We’ve all heard that those who forget the past are doomed to repeat it. When it comes to gold market cycles those who remember the past are blessed to repeat it. Our economy goes through some rather predictable cycles that can save and make you a lot of money if you truly understand how they work.
This is no sort of get-rich-quick scheme as it could takes years, or even decades, of study to time the markets like a master. However, glance at the following historical facts and try to deny the existence of a clear pattern.
1920s: The “Roaring 20s” saw stock markets increase in a never-before-seen way.
1930s: The stock market crash of 1929 and the resulting Great Depression made commodities the investment of choice for those who had disposable income. The U.S. government confiscated gold in 1933 but other commodities continued to climb until….
1940s: The huge draw was real estate because people remembered (and feared) the high premiums on food during the Great Depression. They bought and developed farms to grow crops and graze animals.
1950s: The “Nifty Fifty” stock craze was one of the wildest ever. You could practically put on a blindfold and toss a dart at any random company on the charts and do okay. But of course stocks are always subject to government manipulation, leading to another crash down the road.
1960s-1970s: Rising interest rates put a lid on stock growth and gold shot from $35 to $850 per ounce. CDs and money market accounts were paying interest rates of 9% or more but because of all the inflation many investors chose to b gold and silver, especially in the late 1970s when the ban on gold bullion ownership was lifted.
1980s: Japan started to buy up real estate in California and Florida. China was buying real estate in New York and all over the west coast. Many investors and first-time home buyers were purchasing first time homes, too, but in full disclosure there was a lot of shady money going into real estate in the 1980s. Either way, the real estate market exploded in a wonderful way…at least for a while.
1990s: You’re probably starting to get the picture now, and of course U.S. stock markets had their best performances ever in the 90s. Some people got greedy and took a real bath, and that’s why it’s important to learn the cycles: timing is everything.
2000-present: Stocks and real estate values plummeted starting in 2006. The 25% annual increases in home values were unsustainable since the average income level was only rising 2% each year. Mortgage companies couldn’t collect on bad loans, and defaults affected the manufacturing, construction and retail markets. In turn, jobs were lost and disposable income vanished. Commodities have had a rough couple of years due to the Fed’s tricky monetary policy but gold is up 300% since 2001. With interest rates ready to rise at any time economists like David Rosenberg believe gold and silver could grow by 8% to 12% in 2015. This decades-long cycle will probably start over again once interest rates are around 9% but if you’re looking for safety and not interest rates or dividends then you might want to pick up some gold while it’s still in $1200 territory.
Yes, this is a gold investing web site, and even if the gold spot price went to $10,000 I probably wouldn’t sell a significant portion of my precious metals. But that’s just me. History says that once interest rates rise to 9%-11% it could be time to liquidate or lower your gold holdings.
On the other hand, when interest rates trend down it tends to benefit stock investors, since publicly-owned companies can borrow taxpayer money for expansion and new employees. As we saw from the early 1980s through the first part of 2001, the average investor’s appetite for gold wanes once stocks show they can produce positive returns for more than one year at a time.
Unfortunately for publicly-owned companies and their shareholders, Janet Yellen and the rest of the Federal Reserve gang has backed itself into a corner and must tighten the flow of free money by raising interest rates in 2015. Projections are for a rate of 3%-4% by 2018. What does that mean for stocks and mutual funds?
The three largest stock markets in the United States averaged a 3% loss for every 1% hike in the Fed’s key interest rate from 1960 to 1980. Rates went from 4% (1960) to 15% (1980). If the Fed fixes the core interest rate at 3% in 2018, you could be down 9% and that’s before accounting for inflation.
Our economy’s cycles can work for you and your portfolio. You don’t need a knack for perfect timing because short-term fluctuations always get ironed-out in the long haul. If you don’t want to be a victim of this economy then working the cycles by investing in gold could offset losses in paper and give you a solid back-up plan against an all-out financial collapse.