Sunday, April 21, 2013

Gold, Stocks and the Search for Value

Last week, Gold, considered a safe investment for over a decade, had its largest single day drop in 30 years. The price fell below $1,400 per ounce and was down 5.1% for the week and down 16.2% for the year. These moves triggered market chatter such as “there’s blood in the water”, “it’s now a risky asset” and “don’t catch a falling knife” and caused some investors to question the rationale for owning gold, which includes providing protection against inflation or as a hedge against economic disaster.
In addition, during a week of strong, but mostly negative market swings, stock performance of several firms reporting better than expected earnings results included Google – up 1.2%, Honeywell - down 0.1% and Microsoft - up 3.3%. Firms with weaker than expected results and/or guidance included EBay – down 8.5%, General Electric – down 7.9%, IBM - down 10.1%, and McDonald's - down 3.5% for the week.

Additionally, Apple continued to test the conviction of loyal investors, as its stock dropped 9.1% for the week, driven by concerns of increased competition and slowing product demand.

Regarding the value of gold – While concerns that potential gold sales by European governments including Cyprus, may have led to the sell-off (with hopes that purchases by central bankers, along with consumers in India and China, will support its price from further declines), this comment from the Economist (April 19, 2013) provides a good assessment of the situation:
"Gold, having no yield or earnings, is hard to value. That was a help when the price was rising, since the sky seemed to be the limit. But now that the metal is falling, the lack of valuation support is a curse. Like the government-backed paper money that gold bugs despise, gold is precious only so long as enough people agree that it is."
Regarding stock moves and equity valuation –the strong rebound of global equities in recent years has been driven by:
  • Significant “intervention” by global central bankers - their money printing efforts have devalued many currencies, 
  • Weak employment trends - which provide businesses access to favorable labor rates and 
  • Declining prices for commodities such as copper and oil - which reduce the input cost of many manufactured goods. 
Going forward, it is likely that fundamental economic growth and improving employment trends, rather than the efforts of central bankers, will be needed to support addition advances in equity valuations.

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