I have recently emphasized the distinction between long-term (strategic) investment decisions and shorter-term (tactical) decisions. Strategic decisions should be based on one's financial circumstances, investment goals, and risk tolerance, combined with the long-term prospects for various asset classes. A primary factor for the return prospects of an asset class is its starting valuation. Entering a market at a low valuation level (relatively cheap to its history and to alternatives) sharply increases the probability of satisfactory returns. Entering at a high valuation level (relatively expensive relative to the investment's history) lowers the odds of achieving satisfactory returns. And entering a market with the asset's price well below its long-term trend or level improves one's odds, while entering at a price well above the long-term trend tends to reduce one's odds for success.
Strategic investment decisions can also be based on long-term themes, such as increasing scarcity of water resources or of commodities, such as oil. In such cases, as long as the long-term theme seems sound, one might continue to hold such investments, while reducing holdings or rebalancing the overall asset mix if prices rise so sharply as to be well above the long-term trend. Valuations might not be helpful in such cases. Gold falls into this category.
I have been a proponent of gold over the stock market since 2000. (My main reason has been that the price of gold reflects the (lack of) confidence in paper money and the monetary authorities of the world's major nations. In particular, I sharply criticized the policies of Alan Greenspan, who I thought was one of the worst central bankers in history.) Since that time, the gold price has risen more than sixfold, while overall stock prices have been about flat.
With gold prices rising this year for the eleventh consecutive year, I have increasingly thought that investors should look for the exit so they will know where it is (like before taking off in a plane). On 7/31, 8/10, and 9/15, I cautioned against making new or additional purchases of gold (it had risen to about 30% above its 200-day moving average).
I now suggest (re)entering the gold market. An appropriate price of gold is difficult, if not impossible, to value. Instead, I rely on the thematic approach and on market sentiment and technical measures. Sentiment measures now reflect widespread pessimism toward gold. When this has occurred since 1974, the annual price of gold rose by 24% on average. Similarly, "commercial" gold market participants are now buying heavily. This supposedly "smart money" condition also has coincided with an average annual gain in the price of gold of 24% since 1983. While I'd thought that the price of gold might decline to close to its 200-day moving average below $1600, I now recommend buying gold (with a targeted portfolio range of 5-20% of one's assets, depending on one's circumstances).
Steve Lehman
LehmanInvest.blogspot.com/
Gold: $1,656
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