…A prudent investor is able to spot when an asset becomes a high risk and then has the sense to move his or her funds into one that is a lower risk…[but] complacency has turned investors brains into mush…The majority don’t follow this practice, though. They are caught by surprise when a market correction/crash occurs…even when they are shown that the indicators are pointing to assets that are extremely risky. They ignore it and continue business as usual.
The original article has been edited here for length (…) and clarity ([ ]) by munKNEE.com – A Site For Sore Eyes & Inquisitive Minds – to provide a fast & easy read.
The KISS Principle – Keep It Simple Stupid
Regardless, if we can understand the fundamentals, then we would be foolish to keep most of our investment funds in stocks and real estate assets. The following chart follows the KISS Principle – Keep It Simple Stupid:
You don’t need to be a highly-trained financial or technical analyst to spot the HIGH vs. LOW-RISK assets in the chart above. Hell, you don’t even need to see the figures in the chart. If we understand that all markets behave in cycles, then it’s common sense that asset prices will peak and decline. We can plainly see that both real estate and stock asset values are near their top while the silver price is closer to its bottom. Thus, assets that are near a top are HIGH RISK, and those near a bottom are LOW RISK. It’s really that simple.
U.S. Real Estate Values Are HIGH RISK
Now, if we look at each chart separately, we can easily spot which assets will be the BIG LOSERS in the future. According to the St. Louis Federal Reserve data (FRED), the U.S. Median Home Price of $324,550 is nearly $100,000 higher than the previous peak in 2007:
…[In spite of that,] Americans continue to pile into new and existing homes because they believe the prices will continue higher forever. Unfortunately for American homeowners and buyers, the Fed’s current policy to increase interest rates over the next year is not positive for higher median sales home prices.
Dow Jones Index Is EXTREMELY HIGH RISK
While U.S. median home prices are 52% higher than their low in 2009, the Dow Jones Index is over 220% higher during the same period. If U.S. real estate values are HIGH RISK, then the Dow Jones Index must be an EXTREMELY HIGH RISK:
Going by the 200 Month Moving Average (MA) in red, the Dow Jones Index is 11,000 points higher, or 45% over-valued. However, if we went by the Dow Jones low in 2009, then the index is 73% over-valued. Again, when assets are way above their baseline values, then they enter into the HIGH-RISK category. It doesn’t matter if U.S. home prices or the broader stock markets continue to rise for a while, they still behave as highly risky assets.
Silver Is the LOWEST RISK Asset
Now, if we look at the silver price, we see a much different setup. Not only is the silver price way off its highs set back in 2011, but it is also just 40 cents above its 200 MA:
With the silver price being 2% above its 200 MA, it is clearly the LOWEST RISK asset compared to the Dow Jones or U.S. Residential Real Estate values.
Commitment Of Traders (COT) Report Suggests Silver Price Is Closer To A Low
Furthermore, the Commitment Of Traders (COT) Report suggests that the very low net commercial silver short position also indicates that the silver price is closer to a low:
The chart above shows that the Commercials present net short position in silver is back to its cycle lows. While the Commercials could continue to liquidate more short contracts, as the silver price falls a bit lower, we are closer to forming a bottom than a top.
If we use logic, then the silver price is the LOW-RISK asset to own while U.S. residential real estate and stocks are HIGH-RISK assets to sell.
Of course, it will take time for these markets to correct, but nothing goes up or down forever. However, the horrible irony of how the markets will play out in the future is to watch investors get wiped out because they are unable to distinguish between HIGH and LOW-RISK assets.