Is this a Secret Signal for When to Buy Gold and Sell Stocks?

The Dow Jones Industrials are again trading at over 14000. The S&P 500 is prepared to make an attack run on 1600. Weary cash, tired of sitting on the sidelines waiting for something of value to come along, is off the bench and into the game. And the game itself is at an interesting turning point.

Let’s bring your attention back to a chart we published a few weeks ago. It’s the gold/Berkshire Hathaway ‘B’ shares ratio. It tells you how many Berkshire ‘B’ shares it would take you to buy an ounce of gold. We’ve been using it as a way to measure the strength of stocks and the weakness of gold, and to identify turning points. Have a look.

Productive Businesses vs. Gold

Productive Businesses vs. Gold

The lower the ratio gets, the stronger Berkshire’s ‘B’ shares are relative to gold. If you wanted to translate that into economic and investment terms, you might say that the lower ratio goes, the more willing investors are to takes risks on stocks that can produce real wealth instead of buying gold as a defensive way to preserve real wealth.

The ratio has declined 22.3% since we first looked in May of 2012. It was 19.88 then. The gold price is actually about the same now as it was in May of 2012. What’s changed is that Berkshire’s ‘B’ shares have rallied from US$82.22 to $102.25. Stocks and risk – or the flight from inflation – are beating gold.

A caveman chartist could draw a nice crude trend line from 2004 to now. It would find ‘support’ right around 14. By ‘support,’ we mean that the gold price would start to get stronger. Since 2002, gold has gained on stocks. When you multiply the current share price by fourteen, you get $1428.70. That would be a ten per cent decline from gold’s current price at $1580.

We ‘like’ that level because it would clearly shake out all the weak gold hands and seriously question the conviction of the bulls. You don’t get durable rallies until all the selling has been exhausted. But for the record, the ratio could just as easily return to 14 with a rally to $112.85 in the ‘B’ shares and a stable price.

But what’s this? Are we really constructing short-term forecasts on the basis of an unproven indicator? Is this really a secret signal for when to buy gold or when to sell stocks?

What we’re really trying to measure here is public perceptions of real wealth. Central banks have pacified the public into a stupor by inflating stock prices. This gives the impression of real wealth creation. But it’s only inflation. Real wealth comes from producing more, not paying more for assets and calling yourself rich because you can afford it with debt.

But all performance-enhanced stupors eventually wear off. And when they do, the investing public can’t help but see things for what they really are. The ratio above tells us that when the gold price goes below $1500, people will see it as ‘cheap’. When the S&P approaches 1600, investors will realise its expensive, given the weak growth in the US and the huge support the Fed has given the market.

Regards,
Dan Denning
for Markets and Money

Join me on Google Plus

From the Archives…

Why China’s Economy is Flashing Red
1-03-13 – Greg Canavan

Heroes and History
28-02-13 – Bill Bonner

Bitcoin: Get Rich or Die Mining
27-02-13 – Joel Bowman

Why Italy’s Gold Hoard Tells You the Precious Metal is Ridiculously Cheap
26-02-13 – Greg Canavan

Stock Prices Are Not What You Think They Are
25-02-13 – Greg Canavan

Claim your FREE Special Investor Report…

Why Interest Rates Could Stay Low for the 21st Century… and How YOU Can Profit
Markets & Money Free ReportWill Australian interest rates hit 0% in the next couple of years? If controversial economist Phillip J Anderson is correct… super–low interest rates could be here for the next century. In this special investor report you’ll learn how you can take advantage of low interest rates and potentially make a fortune over the coming decades.

Download this free report now and discover:

  • How to Boost Your Wealth Four Ways in a Low Interest Rate World: Inflation is your biggest enemy when interest rates are low. Phil reveals his four–pronged strategy to overcome this… and shows you where to profitably park your cash in the coming decades.
  • How the ‘Victorian Equilibrium’ Can Make You Rich: What if you could accurately predict where interest rates will travel in the future? You’d know the best time to lock–in rates on your mortgage repayments and save bucket loads of cash… or pick up the interest rate sensitive stocks most likely to rocket higher. As Phil reveals, if you understand the centuries old ‘Victorian Equilibrium’ discovered by an American history professor… you’ve got the next best thing to a crystal ball for interest rates.
  • Why this $402 Million Decision Signals Low Interest Rates: In October 2014, UK treasurer George Osborne announced Britain will pay back debt used to finance the First World War — 96 years after the first shot fired. Phil reveals what this landmark decision means for long term interest rates both in Australia and across the globe and how this could affect your long term investing habits.

To download your free report ‘Why Interest Rates Could Stay Low for the 21st Century’ simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time.

Leave a Reply

1 Comment on "Is this a Secret Signal for When to Buy Gold and Sell Stocks?"

Notify of
avatar
Sort by:   newest | oldest | most voted
watcher7
Guest
* Sarah Pringle, U.S. Stocks Climb as Economic Data Offset Spending Cuts, bloomberg.com, March 2, 2013: The S&P 500 has returned 24 percent on average in years it’s risen in both January and February, a bullish sign for 2013, according to S&P. The index climbed in both January and February 26 times since 1945, Sam Stovall, S&P’s New York-based chief equity strategist, wrote in a note. All 26 years ended with positive returns when including dividends, the data show. The benchmark gauge for U.S. equities returned 5.2 percent in January and 1.4 percent in February this year including dividends. “Even… Read more »
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au