It feels as if it's been quite some time since gold (GLD) was a sure-fire winner. Since putting in its 2012 high at $1,800 in the first quarter, gold has thus far been unable to break out above that resistance after three attempts -- even with the aid of QE3 and additional treasury purchases. Long gone are the days when even a hint at further easing on behalf of a major central bank sent the metal soaring a few percentage points.
I recently explained my thesis for why gold's 12-year winning streak will come to an end in 2013. Nearly a month since that article was published, prices are little changed. But some interesting developments have taken place in the form of a negative U.S. GDP print, further changes in correlations, and record highs for stocks (SPY). A month into 2013, the case for selling gold is gaining strength.
1. Outstanding Strength in Equities: With the S&P 500 breaking above the psychologically significant 1,500 level mark and stocks' ability to shrug off any bad news ("climbing the wall of worry"), the opportunity costs of allocating capital to gold are rising quickly. Let's think about this from the perspective of a fund manager.
While many funds, such as Ray Dalio's Bridgewater Associates, are bullish on growth and are buying gold as a hedge against inflation, it's plausible that a very large number are still sticking to either the "doomsday trade" or the low-growth, low-rate environment trade. Those who positioned themselves for a bearish 2012 were probably met with major redemptions as the year came to a close, which is what some are attributing gold's year-end slide to. The idea there is that funds had to sell some gold holdings to meet investor calls for their cash back. This seems plausible, and I'd argue that a similar change in psychology is under way now.
The big hedge fund story for 2012 was the industry's significant underperformance. As equities continue their historically strong start to 2013, it's likely that many are finding themselves already trailing their benchmarks by a wide margin. Anyone who was betting on a low-growth environment where stocks move marginally was probably holding gold-related assets, and is now worrying. Gold, which as we know doesn't produce any income unless you sell it, is awfully hard to hold when stocks are soaring. It's going to get harder as the bears start to capitulate and retail investors finally get into equities.
As for the economy, the negative GDP figure was largely unimportant, and clearly a result of record declines in government spending. The consumer had a strong Q4, if you care to look.
2. Correlations: I noted the breakdown in the typical gold/dollar, gold/S&P correlations in my above-linked article, and I think these dynamics are still very important to watch. The EUR/USD has been rising rapidly of late, closing Friday at 1.365. Despite this dollar weakness, gold has been unable to catch a strong bid. A major downward move in the dollar should have supported gold prices; instead we're still under $1,700. The same can be seen in the breakdown of the gold/S&P correlation, which should cause many to rethink their theses for holding gold.
3. Macro Indicators Showing Structural Shifts: The yield on the U.S. 10-year Treasury yield is now above 2%, and the 2Y-10Y spread appears to be on its way to 200 bps. As mentioned above, the euro has gained significant ground on the dollar rather quickly, and many other currency pairs (see: EUR/CHF) are also indicating that the "fear trade" may be unwinding.
4. Fed Action Not That Bullish: QE has lost its shock value, and the top that the commodities complex put in during 2011 looks as if it's going to hold:
Click to enlarge images.
I think this top coincided with the peak of Fed-induced enthusiasm in commodities trading. Today, the view that the Fed's current policies will result in a major devaluation of the USD -- and thus sent commodities to record highs -- is a bit less prevalent. This is a major change in the way traders approach commodities as a whole and has major effects on how they formulate opinions on gold.
5. Technicals: Finally, the chart for gold is also bearish:
Following the announcement of QE3, I wrote that I felt gold would finally take out the $1,800 level, which it had tested once in both 2011 and 2012. When the resistance held, I believed it was a major signal that investor enthusiasm due to Fed policies had waned.
Right now, gold is range-bound and consolidating between $1,650 and $1,690. I think we'll stay in this range for a while until we get a temporary change in the direction of equities, causing people to rethink their allocations. My guess is, obviously, that it loses $1,650 and tests $1,600.