Exit Stocks and Buy Gold?
Fed’s Yellen Says Equity Valuations High, Warns of ‘Potential Dangers’
Reuters (May 6) — Federal Reserve Chair Janet Yellen on Wednesday pointed to high valuations in the stock market and said the central bank needs to keep close tabs on the non-bank lending sector.
Yellen was answering questions from International Monetary Fund Managing Director Christine Lagarde at a “Finance and Society” conference here.
“I would highlight that equity market valuations at this point generally are quite high,” Yellen said. “There are potential dangers there.”
Yellen also pointed to open-ended mutual funds, and the potential liquidity risks the funds could face amid a wave of redemptions.
JK Comment: I know two things that aren’t ‘overvalued’….One starts with a ‘g’ and ends with an ‘old’ and the other starts with an ‘s’ and ends with an ‘ilver’. Yellen makes an interesting side comment at the end of the article about open-ended mutual funds – in which 46% of households and better than 90 million Americans hold assets (very often in their retirement plans). Here’s a great article on the statistical distribution of ownership of mutual funds.
It should be noted that the most common investor in mutual funds is your average, every day worker, saving for retirement and hoping for a better future. If what Yellen says is right, as is often the case, when stocks start to slide, it won’t be the big guys that get hurt. It will be everyone else. Those holding overweighted percentages in stocks would be wise to ask themselves whether or not they’d prefer to be ‘early’ or ‘late’ when this inevitable cycle plays out…because if what Yellen is saying is correct, if you’re late, it might be a question of whether or not you can get out at all in that moment, or are forced to make a choice to liquidate well below the market, or days to weeks later.
When looking at the DOW/Gold ratio (the relative value between the two), buying gold today is very similar to buying gold in late 2007…and you’d hard pressed to find investors who don’t wish they had purchased gold in 2007. It doesn’t take an economics degree to see the almost overwhelming similarities between today’s market and that of 2007, despite the almost comical short-term memory of the investment community. 2008 was only seven years ago! Yet here we are again, where the majority seem to believe that both real estate and equities will continue to rise forever. (Shaking my head).
Even though we are precious metals brokers here at USAGOLD, we don’t recommend a 100% portfolio allocation to gold and silver. We believe in prudent diversification, and a modest 10-30% of assets in precious metals – depending, of course, on your own personal financial picture, as well as your particular level of concern about the state of the US and world economy, the future of fiat currencies, and the potential long-term ramifications of our out of control debt, among other things. But no matter where you stand, today may be a good day to look at the value of your equity positions, look at the value of your real estate, and make sure that gold is still holding an appropriate percentage in your overall position. It may prove time well spent, and may prove to be the very move that keeps you resting easy when the ‘dangers’ Yellen speaks of move from the realm of ‘potential’ to full blown reality.
– Jonathan Kosares
