On 15th February, the price of gold hit a six-month low of $1,608 per troy ounce, calling into question the precious metal’s credential as an all-weather asset class.
Contrary to widespread perception, gold has not been inflation proof. But it has been a good hedge in periods of market turmoil, when investors have been forced to flee to safe-haven assets.
As recently as last December, many institutional investors, as well as high net worth individuals, had gold allocations as high as 15% percent – 20% in India. Even after the recent rally in the equity markets, many wealth advisors still continue to favour ‘return of capital’ over ‘return on capital.’ Their rationale has more to do with the worries about the other asset classes and less to do with gold’s intrinsic merit. For gold to succeed, evidently, it is enough for other asset classes to fail. Gold does not have to succeed in its own right. Read more
The 2008 meltdown is finally in the rear view mirror. The global economy has moved on.
But the current market rally is driven largely by the growing sentiment that the worst is over: America has not gone over the fiscal cliff, the Eurozone has not split, China has not had a hard landing, and the price of oil has not spiked despite the unrest in the Middle East.
Previous rounds of quantitative easing in Europe and the U.S. have prevented all-out deflation. The latest round is the most potent. Markets have struggled to shrug it off.
Equities are set for a bounce. They look attractive relative to bonds. But the ice age for equities will thaw only when economic fundamentals begin to look stronger and more sustainable. The much-predicted stampede out of bonds will occur later rather than sooner – if there is one. Read more
After the fiscal-cliff deal, the payroll tax rate – income withheld from our paychecks for social security – went up from 4.2% to 6.2%. For the last two years, American employees were paying a little bit less in social security withholding and the jig was up last week. This rate increase is an effective increase in taxes of about $16 per week (or about $850 per year) for the average American worker.
What does this reduction in income mean for economic growth for 2013? A lot of retailers are concerned that, with less money in their pockets, Americans will spend less. In line with economic theory (taxes increase, demand goes down), many economists forecast that the payroll tax cut will have drag on consumer spending for the year (J.P Morgan expects 0.6% drag on growth, Goldman expects the same drag, Credit Suisse expects consumption spending to move from 2% in Q4 2012 to 1.5% in Q1 2013). We also think the payroll tax cut may have a bit of drag on consumer spending (here and here) in the first half of the year, along with the other changes in tax policy and uncertainty surrounding sequestration and the debt ceiling. Read more
71% of this year’s survey respondents for the CREATE Report see volatility as an opportunity, but only 13% felt they had the skills to convert volatility into opportunity. Bear in mind, the respondents are institutional investors, plan sponsors and retail platforms. Why do these professional investors lack the skills and/or the confidence? We have an entire generation of investment professionals who have only ever managed money in a benchmark-driven world in a single asset class. When money moved away from balanced accounts run by commercial banks starting in the 1970’s, consultants stepped in to provide asset allocation and actuarial advice and to select asset managers. Read more
The 2008 credit crisis, the current sovereign debt crisis in Europe, and the unstable global political landscape places market volatility top of mind with asset managers and investors. Again this year Principal Global Investors has partnered with CREATE-Research to publish a very timely report, Market Volatility: Friend or Foe?. This year’s report, which focuses on volatility, is especially important considering the last four years have been some of the most volatile in the history of global markets.