jueves, 27 de agosto de 2015

jueves, agosto 27, 2015

Timing Gold Is A Fool's Errand
             
 
 
"I don't agree with you Jodie... Gold is in a bear market... too early to put some money in the yellow metal..." is a comment from the article recently posted by the Economic Times asking the question,

"Where do you see the gold prices making a bottom as every fundamental turns unfavorable for gold?"

We love your comments expressing your opinions about where the market is and where it's going, just as much as we love to share the history lessons told through our indices.

Let's pretend today is sometime in the middle of 1981. President Reagan just established the Gold Commission that rejected returning the U.S. to a gold standard. The Fed raised rates to 20%, and inflation fell. But that created a recession. Gold investors lost about half their asset values. They wondered, "Has gold reached its bottom?"

1981 Gold

To understand the answer to this question, investors might consider the underpinnings of the prior bull run of over 400% that started when Nixon took the dollar off the gold standard in 1973. Inflation tripled, the dollar crashed, and after years of erratic monetary policy, investors piled into gold as a safe haven. The perfect environment for gold ended, and investors wondered about the future of gold without these supports.

For the next 20 years, gold lived through mostly expansionary periods. Even as investors abandoned gold for stocks, gold didn't fall much further.

2001 Gold

Not until September 11, 2001 did fear ripple through the market, triggering the flight to safety into gold again. The drivers of inflation and a weak dollar that supported gold through the 1970s bull run were back. These factors, plus the global financial crisis and worries about government reform led gold to a record high. Such forces, in addition to the growing popularity of the gold ETF as a new way for investors to access gold sent gold soaring more than 600% over the next ten years until August 2011.

As worries eased, investors fled gold once again. However, many in this sell-off have no memory of the 65% drop that happened in 1981-82. Currently, gold has only lost 45% since its peak four years ago, but the majority of the loss happened in 2013, when gold dropped 28% - the most since 1981.

Source: S&P Dow Jones Indices
(Source: S&P Dow Jones Indices)

It is difficult to predict where the bottom is, but the last time gold dropped this much, it took over 25 years to recover. It certainly diminishes the importance of identifying the bottom, even if the bottom has been reached.

Gold would need to drop another 40% from current levels in order to match the 1981-82 drawdown, so it wouldn't be surprising to see it fall further. Investors need to look to underpinning fundamentals again to understand gold. Poor economic data from China, inflation under control, low interest rates, plus gold's diminished status of a safe haven are not promising.

Investors continue to flee, as evidenced by recent record outflows. If interest rates rise again, that may help gold futures, since the collateral return increases, but there may be outflows in lieu of income-producing securities.

Since most single factors like inflation, interest rates, jewelry demand, oil prices, geopolitics, and U.S. dollar strength don't alone move gold, they are unreliable indicators of gold's prices.

However, one statistic that is pretty solid through time is that gold is uncorrelated to the stock market. On average, the 12- month correlation is zero, but even on short intervals of rolling 90 days, the correlation doesn't ever exceed 0.6.


Gold 500 Correl

Once again, timing gold doesn't necessarily matter. Gold is not always owned for high returns, but instead, serves to protect against a drop in other assets, like stocks. It has held up in times of inflation, and may hedge against other risks, like geopolitical risks, that hurt stocks. Investors looking for diversification and capital preservation may use gold in a portfolio framework at any time. Now is as good of a time as any to invest in gold, given its recent drawdown and the strong stock market performance over the past several years.

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