Forecasting vs. Paying Attention
A few weeks ago, forecasters were almost ready to hand the World Cup trophy
to Brazil. The future is difficult to predict, and thus, Germans are celebrating
today. In recent weeks, it has been easy to find bullish comments related to
gold based on inflation worries, European banking risk, and Iraq. Should we
consider gold over stocks?
Gold Falling Hard Monday
As of 1:00 p.m. EDT Monday, the gold ETF (GLD) was down 2.40% on strong volume.
GLD normally trades 6.1 million shares in a full trading day. With three hours
to go Monday, over 7 million shares had exchanged hands. From Bloomberg/Businessweek:
Gold headed for the biggest decline in almost seven months as Portuguese
banking concerns eased and equities advanced, diminishing demand for haven
assets. Portuguese 10-year government bonds were set for the biggest two-day
advance in a month on speculation that Portugal would contain financial
woes at one of its banking groups. The Standard & Poor's 500 Index
added as much as 0.6 percent after Citigroup Inc. reported profit that
topped analysts' estimates.
Observable Evidence Has Favored Stocks
As noted in this video clip dated
July 11, from a investing (longer-term) perspective, stocks (SPY) have looked
more favorable relative to gold. The chart below allows us to monitor the performance
of gold relative to stocks. Despite the gains made by gold in recent weeks,
the longer-term evidence has continued to say, "I'd rather own stocks".
The zoomed-in version of the same chart (see below) allows us to see the moving
averages, which have been in the longer-term bearish camp for gold relative
to the S&P 500 Index. The charts are always subject to change; thus, maintaining
a flexible and open mind is always important.
Indian Demand For Gold Hampered
India is an important market for the yellow metal. From gold-eagle.com:
"In India, gold is religion. India's love affair with gold is timeless,
spanning centuries and millennia."
Recent developments in India tend to put a drag on gold. From MarketWatch:
Overall, we believe that physical demand has remained short of expectations,
the latest price increase having been driven largely by speculation," wrote
Eugen Weinberg, commodity strategist at Commerzbank in Frankfurt, in a
note. Pointing to India, Weinberg said the country's decision to maintain
a 10% import duty on gold and silver "is also likely to have a dampening
effect on future gold demand expectations. In conjunction with a rather
below-average monsoon season, this points to below-average gold demand
from India."
Investment Implications - Evidence Will Guide Us
On July
10, we noted that despite last week's Europe-driven pullback in stocks,
the longer-term outlook for equities was still favorable. Monday's intraday
gains in the stock market have done nothing to change that view. While many
investors are concerned about stocks being overpriced,
the evidence we have in hand continues to call for an allocation to U.S.
stocks (VTI) and leading sectors, such as technology (XLK). We will continue
to monitor the incoming data with an open mind. Tuesday morning brings a
report on retail sales.
