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Gold $1197.1 3.2
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Talk to a representative: 855-242-4121


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Buffett’s Favorite Stock Market Metric Screams “CRASH”

Legendary investor Warren Buffett is no fan of gold. That doesn’t mean anyone who is partial to precious metals should discount all of what he has to say. Despite how misguided the Oracle of Omaha is on the investment utility of gold (in my opinion), he’s still Warren Buffett, and it’s never a bad idea for an investor to listen up when he’s speaking.

Buffett’s thoughts on the equities markets are of particular value, of course. There are a number of excellent economic reasons some investors fear a significant correction or bear market, and it’s worth paying attention to the key measurement Buffett relies on to determine if the stock market is overvalued.

That measurement, known as the Buffett Indicator, is reportedly the investment sage’s single favorite metric when it comes to valuation of equities markets. According to a recent Yahoo! Finance article, the Buffett Indicator appears to be screaming that a stock market crash is headed this way.

Buffet Indicator: Total Market Capitalization vs. GDP

So what is the Buffett Indicator? It’s the number produced by dividing total market capitalization (TMC) of all U.S. stocks by the latest gross domestic product (GDP). The higher the number, the likelier stocks are overpriced and due for a fall.

As with many such metrics, the Buffett Indicator doesn’t officially declare which stocks are too cheap or too expensive. The best value of this metric is gained by reviewing its historical position in comparison to periods when the stock market hit the skids or began to soar.

The chart below shows significant periods of upward and downward movement in the GDP compared to all U.S. equities (total market capitalization) – this ratio is the Buffett Indicator. Do you see the sharp drop-off in the metric from 2000 to 2002? It coincides with the fallout from the burst of the dot-com bubble. The plunge in the ratio from 2007 to 2009 matches the market’s collapse during the Great Recession.

Ratio: U.S. Total Market Capitalization (TMC) to Gross Domestic Product (GDP)

(The Buffet Indicator) 

(Chart Courtesy of GuruFocus.com)

A more expansive view of the millennium’s first decade, from 2000 to 2009 (see chart below), reveals a plunge in the TMC/GDP ratio from a high of 148.50 all the way down to 57. Overall, for that period, the Dow Jones Industrial Average returned -30%, while gold climbed roughly 235%. During this period, the Buffett Indicator fell from 148.50 to 57. The Buffett Indicator is presently at 143.70.

Gold vs. Dow Jones Industrial Average

03/30/2000 to 03/30/2009    

(Chart Courtesy of StockCharts.com)

Right now, at over 140%, the Buffett Indicator is about as high as it’s ever been. As with other metrics, we can’t rely on the indicator itself to project what the markets could do next. But the measurement is near an all-time high AND an array of economic obstacles such as higher interest rates and a worsening trade climate are gathering. That makes it difficult to disregard the prospect of a massive market downturn in the near term.

In a cyclical economy, markets that go up … and up … by definition must eventually come back down. The current bull market has been marching along for well over nine years now, helped in no small way by the Federal Reserve’s multiple efforts at unprecedented levels of quantitative easing. Assuming the bull market remains intact for just a couple more months, it will replace the bull market that ran from October 1990 to March 2000 as the longest ever. Note: the bull market that ended in March 2000 was followed by a bear market in which the S&P 500 lost roughly half its value.

Defend Against Down Stock Markets with Physical Precious Metals

Investors don’t have to sit idly by and watch portfolios lose a tremendous amount of value during market down cycles. This is not “just how things go.” Unfortunately, I believe the mainstream financial services industry has done a disservice to investors, telling them to “just sit tight, stay in your positions for the long term, and over time you’ll be just fine.”

Why stand by and watch your portfolio sink by 50% or more if you can potentially avoid that kind of devastating loss?

Physical precious metals such as gold and silver offer investors an opportunity to take action that could help their portfolios appreciate rather than lose overall during prolonged periods of stock market distress. Also, physical gold and silver actually can be purchased inside of an IRA. Does your present IRA or 401(k) contain physical gold and/or silver? It’s not likely. That presents an opportunity to do something that could protect your money from the crash Mr. Buffett’s indicator seems to be projecting. Learn more about the benefits of owning physical precious metals assets and how to buy them in an IRA structure – call Augusta Precious Metals at 855-242-4121 and ask to speak with one of our knowledgeable gold and silver professionals.

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Michael Dallo, CPA, JD, LL.M. is a tax attorney and certified public accountant (CPA) of Dallo Law Group, a Professional Corporation. For over 10 years, Michael has zealously represented hundreds of clients in resolving tax disputes with the Internal Revenue Service and California taxing agencies, as well as developing sound tax positions and arguments to minimize their federal and state tax liability.