Meanwhile, one of the readers recently queried about the movement of Gold prices and its correlation with equities. Personally, i believe Gold is one of the hardest commodities to forecast using fundamentals. I was looking through some past research on Gold prices by Elliott Wave International, that might help. The article is attached below. Enjoy!
Gold, the Dow, T-Notes: Which Does Best
During Recessions?
By Susan C. Walker, Elliot Wave International
April 11, 2008
Each year, the NCAA college basketball tournament winnows its starting field of 64 teams to the Final Four teams who play for a chance to become the national champion. Congratulations to the University of Kansas and the University of Tennessee, this year's men's and women's basketball champions.The structure of the NCAA tournament got me to thinking. Wouldn't it be great if we could set up brackets for our own investments the same way – start with 64 equities, bonds, mutual funds, commodity futures, metals, etc. Then let them duke it out against one another to see which ones emerge as the "Investment Final Four"?
Click here to download a free 5-page report from Elliott Wave International with even more information on which investment does best during recessions. The report, excerpted from Bob Prechter's Elliott Wave Theorist, includes in-depth historical analysis and six eye-opening tables.
Since most of us have neither the time nor the money to act as our own version of the NCAA (which might stand for the "National Coordinator of Asset Allocation"), it's worth knowing that Bob Prechter of Elliott Wave International has already set his mind to the task. He has specifically explored which investments do best in times of recession and which do best during economic expansions. But instead of starting with a field of 64 investments, he researched the three most popular investments – gold, the Dow, and Treasury bonds.
We can call them the Treasured Three, rather than the Final Four.
We can call them the Treasured Three, rather than the Final Four.
Gold and Recessions
Since economists and even Ben Bernanke, chairman of the Federal Reserve, now admit that it looks like the U.S. economy has entered a recession, many people may wonder whether they need to change the mix of their investments. In particular, as some prices keep going up – notably for food and gas – the threat of inflation makes people more interested in gold as an investment, since it's usually seen as a bulwark
against monetary inflation. It is this conventional wisdom that piqued Prechter's curiosity. He wanted to find out whether it would hold up to a reality test. As he writes in The Elliott Wave Theorist, "I have often read, 'Gold always goes up in recessions and depressions.' Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data."
against monetary inflation. It is this conventional wisdom that piqued Prechter's curiosity. He wanted to find out whether it would hold up to a reality test. As he writes in The Elliott Wave Theorist, "I have often read, 'Gold always goes up in recessions and depressions.' Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data."
So he and another Elliott wave analyst ran the numbers, reviewing the behavior of these three key investments during recessions following World War II, from February 1945 through November
2001. This is what they learned:
2001. This is what they learned:
Gold was not the best investment during recessions
in terms of total return.
in terms of total return.
The winner of this tournament was actually Treasury Notes,
which had a total return of 9.96%. In contrast, gold had a
total return of 8.80%, and the Dow came in at 6.89%. But that's
not all – once they figured in the transaction costs
for each investment (at a 2008 level), gold fell from second
to third place as a worthwhile investment during recessions.
The total returns with transaction costs came out this way:
which had a total return of 9.96%. In contrast, gold had a
total return of 8.80%, and the Dow came in at 6.89%. But that's
not all – once they figured in the transaction costs
for each investment (at a 2008 level), gold fell from second
to third place as a worthwhile investment during recessions.
The total returns with transaction costs came out this way:
| 1. T-Notes | 9.82% |
| 2. Dow | 6.85% |
| 3. Gold | 4.80% |
This result turns conventional wisdom on its head. It's also
worth being aware of as you invest in 2008. Here's how Prechter
sums up the results:
worth being aware of as you invest in 2008. Here's how Prechter
sums up the results:
The Best Investment During RecessionsThe most important question, however, is not whether the
Dow beat gold or vice versa but whether making either investment
would have been better than taking no risk at all. Table
3 [see
free report provided by Elliott Wave International]
shows that ten-year Treasury notes beat both gold and the
Dow during recessions since 1945, and they did so far
more reliably. T-notes provided a capital gain in 10
of the 11 recessions, and of course they provided interest
income during all of them. And the transaction costs are
low….So if you want to make money reliably and safely
during recessions and depression, you should own bonds whose
issuers will remain fully reliable debtors throughout the
contraction. Of course, as Conquer the Crash [Editor's
note: Bob Prechter's best-selling business book] makes abundantly
clear, finding such bonds in this depression, which will
be the deepest in 300 years, will not be easy. Conquer
the Crash forecast that in this depression most bonds
will go down and many will go to zero. This process has
already begun. This time around, you have to follow the
suggestions in that book to make your debt investment work.
[The Elliott Wave Theorist, March 2008]
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.
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