Bill Bonner

Gold or stocks?

Gold will go up another $300 next year, says Goldman Sachs. Bloomberg reports:

Gold rose 27 percent this year, heading for a 10th consecutive annual advance. Investors are seeking hard assets as governments and central banks led by the Federal Reserve pump more than $2 trillion into the world financial system.

Gold will reach $1,690 an ounce in 12 months, from $1,390 now, and probably peak the following year, Goldman estimates. Gold in exchange-traded products backed by the metal reached a record 2,105 metric tons on Oct. 14 and holdings were last at 2,093 tons, according to data compiled by Bloomberg. That’s equal to about nine years of US mine output.

Hey, making money is easy. Gold goes up every year. If you believe Goldman it will go up another 20% next year.

But if you believe Goldman, you’ll make money in stocks too. Here’s another Bloomberg report:

The benchmark gauge for American equities will rise 11 percent to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.’s David Kostin, the most accurate US strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011.

Market analysts say earnings will hit record highs, keeping valuations below historical averages at the same time government spending aids the economy. Reaching their average forecast for 2011 would give the index annualized gains of 15 percent over three years, twice the rate anticipated by Pacific Investment Management Co.’s new normal theory that anticipates deficits and increased regulation will limit returns.

Kostin, Goldman Sachs’ New York-based strategist who said last year the S&P 500 would end 2010 at 1,250, wrote in a note Dec. 6 that below-average bond yields help create a “superb backdrop” for equities. He expects the S&P 500 to finish 2011 at 1,450, the second most-bullish call among 11 firms surveyed.

So, Dear Reader, you have a choice. Gold or stocks? Goldman says you’ll make money no matter which one you choose.

We’re not so sure. The way we look at it, we’re still in a Great Correction. Trouble is, if you read the newspapers you’d barely realize it. The financial press says the economy is “recovering.” The analysts are calling for higher asset prices. Advisors are overwhelmingly bullish. And shoppers are said to be going back to the malls that once knew them.

And what’s this? Outstanding consumer credit – the key measure of leverage in a society – went up in September and October. The economy isn’t de-leveraging. It’s adding debt, not subtracting it!

But hold on. If you look at the composition of the “consumer” credit figures, you discover that:

1) The total credit numbers are actually going down; it’s the adjustments that make them appear higher

2) The positive (increasing credit) numbers come from government-supported credit (such as student loans)

3) Take out the government-backed debt and you will see an impressive collapse of credit

The Great Correction is real. It’s a fact of life. And it won’t go away anytime soon.

So, what will it be? Gold or stocks?

We’ll take gold.

Stocks are a bet on an improving economy – on growth…on profits…on prosperity.

If we’re really in a Great Correction, it could be many years before the economy begins to grow again.

But isn’t the economy recovering? What, are you kidding? There are 15 million people without jobs. If the economy continues to “grow” at these rates, they’ll never find work again. Every month, the workforce grows with the population. The number of new jobs barely keeps up.

In order to get a real recovery, the economy will have to grow much more strongly. And that isn’t very likely, not as long as so many people are reducing their debt levels and saving for their retirements.

Sooner or later, investors are probably going to realize that the economy isn’t really recovering. They’ve gone for a dozen years with no net gains from stocks. They’re bound to give up, sooner or later. Once they see that this economy will not make their stocks more valuable they’ll begin to shift their focus from capital gains to income. They’ll look for dividends.

But at current stock prices, investors are lucky to get a dividend yield of 2%. Not enough to compensate them for giving up their money. They’ll want 3% to 5%. And in order to get that level of dividends stock prices will have to go much lower – down by as much as 60% or so.

Could gold go down too? Yes. And it probably would – if the feds would permit the economy to de-leverage in an orderly way. Instead, they’re fighting it…digging in their heels…and holding onto the furniture to try to avoid getting dragged along.

They’ve tried monetary policy. They’ve tried traditional fiscal policy. Nothing worked. So, now they’re trying QE2.

