Gold's negative correlation with stocks combined with the fact that the price of mining shares are leveraged to the price of gold is the reason gold shares offer a very efficient form of portfolio insurance against catastrophic stock market declines. O'Higgins provides a significant amount of data and he explains the logic behind his methodology. In Beating the Dow with Bonds , O'Higgins has illustrated how, by using bonds, investors can beat the Dow by an even more remarkable margin. As noted below, we have imposed a gold investment on the O'Higgins results to see whether we could further improve on the fantastic results gained by O'Higgins. However, even if you do not buy the book you will benefit from it by subscribing to this newsletter because the O'Higgins methodology has become a major input into the shaping our own Model Portfolio.
Earnings yields are simply equity earnings divided by the price of equities.
If Step 1 tells you to buy bonds, you then look to the gold price to determine whether you should buy long term or short term bonds. If the price of gold on January 1 of the New Year is higher than on January 1 of the prior year, you buy short-term bonds. Otherwise, you buy long term bonds. Because these are Dow stocks, they are high quality companies, which you are buying at low, out of fashion prices. Huge Gains from the O'Higgins Model Chart II on the opposite side of this page illustrates an enormous advantage using the O'Higgins model.