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Why move out of stocks to both gold and T-Bils?

*Dow Theory Letters, Richard Russell, September 14, 2006

“Everybody’s wondering about gold. Is gold finished, and has fiat paper won? Is the Federal Reserve more powerful than real money? Should we sell our gold for Federal Reserve Notes (we continue to call them dollars)?

My answer is no, no and again no.”

“Gold  has corrected back to its 200-day moving average, which is not that unusual. RSI is down to 29.7 which is about at the oversold level. The histograms are still negative, but not severely so. And the full stochastics are down to 8.80, which is at the oversold level, and a level that has triggered many previous turns to the upside. So my conclusion is that gold is correcting and the correction is still in progress.

Gold down, silver down, oil down, CRB Commodity Index down, housing down — increasingly I’m wondering whether we aren’t starting to deflate. That was my original thought when all the above started to break down. I said that the US’s massive debt structure was basically a vehicle for deflation. And that if the Fed failed to “inflate enough,” the basic forces of deflation would take over. Could that be what’s happening, or at least what’s beginning — now?

Here’s a key question and a key test: If you invest today’s dollars in “safe” T-bills, where will you do best in terms of retaining purchasing power — rolling over your T-bills and collecting the interest or simply sitting with your gold?

And the answer? No one knows. For this reason, it pays to have both gold and T-bills. But why T-bills when you could have all your money in stocks? The only answer to this is that historically, stocks are very expensive at this time. Why do I say that? Because the dividend yield on the S&P 500 is only 1.9 percent before taxes. And T-bills pay you better than twice as the yield on the S&P.

But stocks can go up, while T-bills don’t, you argue. No, is my reply, stocks HAVE gone up. But how can you be sure that they will continue to go up? And, of course, you can’t. The odds on stocks advancing increases with higher dividend yields. The higher the dividend yield, the surer that stocks are “cheap” and that they will head higher. On that basis, the S&P providing a dividend yield of 1.9% and selling at 17 times earnings is a crap shoot. Based on past history, the odds of stocks going “up” from here are not good. I’m not saying that they won’t go up, I’m saying that you’re playing with unattractive odds.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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