Should You Buy Stocks, Bonds, or Gold?

Yesterday witnessed a rather extraordinary confluence of events: The Dow stormed to a 13-month high while gold reached another record high (in nominal terms). Meanwhile, the ratio of bids to amount offered in yesterday's $40 billion three-year Treasury note auction was the highest since 1990, pushing the yield on the issue down to 1.40%. Why is this unusual, and what does it mean for investors?

A rare correlation
Monday's events highlight a period in which stocks, gold, and government bonds have been positively correlated -- i.e., all three have been rising simultaneously (see table below) -- which is highly unusual. The probable culprit behind this state of affairs is the Fed, which has flooded the system with money through bond purchases and lowered short-term interest rates to zero. As a result, investors are frantically seeking yield or the promise of capital appreciation wherever they can find it. They would rather take unconsidered risk than earn nothing while they sit on their hands.

 

1-Year Return

S&P 500 Total Return

20.5%

Gold

50.5%

U.S. Treasury Bonds (Morningstar Government Bond Index)

5.5%

At Nov. 9, 2009.
Source: Standard & Poor's, Kitco, and Morningstar.

When will it break down?
What would it take for this Neverland market, in which all assets go up, to break down? The fear of a rate rise could do the trick. Last week, the Fed explicitly identified inflation expectations as one of three factors it is monitoring in deciding when to raise rates. Yesterday, the market-implied expected inflation rate, based on Treasury bond and inflation-protected Treasury security prices, reached 2.22% annually over the next 10 years -- the highest figure in over 14 months.

What to hold when the cards are laid down
Once the correlation breaks down, what should investors be holding in their portfolios: The SPDR S&P 500 ETF (NYSE: SPY  ) , SPDR Gold Shares (NYSE: GLD  ) , or T-bonds? As a value-driven investor, I can't recommend buying the S&P 500 or T-bonds in this environment; both look overvalued. As for gold, some exposure is useful as an inflation hedge. Beyond this, investors who can drill down and focus on individual stock names will reap the rewards. High-dividend payers such as Pitney Bowes (NYSE: PBI  ) , Eli Lilly (NYSE: LLY  ) , Bristol-Myers Squibb (NYSE: BMY  ) , or Kraft (NYSE: KFT  ) might fit the bill, for example.

As we emerge from the recession, this is exactly the time to buy these stocks.

Sustainable dividend growth is the hallmark of a high-quality business. The team at Motley Fool Income Investor can show you how to build -- and manage -- a portfolio of high-quality company stocks that produce a robust dividend yield. To find out their seven 'Buy First' stocks, take advantage of a 30-day free trial today.

Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Pitney Bowes is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (30) | Recommend This Article (61)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2009, at 5:43 PM, jrj90620 wrote:

    Low priced,profitable, producing gold miners would be my first choice.Also,anyone producing necessary commodites whose stock isn't overpriced.Then growing Asian market stocks.Forget anything tied to the U.S. Dollar,such as money market funds or bonds.

  • Report this Comment On November 10, 2009, at 7:00 PM, stockmenot wrote:

    This is a bit off topic, but I was wondering if you fools out there could help a girl figure a couple things out? Why does "The Wall Street" give such an unfavorable outcome for highly rated Japanese stocks? I'm hearing today that the Asian markets are in debt like we are, but yesterday I heard that the only stocks that aren't over priced are Japanese....could someone who knows more than me help me out with this information? More opinions, the better.....

  • Report this Comment On November 10, 2009, at 7:50 PM, CIGA wrote:

    The answer is simple. Buy as much physical gold as you can. Please compare the total 5 year return of gold vs the S&P. Actually -- silver will do well for the same reasons as gold, but is actually rarer and has other reasons to remain in demand and will probably do better than gold.

  • Report this Comment On November 10, 2009, at 8:56 PM, jm7700229 wrote:

    In the case if gold, the fact that it has gone up in value rapidly is a good reason NOT to buy it. It doesn't do anything and is only a store of emotions. Look at your stocks; look at the PE, the cash flow, the growth projections, the debt, the management. You should be able to figure out when the stock is overpriced. Now do the same for gold. Oh, sorry, you can't, can you?

  • Report this Comment On November 10, 2009, at 9:53 PM, jm7700229 wrote:

    In the case if gold, the fact that it has gone up in value rapidly is a good reason NOT to buy it. It doesn't do anything and is only a store of emotions. Look at your stocks; look at the PE, the cash flow, the growth projections, the debt, the management. You should be able to figure out when the stock is overpriced. Now do the same for gold. Oh, sorry, you can't, can you?

