Why Would You Want To Own The NASDAQ Rather Than Gold Right Now?

The higher than expected figure for US non-farm job creation of 271,000 has brought the Fed much closer to pushing the plunger down and exploding the global economy with its first interest rate rise in nine years. 

US treasury bonds have already spiked to 2.3 per cent from two per cent a week ago. We live in a very heavily over borrowed world. The International Monetary Fund and Bank of International Settlements have both warned the Fed against interest rate rises because it will tip many national economies over the edge. Chinese ‘private’ companies are the most obvious problem but everybody, everywhere has been borrowing cheaply to invest in just about everything.

Raise interest rates and you prick that bubble, not just in the US but worldwide. Leverage has been used upon leverage to jack up the prices of stocks, bonds and real estate. All of the major asset classes of the world are hugely overvalued and that overvalued bubble depends on the continuation of the low interest rates of the past nine years. 

So would you want to buy the Nasdaq now or go for gold? The knee-jerk market reaction to the latest US jobs report was to press down on gold and hesitantly support the major US stock indices. Indeed gold prices fell back very sharply to levels that are close to testing the support of the lows of last August. 

However, with bond market experts like Bill Gross now giving a 100 per cent probability to the Fed raising rates on December 16th it cannot be long before markets begin to digest what this really means for the outlook. 

Could it be that stocks, bonds and real estate are all at, or very close to, their cyclical peaks? Are we now not in what Mr. Gross called a ‘risk-off’ environment which will be very bad for riskier asset classes like stocks whose price will have to reflect the higher cost of money and therefore move lower. It is more than that, of course, because the same leverage effect that has propelled stocks to very high valuations - not seen since 2000 and 2007 - will now work in reverse to produce a major correction or crash. 

The Nasdaq has just got back and past its 2000 all-time highs. If you invested in this index back then you have just gotten your money back. Perhaps you should take it. Gravity is now pulling in the down direction. We all know Apple, Alphabet the company formerly known as Google, Facebook and Amazon are great tech stocks, whether they are really worth more than some whole countries is less certain. 

To make a classic investment rotation you need to sell what is overvalued and buy into something that is forgotten, undervalued and out-of-favor but which nonetheless has excellent prospects. Why should that asset class now be precious metals? 

You just have to ask yourself what lies ahead for the global economy over the next couple of years. Sure the US jobs number on Friday indicated positive growth in the US economy. But is this the climax of a tepid seven-year recovery cycle or the start of one? How is the rest of the world doing, or is it relying on the US as the sole engine for global economic recovery? How can it do that with an overvalued dollar dragging its earnings down? And let us not forget both sales and profits of S&P 500 companies have been falling for the past two quarters. 

Where else do we see the green shoots of economic recovery in the world? In Germany where industrial orders are falling due to the recession in Russia and slowdown in China? In South Korea, the world’s 11th largest economy, where the last monthly export tally was off 12 per cent. In sickly Japan which is also hit by the slowdown in China whose imports are down more than 20 per cent?

Not so fast. These countries are all cranking up their money printing. The European Central Bank has hinted at extending and widening its quantitative easing. China is back pedaling on its money tightening and the Bank of Japan is printing money with abandon. 

Now with the US pulling in one direction and raising interest rates and the rest of the world heading in the other direction this is clearly going to boost the dollar. More expensive US products will not sell as well in a world that has already has less to spend on them. 

Apple finally opened its i-Store in Dubai last week which will undoubtedly be a successful shop. But there is a limit to the extension of this phenomenon and probably only smaller and less profitable business locations are left. The Dubai i-Store seemed a bit of a metaphor for the topping out of the Nasdaq index, driven by the public’s current faith in tech.

So if you accept that the Fed is pushing the plunger on an explosion in global financial markets on November 16th then why should you look to gold as a safe haven and not the US dollar? It’s true that the dollar should become even more overvalued as stocks, bonds and real estate get into trouble. But then what happens?

If we look back to the last global financial crisis then it was not the dollar that offered the best performance after the dust had settled in March 2009. Gold and silver shot ahead for the next two years, and that was the best place to have your money. 

Given the even bigger unknowns of the second round of this crisis that we have coming up as soon as December 16th, and the fact that if we are discussing this now then it is possible that others are also doing so, then gold is settling back to its launch-pad for a huge rise in prices, and as in 2011 will only be outperformed by its sister monetary metal silver.

Friday’s jobs report might have seemed like the end of the world for precious metal investors. In fact it was pure gold. The Fed’s horrendous error on interest rates will be the catalyst for much higher prices.