Gold to Rebound on the Back of a Recovery That Never Was
Once again, the proof is in the numbers. On one hand, the Dow Jones Industrial Average and the S&P 500 are doing amazing! But on the other hand, few seem to be benefiting. You don’t really hear about the latter on the evening news, even though the amount of supporting data is overwhelming.
Do you really want to hear over and over again that the U.S. unemployment rate remains stubbornly high? Or that gross domestic product (GDP) growth has been revised downward again? Or that consumer confidence is down and personal debt is way up? Housing, the so-called “bright spot” in the U.S. economy, is tarnished; building permits have been down all year, and foreclosure rates are up. Meanwhile, the Federal Reserve continues to print cash at an alarming rate.
Reporting on how the average American is doing gets in the way of the sizzle on Wall Street, and can put a real kink in the exuberance of the economic recovery! Indeed, ignorance is bliss.
Most financial news is about how investors can still make money off Wall Street, covering overlooked stocks that will catch up with the bull market and why this bull market still has room to grow. The Wall Street Journal even noted recently that the market’s record-breaking spree has many American households worrying that they’re missing out on big gains.
That fear is a little misguided. The average American knows they’ve missed out on big gains and the stock certificates are stacked against them.
Thanks to a study released earlier this week by the Pew Research Center, we once again have sufficient evidence reminding us of what all but a precious few already know: that this so-called bull market isn’t the great financial equalizer or wealth creator. In fact, for the average investor, it’s been the opposite.
The U.S. economy has recovered for households with a net worth of $500,000 or more. For everyone else, the recession rages on. (Source: “An Uneven Recovery, 2009-2011: A Rise in Wealth for the Wealthy; Declines for the Lower 93%,” Pew Research Center web site, April 23, 2013.)
During the first two years of the economic recovery (2009–2011), wealthy households increased their net worth by a tidy 21.2%; the rest of the country lost 4.9% of household wealth.
Why? Because you need money to make money. The top seven percent of Americans tend to put their money in stocks and other equities, while the remaining 93% of Americans have their wealth tied up in the value of their homes.
Between 2009 and 2011—the last years for which wealth data are available from the United States Census Bureau—the S&P 500 climbed 34% (and is up a further 26%); over the same period of time, the S&P/Case-Shiller Home Price index fell by five percent. The report notes that while housing prices have experienced a modest rebound, they are still 29% below their 2006 peak.
Where does that leave the average American investor hoping to shore up their investment portfolio or retirement fund? Eventually, the markets will have to reflect the underlying economic indicators.
Peter Schiff, the CEO of Euro Pacific Capital and a contrarian investing guru, predicts the U.S dollar will eventually collapse, thanks to the Federal Reserve’s massive quantitative easing program. (Source: Weil, D., “Peter Schiff: ‘Dollar Is Going to Collapse’,” Moneynews March 25, 2013.)
Schiff also notes that gold’s recent retreat is simply a hiccup; he believes that the precious metal continues to hold real wealth and will rebound when the central banks in emerging markets like India, China, Russia, and Indonesia buy gold to diversify their own foreign reserves.
For those investors who have not given up on gold and know that it’s better to get involved when the herds are running for the exits, gold exchange-traded funds (ETFs) might be worth taking a look at. SPDR Gold Shares (NYSEArca/GLD) is the largest physically backed gold ETF in the world. It has 39.2 million ounces, or $62.7 billion, of assets under management. The iShares Gold Trust (NYSEArca/IAU) has 6.3 million ounces, or $10.9 billion, of gold under management.
Gold may be out of favor right now, but eventually, Wall Street will be the scene of a perfect economic storm. And when it happens, the herd will, once again, return to gold.
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