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Gold Outperforms the Dow

July 23, 2000

Ultimately, the only way to make money in an investment is to buy low and sell high. Comparing gold and stocks, now is clearly the time to move 5% to 10% of your assets into gold.

Gold is now trading at $280 per ounce, while the Dow is at 10733. The ratio of the Dow to the price of an ounce of gold is now 38 to 1. Before you invest another dollar anywhere, consider that just 20 years ago, the same ratio was 1 to 1. History suggests that this ratio could turn downwards; this means that either the gold price will rise in the coming period and/or the stock market will decline.

This ratio is important because of the historical inverse relationship between gold and stocks. In fact, from 1986 to 1996, gold was the most negatively correlated asset to U.S. stocks. Surprisingly, real estate, Treasury bills, corporate bonds, and international stocks were all positively correlated to the Dow during the same period. This means that gold is the best way to add diversification to your portfolio if you already own stocks.

Those wise investors who bought gold to diversify their portfolios back on July 21, 1999, when the price of gold hit a 20-year low, are now realizing a profit of nearly $30 per ounce. This profit is the added benefit gold investors gain while lowering the overall risk of their portfolio.

Consider some other facts:

  • From July 21, 1999 to July 21, 2000, the Dow moved from 11002 to 10733 – a loss of 2.4%.
  • From July 21, 1999 to July 21, 2000, gold moved from $253 to $280 –a gain of 10.7%.
  • Gold at the current price of $285 per ounce is undervalued and historically cheap:
    • $280 gold is lower than the average annual price of gold in 19 of the last 20 years.
    • $280 gold is lower than the average low price of gold in 16 of the last 20 years.
    • $280 gold is 27% lower than gold's 20-year historic average of $384.

Now is a particularly appropriate time to include gold in your portfolio. Investors should be focusing more on "preservation of wealth" strategies rather than aggressively seeking capital gains. They should recognize the need to diversify their portfolios into alternative assets, including gold. To hold all one's investments in conventional assets as stocks and bonds is to run the risk of experiencing bad portfolio performance due to the unbalanced structure of the portfolio. Call Blanchard at 1-800-880-4653 to find out more about diversifying your portfolio.

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.
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