  • Report this Comment On November 10, 2009, at 10:14 PM, AlexanderAkhavan wrote:

    Actually there is a way to value commodities, whether its oil, gold, cotton, etc. It would take alot more then I could write in this little space. Its just a different process then stocks.

  • Report this Comment On November 10, 2009, at 10:17 PM, rd80 wrote:

    The contrarian play would be to accumulate what everyone else is selling, cash.

  • Report this Comment On November 10, 2009, at 10:33 PM, irapm wrote:

    Do you guys ever read your free advertisements?

  • Report this Comment On November 11, 2009, at 12:53 AM, wrkdiver wrote:

    Silver is rarer than gold? Psssst.....If it was it would be priced HIGHER!!!! LMAO

  • Report this Comment On November 11, 2009, at 2:01 AM, Beebzer wrote:

    Okay, right, let's accumulate cash. But... what currency?

  • Report this Comment On November 11, 2009, at 2:38 AM, tanagain wrote:

    why do you guys comment on things you know nothing about? yes, silver is rarer than gold. and no, just because gold has shot up doesn't mean it won't keep shooting up. gold is not an investment, it is a hedge. $20 of gold will buy you the same thing today as it did in 1935. It is a way of preserving your wealth. So as the dollar continues to decline, gold will continue to shoot up. And silver even more so, because yes, it is rarer.

  • Report this Comment On November 11, 2009, at 5:25 AM, marktsgooch wrote:

    Tortillatree - curious why you state that 'silver is rarer than gold'. Where are you getting your data from?

    Relative abundance of elements:

    http://en.wikipedia.org/wiki/Abundances_of_the_elements_(dat...

    See Silver (47) and Gold (79)

    Different sources have silver as 10 to 40 times more abundant than gold, by weight.

  • Report this Comment On November 11, 2009, at 8:51 AM, davion13 wrote:

    I'm waiting until gold goes up another 5-10% then selling like mad and hoarding greenbacks for a month or two.

    "Everyone" is always wrong when it comes to investing..

  • Report this Comment On November 11, 2009, at 6:46 PM, kayakmastr wrote:

    Abundance that relates to supply and demand and economic value refers to market abundance not the natural abundance of the elements.

  • Report this Comment On November 11, 2009, at 6:50 PM, kayakmastr wrote:

    Also, invest in dividend payers and add to your returns by selling covered calls! Subscribe to MF Pro and learn how to do this. I did, and increased my return in stocks this year by 25% through selling covered calls and puts. Very low risk, you only do what you would do anyway, and someone pays you to do it! Amazingly simple and profitable strategy!

  • Report this Comment On November 12, 2009, at 4:23 AM, sofpan wrote:

    Fellow investors: the article was very good but I'm still confused.

    Should we buy stocks?

    But stock market is fundamentaly expensive (high P/E, low Dividend Yield, Tobin's Q ratio above 0.75 with the last data and I assume - because the market keep moving up - that now is above 0.80 to 0.85. So Tobin's Q ratio showing the stock market expensive, comparable to the true condition of the economy (very weak recovery, high unemployment).

    And if the market correct, I think will do this violently. So, even if I have good stocks with low valuation, in a violent correction, I believe all the stock will move down.

    Should we buy bonds?

    Bonds seems to me worthless with no real performance.

    Should we buy Gold?

    GLD, the gold ETF is expensive by terms of P/E. Furthermore, gold is not something productiveQ gold is not producing something more, with an increased value. I think that gold is rising to historical highs, just because of crowd's psychology and this, has symptoms of a bubble. I have bought lots of GLD as a hedge and speculation but I think its dangerous for a collapse.

    Should we buy silver (SLV)?

    Yes, I have read that silver is "rarer" than gold (http://www.investmentrarities.com/ted_butler_comentary/04-22..., so in a sense market a "rarer" special metal would be valuated more (than gold). But markets are not acting with sense: I have realise that gold for the crowd is THE absolute hedge for weak dollar and weak economic recovery and silver can not take the place of gold. That makes none sense because silver is "rarer" than gold? I agree but I can not change how crowd thinks.

    So the question remains: what should we invest now???

    Helpppp!!!

  • Report this Comment On November 12, 2009, at 4:25 AM, sofpan wrote:

    Fellow investors: the article was very good but I'm still confused.

    Should we buy stocks?

