Stephen Leeb, Leeb's Market Forecast
Dr. Leeb is a leading authority on the stock market, energy trends and personal finance. He is the author of six books on investments and financial trends. His most recent book, The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel (Broadway Books, 2006) was a New York Times bestseller and is consistently Amazon’s top ranking in both energy and natural resources categories. The book outlines the biggest challenges facing the American economy and the steps individuals and government can take to forestall them. Timer Digest has rated Dr. Leeb among the top market timers for both stocks and bonds several times over in the past decade, and Dr. Leeb’s The Complete Investor newsletter has earned awards for editorial excellence by the Newsletter & Electronic Publishers Association. Dr. Leeb is frequently quoted in the financial media, including Investors Business Daily, USA Today, BusinessWeek, New York Times and the Wall Street Journal. In addition, Dr. Leeb is a recurring guest on Fox Business, Bloomberg and has appeared on Wall Street Week, Business Insiders and CNBC.
Gold, Glorious Gold
We’re certainly worried about the world—from the environment to global inequalities to diminishing resources to geopolitical risks—though far from predicting its imminent demise. But as investment advisors, our approach isn’t to wail and moan: it’s to pick the investments that will best protect your assets. And we can sum up our thinking in one shining word: gold. Today, gold makes compelling sense for investors of all stripes— those ready to head for the hills and more optimistic types seeking major gains along with safety.
Why is gold the ultimate insurance policy? Ironically, one reason is that gold has few practical uses, while being virtually indestructible. This means that just about all the gold with which the world has been endowed—both above and below the ground—is still in existence. This wouldn’t matter if gold didn’t have other desirable properties, but it does.
For starters, because gold molecules don’t combine with oxygen, gold doesn’t tarnish. It’s also highly ductile, meaning it can be molded into almost anything and making it ideal for jewelry and other art forms, whose life expectancy is for practical purposes forever.
As such, over the long haul, gold will at the very least keep up with inflation. An old adage has it that the amount of gold needed to pay for a complete wardrobe has remained roughly constant over six millennia. We can’t vouch for that, but we can say that in recent history, whenever inflation has become a real problem, gold has risen in anticipation and has continued to rise as inflation gathered steam.
Gold does best when inflation is accelerating and tends to falter when inflation is flat. During periods of rising inflation—specifically, of rising commodity prices—gold tends to lead the way. Between 1970 and 1974, as inflation rose into double digits, gold outperformed other commodities—which themselves dramatically outperformed financial assets—by more than two to one. For the entire decade of the 1970s, gold climbed at an average annualized rate of 33%, better than any other major asset. Only oil service companies came close. Gold’s performance offers a stunning contrast to the S&P 500, which by decade’s end was virtually flat after inflation—versus a better than nine fold gain in gold’s actual purchasing power.
You might wonder why we stress gold rather than a basket of commodities. The reason is that gold, historically, is a rare dual-purpose hedge – as good in deflationary as in inflationary times. During the Depression, gold was one of the best-performing assets around, possibly the best. Its recent action confirms this status. Gold’s bull market started during our flirtation with deflation early this decade. And recently, as the market tumbled on renewed deflation fears, gold gained more than 20%. Non-precious commodities, including oil, are great inflation hedges, but falter when deflation hits. Okay, so history never repeats itself exactly. The current decade has different dangers, though, is giving a pretty good imitation of the 1970s. And to the extent that the comparison holds, it means the best is yet to come for gold, with massive gains ahead. Gold made a 20-year low at the start of the decade as inflation was bottoming at around 1%. Through 2008, gold and most commodities are still in a powerful bull market. In sum, get set for gold. There may be unpredictable time lags, but within the next couple of quarters, gold should start a sharp uptrend.
What’s the best way to invest in gold—through the metal itself via a proxy or through gold mining stocks? Here history is somewhat neutral. In the 1970s, the metal itself outperformed gold mining stocks but not by a wide margin. But the stocks have risks. Gold miners face environmental issues. Moreover, they’re international in scope, with mines around the world. This international aspect means that a declining dollar—which is a positive for the metal itself—can be a negative for the miners as their costs will be in a rising currency and their revenues in dollars. Still, gold stocks offer potential rewards that can’t be matched by the metal itself if you can find a mine that dramatically increases output.