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Time was, stocks were riskier than bonds and should have the higher yield. But then came inflation…
AT THE START of this week, stocks on the Dow Jones, Tokyo Nikkei and FTSE100 in London offered a bigger dividend-yield than you’d earn in interest from their local government bonds.
“That’s pretty rare, and in general has been quite a good indicator of turning points in the markets,” notes the Financial Times‘ investment editor James Mackintosh. But it only looks rare if you ignore most of history. And it’s only screamed “Buy!” once on Wall Street, back in winter/spring 2009.
Yes, this “signal” worked, notching up a 100% strike-rate for the last fifty years. But buying stocks today because their yield (only just) beats bonds might prove ill-timed if not a disaster
For at least 75 years prior to the late-1950s, US stocks consistently paid more than 10-year Treasurys. Rather than being an eight-decade-long buy signal, however, “That was the relationship ordained by Heaven,” as the late Peter Bernstein learnt from his senior partners on Wall Street.
“Because stocks were riskier than bonds and should have the higher yield.”
On a monthly basis in fact (paceRobert Shiller’s data), US equity yields offered investors 1.78 percentage points above Treasury yields between 1871 and 1957, with this “div-yield premium” rising from a long-term average of 1.30% to 3.02% as the Great Depression morphed into WWII and equities got riskier still.
Only twice did equity yields fall below bond yields – first in March-May 1872 and then again in July-Sept. 1929. That anomaly first marked the start of a five-year bear market, and then of the Great Crash itself. Here was a sell signal even Ken Fisher could see.
No, it wasn’t infallible. Like the inverted yield curve forecasting recessions, near-zero Div-Yield Premiums forecast three bear markets that failed to show (Jan. 1890, mid-1899 and spring 1905). And picking the peak in Div-Yield Premiums was a tough buy signal to follow, as the variance in our fourth column shows.
But for 60 years, every significant top and bottom in US stocks was indeed marked by a relative extreme in the Div-Yield premium, at least until the signal broke down – and stocks kept paying ever-more over bonds – in the Great Depression.
So what of 2010′s return to pre-Buddy Holly conditions? No idea, to be honest. Not with the UK’s long Bank Holiday weekend beckoning. But we might get a quick clue from asking first: Why the late-50s’ switch?
The Great Depression, of course, was finally becoming faint memory, as was its record of destroying stockholders while handing deflationary gains to fixed-income bonds. Second, the idea of growth-stock investing – propounded by youngsters like Peter Bernstein himself – was starting to take hold, slowly mutating into the “cult of equity”.
But a third (and more critical) change, however, was in the underlying promise of return on versus return of your money. Because where risk-capital was formerly known as “equity”, government bonds were fast on their way to becoming “certificates of confiscation” as the long post-war inflation took hold. So you could even put the switch down to the slow death of that natural deflation built into the Gold Standard (or rather its step-nephew, the Gold Exchange system), starting at the very same time as US stockholders kissed goodbye to earning a premium each year above Treasury yields.
From that year – 1958 – until 1971, “There was not one year,” says Texas professor Francis Gavin, “when the Dollar and gold problem was not the most pressing issue of American foreign economic policy.” Because America was flooding the world with Dollars, which the world in turn kept exchanging for gold, draining Fort Knox until Richard Nixon closed the Fed teller’s window and the US finally abandoned its $35-per-ounce currency peg.
Lacking all gold-backing today, it’s plain to see that the relationship between stock and bond yields was snapped in half five decades ago. And whatever snapped it is now at stake again.
So, two late-summer speculations for bargain-hungry investors:
#1. A few days or weeks won’t do it. Last year’s buy signal lasted five months, knocking a further 20% off stocks before they turned higher. The pre-1950s sell signal (then a near-zero or negative Div-Yield Premium) lasted three months or so.
#2. Should this modern “buy” signal fail, it could fail with style, as Tokyo bulls know only too well. Stock yields beat Japanese government bond yields four times between late 1998 and end-2007. The first three worked like a charm, but the fourth was a feint, with the Nikkei losing 52% over the next 15 months, even as JGB yields fell still further below equity’s dividend yield.