Will that do the trick? No. If you could really make people more prosperous by printing money, quantitative easing would be a lot more popular than it is now.

Of course, it won’t “work.” But the feds have already shown that they have no intention of giving up. Obama appointed a bi-partisan panel to figure out how to reduce the deficit. The panel made some modest proposals. And both Congress and Obama himself rejected them. If there is to be de-leveraging of the public sector, it will be over their dead bodies.

Which is the way we’d like to have it.

But it won’t happen soon. Instead, they’ll continue on this route until they can’t go any further. The Fed has already printed up $1.3 trillion trying to avoid the correction. And they’re now working on another $600 billion.

And when that doesn’t work, they’ll probably print up some more…

…and they’ll keep printing (why would they stop?)…

…until the whole system blows up.

THAT’S when you’ll be glad you bought gold rather than stocks.


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • John

    “Hey, making money is easy. Gold goes up every year. If you believe Goldman it will go up another 20% next year.
    But if you believe Goldman, you’ll make money in stocks too.”

    Hey Goldman makes money on everything they steal…..errr touch. How can you lose when you privatize the gains and stick the public with the losses. I hope I live long enough to see those bastiges pay. Be patient, “Vengeance is mine sayeth the Lord!”

  • The InvestorsFriend

    Gee, if things are this bad, maybe people should just “Off” themselves right now.

    It would help with the unemployment rate too.

    But seriously folks, life is grand and is well worth living.

    We live in the Horn of Plenty.

    Now get out there and get your share.

    And stop whining…

  • The InvestorsFriend

    I interrupt the verabl diarea here to bring you some… (well you decide what is is I have here)..

    What it is, is a couple of charts that show exactly how Gold has (NOT)tracked U.S. inflation since 1926.

    What kind of store of value fails to keep a constant purchaing power or anything like it?

    Oh that’s right, Bil says it has held value well over the last 2000 years. Well tah’t great as long as you plan to live for 2000 years. I am more interested in periods like 5 years, 10, 25, up to 50 years. Has it been a store of value?

    (And yes I know Gold has outperformed inflation over the last 5 and 10 years, but what about the decades prior?)

    I have the charts, you decide.

    Useful or … crap?

    Click to the article here and then scroll down and look for the charts…

    Prepare to be amazed… (or at least amuzed, or perhaps even aroused, whatever turns you on)

  • Bloomer

    Well if the U.S. is following the same path as Japanese economy, the trend is not your friend if your investing in stocks. Gold has perform well as a safe haven against the falling U.S. dollar. However, if we do see Japanese style deflation, the dollar may strengthen. I am in cash waiting for buying opportunities as I believe we are in for a volatile year in investing. I am not holding much of anything (pretty much sold out) I am keeping my powder dry.

  • Mr T

    Why would gold keep up with inflation when it’s not currency anymore you moron.

  • The Investors Worst Nightmare

    I wonder if the Investors Friend has registered with the SEC yet.

    The dollar was pegged to gold down here in the States until Nixon un-pegged it, Cliffie.

    Gold couldn’t float, regardless of inflation. Dig?

  • The InvestorsFriend

    Gold buggers claim Gold is a store of Value…

    I gave two charts one from 1926

    The other starting 1972 to cover the floating Gold era post Nixon

    Both show Gold was not a good store of value in terms of purchasing power over the years.

    What do you think the graphs tell us, if any thing?

    I don’t need to register with SEC, for one thing, as someone pointed out earlier, I live on Mars… For another I give no personal investment advice.

  • Elder TruthTeller

    Bill–your Economic Assessments are spot on! Cracking good writing. Just a HAIR of a quibble though. Instead of going for the GOLD–id go for COMMODITIES (food, agriculture that is). Reason being Gold is being INFLATED ala the ASSET BUBBLES you wrote so well about. Thus, the PRICE is ILLUSIONARY.
    –Elder TruthTeller–

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