Today we finish the last trading day of May, and with it the first five months of this year are behind us. And what do we have to show for those five months?
The two “biggest picture” items I follow for investors are stocks and gold. So far this year, the Dow Jones Industrial Average is up a meager 1.7%. Gold bullion prices are up about the same…at 1.5%, to be exact.
Stocks Rallying Since 2009
Now, here’s the big difference: Stocks have been rallying since 2009. The Dow Jones is up 176% since March of 2009. I see that rally as over. The Dow Jones has been in a trading range between 17,500 and 18,300 for months now. By every stock valuation tool I know, stocks are overpriced. Corporate earnings growth has stopped, revenue growth is contracting.
Unless the Federal Reserve announces that it will start printing money again, the top for stocks is in. (In China, Japan, and the eurozone, their stock markets are rising for the simple fact that their central banks are printing money.)
Gold So Far this Year
Moving to gold, the opposite holds true. In September of 2011, gold bullion hit an all-time high of $1,900 U.S. an ounce. Gold prices are down 37% since then. And since August of 2014, gold bullion has been in a trading range of $1,300 to $1,150 an ounce. While stocks are putting in a top, I see gold as putting in a bottom.
After the beating gold prices took, gold producers closed mines that could not make money at $1,200 an ounce gold. And they slashed their exploration programs. This means the gold supply is contracting. But, at the same time, demand for gold is rising because of demand in India and China and from central banks.
What Has More Value Now: Stocks or Gold?
But you tell me: what do you think has more value today, fully valued (and likely overpriced) stocks or oversold gold?
Now, here’s where it gets interesting: since the beginning of 2015, the Dow Jones U.S. Gold Mining Index has gone up 34%. Dear reader, the stock market is supposed to be a leading indicator of what is to happen six to 12 months down the road. With gold stocks up 34% this year, I believe the message is clear: higher gold prices lie ahead.