Gold can glitter if stocks hit the rocks
Marketwatch (May 28) by Jeff Reeves
But the story may be vastly different as 2015 becomes less favorable for U.S. stocks. Consider that according to the latest data from FactSet, the blended earnings growth rate of the S&P 500 SPX, -0.27% in the first-quarter of 2015 was an anemic 0.3%! Furthermore, economists are now predicting that first-quarter GDP growth for the U.S. was likely negative thanks to a sharp widening in the trade deficit — hinting at the beginning of another recession if things don’t get turned around.
It doesn’t bode well for stocks, particularly as the market continues to hit new highs. Valuations vs. earnings and sales are stretched as a result of this no-growth backdrop.
All bets may be off if we see a correction in equities, coupled with a rising-rate environment that threatens big principal losses for anyone in long-term bond funds. In such a world, gold may be quite attractive — particularly to investors focused on protecting the profits they’ve made after a big run for stocks.
The easiest way to defuse talk of rising gold prices lately has been to point out the strength of the U.S. dollar as a ceiling on commodity prices, and note that monetary policy will only get tighter going forward — cementing this headwind for gold.
But there is plenty of precedent for gold mounting a big multiyear run even during a period of significant rate tightening and a strengthening U.S. dollar DXY, +0.05% .
That’s what happened from 1976 to early 1980, when gold went from around $105 an ounce to about $850. At the same time, the effective federal funds rate went from about 5% to a brief high of about 20% during that period to mark an all-time high.
That 700%-plus gain for gold trounces a roughly 30% gain for the S&P 500 in the same period.
JK Comment: Love this article, especially as it offers an incredibly rational analysis of why gold often rises with interest rates. This is a message we’ve repeated for years here at USAGOLD, especially as rhetoric from the financial media continues to point to the notion that gold’s inability to break from its current range is a direct result of the spectre of higher interest rates moving forward. This author echoes a point all would-be and existing gold owners would do well to note: Rising interest rates is much more likely to negatively impact equities and bonds than gold – the central point made by our most recent newsletter.
