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Strategies & Market Trends : Natural Resource Stocks -- Ignore unavailable to you. Want to Upgrade?

To: mrbodine who wrote (24865)	5/14/2005 7:12:14 PM
From: SliderOnTheBlack	Respond to of 108972

re: [""Neither Gibson's paradox nor Summers and Barsky posit any relationship between gold prices and total returns on equities, whether real or nominal, especially where capital gains rather than earnings or dividends are the principal measure of return."] ????????? I think what Summers clearly concluded with Barsky in their 1988 "Gibson's Paradox and the Gold Standard" is pretty simple and clear, it was: "THAT THE RELATIVE PRICE OF GOLD IS DRIVEN BY AND IS THE RECIPROCAL OF THE REAL RETURN FROM THE CAPITAL MARKETS." "This relationship [of gold prices] to the capital market real return (and particularly to the movement of the stock market) has proven stunningly consistent since [the Summers and Barsky] paper was written." I think Peter Palmedo is spot on here. He showed that since 1988 the Gold vs. S&P 500 monthly correlation coefficient is a negative .85 with an R2 of 72%...and post 1994 has risen to a stronger correlation coefficient of a negative .94 (using weekly) with an R2 of 88%. Palmedo's conclusion is that Gold would shine in the coming years (his piece was written in 2002); given that the past decade+ of exceptional returns in stocks and bonds was an anomaly, actually I think he called it "exceptional" - I'll call it an anomaly....and we can argue reversion to the mean...ala Bill Gross or we can look at the mathematical facts of the over 200 years of imperical data in the studys that supports Golds negative correlation to Bond & Equity returns. If one expects a period where Stock & Bond Market returns revert to a period of 5%, or less combined annualized returns... Gold stands to shine and Goldtocks via their traditional 2:1 leverage to Gold, stand to shine even brighter. From Palmedo's numbers: A blended (stocks + bonds) Market Return of +4% for Stocks & Bonds correlates to an average return of +7% for Gold and +14% for Goldstocks. A blended Market Return of +2% correlates to a +12% return for Gold and a +24% return for goldstocks. A blended Market return of "0" correlates to a +17% return for Gold and a +34% return for goldstocks. A blended Market return of - 2% correlates to a + 22% return for Gold and a +44% return for goldstocks. ...etc, etc, The only debate is what combined rate of return for stocks & bonds one expects over the next couple of years; or whether you see Gold returning to it's historical inflation ajusted mean, or whether you see positive catalysts for Gold such as a continued longterm falling USD etc. As far as expected future returns ? I think Bill Gross is amongst the best & brightest and he has opined his expectations of years of low market returns lying ahead... ie: Gross on Stocks: ["Gross, who said earnings have "been phonied up for years," sees the absence of conditions necessary for stock returns to exceed bond returns. The market needs to yield close to 3.5 percent before it approaches fair value, and that means Dow 5,000," Gross wrote in his monthly commentary. The yield, which is the price of an index divided by the dividends paid by companies in that index, is only 1.7 percent for the Wilshire 5000, which is historically low and a very likely indication that stocks are overpriced, according to Gross." "Stocks historically return more than almost all other alternative investments but only when priced right when the race begins," Gross said. "If you start from day one with P/Es too high or, importantly, dividends too low, you will not obtain equity returns in excess of bonds." Gross on Bonds: ["Here’s an investment mind bender (or mind blower if you happen to have grown up in the late `60s): A “reflating” economy is ultimately bad news for a bond investor. Still, the “re” portion of the word is initially invigorating for bond prices and total returns since it implies a central bank on a downward interest rate path. Greenspan’s march from 6½% at the beginning of 2001 to what is probably an ultimate low of 1% today epitomizes the feel good sizzle of “re”-flation. Since that date, the bond market has produced a total return of over 26% — more than 8% annualized — with higher prices contributing 6% of the total. Once a central bank reaches its ultimate destination, however, (and who could argue that 1% is not far from absolute 0?), a bondholder is stuck with the worst of all worlds. Not only is she earning a low “real” interest rate (negative, as a matter of fact in today’s market), but she has to look forward to the inevitable day in which rates go back up and prices back down. She is damned with a 1% money market fund and damned with a 4.8% 30-year Treasury that almost inevitably will generate capital losses, as the re-“flation” steers long yields higher. The 1% money market rate, as a matter of fact, along with a 1% or so risk premium for holding longer dated bonds is a pretty good approximation for what an investor in U.S. bonds should earn over the next 4-5 years. Staring 2% returns in the face, what is a bond investor to do?"] Gross on General Market Risk: {"Because of these realities based on historically high levels of debt issued during a period of superficially low interest rates, the global economy is indeed in my view, more vulnerable than it has been for the past 25-30 years. The economic and investment consequences appear to be as follows: real short-term rates kept too low will create asset bubbles and accelerating inflation. Real yields raised too high will pop existing asset bubbles and lead to economic recession. The “Goldilocks” yield is the only one that speaks to relative stability, and the margin for error is much narrower than in prior decades. If bond investors are accepting of this thesis, they must acknowledge the uncertainty of their own portfolio structures. Accelerating inflation speaks to defensive durations and a healthy dose of TIPS. But potential recession at some point speaks to extended durations and a reemphasis on deflationary preventative interest rate policies similar to the past 24 months. While Greenspan “speak” points towards gradual and measured hikes to return to a more neutral interest rate policy, he as well as other global central bank chieftains must acknowledge that “neutral” in a levered global economy is a yield shrouded by fog and fraught with uncertainty "] ...we all place our bets - I do not have expectations of very high returns from Stocks & Bonds over the next few years and I like Gold/Goldtocks. Time will tell.