Gold, equities, and bonds: how do they fare in today’s market setup?

By | February 18, 2015

Gold, equities, and bonds: how do they fare in today’s market setup?

Financial advisers tell their clients to diversify, and with good reason. There’s no such thing as “100% sure”, and experts can do nothing but speculate on the markets.

In reality, gold is only remembered when political turmoil is brewing. The only reason why gold prices peaked in the previous months is because of what’s happening in Ukraine and the Middle East. When news broke out that Russia invaded Crimea on February 28, gold prices skyrocketed. Gold investment site BullionVault’s historical price graph shows that after the invasion, and after Russian President Putin approved the use of military force in Ukraine, gold prices peaked at $1,386.76 on March 16th. In January before the invasion happened, precious metal experts are saying that gold will go below $1,000 per ounce before the year ends. They’re basing their claims on the quantitative easing of the Fed and the foreseeable higher interest rates. Since gold doesn’t produce high interest rates compared to other investment vehicles, investors became bearish on gold.

In today’s market setup, is it right to turn to gold just because trouble is brewing? Is it good to just focus on equities and bonds and move the money away from gold when the U.S. implements higher interest rates? Or should gold still be considered as insurance to the often-unpredictable market?

Today’s equities

Before the newer forms of investments such as ETFs were created, stocks and shares were the way to invest, which form the asset class commonly known as equities. However, despite being the oldest form of investment, equities are still a real threat to investors. In fact, the creation of options can be attributed to the risk that investors put into stocks.

Historically, equities have always outdone gold, bonds, and other forms of investment vehicles. However, the problem with it is that there’s no guarantee that anyone will make money from them. Compared to investing in real money (gold and silver), there are no guarantees that the prices of stocks will have value in the future. After all, companies close down when they go bankrupt. Worse, if an investor used leverage to buy stocks, he or she would even lose more money. Just how many companies that people thought was good investment closed down in the last decade? Who would’ve thought that New Century Mortgage Corporation, one of the biggest lenders in its time, would close down due to bankruptcy? Similarly, General Motors filed for a 40-day bankruptcy in 2009, closing down plants and selling some of its divisions during the period.

Today’s bonds

Financial experts love bonds because of the latter’s conservative nature. Before 2014 even began, everyone thought that the year ahead would be a bad time to own bonds. Investors were told to stay away from bonds mainly because of the Fed’s decision to ease its stimulus package. When fewer bonds were acquired by the government, it’s only natural to expect rates to go up.

However, they could never have been more wrong. In February 2014, those who were advised before to stop investing in bonds were being told to invest in more.

“When the Fed began to reduce its bond purchases, you saw a sell-off in emerging markets, declining commodity prices and a lot of the global economy had been having fun at the party because the Fed had been spiking the punch bowl, but now they were taking the punch bowl away,” said Kathy Jones, an income strategist at Charles Schwab. “While short-term bonds are not paying you for taking the risk and long-term bonds are still too volatile, intermediate bonds—somewhere in the three to five year range—are pretty attractive, especially in investment-grade corporate bonds and even municipals.”

Markets get hot and cold quickly, and experts aren’t always correct, no matter how many of them have the same predictions. This, of course, is bad news for those were quick to believe the opinions of experts regarding bonds this year. Stocks may outperform other investments today, and that may change in the following year. In fact, Seeking Alpha is saying that gold can even outperform stocks – its long-time rival – this year.

The possibility of gold outperforming stocks this year

John Arnold of Seeking Alpha wrote an article in February 2014, saying that gold would be able to outperform stocks this year. He based his claims on the data gathered by the S&P 500 ETF. While this isn’t happening yet, he cited a few interesting points as to why gold may outdo the most popular investment vehicle on earth.

The chart below represents the ratio of GLD to SPY for the past 3 years.

chart

According to Arnold’s explanation, gold’s underperformance against stocks may be immense, but the ratio from the 1.2 range spiked up to 1.6 before going back to the 1.2 mark in 2012.

“The ratio stands right where it did when I wrote my February article so nothing has really changed for me fundamentally,” said Arnold. “What has changed, however, is that when I wrote my previous article I was suggesting catching the proverbial falling knife. Now, with the double bottom forming, I think the evidence is much stronger this time around that we are indeed setting up for gold to outperform stocks. Anything could happen but the odds appear to be in the favor of gold to outperform for the foreseeable future.”

The thing is, nothing is predictable, especially not in any market. This is why portfolio diversification is still king and gold should be a part of an investor’s portfolio all the time. Gold may always have been crushed by stocks and other forms of investments, but that doesn’t mean it has lost its worth. In this time of unpredictability, gold’s power to cover assets is invaluable in case equities and bonds fail.

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