That’s an ugly warning, in short, from the “deflation nation” everyone fears the US is aping. But to date, as the latest US housing, jobs and GDP data show, printing money has only stalled the post-bubble deflation, not reversed it.
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
THE PRICE OF GOLD held flat early in London today, heading into the long August Bank Holiday weekend some 0.8% higher from last Friday’s close against the Dollar, Euro and Sterling.
The Silver Price stood 5.7% up for the week, nearing its best weekly close since late-June.
A further rally in Asian stocks meantime failed to buoy European shares, while commodities and G7 government bonds were also unchanged.
Ahead of US Fed chairman Ben Bernanke speaking at the Jackson Hole central-banking symposium today, upwardly revised US growth data failed to move the major currency crosses, save for extending the Japanese Yen’s retreat from this week’s 15-year highs.
In wholesale Gold Trading, London “was rather quiet” on Thursday and overnight volumes in Asian trade were “almost non- existent” according to one dealer today.
“The northern summer months have been weak for gold in more years than not,” writes former mining exec’ and industry journalist Lawrence Williams at MineWeb.
“In fact this year has been a bit of an exception with prices holding up remarkably well.
“Some take this as a pointer to a big surge ahead after the US Labor Day holiday [on Mon 6 Sept.] once market activity returns to normal in mid-September. We will see.”
US investors saw the gold price slip 8.2% from June’s record high to the summer’s low of $1158 per ounce one month later.
Gold prices have risen between end-June and New Year’s Eve in 21 of the last 30 years.
By the start of New York dealing on Friday, the metal was $4 below the second-quarter’s finish of $1244 an ounce.
“Precious metals [have seen] high volatility in thin trading,” says German refiner Heraeus’s head of sales Wolfgang Wrzesniok-Rossbach.
In the retail gold investment space, “German demand for precious metals bars in the past two weeks, despite negative reports on economic developments in other nations…and with their own economy doing well…did not get rekindled.
“Additionally, there has been an increase in critique on gold in the press, especially the rather negative [Euro gold] chart-picture.”
Heraeus’ team, however, are not as “skeptical” of the short-term gold price “as some of the technically-oriented analysts,” Wrzesniok-Rossbach says, citing instead the worsening economic and financial situation in the US and some Eurozone states.
“With low interest rates foreseeable for an extended period of time, this speaks positively for gold. In any case the downward risk appears to be much lower for gold than for the [industry-reliant] platinum-metals.”
Also noting the diverging path of much US and German data, “The Fed has an employment issue, and [the European Central Bank's] Trichet does not,” says Diane Swonk, chief economist at Mesirow Financial in Chicago – and an attendee of this weekend’s Jackson Hole conference in Wyoming – speaking to Bloomberg.
“The ECB seems to be viewing the world more optimistically and the Fed more pessimistically,” says former Bank of England policy-maker Julian Callow, now chief economist at Barclays Capital.
Next Friday will bring US employment data for August, and “on further deterioration and another round of significant stimulus, inflation will sneak closer to the front of investors’ minds,” reckons analyst Daniel Major at RBS in London.
“That would be positive for the gold story.
“Should we see a meltdown in economic data, stimulating significant safe-haven inflows…we could see significant further gains.”
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
How many of us treasure our fabulous fitting jeans as if they were made of gold? Well, now, not only can we treasure them as if they were gold, they are gold! Like a genie in a bottle, Kohzo Denim has granted our wish and gold-plated our jeans. These shiny, straight legged luxury jeans are made of an organic cotton-blend, rock washed and distressed before getting bathed in their golden treatment with an 18K yellow gold painted finish.
THE PRICE OF GOLD and silver touched new 8-week highs in London dealing on Thursday, while the Japanese Yen retreated further and developed-world stock markets extending yesterday’s rally on Wall Street.
G7 bonds slipped back, nudging yields higher from this week’s record lows.
