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The Trend is Your Friend

By Bruce Vanderveen on May 22, 2013

Equities are surging even as precious metals spiral downward. The Dow/Gold ratio, having fallen to a record low by late summer 2011, is once again climbing. Currently a little over 10, the ratio is still low by historical standards (it was 50 in 2000).

Blue-chip equities and real estate are the new market leaders. They are taking the baton away from precious metals in the race to stay ahead of central bank balance sheet expansion. Equities, as noted above, are still cheap compared with gold. Real estate (especially US single family homes) is only now beginning to show signs of recovery from the crash.

Don’t fight the market: steer clear of precious metals. The “trend is your friend” and for now the trend in precious metals is down while that of equities is up. You can short precious metals with ProShares UltraShort Gold (NYSE: GLL) and ProShares UltraShort Silver (NYSE: ZSL).

Blue Chip ETFs

Broad based blue chip exchange-traded funds (ETFs) such as PDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), and PowerShares QQQ (NASDAQ: QQQ) are excellent and easy ways to enjoy the trend up, with little investment in time or research.

The above ETFs will get you a share of some of the best international companies in the world, companies such as International Business Machines (NYSE: IBM), Johnson & Johnson (NYSE: JNJ), Apple (NADASQ: AAPL), Chevron Corp (NYSE: CVX), General Electric (NYSE: GE), and many others.

Money is flowing out of sovereign bonds, bank deposits, and precious metals, with equities now perceived as a “safer” asset class, less likely to be confiscated by cash starved governments.

US Real Estate

Last year, Warren Buffet in an interview on CNBC said he saw single family homes as the best opportunity available. The takeaway is that now is the time to buy a home to live in. It usually pays to get the best house you can afford, in the best possible neighborhood.

You could also buy houses and rent them out. However, unless you like being a landlord, a much easier route is to buy shares in companies that own residential real estate.

Avalonbay Communities
(NYSE: AVB) is a Virginia based real estate investment trust (REIT) that owns or has an interest in over 80,000 residential units located in ”high barrier-to-entry” apartment communities across the US Northeast, Mid-Atlantic, Pacific Northwest, and California.

Avalonbay pays a 3.2 percent quarterly dividend. The dividend has increased but never been cut (even during the 2009 real estate crash) over the last 15 years.

With the percentage of Americans who own their own houses down since the crash, demand for rental housing is likely to stay strong. Companies such as Avalonbay will continue to benefit.

The Blackstone Group LP
(NYSE: BX) is a $12 billion asset management and financial services outfit that has a huge US real estate portfolio. The portfolio includes hotels, commercial offices, and over 16,000 single family houses. The houses were mostly bought at distressed prices, so appreciation may be significant. The company’s dividend yields 5.3 percent.

Blackstone’s stock has been hot, up nearly 400 percent since 2009 and 40 percent year-to-date. Management seems to be doing exceptionally well. With single family homes now just starting to appreciate, the future looks good for The Blackstone Group.

Warren Buffett said it best: “Gold doesn’t do anything.” The recent declines in precious metals may once again prove Mr. Buffett knows what he is talking about.

Bruce Vanderveen is a Florida-based writer and investment analyst.

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