An all-inclusive, equal opportunity bear market
During the early part of my career as a financial writer, I worked for Howard Ruff, who had written a best-selling book called How to Prosper During the Coming Bad Years. The bad years he was referring to were the late 1980s and one thing he advised was for investors to hedge their market exposure and hedge against inflation by buying gold and silver.
His advice proved to be accurate. Precious metals prices soared and investors who listened to Ruff made a lot of money. He parlayed that successful call into the highest circulation investment newsletter of its era–The Ruff Times– with more than 250,000 subscribers.
Of course Ruff is not the only analyst who has advised that gold tends to be a solid investment during uncertain economic times. The yellow metal has long had ardent proponents who talk about how it holds its value unlike virtually any other investment. A gold buff once explained his passion for gold by noting that at the turn of the 20th century, a man with a one-ounce gold coin could buy himself a pretty nice suit. One hundred years later, that same ounce of gold could still purchase a quality suit.
While his reasoning was sound, I did not point out that if the same man had invested that amount of money into GE or AT&T stocks, he could have used the proceeds to buy dozens of suits through the years.
So given the fact that investors tend to flee to gold during times of economic turmoil, one might expect to see the price of gold soaring in recent weeks. In fact, gold is struggling along with every other sector of the markets.
The chart above shows the price of gold (black line) over the past year. The gold line is the S&P 500 and is included just for comparison. While gold has done quite a bit better than the S&P, an investor who bought gold a year ago has still lost money. And in the past few weeks, the decline in gold has been much steeper than in stocks. In March 2008 gold topped $1,000 an ounce, an all time peak. Gold is now trading at just over $700 an ounce. That is about the same rate of decline as the S&P 500 over the same period.
There is something called the Dow/Gold ratio that can explain part of the reason about why gold is declining along with stocks right now. But all you really need to understand is that contrary to many previous periods of market weakness when investors moved assets to gold, in this downturn, gold is also in a steep decline.
As we have indicated for many weeks, this correction is very unusual because every market sector is declining. For anyone looking for a safe haven for their investments, right now the only viable options appears to be money market funds.
F.S.