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This seems to make a lot of sense to me...that mea

  1. Yak

    13,672 Posts.

    Investing like you should have in the '70s

    Posted: November 13, 2002
    1:00 a.m. Eastern
    \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.

    By Kevin DeMeritt

    Hindsight may be 20/20, but few investors actually use it today.

    "Those who cannot remember the past are condemned to repeat it," is how philosopher George Santayana put it. And that remains one of life's great truths. Because man does not learn from his past; he's always falling victim to the same mistakes. Of course, nothing says you have to repeat your investment mistakes. And all it takes to break the "cycle of bad investing" is a little time spent examining the history of gold, stocks and interest rates.

    Take Wall Street's performance over the past century, for example. It can show you when you should have jumped into stocks with both feet … and when you should have taken the detour.

    "The fact is that it all depends on when you enter the market and when you buy your stocks. If you buy your stocks when they are overvalued, if you had bought in 1929 or 1946 or 1966 or 1968 or 1971 or 1987 or 1999 or 2000, you may have to wait a decade or a quarter of a century to get even. But if you bought your stocks at or near a bear market bottom such as 1942 or 1949 or 1974 or 1982, then you can probably hold your stocks forever and never look back. Or at least you can hold your stocks until the next bull market top," observed veteran stock analyst Richard Russell.

    What hindsight teaches us about today's stock market

    In 1999 and 2000, he added, "… you may have to wait a decade or a quarter of a century to get even." Russell didn't just pull that one out of his hat, either. Entering a bull market at the top often means that it will take years before you can recoup your total investment. Investing in the bull market top of 1929, by way of comparison, would have taken you well over 25 years just to get even again.

    So what does hindsight teach us about the stock market of 1999/2000, the greatest bull market top of all time? According to Russell, it teaches us that it may still be some time before the stock market is again worthy of our hard-earned investment dollars.

    Interest rates and hindsight

    Then there are the interest rates. The last time interest rates were this low was way back in 1965. Hindsight tells us that conditions back then were eerily similar to what they are today – war, recession, dismal stock market, weakening dollar – and it also tells us that those low rates climbed from 1965, over the next 15 years, to a market high of 15 percent in 1980.

    So what does hindsight teach us about all this? It teaches us that when rates are this low, they ultimately have nowhere to go but up. They have to go up just to maintain a strong dollar and to keep inviting essential foreign investment. Hindsight also shows us that during this sometimes decades-long up trend of interest rates that real estate and the stock market are not particularly profitable places to be. After all, the Dow in 1965 was 856. Seventeen years later, two years after rates peaked, the Dow had moved exactly one point to 857!

    Hindsight is tugging at our sleeves, begging us to pay attention here. Because during a period of rising rates, while stocks and real estate may be in the doldrums, history shows us that gold certainly is not. Exactly paralleling those years of rising interest rates, gold rose from $35 an ounce in 1965 to $850 in 1980, fifteen years later. That's a 2,400 percent increase!

    What the gold/S&P 500 Ratio is telling us

    Gold has already started justifying this hindsight. The Gold/S&P500 Ratio, a revealing ratio of gold to stocks, turned up in September of 2000 in favor of gold for the first time since 1982. In August of 2001, it broke up above its 50-month moving average. It's now telling us that gold has outperformed stocks for the past two years – and that this performance is accelerating.

    Since the end of World War II, the Gold/S&P500 Ratio shows us three distinct cyclical periods when investors favored gold over stocks. The first cycle peaked in 1945 (reflecting a gold high), the result of depression and war. The next cycle peaked in 1980 when inflation was skyrocketing, interest rates were spiking and gold was hitting its $850 high. Since then, the dropping ratio has reflected the '90s bull market in stocks (a falling ratio favors stocks). But now, the upturn in the ratio, the first since the stock bull market began, is telling us that gold is again off and running.

    No need to ignore hindsight

    Of course, you can choose to ignore hindsight and, instead, listen to the perpetually optimistic talking heads on TV when they preach, once again, that we've "hit a bottom" and that it's now safe to re-enter the stock market. But then you would be ignoring philosopher Santayana's timeless words, "Those who cannot remember the past are condemned to repeat it."


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