Gold and Equities

Question: Why are both equities and gold and the like headed up? What happened to dissimilar price movements?”

As for equities and commodities rising in price at the same time - first keep in mind - nothing in nature has a correlation coefficient of -1. That is to say, there will always be times where dissimilar price movement is not evident over short periods between asset classes that move dissimilarly over long periods.

If we expand our scope and look at equity prices against commodities over the last 4 years instead of the last 2 – it is easy to see that half of this period commodities saw significant increases in price whereas stocks are struggling to get back to even.

But also keep in mind a “short period” could wind up being 10 years or even longer. The short and only real answer to why both are going up at the same time is that money is currently going into both asset classes on a broad scale.

Understanding why prices go up and down is extremely easy. Much easier than the media would have us believe. It is a volume equation. Picture a glass half filled with water. If water is added the level (price) goes up and vice versa. As people put money into various assets their prices appreciate, and when they pull money out the prices do the opposite.

It is estimated between 7 and 11 trillion dollars is sitting on the sidelines and since prices are going up in these markets the most, well, they become more and more attractive relative to cash which is paying .2% and bonds between 3% and 4%.

As for gold and other precious metals there is a compelling possibility that could explain a continued rise in these assets for some time, being China and other large emerging markets. While a gold standard no longer exists many economies including the U.S. Germany, UK, France, etc., still sit on between 50% and 70% of their GNP in gold (as in holding that much of the asset).

India and China are only closing in at @ 5% currently and it wouldn't be surprising for these nations to extend demand of these commodities as they catch up. Needless to say, that is a butt load of gold.

And while this is logical, it in no way means that is what is going to happen. No emerging market has made a run on gold in the last 10 years where this looks, retrospectively, like it would have been a hell of a good idea.

But if you can imagine yourself as an emerging market - you have to balance which is more valuable: buying more and more ownership of foreign based companies (stocks) and government issued debt (leverage) with other nations, or a bunch of metal at a high price requiring even more money to protect it.

To this all I can say is no run is infinite, so owning the hay stack instead of trying to find the needle therein is still the smarter option. That is why I am personally pursuing and advising Wiser clients to dip their toes into the array of asset classes we are, instead of trying to guess whether gold or stocks will do better over the next 5 years.

This strategy will meant that whatever stock or commodity does the best, we will own it – while investors guessing at what will perform best very well may not.

Questions about anything financial? Write me…I’ll write back.

Your favorite Money Coach,

Marc Becker
Email: info@wiserfinancial.com