Crude oil pushed higher again, unwinding a third of this month’s 7% drop at $73 per barrel.
“Base metals have [also] staged a rebound,” notes Standard Bank’s commodities team today, but “precious metals continue to push higher, adding weight to our assertion that equity markets and base metals are largely being driven by bargain-hunting rather than resurgent risk appetite.”
“Gold is now open to the next leg higher from $1256 to $1265,” says Russell Browne at bullion bank Scotia Mocatta in his latest technical analysis.
“Silver [also] made a dramatic move to $19.05…and the Gold/Silver Ratio dipped to 65.44, its third consecutive day moving lower.”
A falling Gold/Silver Ratio – which has averaged 61 over the last 10 years – means it takes fewer ounces of silver to buy one ounce of gold.
The ratio “has focused itself ever more tightly into a potentially explosive arrowhead, right on a long-term mean,” writes Sean Corrigan at Diapason Commodities in Lausanne, Switzerland.
“The intriguing thing is that gold outperforms [silver] when the stock market is weakening, so adding urgency to the question which way the ratio might go next.”
Interviewed by Bloomberg today, “Silver is looking cheap and we’re seeing strong investment demand for small ingots, as well as good industrial demand from solar-panel makers,” reported Dick Poon, head of precious metals trading at the Heraeus refinery group’s Hong Kong office.
Over on the currency markets on Thursday, the British Pound gave back half-a-cent of yesterday’s jump towards $1.56, holding the gold price in Sterling above £800 an ounce – a six-week high broken for the first time on the way up in May.
Eurozone investors wanting to buy gold today meantime saw the price rise above €31,300 per kilo, gaining 3.2% from Tuesday’s dip.
Money-supply growth ticked higher across the 16-nation Eurozone in July, the European Central Bank said, but lagged analyst forecasts at 0.2% month-on-month.
Ahead of monthly US employment data next week – a key mover recently for the Dollar and gold prices – new figures today showed both new and continuing jobless benefit claims slipping last week.
“Whilst we are getting any negative data, you can expect gold to benefit,” said Investec Australia’s Darren Heathcote to Reuters this morning in Sydney.
“I still don’t see it really moving substantially lower in the short term.”
Looking further ahead, and even on a 20% slump, “We do not believe the price can fall below $800 an ounce for long,” says Edward George, senior economist at the Economist Intelligence Unit, speaking to The Guardian, “as over half of current gold mining operations are only profitable at a price of at least $1,000.
“If the price falls below this level for a long time they will simply stop producing, reducing supply and ultimately driving up the price again.”
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
What jewelry-selling Western consumers have discovered about China’s gold buying…
WHATEVER the reasons for China’s massive household savings rate (Western economists blame the lack of social security, so you can guess their cure), the World Gold Council’s Gold Demand Trends today showed private consumers putting ever-more money into physical gold.
Compared to household savings, in fact, revised forecasts here at BullionVault this morning put likely gold purchases in 2010 at the equivalent of almost 1.7% – over twice the level of five years ago.
This confounds Western analysts who foresaw substitution – from gold jewelry to consumer gadgets – as China’s household wealth grew. Because gold demand, even for the kitschest gold kitten, remains an expression of saving, not spending.
That might jar with Western tastes and ideas. But it’s clear in the numbers.
According to Peking professor Michael Pettis – and despite disposable income growth of perhaps 15% annually since 2000 – consumption growth in the world’s No.2 (and fastest-growing) economy “is anemic” by comparison. A BIS study last month suggested it’s because household earnings are falling as a proportion of national income. But either way, and in contrast with consumption spending, private Chinese gold demand has risen 26% annually by volume in the last decade, drawing a still-greater share of retained wealth as domestic gold prices rose near three-fold.
So where Western analysts divide “jewelry” from “investment” demand, Chinese gold buying – as in India, the world’s No.1 market (for now) – cannot be so easily split. Gold’s form doesn’t define its purpose so tightly in China, as North American and European gold sellers have rediscovered since the financial crisis began.
