Wednesday, January 18, 2017

Gold Has A Lot Going For It This Year -- And It’s Not Only Because Of Trump

Concern over weak earnings and a stock market correction sets up a gold trade.

By Jeff Reeves
January 18, 2017

Gold had a ho-hum 2016 on paper, as the precious metal rose 9%, in line with the S&P 500 index and the Nasdaq 100 Index.

That said, the details on gold’s recent performance are anything but boring.

A year ago, gold prices briefly traded under $1,050 an ounce for the first time in six years, thanks to a strong dollar holding back commodity prices and investor demand for stocks over safe-haven assets. Gold GCG7, -0.03% then steadily rose up to almost $1,400 an ounce by July, as the uncertainty of the Brexit vote and the U.S. presidential election weighed on global markets. But after Election Day in the U.S. sparked a “risk-on” rally in stocks, gold fell out of favor in a hurry and bottomed out in the low-$1,100s in December.

In other words, if you bought gold at the bottom a year or so ago, and sold at the top in the summer, you made a nearly 35% gain in a few months. But if you bought the mid-year top and sold the bottom recently, you lost almost 20% in equally short order.

This kind of volatility has been commonplace for commodities over the past few years, and has been particularly true for gold. And while plenty of wing nuts and conspiracy theorists like to label all big moves like this “manipulation” in the gold market, investors who have been around the block know that precious metals almost always give you a bumpy ride.

Still, the outlook for gold seems to be brightening. Here are some reasons why:

Trump vs. The World

Love him or hate him, President-elect Donald Trump sure knows how to spark controversy with a single sound bite. And a lot of his comments lately — most recently those about China and Taiwan, but dozens of others I don’t have room to list — seem to be creating more geopolitical destabilization and political feuds. In the absence of a clear and steady worldview, uncertainty rules — and gold thrives.

The ‘Trump Trade’ Wanes

It’s also worth noting that as the transition to a new administration culminates in Trump’s inauguration this week, we have seen markets perform in their typical “buy the rumor, sell the news” style. The dramatic run-up in November and early December priced in many of the policies that investors were expecting from a Republican Congress and White House, and now that those expectations are becoming reality, the trade has run its course. As the risk-on rally stalls, gold is returning to favor and has added about 6% since Jan. 1.

Brexit Plans

As much as some would like to blame Trump alone for uncertainty, the rest of the world is hardly less murky. British Prime Minister Theresa May recently said the U.K. has no interest in partial membership of the European Union, which means it will leave the market altogether in a so-called “clean break.” Of course, a Brexit will be anything but clean no matter how it goes down, and that is roiling currency and stock markets. It’s also boosting gold.

Dollar Softening

The U.S. Dollar Index, a measure of the greenback against major currencies, hit its highest level since 2002 around the turn of the year. However, much of the negativity for other currencies is now priced in. And thanks, in part, to concerns about big spending plans out of Washington and to Trump recently saying the dollar was “too strong,” America’s currency has softened to its lowest levels since early December.

Weak Earnings

While bank stocks offered an upbeat start to fourth-quarter earnings season, guidance for 2017 from other sectors isn’t encouraging. The latest Earnings Insight report from FactSet shows that of the 112 S&P 500 stocks that have provided guidance for the fourth quarter, 78 have issued negative guidance — roughly seven in 10 corporations. And already this earnings season, we’ve seen weak guidance from a wide array of companies including luxury giant Tiffany & Co.TIF, -2.47% retailer L Brands Inc. LB, +0.74% oil producer Hess Corp. HES, +0.70% and cereal giant General Mills Inc. GIS, +1.47% to name a few.

Correction Fears

Even if the economy powers higher in 2017, and even if the worries about Brexit and Trump’s presence on the world stage are overblown, there has been a steady chorus of bears who worry that we are overdue for a correction.

For some, it’s a valuation concern. The S&P 500 SPX, -0.30% trades for almost 18 times forward earnings, and the Nasdaq 100 Index NDX, -0.29% trades for almost 19. CAPE, or Shiller P/E ratios, are now above their pre-crisis levels and in territory not seen since the dot-com days.

For others, it’s a growth concern as stocks are struggling to eke out low-single-digit earnings improvements and U.S. GDP remains stuck in a rut. Even if the worst of investors’ fears aren’t realized, there are still plenty of reasons for the market to soften up soon — and, similarly, for gold to return to favor.

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