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Lear Capital's Gold Vs. S&P 500 Report

by David EngstromJune 30, 2010

One of the many market reports I receive or review daily, included a stern warning about the direction in which the S&P 500 could be moving.

According to David A. Rosenberg, Chief Economist and Strategist for Gluskin Scheff, a Canadian Wealth Management firm, "For the first time, the S&P 500 broke below the 1,040 threshold on an intra-day basis and this was a critical level, which up until yesterday, was holding. But no longer."

In addition, there was 60 times more volume to the downside than the upside.Rosenberg goes on to say, "Only one of the S&P 500 companies saw their stock price rise (medical producer Zimmer Holdings), the first time that happened since September 29, 2008. History shows that from that day to the March 2009 low, the S&P 500 had 40% downside."

Meanwhile, bonds are zooming higher as the flight to quality has now left the gate.Because bond yields move inversely to the price of bonds, the 10 year note today dipped to a yield of just 2.94%.Even if you believe, the reported 2.2% inflation rate, how desperate are people to earn a net annual return of .74%?

As I look at the charts, the 2.94% yield of today matches almost exactly the average inflation rate over the last 10 years.If the same holds for 10 more years that means bond buyers of today will get nothing for their commitment of cash as inflation could potentially eat up all the returns.

Now, I try never to assume the people who spent billions of dollars on bonds today are knuckleheads.Sometimes it's hard but admittedly, I never spent a billion dollars on anything before so what do I know?So, if I give the benefit of the doubt, I may have to conclude that those who paid more for bonds today and drove down yields, don't expect inflation to rise.Maybe they even expect deflation.That could explain a lot of things.

As you have read in previous Lear Capital reports, in a deflationary environment stocks will fall and gold will play an increased role in protecting and growing your wealth.Today, we saw evidence of all of this as gold rose slightly while stocks slid further back into the abyss of March 2009.

This may also explain why central banks of the world are buying gold like it's actually in limited supply and why European gold demand, of late, has been skyrocketing.You may recall that in Greece, for a time, citizens were happy to buy gold at a price equivalent to $1700 USD an ounce.

No, it's not time to panic but when the gold charts consistently point higher and the stock charts seems to be heading in the other direction, maybe it is time to buy gold!

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