January 29, 2019

This bull market is intact. We never reached a 20% correction in the S&P 500 on a closing basis. Last Christmas Eve brought us down 19.8% from the September 20 peak, but that was the second time that this bull market retreated over 19% without touching 20%. (The other close call was -19.4% in 2011.)

Economist Ed Yardeni calls this “relief rally #62” of the bull market. He also recalls that this is the sixth correction of 10% or more and 8th correction of 9.8% or more since the bull market began in March 2009.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Furthermore, the market has now recovered to its levels of January 1, 2018, as 2018 began:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What we saw in December was madness – the delusion of crowds. Mitch Zacks summarized the results of several research reports into the behavior of institutional investors as markets fell. In summary, he wrote:

“What they discovered is that one of the main reasons large institutional portfolio managers sell during market corrections is because stock prices are falling. Read that again: institutional investors sold because prices were falling. This active decision means institutional investors were largely reacting to price movements instead of changing fundamentals – which is the precise opposite of what long-term investors should do….”

If you’re a long-term investor, as I am, you tend to ride out these storms. We don’t lose any real money by holding on, just theoretical daily price tags. The market will recover. It always does, but institutional investors feel the need to “do something” to “protect their gains” (by selling), but they seldom get back in the market before a rapid increase shuts off their options for buying at a lower price than they sold, so they miss out on the rapid gains, while long-term investors never have to worry about “re-entry” prices.

Gold is a Better Portfolio Balancer than Cash or Bonds

The S&P 500 is still up 24.8% since Election Day, November 8, 2016, but it has risen so fast in the last month that maybe some diversification is due, so let me put in a kind word for gold as portfolio ballast.

Gold is a portfolio balancer. It tends to “zig” while stocks or bonds “zag.” Gold had a strong December while stocks were tanking, but it has also continued to rise in early 2019, while stocks were recovering.

Last Friday, gold hit a 7-month high of $1,303, up over 10% from its 2018 low of $1,176 set last August 17. In that same time span, stocks were mostly trending downward, as were most other commodities.

Here is a comparison of gold (upper left) vs. a smaller rise in silver (upper right), vs. outright declines in the price of crude oil and copper (bottom charts) over the same time frame (since July 2), showing gold’s unique quality as a “crisis hedge” in world affairs. By contrast, crude oil and copper are driven mostly by industrial demand and silver is a “hybrid” metal, with most of its supply coming as a by-product of other metals, and most of its demand coming from industry, with limited investor demand as ‘poor man’s gold.’

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

These prices and charts are in U.S. dollar terms. With the dollar strong, it’s important to note that gold is still down 32% from its peak of $1,920 in 2011, but gold has also recently reached (or is about to reach) an all-time high price in 72 other global currencies. Among those currencies are the Argentine peso, Australian dollar, Brazilian real, Canadian dollar, Chilean peso, Indian Rupee, Iranian rial, Japanese yen, Mexican peso, Norwegian krone, Russian ruble, South African rand, Swedish krona, and Turkish lira.

Even in U.S. dollar terms, gold has averaged 8% annual gains since Y2K (January 1, 2000), a rate of increase which far exceeds inflation, prevailing interest rates, or any major stock market index. Over the last 19 years, gold is up 349% vs. only 81% for the S&P 500 or 115% for the Dow Jones Industrials. Stocks and gold will go up or down vs. each other in any given year but it usually pays to own gold in a well-balanced portfolio. I have always tried to maintain a 5%-10% portfolio position in precious metals.

Gold’s Role in U.S. Monetary History

In late January, we can also celebrate gold’s central role in U.S. monetary history around this date:

On January 24, 1848, James Marshall discovered gold on John Sutter’s mill, at the junction of the American and Sacramento rivers in California. In 1847, the year before the California gold strike, the total U.S. production of gold was only 43,000 ounces, mostly as a by-product of base metal mining. But 1848 yielded a 1,000% gain, to 484,000 ounces. That total quadrupled again in 1849, to 1,935,000 ounces, and it peaked in 1853, at 3,144,000 ounces. This gold changed American history in many ways.

On January 24, 1894, the Treasury’s gold reserve dipped dangerously below $100 million, the warning bell for the upcoming Panic of 1894, so Wall Street investment bankers underwrote a $50 million issue of gold bonds, selling them to the public and restocking gold in the Treasury back to $107 million. Later in 1894, another $50 million bond issue was underwritten by Drexel Morgan but then, on January 24, 1895, gold reserves hit a new low of $68 million, then $45 million on January 31. This caused a gold shortage which was remedied in the nick of time by a new gold discovery up north: Klondike Gold!

On January 30, 1934, Congress passed the Gold Reserve Act, giving President Roosevelt authority to set the price of gold, on his birthday no less. On January 31, he devalued the dollar 41%, by raising the price of gold 69% from $20.67 to $35 per ounce. FDR also nationalized most gold supplies. For the next 41 years, it was a crime punishable by up to 10 years in prison and $10,000 fines to hold this inert metal.

On Friday, January 18, 1974, the first gold-oriented investment conference debuted in New Orleans, under the sponsorship of the late Jim Blanchard. Bunker Hunt attended that seminar. According to Jim Blanchard’s memoirs, “Confessions of a Gold Bug,” Hunt probably hatched his idea of cornering the silver market at that seminar, although the plan took six years to reach fruition in early 1980. On the following Monday, January 21, 1974, gold hit a record $161.31 and silver hit a record $3.97 an ounce in London, but it was still illegal for Americans to own gold until it was legalized on December 30, 1974.

On Friday January 18, 1980, silver hit $50 an ounce for one day, resulting partly from inflation fears, but mostly from a cornering of the silver market by the Hunt brothers. On the same day, gold hit $750, on its way to a then-record high of $850 on Monday, January 21, 1980. Gold would not exceed $800 for 28 years, but gold was over $800 for just a single day in 1980, and it was over $700 for only three or four days. This one-day spike to $850 was gold’s one-day “spike,” so anybody who analyzes gold’s long-term performance by beginning with this spike-high price (for comparison purposes) is trying to mislead you!

Gold will seldom beat stocks over a long (25+ year) time frame, but gold is not designed to compete with stocks. I view gold as competing with cash or bonds as a wealth-protection anchor in a prudent portfolio.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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