Swapping gold-for-cash by ditching unwanted jewelry, the Western world’s new “scrap gold” sources are simply finding in gold a value they’d forgotten was there. Stored wealth in whatever shape is still wealth. The trick, of course – and as China’s fast-growing “investment products” demand now shows – lies in reducing your transaction costs both on purchase and sale.
P.S: As for the People’s Bank buying gold, Beijing’s reserve managers are very much the junior player in China’s gold market. In the 30 months between Jan. 2008 and June 2010 alone, according to WGC data, private households bought more gold (1057 tonnes) than the central bank reports in its entire hoard (1054 tonnes).
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Laban Roomes received an award for the bespoke Gold iPads by Goldgenie from the London Business Innovation Centre (BIC) for the mostinnovative product: 24ct. Gold iPad and packaging. The Hello Kitty 50th Anniversary Gold iPad was also on show. Thanks to everyone for supporting Goldgenie.
Note: The 24ct Gold iPads by Goldgenie are limited edition. Each one is embellished in pure gold, laid with genuine gold pieces and protected in a clear resin. No two are the same, each one as “unique as your finger print”. For more info, visit our selection of bespoke iPads at Goldgenie.
This year is the 75th anniversary of the board game Monopoly. Ordinarily a fact like this would have escaped me but a board game worth in the region of £1.3 million ($2 million), made from gold, diamonds, sapphires and rubies gets my undivided attention. Before the computer game era, good old board games were a favourite pass time. Monopoly has actually been around for over 100 years, it’s a redesign of an earlier game; “The Landlord’s Game” first published by political activist Elizabeth Magie in 1903. The original purpose of that game was to teach people how monopolies end up bankrupting the many and giving extraordinary wealth to one or few individuals. Despite Magie’s original and renewed patents several versions of the game were made in the years before the game was published by The Parker Brothers, a toy, game manufacturer and brand. It was first known as Monopoly in 1910.
Some say it’s the most hated board game ever, which might have something to do with it’s complexity – it’s hardly snakes and ladders – but it has become one of the most played games of all time.
Fast forward to 1988 when Sidney Mobell, a jeweller from San Francisco put together a 23ct gold plated Monopoly board. The set is a full-size board, weighing 32 pounds and is encrusted with 165 gemstones. That includes 60 diamonds, 47 sapphires and 24 rubies. The 28 title cards are gold-plated and 42 diamonds display the numbers in the dice. The houses, hotels and the dice are 18ct solid gold. The gold version has been certified by the Guinness Book of World Records as the most expensive monopoly set in the world. I am sure those of you over the age of 25 remember playing this game (not on such a glamorous set) during your younger years, perhaps during the festive seasons when Top of the Pops was on followed by Her Majesty’s Christmas day speech or the EastEnders Christmas episodes that USED to have us glued to our seats. Of course I don’t remember all this because I am a mere spring chicken and this was all before my time ;0)
Over the years monopoly has been recreated in various shapes and with varying titles. The Mobell gold set is probably not an option for the Christmas list this year, but real fans of the game might appreciate the Franklin Mint Collector’s Edition:
The houses are all dipped in silver and the game pieces and hotels are plated in 24 karat gold. The Community Chest and Chance cards are decorated with gold foil. Authenticated by Parker Brothers the Franklin Mint edition costs just $595 (roughly £490).
AND to mark the 75th anniversary of the game as we know it in the UK, Monopoly Revolution will be available this Autumn and it’s round!
The new Monopoly Revolution edition features a round game board, electronic banking, music and sound effects. This upgraded version requires you to purchase property at today’s house prices – so if you want Mayfair, you’ll need £4 million instead of the traditional £400 which I find slightly depressing as it’s far too close to reality and sometimes the fantasy world is so much more fun!
There is just one week left for your chance to win a fabulous keepsake hoodie!!! For more information go to the Great Gold Medal Robbery blog in the All Thingz Nice section. Competition ends 2nd September 2010.
Images via Nixon 
