Despite the tax cuts benefiting corporate earnings, consumer spending topping forecasts and inflation holding at a government reported 2%, the economy is not that strong. This is reminiscent of 2008 when the economy had been on a good run for years and then it all fell apart. Ten years ago, I was in my late 20s running a private investment company in a suburb of Atlanta. We were up 40% on the year heading into summer, and by 2009 we suffered our first loss.
The S&P 500 was trading around 1,400, the Dow around 12,500. By December the indices were down to 870 and 8,700 respectively and panic was setting in. Obama had been in office less than 60 days as the market continued its downward trend to 735 on the S&P and 7,000 on the Dow. From June 2008 to March 2009 the Dow and S&P 500 both fell by more than 40%.
Over that same period, the SPDR Gold ETF (GLD, Financial) was up 2%. In fact, for the next couple of years, the gold trade outperformed the markets all the way into the fourth quarter of 2012. Since that September the performance of the Dow and S&P have far outpaced that of gold, but for how long going forward?
Of course, that’s not to say gold outpaced individual stocks that got super cheap in 2009. Like Starbucks at $5 or Berkshire Hathaway B shares at $50. There were plenty of no brainers to cash out of gold and into a stock with a large margin of safety. The future will provide the same opportunities in different and possibly the same companies.
Investors should look to hold both gold and cash because leading up to a correction while gold may provide a hedge and should outperform the indices as they trade into bear territory or lower, it will still lose some value along with stocks on the way down, and that’s when you want to be buying. Granted, losing 5% is better than 50%, and there are tax harvesting strategies that will help in painful times. More importantly, since no one can accurately call the exact bottom until after the fact, holding mostly gold and slowly liquidating as opportunities present themselves is far better than the alternative: trying to sell stocks on the way down.
There is only one gold investment to make and that’s the SPDR Gold ETF. It’s been relatively flat since 2013, which is why I’m not convinced that the correction will happen this year. About nine months before the 2008-2009 crash, as the S&P and Dow began to fall slowly, gold rose by 50%. Look for the same next time, and gold, namely the GLD stock, is exactly where you want to be right now, especially if the sell starts happening in the next six to nine months.
There are plenty of big money managers invested in gold as well with John Paulson (Trades, Portfolio) being among them. Paulson made $5 billion in a single year betting against subprime mortgages and has owned the gold ETF in his fund for years. Of course, this has cost him roughly $30 billion in assets under management as the trade is down 25% compared to an 85% gain on the S&P during the last few years alone. Paulson recently returned client capital from his gold funds. When others get fearful, it’s time to be greedy.
Disclosure: I am long GLD.
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