Sell the Dow, Buy Gold as US Consumer Spending Falls

What’s an investor to do? Without ‘deals on wheels’, what will keep stocks rolling? And without rising house prices, how will consumers keep spending? And without consumer spending (it is 72% of the economy…no economy in history ever depended so much on people spending money they didn’t have on things they didn’t need), what will prevent the US economy from going into recession?

We don’t know. But, as a dear reader remarks below, there are many things we don’t know…

First, you will recall our Trade of the Decade. Sell the Dow… buy gold.

Well, in 2000 an aunt died and left our children a very small inheritance. We took our own advice, more or less. We set up an account for each of the children, put the money (not enough to merit diversification) into Newmont Mining (NYSE: NEM), and forgot about it. But now, Maria (our daughter) has turned 21. She has to take charge of her account herself.

“What should I do with this…maybe I should invest in something else? I think I should invest in China…that’s where the growth is,” she pointed out.

She is right. Chinese shares are rising at about 10% PER MONTH! CITIC, a fast-growing Chinese brokerage, is now said to be priced at US$40 billion – or US$8 billion more than Lehman Bros. (NYSE: LEH) and US$24 billion more than Bear Stearns. (NYSE: BSC).
Looking at the entire basket of emerging markets, we find extraordinary growth. Gold has done well over the past seven years – up more than 150%. But Chinese stocks have risen that much in the last 15 months. Emerging stocks generally have gone up about twice as fast as gold since the year 2000. Since the bottom in 2002, emerging market shares are up four times.

Newmont Mining has done well; it is worth about twice what it was when we bought it. But it is a laggard compared to emerging market shares.

If you were to look back another decade, you still would have done remarkably well in emerging markets. The MSCI index, in dollar terms, rose from about 200 in ’90 to about 1200 today – a 500% increase (meanwhile, the price of gold rose only modestly).

Looking back even further…to that fateful year, 1971…when the dollar and gold parted company for the last time, where has the big money been made?

In US stocks – up about 13 times. In emerging markets – up a bit more. And in gold – up from around US$41 to over US$730 – an increase of nearly 18 fold – though, admittedly, with long periods of time when gold was going down in dollar terms. But gold is not really an investment. All it does is measure out the pace of the dollar’s decline. For the past 36 years, simply betting against the dollar has out-performed every major investment class.

Yesterday, the dollar sank to a new record low against the euro. Compared to gold, the dollar sank too – putting the gold price up to almost US$740. Oil climbed back over US$80. And the commodity index hit a new record high.

What will happen next? Will the money that comes from trees finally find its roots? Will it stand as tall and straight as a mighty oak? Or will it continue to dry up…and whither like an autumn leaf? Might it will even blow away?

“I would stick with Newmont for a little while longer,” we told Maria.

Bill Bonner
Markets and Money

Bill Bonner

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 Markets and Money.
Bill Bonner

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2 Comments on "Sell the Dow, Buy Gold as US Consumer Spending Falls"

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I think Maria is right, buy china.


HSI could go up another 20-30% by the end of the year.

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