 Gold, the
Dow, T-Notes: Which Does Best During Recessions?
Susan C. Walker
Elliott
Wave International
April 14, 2008
Each year, the NCAA college
basketball tournament winnows its starting field of 64 teams
to the Final Four teams who play for a chance to become the national
champion. Congratulations to the University of Kansas and the
University of Tennessee, this year's men's and women's basketball
champions.
The structure of the NCAA tournament
got me to thinking. Wouldn't it be great if we could set up brackets
for our own investments the same way start with 64 equities,
bonds, mutual funds, commodity futures, metals, etc. Then let
them duke it out against one another to see which ones emerge
as the "Investment Final Four"?
Click here to download a free 5-page
report from Elliott
Wave International with even more information on which investment
does best during recessions. The report, excerpted from Bob Prechter's
Elliott Wave Theorist, includes in-depth historical analysis
and six eye-opening tables.
Since most of us have neither
the time nor the money to act as our own version of the NCAA
(which might stand for the "National Coordinator of Asset
Allocation"), it's worth knowing that Bob Prechter of Elliott
Wave International has already set his mind to the task. He has
specifically explored which investments do best in times of recession
and which do best during economic expansions. But instead of
starting with a field of 64 investments, he researched the three
most popular investments gold, the Dow, and Treasury bonds.
We can call them the Treasured Three, rather than the Final Four.
Gold and Recessions
Since economists and even Ben
Bernanke, chairman of the Federal Reserve, now admit that it
looks like the U.S. economy has entered a recession, many people
may wonder whether they need to change the mix of their investments.
In particular, as some prices keep going up notably for
food and gas the threat of inflation makes people more
interested in gold as an investment, since it's usually seen
as a bulwark against monetary inflation.
It is this conventional wisdom
that piqued Prechter's curiosity. He wanted to find out whether
it would hold up to a reality test. As he writes in The Elliott
Wave Theorist, "I have often read, 'Gold always goes
up in recessions and depressions.' Is it true? Should you own
gold because you think the economy is tanking? Whenever we hear
some claim like this, we always do the same thing: We look at
the data."
So he and another Elliott wave
analyst ran the numbers, reviewing the behavior of these three
key investments during recessions following World War II, from
February 1945 through November 2001. This is what they learned:
Gold was not the best investment during
recessions in terms of total return
The winner of this tournament
was actually Treasury Notes, which had a total return of 9.96%.
In contrast, gold had a total return of 8.80%, and the Dow came
in at 6.89%. But that's not all once they figured in the
transaction costs for each investment (at a 2008 level), gold
fell from second to third place as a worthwhile investment during
recessions. The total returns with transaction costs came out
this way:
| 1. T-Notes |
9.82% |
| 2. Dow |
6.85% |
| 3. Gold |
4.80% |
This result turns conventional
wisdom on its head. It's also worth being aware of as you invest
in 2008. Here's how Prechter sums up the results:
The Best Investment During
Recessions
The most important question,
however, is not whether the Dow beat gold or vice versa but whether
making either investment would have been better than taking no
risk at all. Table 3 [see
free report provided by Elliott Wave International] shows
that ten-year Treasury notes beat both gold and the Dow during
recessions since 1945, and they did so far more reliably.
T-notes provided a capital gain in 10 of the 11 recessions, and
of course they provided interest income during all of them. And
the transaction costs are low.
 So if you want to make money reliably
and safely during recessions and depression, you should own
bonds whose issuers will remain fully reliable debtors throughout
the contraction. Of course, as Conquer
the Crash (Bob Prechter's best-selling business book)
makes abundantly clear, finding such bonds in this depression,
which will be the deepest in 300 years, will not be easy.
Conquer the Crash forecast that in this depression most
bonds will go down and many will go to zero. This process has
already begun. This time around, you have to follow the suggestions
in that book to make your debt investment work. [The Elliott
Wave Theorist, March 2008]
Apr 11, 2008
Susan C. Walker
321gold Ltd
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