FSO Editorials

Echoes from the Past

May Illuminate your Future Path to Wealth

by I. M. Vronsky, Editor-in-Chief, Gold-Eagle.com. March 30, 2007

Traditional long-term investors have always sought a good dividend yield plus reasonable average annual appreciation. I am not talking momentum traders nor scalpers who go in an out numerous times a year. Rather, I refer to those who embrace the multi-billionaire Warren Buffett strategy of buying and holding for the long-term. This investment focus assigns great import to the stock's dividend yield.

A simple test of the dividend yield as a forecaster of future stock prices is described in a study show below:
http://www.gold-eagle.com/analysis/stocks_over-valued.html

The analysis covered a 34-year period from 1941 - 1975. It concluded dividend yield is a prime factor in determining whether stocks (i.e. Dow & S&P Indices) rise or fall in the next 12 months.

Fast forward to March 2007. DOW average dividend yield is today a mere 2.50%. As we all well know history does NOT always repeat. NONETHELESS, the current pitifully low dividend yield would suggest Wall Street stocks might drop 10% in value during the next 12 months. Here's today's dividend yield:
http://www.indexarb.com/dividendYieldSorteddj.html

Some might counter-argue the early study (1941-1975) does not take into account the greatest bull market in history (1984-2000). Nevertheless, the original analysis did encompass the long bull of 1946-1972 and the 1973/74 stock market debacle. Therefore, in my view a miserly low 2.50% dividend yield does not augur well for rising stock prices during 2007...and perhaps well into 2008.

In conclusion Wall Street stocks at these levels do NOT inspire me with confidence. Moreover, I would even project this reasoning to most world stock markets, which remain over-valued...despite the recent sell-off.

And How About Real Estate?

Certainly we have heard all our friends and relatives boast about the unbelievable appreciation they have made in their real estate investment. And Indeed they have made a good return relative to nearly all other type of investment vehicles. The chart below shows the investment performance of the Vanguard REIT Index Fund (a basket of real estate investment across the US):

A +173% appreciation in 6 years...not shabby, not shabby when compared to nearly all investment vehicles. However, let's compare the US real estate investment performance to HUI in the same time period:

Surprise, surprise...US real estate is left dead in the water.

HUI boasts (+729%) well OVER FOUR TIMES greater return than real estate (+173%).

However, I need to clarify the above lopsided comparison. A person's house is NOT AN INVESTMENT, and should never be compared to anything. Your house is YOUR HOME...and should never be thought of something for buying and selling or trading purposes. Nonetheless, in the most recent US Real Estate Bubble, as much as 30% of all transactions were by speculators (a.k.a. as "Flippers"), who bought a property for say $200,000 -- with the express intention of reselling it in a very short period for $250,000 (or whatever figure he could get from the next �sucker�).

In my view all investors should first own their own home. But with one's investment money one should seriously seek HUI like investments that have done exceptionally well during the past 6 years vis-�-vis all the rest.

Although there is no guarantee the future will repeat the past, I challenge anyone to show me something better with as little risk.

What Other Investment Factors Merit Attention?

It's no secret US real estate is going to hell in a hand-basket. And as LBJ was fond of saying, ��and it's gonna get a lot worst before it gets any better!�
Subprime forecloses are avalanching around the country, which may threaten the solvency of errant banks who granted too many �NINJA Loans� (No Income No Job No Assets). Blinded by their unbridled greed many bankers gave loans to those who heretofore were qualified as indigent. A pathetically sad example of this financial atrocity is the recent avalanche of foreclosures across the nation, led by Florida where the foreclosure rate skyrocketed 91%....UP NINETY-ONE PERCENT !!
Only the naïve and ill-informed delude themselves that oil price increases will abate. Au contraire -- $3/gallon gasoline will be considered cheap in the future. In fact $70/barrel crude is a fait accompli this year, according to global oil guru T Boone Pickens.
China is being suffocated by burgeoning foreign deposits while choking on indigestible amounts on US Treasuries. Moreover, China's trade surplus with the USA grows like a terminal cancer. For its own good, Chinese government officials have publicly stated their intention to DIVERSITY their growing mountain of foreign reserves. Poignantly relevant, The Peoples Bank of China (central bank) has a minuscule amount of gold reserves vis-�-vis their more than US$ One-Trillion in foreign reserves. The dire implication for the greenback is self-evident.

So, What's Left?

To be sure, I AM BIASED. But my bias is predicated on many years of study, experience and recent investment history, which teach me that it behooves all investors to have a significant amount of their total net worth in some form of precious metals (ie bullion, select gold and silver stocks and/or precious metal coins). The chart below should convince all but financial masochists and the clinically retarded where the best return might be obtained going forward. It demonstrates 6-year comparative performance of HUI (+732%), SILVER (+188%), GOLD(+145%), DOW (+15%) & NASDAQ (-24%). It is almost axiomatic to observe, WALL STREET STOCKS AIN�T CUTTING THE MUSTARD !!

Not to comprehend the awesome and illuminating ramifications of the above chart may prove to be hazardous to your financial health�as HUI (gold and silver equities) leaves the rest dead in the water.

Mirror, mirror on the wall, WHO is the fairest of them all?
Yesterday, today and the foreseeable tomorrows!

I. M. Vronsky started one of the first gold internet sites in 1997 -- way ahead of the pack. Many have copied, but few can compete with Gold-Eagle.com for metals market insight, charts, editorials, and a premier Forum.

Contact Information

I. M. Vronsky | Editor-in-Chief, Gold-Eagle.com | Email