    But stock market is fundamentaly expensive (high P/E, low Dividend Yield, Tobin's Q ratio above 0.75 with the last data and I assume - because the market keep moving up - that now is above 0.80 to 0.85. So Tobin's Q ratio showing the stock market expensive, comparable to the true condition of the economy (very weak recovery, high unemployment).

    And if the market correct, I think will do this violently. So, even if I have good stocks with low valuation, in a violent correction, I believe all the stock will move down.

    Should we buy bonds?

    Bonds seems to me worthless with no real performance.

    Should we buy Gold?

    GLD, the gold ETF is expensive by terms of P/E. Furthermore, gold is not something productiveQ gold is not producing something more, with an increased value. I think that gold is rising to historical highs, just because of crowd's psychology and this, has symptoms of a bubble. I have bought lots of GLD as a hedge and speculation but I think its dangerous for a collapse.

    Should we buy silver (SLV)?

    Yes, I have read that silver is "rarer" than gold (http://www.investmentrarities.com/ted_butler_comentary/04-22... ), so in a sense market a "rarer" special metal would be valuated more (than gold). But markets are not acting with sense: I have realise that gold for the crowd is THE absolute hedge for weak dollar and weak economic recovery and silver can not take the place of gold. That makes none sense because silver is "rarer" than gold? I agree but I can not change how crowd thinks.

    So the question remains: what should we invest now???

    Helpppp!!!

  • Report this Comment On November 12, 2009, at 5:02 PM, stockmenot wrote:

    I asked my fool friends to tell me why I'm hearing that the only stocks that aren't overpriced are Japan. Yet the WallStreet gives the dreaded red line to all Japanese companies....Why? Then on the other hand I hear they are in as much financial trouble as we are. Can anyone help me out. I am not buying gold.

  • Report this Comment On November 12, 2009, at 9:01 PM, derfberger wrote:

    too late to get in on the gold rush.

    Look at Templeton Global Bond.80% foreign, 5% U S

  • Report this Comment On November 13, 2009, at 4:20 AM, sofpan wrote:

    @ derfberger:

    what do you mean about the Templeton Global Bond?

    I don't understand you.

  • Report this Comment On November 13, 2009, at 3:46 PM, shuee5 wrote:

    Gold only holds value. What an once buys is a better measue of its worth. You are not "making money" when gold goes up, but are in stead LOOSING BUYING POWER. Ron Pauls book "End The Fed" and the Rich Dad's book on metals are current books that explain this well. For fun compare the charts of the S&P, GLD, and USO. Maybe that will help you see what I'm talking about.

    Silver is an industrial metal. Silver is in decline as an industrial metal as it is no longer used in photo or xrays like it once was, but the demand for jewlery is growing.

    The border based miners like BHP have been a better play as they both hold real metal and pay dividends. The EFTs on the other hand are not showing storage expences on the ballance sheets. What's up with that? Are they getting storage for free or are they only holding paper?

    Gold??? Some bullion has never been a bad idea in the longer run. There have been corrections in gold market like everything else. Bullion does not pay dividends.

    Silver has a much more affordable entry point. It still has industrial demands that help keep a lid on the higher beta than gold.

  • Report this Comment On November 13, 2009, at 7:23 PM, CIGA wrote:

    It's too much work to follow all these stocks. I'm actually quite impressed at some of the intelligent commentary here. Keep it simple -- buy as much silver (or gold) bullion as you can -- maybe not today, there could be a pull back, but if there is back up a truck. With the ETFs read the prospectus carefully -- some may use derivatives instead to give you gold exposure and if things hit the fan they may not have the bullion you think they have.

    Anyway thanks for the intelligent posts -- silver is rarer than gold, both gold and silver will be worth much more in 5 years. You'll see........

  • Report this Comment On November 13, 2009, at 11:25 PM, bricks79 wrote:

    Short to intermediate bonds are a good investment. The Fed will keep interest rates low for at least another six months and you can earn 3-6%. Dividend paying stocks are good but getting pricey.

  • Report this Comment On November 14, 2009, at 12:25 AM, unlearned wrote:

    Sofpan,

    First, Gold is NOT an investment, I explain this on a daily basis as it has been explained in the previous posts. Gold is simply a hedge. You are taking your Dollars and putting them into gold as a way to preserve them. If you bought $300 worth of gold in 2001-2 you would not have GAINED money if you sold your gold now, you would be taking back your 2001-2 dollars.

    So, Invest in gold if you think the US dollar is going to crash, but if you think the US dollar will regain value then Gold will drop.

    The Fed (my opinion later) is trying to time it just right to increase interest rates where they can pull dollars out of the system.

