Tag Archives: fiscal cliff

Gold Could Rally If We Go Over Fiscal Cliff

Gold is definitely not in a bubble, said Nicholas Brooks, ETF Securities’ head of research and investment strategy, recently. The yellow metal hasn’t experienced the typical exponential rise seen in the run up to the collapse of previous asset price bubbles. As long as countries have to tackle economic problems over the next year, Brooks predicts the price of gold will do well.

“Gold could rally if we go over the fiscal cliff,” said Brooks at the ETF Securities Annual Precious Metals Conference in New York. “There seems to be a growing view that gold may be one of the better hedges against the risk that a policy mistake is made and we go off the fiscal cliff.”

The fiscal cliff is the name given to the dramatic spending cuts across the federal budget that will go into effect January 1, 2013. This is the same day Bush era tax cuts expire, causing tax across the board to increase to the rates seen during the Clinton Administration. The big fear is that spending cuts and higher taxes will hurt the economy so much the U.S. will fall back into a recession. This could also spark another downgrade of U.S. debt by the debt rating agencies. While not good for the economy, such a situation would be good for the price of gold, he said.

Brooks said structural factors continue to support the gold price, especially behavioral changes among the world’s central banks. Prior to the second quarter of 2009, central banks were large net sellers of gold, selling between 10% and 15% of their supply. But in 2009 they became net buyers. Now between 10% and 15% of the annual supply of gold is being bought by central banks, a switch of 30 percentage points which is a net positive for the precious metal, he said.

He also pointed to central banks around the world, including the U.S. Federal Reserve, saying they will continue to increase liquidity until their economies recover.

“Low real interest rates and a decline in the real return on cash are enormously good for gold,” said Brooks. And if later in the year, “European sovereign risk concerns rise again, a relatively high probability scenario, the gold price has the potential to rally strongly, as it did last summer when Spain saw its bond yields rise sharply on growing fears it would not be able to finance its debt payments.”

The British-based ETF Securities says it launched the first exchange-traded commodity (ETC) in the world when it listed the Gold Bullion Securities in Australia and London in 2003. When the SPDR Gold Shares (GLD) launched in 2004, it was the first U.S.-listed ETC. Today, GLD, with $73.5 billion in assets, is one of the largest ETP’s in the world.

ETF Securities manages seven precious metal exchange-traded products in the U.S. The ETFS Physical Swiss Gold Shares (SGOL) and the ETFS Physical Asian Gold Shares (AGOL) each charge an expense ratio of 0.39%, one basis point less than the SPDR Gold Shares. ETF Securities’ other products track silver, platinum and palladium.

T.Rowe Cautiously Optimistic on Stocks

Mutual fund firm T. Rowe Price said now is the time buy equities and predicted that real gross domestic product will grow 2.25% in 2013 at a press briefing in New York today. 

While the U.S. fiscal cliff combined with uncertainty over U.S. policy and regulations, the European debt crisis and China’s hard landing have dampened investor sentiment, John Linehan, T Rowe’s director of U.S. equity, said, the market headwinds will diminish in the coming year. Linehan said there is a “tug of war” between these headwinds and market tailwinds such as strong corporate fundamentals, attractive valuations, decisive monetary policy actions to support economic recovery, improving housing and labor markets and a deleveraging of consumer debt. In the end, he thinks the tug of war will prove positive for stocks. 

The fiscal cliff may cause a small recession in early 2013, but politicians will solve the problem, lowering the deficit and sparking a rebound in the second half of the year, said Alan Levenson, T. Rowe’s chief economist.  He expects the final deal will end the Bush tax cuts for upper income earners, the 2% payroll tax holiday and extended unemployment benefits. Both analysts expect the tax rate on dividends to rise. Levenson said real gross domestic product should grow 1.5% in the current quarter and 2.25% next year. He expects the unemployment rate to fall 0.3 to 0.5 percentage points in 2013. 

Stock chief Linehan points to a few reasons to be cautiously optimistic. He said the price-to-earnings ratio on the S&P 500 is a low valuation of 13. The market’s current low valuations combined with strong corporate balance sheets suggest stocks are poised to perform well from here, he said. 

He also said the heavy net inflows into bond funds since 2007 will reverse as retail investors seek higher returns and begin to embrace risk.  Linehan finds the following investment themes to be attractive:

  • Companies with exposure to emerging market consumers.
  • Derivative plays on the housing recovery.
  • Companies with growing dividend payments. 
  • Providers of new treatments in healthcare.
  • Companies with exposure to mobile and cloud computing.
  • Compelling “sum-of-the-parts” valuations in energy.