Long Gold, Short Stocks

Go 15% physical gold, says this analyst, and sell the S&P short...

AN OLD-SCHOOL straight talker who doesn't mince words, Ron Struthers believes the US economy never came out of the 2008 recession, and predicts America is about to face a whole new set of debt problems at the state level.

"Any one of the US states is bigger than Greece and 40 or more of them are in the same bad shape," Struthers warns. Editor of Struthers' Resource Stock Report since retiring young from IBM over 20 years ago, he continues to recommend investors fortify their portfolios with 15-20% physical gold and another 40% in cash – ready to jump onto bargain opportunities.

Here Ron Struthers speaks to The Gold Report about his long-term investment approach to picking major trends and sticking with them.

The Gold Report: According to Struthers Resource Stock Report earlier this month, the market rally would continue for as little as two weeks. What fundamentals led you to that conclusion?

Ron Struthers: In the first place, the US economy has never been in recovery. It was more or less just a statistical recovery. GDP increased because of the way it is calculated, but the real economy and people on the street experienced no growth. Better employment numbers were the result of temporary government hires and those created by the Bureau of Labor Statistics' (BLS) small business birth-death rate model. "Cash for Clunkers" helped the auto industry temporarily, but now auto sales have plummeted. Stimulus for housing only slowed or paused the decline; now that those programs have expired, housing has plunged further.

I could go on, but those bearish fundamentals and others are coming back to the point that the market and its followers are beginning to realize the economy is still declining. A lot of people are calling for a double-dip recession, but I don't even think we came out of the recession. This is just a deeper plunge, and will feel more like going into depression.

There are also the debt issues. So far this is mostly focused on Europe, but the US is a bigger problem. Many of the US states are bigger than Greece, and 40 or more of them are in the same bad shape. I expect that to come to the forefront before long because those states are going to have to have federal bailout assistance.

TGR: Are you saying the US government is going to have to print more money?

Ron Struthers: They'll probably try that as a solution. Whether the market will put up with it, I don't know. We'll see. At that point, you'd have to watch the bond market and the US Dollar to see how they're reacting. Like Europe, they might have to go more with severe austerity programs that will push the economy down further.

TGR: You watch the market very closely. Your research seems to indicate that you look to the S&P 500 for monitoring the market.

Ron Struthers: I think that's the best index to follow as a gauge for the market. It's fairly broad based compared to the Dow.

TGR: What are you seeing in the S&P 500 that made you think it would be just a short-term rally?

Ron Struthers: We had that topping formation in May and June. I was actually expecting to see the market rally up further, maybe come close to retesting that top as more of a confirmation that we had a top. Instead it's done much worse. It's actually broken down far enough to make a lower low than February's. It's really turned into bear market territory in the short term.

TGR: As a hedge against a significant market correction, you recommend investors hold about 40% of their portfolios in cash. Does that include physical gold?

Ron Struthers: No, I've been suggesting about 15% in gold. If you go 20%, that's not bad either. In my portfolio, we're really sitting on 15-20% gold and 35- 40% cash.

TGR: What's in the cash component?

Ron Struthers: Right now it's strictly cash, but I've been suggesting that cash be used to start shorting the stock market through ETFs. Avoid leveraged funds, so you get better exposure for a longer-term hold. You really have to be a trader to use leveraged ETFs effectively.

TGR: Is the premise of the ETFs you like an inverse relationship to the S&P 500?

Ron Struthers: Yes, just 1-to-1 in terms of an inverse relationship, and not leveraged at 2-to-1 or 3-to-1 like some of the ultra-short ones. I suggest putting about a third of the cash position into a straight inverse S&P fund.

TGR: How long should you stay vested?

Ron Struthers: The time horizon we're looking at for the market to move down substantially is before the end of the year. If the S&P rallies more and we have a better entry point, we'll add to the position. Or if it breaks down further and confirms momentum to the downside, we'd also add more to the position.

TGR: You quote a stat in another Struthers Resource Stock Report that says 90% of short-term trades lose money. You also stick to the old adage that says, "The trend is your friend." With those two points in mind, what are some long-term trends you see in the gold sector?

Ron Struthers: Obviously physical gold itself; it's been in a bull market for 8–10 years, depending on how you want to measure it. We basically don't sell or trade our gold. We just buy and hold it. We've been increasing the percentage held; we were at 0%, then 5%, 10%, 15%. We are just going to hold it until I see some good signs that the market is peaking out and reversing. Then, of course, we'll be selling.

TGR: In that 15%, what is your equities-to-bullion mix?

Ron Struthers: That 15% is just Gold Bullion. I suggest you have actual physical gold like coins and bars or funds. I really watch the premiums. The one with the lowest premium is what I'd be buying.

TGR: So you believe in holding physical gold?

Ron Struthers: Yes, you can look at it as insurance or just a core savings. Gold bullion holds its value. If you hold cash money in the bank, you lose purchasing power all the time. With low interest rates, your return on investment is not good; you're not getting anything on it. And there aren't many good alternatives. Either Buy Gold or hold cash that pays you nothing. You could put your money into bonds, but they've been in a 20- to 30-year bull market so there's nothing left to be gained there. The risk is high that bondholders are going to lose money in the years ahead as interest rates rise, pushed by high debt levels. Or you could gamble in the stock market. I think gold is a pretty important asset to hold right now.

TGR: But for people who don't want to buy Gold Coins or hold bullion, Gold Mining equities are another way to gain exposure to gold. Some gold plays are always media darlings.

Ron Struthers: The key thing in any of these companies is the people. It's the people who build a company, so it's important to have confidence in who's running a company. That's the number-one thing I look for in junior mining companies. The other consideration when I'm looking at junior gold stocks is their gold in the ground.

TGR: Tell us a bit about what you like about Buying Silver as a commodity.

Ron Struthers: Physical silver has two roles – as a commodity and for industrial demands. It's big in the electronics industry, which we know just keeps growing and growing. It's also used heavily in the automotive sector, which may not be growing here, but Asia is seeing strong growth; so there's an underlying demand there it terms of industrial uses.

Silver has become more of a currency, as well, along with gold; it's sometimes called "poor man's gold." Silver was in all the coins up until the late 1960s. It was accepted as real money until that point. I think demand will only increase as the Gold Price rises. New investors will come into the precious metals market and they might not want to pay $1500 or $2000 for an ounce of gold. They'll look at silver as a cheaper way to get into the market. I think that will be another market development down the road.

TGR: What's the multiple right now of silver to gold?

Ron Struthers: In the neighborhood of 66-to-1 or 67-to-1...

TGR: That's a little on the high side compared with historical averages.

Ron Struthers: Yes, historically, I think it'd be more like 55-to-60 or close to that range. It's offering a little bit of value when you measure it that way. I think silver has a bit more potential in terms of percentage growth than gold. It probably has to break through the $20 mark, just as gold had to with the $1000 psychological barrier.

TGR: Then it might shoot up from there?

Ron Struthers: Yes, that's what I'm looking for. While gold has broken well above its 1980 high, which was just over $800, silver is nowhere close to the $50 high it achieved back then.

TGR: This has been great. Thanks so much for your time today, Ron.

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