    Supply and Demand: More dollars= lower value

    Fewer dollars= higher value

    So, when/if the Fed finally increases interest rates, if history holds true gold should start to appear to lose value as in the price of gold will fall.

    Bonds are not my area, but from the outside looking in, selling gold now or well before they increase interest rates would be wise. Then purchase locked bonds or the adjusted inflation bonds.

    In terms of what to do in the market right now? We have the bulk of commerical subprimes coming due next year (commerical realestate is worth far more than residential) If that is not being dealt with we are in for a horrible suprise.

    You might consider gold options for Febuary or March between 1500-2000, whichever you feel better with.

    You could (I know people say bad) keep your money in cash leading up to a collapse. If the market falls as it did in march/april of this year one might be able to grab Apple for $80 again.

    So, 1) Gold- I would not buy gold I would buy silver it has outperformed gold many times over.

    2) Get out of gold/silver by febuary (if the FED appears to want to raise interest rates)

    3) Wait a month or two (until a pullback) buy stocks

    4) when things get over valued purchase the inflationary bonds at 5-6% (before the starts a new business cycle, judging over the past few years could take only a year)

    I am unlearned what do I know?

  • Report this Comment On November 14, 2009, at 9:17 AM, shuee5 wrote:

    We are being caught in a conflict between an administration that is trying to inflate its way out of a mess and Creditors, like China, who want to preserve the buying power of thier returns. Ron Paul's book explains this in broader manner if you want to understand this more in depth.

    If you have something like Roth and want to take advantage of a real metal then the non US mining companies are they way to go as you get metals play and dollar plays often with a good dividend. The broader based miners are better than the gold miners, who are facing increased cost.

    If you want to hold the metal its self, then expect to pay a spread going in and going out in order preserve your buying power. I've worked with silver before. The stuff is dense and gets heavy quick; a kilo is about the size of a CD case. 20 oz is about the size of a can of "red bull".

  • Report this Comment On November 14, 2009, at 2:24 PM, DrBrianOblivion wrote:

    When ads are hawking gold several times an hour to the unsophisticated masses, it is time to be careful, the opportunity is probably past.

    BTW, I would read more of the fool ads and emails if they were not multi-thousand word tomes. Cut to the chase sooner and I might get interested.

  • Report this Comment On November 17, 2009, at 10:57 PM, MikesMoneyTalk wrote:

    Michael Jon Byers Lubbock Texas I think Gold still has a way to go up.

  • Report this Comment On November 18, 2009, at 1:24 AM, oSUNo wrote:

    To stockmenot:

    Public debt in Japan is wopping 200% of GDP.

    How does the government service that debt? They issue Japanese Government bonds.

    Why would Japanese investors buy bonds which yield a maximum of 2% ? Because the government uses the law to make every other kind of investment unappealing - including the stock market.

    That's why Japanese stocks are red lined. They won't appreciate in value - no local volume.

    They're also horrible at collecting taxes, and small businesses know this and rely on not paying taxes (which would service the debt) to book a profit. Even so, profits are waaay down after 2008.

    ----------------------------------------------------------------------

    Gold bullion is a talk up. Look at how the big holders sold it in 2008. Death.

    Small leverage short EURUSD on the currency market if you can pick the top, which will be soon by my indicators, but nowhere near as bad as 08.

  • Report this Comment On November 23, 2009, at 2:52 PM, tony2390 wrote:

    SO QUICK QUESTION.

    IN HISTORICAL TERMS SILVER WAS AT ABOUT 1 TO 5.8 RATIO FROM GOLD TO SILVER. WELL IN TODAYS TERMS THE RATIO IS ABOUT 1 TO 1 TO 62.7. WELL WITH ALL THAT SAID, IS GOLD OVER PRICED OR IS SILVER UNDER PRICED?

  • Report this Comment On November 26, 2009, at 4:10 PM, stockstuck wrote:

    Stocks seemed so confusing and crazy to me, so I started buying gold and silver in 2005, when the market looked way overvalued to my unlearned eyes. I just knew in my heart that the administration would make a mess of things. Woke up one morning in 2007 and knew I should convert my 503B to metals. My question-were these a bad decisions? Since gold was then $525 and silver $5 as I started-how can it be said there has been no gain? Front loaded yes-but almost no back-load. I believe both gold and silver are underpriced if you consider inflation over the years. But, I'm still trying to learn how to buy stocks because it is ALL too scary having everything in coins.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1039652, ~/Articles/ArticleHandler.aspx, 11/28/2014 9:33:24 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement