Cash & Gold: The Next Best Investments

With a bull market in equities, every expert has an investment idea. Real estate investors have their own recommendations; commodity bulls are calling for a market bottom and the best time to invest for the long-term. But if you ask me, the best investment opportunity today is to be in Cash. Yes, you read it right; cash is the best investment possible today and has been so for the past one year.

Let’s face it, since we started to see the US stock market breadth and internals weaken a year ago the SP500 has done almost nothing for investors. Currently the stock market is up 0.61% year to date.

In short, 50% of stocks are trading below their 200 day moving average which means if you are a stock picker and hold individual stocks rather than the index funds you are likely down 10-25% this year even though the index is slightly up.

Money managers, hedge funds and mutual funds are having a horrible year because of this weakening market which 99% of investors have no idea is even taking place.

This article is an effort to prove to you, with various examples why you should guard every dollar you have today, rather than invest in any asset class. There are times when making money shouldn’t be your priority; the main goal should be to sit tight with your cash and do nothing. Don’t fall for the various experts who advocate being fully invested in stocks or other asset classes. Read on and decide for yourself if you agree with my analogy about holding cash.

Who else follows this strategy of holding cash?

Who would you rather follow? Jesse Livermore, Jim Rogers, and Warren Buffet, all extremely successful investors or some unknown expert who is on a business television channel, giving you the next hot tip or advice. As of September 30, Berkshire Hathaway, a Warren Buffet company had $56.16 billion in cash and cash equivalents. Being an astute investor, he is holding large amounts of cash waiting for the next opportune moment to invest. His ability to hold cash and wait for the right time has made him the most successful investor in the history of Wall Street.

A famous quote from Jesse Livermore says it all “There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily or sufficient knowledge to make his play an intelligent play.”  

Jim Rogers, the famous commodity Guru, advocates “staying in cash most of the time until you find screaming bargains”. Jim stays away from the markets for long periods of time, entering only when there is “panic” all around and there is a “fire sale” on assets.

Why is the timing right for holding cash?

This chart of the year to date performance of the major asset classes, shows that gold, crude, copper and T-Bonds have given negative returns. The only two asset classes which have gained are SPX and the US dollar which gained 9.13%. The strengthening US dollar has increased the purchasing power of the US investors who have held on to cash.

The SPX is ready for a correction! 

The Shiller P/E index, also called as the CAPE, is constructed by Robert Shiller the famous Nobel Laureate in Economics. It is close to its 2007 levels and is 50% above its long-term average. Combining the readings of the CAPE with Valuation confidence index (a sentiment index), Shiller has warned of similarity in readings leading to the 2000 stock market bubble burst. He agrees that forecasting the short-term is difficult as the market behaves differently when the rally is led by the easy money policy of the Central Banks.

Conclusion:

The Price of Gold has been in a secular bull market since 2001 and the major correction in gold which started in October 2011 is part of a major secular bull market.

In the last couple weeks the gold market and leading gold sector indicators have been showing bullish divergence. While I do not think the bottom has yet to be put in place for gold, silver or gold mining stocks, I do feel we are 1-2 months away from bottom if things unfold as I expect they will.

In my next exclusive report here on Gold-Eagle I will show you my technical analysis which is pointing to this conclusion along with the key price which gold and silver much move above before a new bull market will be confirmed.

Staying in cash is an opportunity to buy when everyone else is selling in the panic. A smart investor should keep his shopping list ready and pick up his favorite stocks for pennies on the dollar during market downturns. You might get a chance to buy your favorite stocks 40-60% lower from current levels. What percentage of your portfolio you should hold in cash depends on your investing philosophy, but in the current scenario, let your cash holding be the maximum you have ever held in your portfolio.

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Happy Trading

Chris Vermeulen