Gold and gold miners have been on fire since 2014 began, despite many analysts and portfolio managers making the case that the precious metal would continue to decline following 2013's free fall. At the very start of the year, I made the case in my writings that gold would likely rally on anticipation of a return to a negative real rate environment. When inflation is higher than nominal rates, history indicates that is the condition under which momentum takes place. This was largely one of the problems last year for gold, as yields spiked without a commensurate move in actual reflation. The deflation pulse got the better of miners, in particular as the Fed began altering quantitative easing expectations.
Yields fell quite a bit as Treasuries rallied, despite Fed tapering. The market began replacing the Fed precisely because of the market's realization that hope for a "rising rate environment" might have been unjustified. US stocks have clearly bounced back strongly since the January-February correction, seemingly in the blink of an eye. Perhaps this is on anticipation that Federal Reserve Board Chair Janet Yellen will finally be able to reflate the economy, or perhaps it's simply irrational buy-the-dip behavior. Regardless, with stocks continuously reinforcing the bull case, it makes other asset classes have a hard time attracting attention.
This then makes it worth questioning whether the gold trade is pausing in the context of a bigger period of leadership or rolling over. Take a look below at the price ratio of the SPDR Gold Trust ETF (NYSEARCA:GLD) relative to the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/SPY.
Still an uptrend, but the ratio has gone sideways the last week or so. I think gold has been a beneficiary of the Bitcoin exchange debacles we seem to be hearing about almost daily, but the question for any tactical trader is ultimately about whether this is a trend reversal or simply a bounce. Market Vectors Gold Miners ETF (NYSEARCA:GDX) has been considerably strong on a relative basis.
Yes -- still bullish, but I doubt the trend in strength will be straight up. Those who positioned ahead of time certainly made some nice gains and far outperformed, but for those looking to get in now, I think there is some vulnerability that comes from chasing. With US stocks continuing along their honey badger ways, money may simply rotate out of everything else into US stocks, which at the margin puts selling pressure on gold and gold miners.
For the year, I maintain gold can do well. Negative real rates remain the more likely course so long as deflationary pressures continue to persist. At the end of the day, every investment is competing with each other for attention by investors. Gold got a lot of attention late into this surge, but with US equities ripping higher, investor distraction may be negative for the precious metal.
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