WASHINGTON, June 28, 2013 – Ecstatically happy for the most part, at least since the twin hits of the 1991 dot.bomb debacle and the tragic events of 9/11, and even happier after the financial swan dive of 2007-2009, gold bugs have been riding high for the most part since the late 1990s. But now, “anything goes,” just like it does at the eponymous Cole Porter musical we caught recently here at the Kennedy Center. Starting quietly sometime last summer as gold hit its all-time high near $1900 an ounce, investing in any form of gold has been an unqualified disaster.
Gold traders obviously don’t share Cole Porter’s sunny attitude toward life these days.
In recent trading, the price of gold plunged $45.30, or 3.6 percent, to $1,229.80 an ounce, its lowest price in three years. The reasons for the sell-off weren’t entirely clear. Investors tend to buy gold when they’re looking for a safe place to put money. Wednesday, they did that by buying stocks in dividend-rich, stable sectors — such as utilities — as well as government bonds. The same things, ironically, that they’ve been selling hard, beginning some time in late April or early May.
According to CNBC, gold “fell to its lowest level since 2010 on Friday to under $1,200, which is what it costs many miners to produce an ounce of gold, and analysts tell CNBC that miners will be ‘severely’ impacted if prices stay here.”
The network spoke with Andrew Su, CEO at brokerage Compass Global Markets, who said “the average cost of producing gold in Australia, home to some of the world’s biggest gold miners, has jumped from $500 an ounce in 2007 to over $1,000 an ounce this year.
“What I believe is that the official costs, the costs in reality,” he continued, “are significantly higher than $1,000. So we’ve had quite a few gold mines close in Australia,” Su said on Friday. “We’ve had some companies actually go bust and we’ve also got significant job cuts by big miners like Newcrest, Barrick, and Silver Lake Resources.”
As for the stock market itself, surprise! It’s been partying hearty in spite of horrific losses across the board, and most particularly in those interest rate- and yield-sensitive stocks everybody seemed to be dumping, along with any bond in their portfolios, for the past few weeks. A good bit of this is likely end-of-quarter window-dressing by funds and financial managers, as we’ve already noted in several columns. It’s totally illegal, but the Feds never bother to prosecute it. Why do we pay these people the big bucks?
Major stock indexes rose for a third day on Wednesday. It was the first three-day stretch of gains since the Federal Reserve gave a timetable for throttling back its economic stimulus a week ago.
Even news that the economy grew at a much slower annual rate in the first quarter than previously estimated — 1.8 percent versus 2.4 percent — didn’t dampen the buying. In fact, it persuaded some traders that the Fed could extend its easy money policies beyond next year. That would likely be a boon for the economy and the stock market.
The market’s gains were decisive. The Dow Jones industrial average jumped 114 points Thursday and the S&P 500 and the NASDAQ followed suit.
Investors also seemed to realize that they dumped too many stocks last week, when they panicked after the Fed outlined plans on how it might eventually end its stimulus measures.
The yield on the 10-year Treasury note fell again on Thursday for the second straight day, indicating that the bond-selling panic is easing, at least for now.
The markets have been volatile for weeks, ever since Fed Chairman Ben Bernanke started hinting that a pullback in Fed stimulus programs would start soon. In the last 26 trading days, the Dow has ricocheted through 18 triple-digit swings, split almost evenly between ups and downs.
Still, some investors were already turning their attention away from the Fed and back toward company earnings. There they saw reason for caution, not optimism.
Analysts expect earnings to grow about 3 percent, though that is down from estimates as high as 15 percent a year ago, according to S&P Capital IQ. Revenue is expected to fall by 0.3 percent.
“We’re not seeing any significant bottom-line growth,” said Chip Cobb, senior vice president of BMT Asset Management in Bryn Mawr, Penn. “It’s all been cost-cutting measures.”
Chris Baggini, senior portfolio manager at Turner Investments in Berwyn, Penn., pointed out that the stocks that performed best are the kind that investors tend to buy when they’re nervous about the economy.
Investors are “buying bonds and bond-like stocks,” Baggini said.
Friday, June 28, is the last trading day for the second quarter, which could also make the market’s moves erratic. Complicating matters is the fact that next week is a shortened trading week due to the Independence Day holiday. Since the 4th of July falls on a Thursday this year, trading next Friday could be light, treacherous and volatile as well.
That observation may apply to the whole week as well, as light pre-holiday trading could be very dicey indeed. We have been recouping a few losses in the current rally just by staying put. We’d love for the rally to continue so we can load up on stocks again. But, aside from nibbling back in to stocks with a decent yield—certain utilities, one or two stable REITs, and two or three promising MLPs like Alon Partners (ALDW) and CVRR, we’re still content to stay on the sidelines.
We’d encourage you to do the same. No point putting on risky investments that may ruin the enjoyment of next week’s holidays, right?
Speaking of which, we may skip a column or two next week and won’t offer one on July 4, of course, which is closed for trading. Anything that happens next week under light volume is probably unreliable as an investment predictor, so sometimes it’s best not to say anything at all.
So again, enjoy your weekend or, better yet, the start of your summer holiday break.
—AP contributed to this report
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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