By Susan C.
Walker, Elliott Wave International
April 11, 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
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
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 [Editor's note: 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]
Susan C. Walker writes
for Elliott Wave International, a market forecasting and
technical analysis company. She has been an associate editor with Inc.
magazine, a newspaper writer and editor, an investor relations executive and a
speechwriter for the Federal Reserve Bank of