Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
One of the chronic mistakes we make as human beings is to base long-term decisions on short-term history. Short-term history too often paints a false picture of tomorrow and can lead us into making the kind of trapdoor decisions that sink our profits and collapse our retirement plans.
Take, for instance, your investment strategy heading into 2003. The die-hard bulls out there – the investors who always see a bull stock market coming no matter how bad the economy – are ecstatic that, in their world, a brand new bull market began with the 20 percent rise in stocks since October. Amazingly, over 70 percent of all stock investors are again bullish on the Dow, according to one December poll.
But the problem with putting the “square peg” of rising stocks into the “round hole” of today’s economy is that it simply doesn’t fit the facts. And it’s a symptom of the kind of short-term, “can’t lose” 1990s mindset that many investors have taken with them two years now into the 21st century.
Conditioned by the ‘can’t lose’ ’90s
It’s not hard to understand where this “can’t lose” mindset originates. The past bull market was, after all, the greatest of all time, lasting 18 long years and breaking more records between 1995 and 2000 than ever before in history. You could have picked your stock portfolio by throwing darts at the NYSE pages in your newspaper and still made a killing.
Regrettably, these unsinkable investors, born and bred during the heady days of the ’90s, have been conditioned to believe that “Wall Street will always act that way.” Many now won’t settle for anything less than 15 percent annual growth in their stock portfolio, owing to those nearly 20 percent annual returns they averaged between 1995 and 2000. In their short-term investing experience, they know of no other way for the market to act.
But the future has – and always will have – contrary ideas.
Planting in the winter
Investments never climb – or decline – for uninterrupted decades on end. They always move in cycles. For example, the cycle of peace and prosperity of the ’90s was violently replaced with a cycle of war and uncertainty in just one day last year. With that sea change, the market changed, too. The Dow plummeted from its all-time high of 11,722 in January of 2000, while the Nasdaq tumbled from its 5,000 mark a month later. Now, three years since those markets topped, their downward trends by and large continue.
Meanwhile most investors keep whistling away in the dark with their stubborn “buy and hold” strategies. This is the same strategy that has kept eternal optimists holding United Airlines, for example, all the way from its $90 in 1997 to recent lows in the 90 cent range, a disastrous five-year ride that should have been spent on something more promising. The optimists keep planting more of their seeds … not noticing that it’s the dead of winter.
At least it is for stocks.
The truth about gold
To be successful, investors need to take a step back and actually see – and respond to – the real market conditions confronting them. Given that, here’s a snapshot of real market conditions that should have a powerful bearing on your 2003 investment decisions.
- The rise in stocks since October more closely resembles a bear market rally than the start of a new bull market. The technical and fundamental signals simply don’t support anything but further declines. Wall Street’s price-to-earnings ratio of 33, for instance, still has a long way to fall to match historical bear-market bottoms. Those bottoms have ranged from a P/E ratio of 5 to 10. For this and many other long-term reasons, it’s not safe to get back in the water.
- America is now running twin deficits: a record $409 billion trade deficit and a $160 billion federal budget deficit (an especially startling statistic since just 24 months ago a $313 billion dollar federal surplus was projected by the government). This does not bode well for the bulls to run on Wall Street.
- Despite the loss of 40,000 jobs in November and an unemployment rate now reaching 6 percent, personal expenditures, at 1.4 percent, keep outpacing personal income (which was rising 0.1 percent in the third quarter). Debt, in both the personal and corporate sectors, is suffocating the nation. (The business debt-to-asset ratio is the highest since that data has been collected.)
- Meanwhile, according to top investment analyst Peter Zihlmann, gold is expected to advance in the long, medium and short terms, pushing through its $325 resistance level. “Gold is looking good on a long, medium, and short-term basis,” also proclaimed the world-famous Aden sisters. “The good news is that, according to the Elliott wave theory, we are in a powerful bull market. I expect gold and gold shares to take off in a powerful advance to new highs,” Clive Maund, an English technical analyst, recently observed.
- The average price of gold over the past 20 years is $391 an ounce, 30 percent higher than where gold trades today. Gold’s worldwide production cost is $317 per ounce, providing a limit for investment downside risk. Both The Wall Street Journal and Morgan Stanley agree that the dollar could drop by 20 percent or more from today’s levels. (Every 1 percent drop in the dollar usually translates to a 2-3 percent positive move in gold.) The Dow/gold ratio is still high at 27-to-1. (In 1980, that ratio was just 1-to-1.) This all translates into a very positive outlook for gold.
- One long-term view of gold is that it is positively correlated to rising interest rates. For example, gold rose from the late ’60s to 1980 in concert with rising rates. Now, with rates at historically low levels, gold could repeat the very same scenario and rise as rates inevitably climb.
These and other historic signals – not the giddy memories of a day long past – should shape your investment choices over the coming year. It’s true that the decade of the ’90s was truly a miraculous time for stock-market investors. But those days are gone and the times have changed. Now, only the naive will keep investing today as if it were 1995. Better to invest in 2003 for what the economic picture accurately presents.
It’s a picture that’s highlighted by the color of gold.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.