing and stimulus spending.

Germany’s central bank started the trend last year with its decision to return some of the country’s gold home from vaults in the U.S. and Paris.  It was followed by a campaign called “Bring Our Gold Back Home,” but Germany has since backed off on plans to repatriate more gold.Gold Prices

Netherlands has already moved 122 tons of gold back home.  And Switzerland voted yesterday on its “Save Our Swiss Gold” initiative, which would force the Swiss National Bank to buy gold every time it buys euros, which it has done to curb the rise of the Swiss franc.

If the initiative were to pass, Zerohedge noted, “it will undoubtedly set off alarm bells throughout the gold market, as yet more physical gold will need to be repatriated and another sizeable, price-insensitive buyer will enter the marketplace.”

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We Told You So

Sometimes the best investment advice is to do the opposite of what everyone else is doing.

When the stock market was in free fall during the financial crisis, many investors who had hung on for as long as they could take it finally gave up and sold their stocks, locking in huge losses and missing out on a historic rally.

Last summer, with the first hint that the Federal Reserve Board would be tapering its bond purchases, interest rates began to rise and investors sold bonds in record numbers.  In many cases, investors moved more money into stocks, as the market continued to set records throughout 2013 after a brief drop that was fueled by taper talk. Bond Chart

That’s proven to be a mistake, as bonds have so far outperformed stocks in 2014.  In fact, 10-year Treasuries have outperformed the S&P 500 by about 620 basis points.

We’ve suggested that investors not give up on bonds and likewise suggested that gold may shine again, in spite of its tarnished 2013 performance.  Recent trends suggest that it’s worth repeating this advice.

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Why Gold Soared

Gold prices are no longer setting records.  Special parties are no longer being held where people can sell their gold jewelry at spectacular prices.  The Midas touch for gold has faded.

Gold was selling for as little as $256 an ounce in 2002 and soared to nearly $2,000 an ounce in 2011.  An investment of $1,000 in 2002 would have been worth about $7,800 in 2011.  In May 2013, though, gold was back down to $1,343 an ounce.

The Federal Reserve Board’s quantitative easing program not only distorted the prices of stocks and bonds, it also sent gold prices soaring for several reasons:

Record-low interest rates.  As an investment, gold earns no interest, so when interest rates rise, gold typically drops in value.  Conversely, when interest rates fall, the price of gold typically increases, although there have been times when gold prices hit record highs while interest rates were rising.

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