Gold has not been able to enjoy a rally that equity markets have saw. Year to date, gold is down 4.5%, while the S&P is up 10%.
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The reason why gold is down may speak for itself. It’s often believed that a strong equity market will translate to a lack of demand for gold. Gold is a hedge when the market is falling, so it’s pretty clear investors have little reason to invest in gold when equity prices are rallying.
Scotiabank believes that gold prices will remain flat or decline due to lack of risk aversion. I agree with Scotiabank’s thesis here. If we look at the flow of funds, we can see institutions are rotating out of defensive assets such as gold. In February, ETFs sold a 106 tons of bullion. Investors are choosing to be more aggressive as strong GDP numbers show an improving economy.
You can see there is a clear rotation happening here. Investors are beginning to realize they have to put their money somewhere. Cash is simply not an option due to the Fed’s printing policy. Gold has done poorly and many investors have incurred losses due to the decline in prices. Defensive assets are no longer a necessity in portfolios anymore.
Investors may still be contemplating whether or not to invest in gold due to a lower than expected GDP growth. For the fourth quarter, GDP grew at a .4% rate against analyst expectations of .5%. It’s important to note that this decline in growth was due to military spending cuts. Defense spending fell more than 22%, which can help explain the lower than expected rate.
A recent Seeking Alpha article talks about the Dow/gold ratio. The ratio helps gauge future price activity for the metal. The article shows that the ratio is moving higher from hitting low. This means that investors are likely to turn away from gold for quite some time. Gold is likely to continue to fall. Societe General has pegged a target of $1,400 by year-end. This is a 12% decline from where it is currently at. This is considered more than reasonable, and I agree with Societe General’s reasoning for it as well. A growing economy will only further cause investors to sell defensive assets.
A $1,400 price target is very possible and I consider to be conservative. First-quarter GDP numbers are likely to be strong as most of the backlash from defense cuts wears off. Current gold investors should sell a portion of their holdings in gold. I wouldn’t advocate selling entire positions since it’s good to maintain diversification. Those who are willing to take on more risk can short the GLD or miners. The Market Vectors ETF (GDX) might be a better option as it allows investors to short a basket of miners.