Don't Quit Your Day Job…

Long written off as the stuff of ‘goldbugs’ and conspiracy theorists (mostly unfairly), gold is coming into its own as a favored investment. Monday, gold climbed to an all time high of $1174 an ounce, enough to make many people sit up and take a look. Gold has been in a bull market for a long time… is gold for real, or are we witnessing the third bubble in a ridiculously short time (housing, oil, gold)?

Or is it? The Dow Jones Industrial Average increased 2.03% yesterday, on the surface a nice gain for the index. Rises such as that give confidence to investors that the worst is over and it’s time to work back into stocks. Let me briefly present the other side of that argument.

One pays a dividend, has enterprise value, and has the potential for growth. One is a piece of metal long accepted as a store of value. Which one do you invest in: gold (or silver) mining stocks, or gold (or silver!) itself?

What better way to start writing again (Happy October!) then to write about an investing fallacy: over periods of 20 years or longer, many investors automatically assume that stocks are the best investment. Really, it isn’t fair. Stocks have behaved (before this decade anyway) in such a controlled fashion, gaining 10% or so on average every year, that it is only natural for many investors to assume that this trend will continue. Well, as Jason Zweig of the Wall Street Journal makes clear, that isn’t the case.

From the Wall Street Journal yesterday: the bear market has taken a swipe at college savings rates. In fact, it’s taken more than a swipe; 47% of parents are savings less than before or nothing towards the education of their children. Ouch.

How did you react to the stock market’s (defined, in my mind, as the S&P 500 index) recent precipitous drop? If you’re like many investors, you moved out of ‘risky’ assets such as stocks and into ‘safe’ assets such as money market funds and stable value funds. Unfortunately, the seeming safety of fixed income investments is a mirage… hidden forces, such as the danger of inflation, make ‘safe’ investments less safe than first glance. Paradoxically, the recent movement to safer portfolios has put many people at risk for a reduction in the real value of their money in inflation adjusted dollars.

As noted in a CNN article today, one way to gauge the market’s reading of current conditions is by reading the bond yields. Twice I’ve taken a look at how you can use Treasury Inflation Protected Securities plotted with the Daily Treasury Yield Curve to get a glimpse at the market’s inflation expectations (TIPS adjust their value due to CPI). Some other interesting ratios are presented, the treasury yield curve on its own, and the spread between junk bonds and government debt.

I hope I convinced you in my earlier article you’ll soon be dealing with higher taxes. I’ve got some more slightly depressing news for you… you might be dealing with a reduction in the amount you can contribute to your 401(k) in the near future.

Yes, as Robert Powell says in this MarketWatch article, to go along with retirees not getting an increase in their Social Security payments, you may be losing some of your ability to sock away money in your 401(k). Nice.

I’d be remiss if I didn’t highlight Warren Buffett’s post today in the New York Times. Buffett is never lacking with a quote or an opinion, and on the topic of deficit spending he’s no different. Hilariously, he refers to the massive influx of liquidity into the economy as “Greenback Emissions”. I definitely agree with Buffett on this topic; we’re in for a pretty good amount of inflation if the government doesn’t dial back it’s money printing efforts.

In an earlier article, I detailed how you could check on inflation expectations using information publicly available from the Department of the Treasury. Using the data they provide, it is simple to calculate the market’s expectations for inflation over the next 5, 7, 10, and 20 Year periods. Let’s take another look not at the 2009 inflation rate, but the expected inflation rate of the future viewed through ’2009′ colored glasses.