Gold prices are up 25% for the year-to-date through August 8th. Thats better performance than most major asset classes have turned in so far this year.
After this torrid run, you might expect professional investors to cool on the precious metal. Instead, love for gold continues to burn brightly for some leading money managers.
Two prominent U.S. managers recently made separate but similarly dramatic announcements about gold — forget about nearly all other asset classes and turn your attention to gold.
Thats exactly how I feel sell everything. Nothing here looks good. That was Jeffrey Gundlach, chief executive of DoubleLine Capital, quoted in a July 30 article on Reuters. Gundlach believes in an upside for gold and sees prices continuing to rise to $1,400 per ounce. His firm continues to own gold and gold mining stocks in their portfolios.
Then theres Bill Gross, renown fixed income investor and manager of the Janus Global Unconstrained Bond strategy. I don’t like bonds; I don’t like most stocks; I don’t like private equity, he wrote in his August 2016 monthly commentary. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories.
Why are these two leading money managers so enamored of gold right now? Its what they and many other professional investors see in the current market environment–too many risks and not enough return to reward investment.
The twin forces of higher risks and lower returns create ideal conditions for gold prices to continue their upward trajectory. Among the higher risks are:
Elevated valuations — Major indexes like the S&P 500 are in record territory but earnings growth for S&P 500 companies is on the decline. For companies that have reported 2nd Quarter earnings so far, FactSet reports earnings growth is down -3.5%.
Stocks appear to be overvalued at current market levels. Higher prices and lower earnings means the current P/E ratio for the S&P 500 remains above its 5- and 10-year averages.
Weak global growth — U.S. economic growth has been at or below 2% for four consecutive quarters, with the annualized rate for Q2 2016 coming in at 1.2%. The current U.S. economic recovery has been notably weak, but things are better here than in other parts of the world: quarterly GDP in the Euro-area has been below 1.0% for two years, while quarterly GDP in Japan has flip-flopped between growth and contraction over the past year.
Theres reason to be optimistic about future economic growth in the U.S. with continuing strength in the job market. The improving outlook may give the Federal Reserve the green light to resume interest rate hikes later this year.
But the investment markets dont seem to share the same view. According to the Fed funds futures market, odds that the Fed raises rates at all by its December meeting at not even at 50% as of August 8. That means many market pros expect sluggish worldwide trends to persist, enough to keep the U.S. central bank on the sidelines for the rest of the year.
Political uncertainty — Earlier this year, political dark clouds gathered over Britain and Europe with the results of the Brexit vote and the U.K.s decision to depart the European Union. Concern is spreading that copycat breakaway movements will emerge in other E.U. countries and weaken economic growth on the continent.
But uncertainty also darkens the outlook for the worlds one shining beacon of optimism, the United States. The current presidential campaign has been one of the most contentious in history. And Election Day is still three months down the road. Gold should continue to shine as the level of anxiety increases.
Higher risks would be fine if investors see prospects for returns equal to the risks. But thats far from the current situation. Many money managers expect low returns for the foreseeable future. Here are a few reasons:
Low bond yields — Fixed income investors continue to be squeezed by historically low rates on bonds. While U.S. government bond yields seem to have found a floor of support as of late, yields on U.K. government bonds have dipped following Bank of England interest rate cuts, and yields on many Japanese and Eurozone bonds are negative.
Many market watchers are focused on negative government bond yields, for good reason. The amount of global government bonds yielding less than zero continues to grow. The World Gold Council (WGC) sees around 40% of global developed market debt with negative yields.
Much of the outstanding government debt is in the hands of global central banks, leaving less for fixed income investors. WGC also estimates that for global government bonds with yields above 1%, only 17% is available to investors.
Stock market vulnerability — Stock investors have seen multiple market shocks in the last 12 months, from last Augusts currency devaluation in China to the Brexit vote in the U.K. this past June. Many investors see these short downturns and sharp rebounds as part of the new normal in the global financial markets.
With stocks hovering at record highs, the possibility of future market shocks and continued volatility will grow. Stock analysts are tempering their expectations for returns in the second half of 2016, based primarily on these heightened risks. Equity performance may still come out on the positive side, but many professional investors believe gains will be harder to come by in the next few months.
All of these factors make gold more attractive in the eyes of money managers — not only for its traditional safe haven status in times of economic stress, but also as an asset class with the potential to provide growth for investors.
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