Lear Capital: Is Gold Set To Drop Like a Rock or Rise Like a Rocket?

The cheerleaders are at it again. "Wow look at that S&P soar. It's about to break through 1200!" Then there's gold. "Gold has fallen $73 from its high - is it set to drop like a rock?"

These are headlines and comments made this morning by some of the talking heads. The suggestion is clear, now is the time to own stocks and bail out of gold. What's your call?

Before we even attempt to answer let's ad a little perspective to the issue of stocks versus gold. Less than a month ago the S&P traded at 1345. As it trades now it has fallen 11.5% from that level. Gold on the other hand is up 8.7% in the same period. That's after the $73 drop from its recent new record high.

Now let's look at why the S&P is trading so far off its recent high. Generally, I believe stocks are off because the risk of losing stimulus, (printed money) has risen. In my recent article , the charts tell the story. When the supply of printed money has been threatened, markets have dropped. Since June, the threat has come from two fronts. First, with the expiration of QE2 and then with the potential that the debt ceiling would not be raised. All of this has left the S&P down more than 5% for the year.

Will the S&P recover some value as more stimulus programs are announced? Probably! But, do you see it as anything more than a short-term play?

Gold, on the other hand, is up 24% on the year as the act of printing money, in the long term, destroys the purchasing power of the dollar. In this regard, both stocks and gold prices respond favorably to printed money. But, here's what separates the two. When you threaten to cut off the supply of printed money, gold still keeps rising as the potential for debt default now enters the scene.

If you listen to the media, it seems, no matter what, it's always a good time to buy stocks and gold prices are always on the brink of dropping like a rock. We've been hearing it for 10 years as we watched gold rise 500% and stocks barely hang on to zero gain.

That's ZERO gain in 10 years for stocks, even less when you add some inflation into the formula!!

Now, take a look at all the conditions under which gold has risen and stocks have fallen over the last decade and project 3 years, 5 years or even 10 years ahead. Do you see anything different than we have seen over the last 10 years?

If you see more of the same, why should we believe stocks are a good long term bet for your money and gold is not? At the very least, the performance of stocks over the last decade, as it compares to gold, should be the best argument for diversification into precious metals. Don't sell all your stocks. Don't give up on America. This is not the message. The message is diversify. Do the math. A stock portfolio diversified into just 10% precious metals 10 years ago could be up 50% right now. That's right! Up 50%!! Follow along.

Let's take a $10,000 self directed IRA. In 2001 if you had $9,000 in stocks and $1,000 in gold bullion, the portfolio today, on the stock side, could still be worth about $9,000 but on the gold side your gold bullion (Yes you can own physical gold in your IRA click here for details) could be worth in the neighborhood of $6,000 depending on the exact type of bullion or bullion coin held.

Is gold set to drop like a rock? JP Morgan says $2500 by year-end, Deutsche Bank called for $2000 by year-end, and now Bank of America has raised its gold price prediction to $2,000 in 12 months. So, if gold does drop like a rock watch out out cause it could turn around and rise like a rocket!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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