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Posted January 20, 2021

Ray Blanco

By Ray Blanco

The Ugly Truth About Gold

The big S&P 500 Index is off to a solid start in 2021 the big index is already bumping up against all-time highs this year, ramping up investors anxiety over a pricey market.

A new E-Trade survey of investors with $1 million or more in a brokerage account shows that most think were in some sort of stock market bubble.

Says CNBC: Only 9% of millionaires surveyed by E-Trade think the market is nowhere near a bubble.

If youre part of that 91%, it makes sense to think about a game plan for 2021. Its one thing to think stocks are overvalued and quite another thing to dump stocks a year or two early and miss out on massive upside as the uptrend in stocks rallies on.

Last week, we looked at the data that suggested the best thing to own when the stock market tops might actually be more stocks

Today, lets talk about the ugly truth about gold.

The conventional wisdom has long been that gold is a wise contrarian play to frothy stock market valuations. But that doesnt pan out in the data.

Looking back at all 15%-or-worse S&P 500 drawdowns from 1975 through today times when investors could reasonably feel like stocks were in crisis territory gold has only worked about half the time.

Want a better investment than gold when stocks tumble double digits? Turns out stocks themselves offer a better historical return:

What about something more severe? In general, shouldnt gold do well when stocks dont? It turns out that gold is one of the worst stock market hedges there is:

To be clear, Im not saying that you shouldnt own gold.

You just shouldnt own it if youre counting on gold to act as a sort of insurance policy for your stock portfolio.

Instead, the evidence continues to suggest that the ignored names in this frothy bull market will perform much better than a move to cash, gold or just about anything else when the next top comes.

And it turns out that many of the most ignored names in this market are actually small-cap tech stocks that arent part of big indexes like the S&P 500.

Theres a historically wide valuation gap between the Big Tech names currently leading the stock market and the tiny stocks that are off most investors radars. The last time we saw separation this big, that group of dirt-cheap stocks paid investors 23% average annualized returns for the next five years.

Just to reiterate what I said last week, I still think its too early to shift away from Big Tech and toward smaller names. The trend is still your friend in 2021 at least for now.

But the conventional wisdom is wrong about gold.

And knowing that could help pay you big returns if and when the current market momentum reverses course.

Sincerely,

Jonas Elmerraji, CMT

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