At the close of the year, we penned a piece entitled Expect January Ill-Effects this Year. You will want to read it, but in summary, we suggested that the great breadth of stock market rise in 2013 meant there was little room for a January Effect this year, especially given the Santa Claus Rally that drove stocks higher to close the year. What we did not say in that piece, is that capital flows out of stocks have to go somewhere, and if it is not going to be other stocks, then beaten down gold and relative securities like the SPDR Gold Shares (GLD), the Market Vectors Gold Miners (GDX) and iShares Silver Trust (SLV) make likely destinations for capital. We believe this is the reason why the GLD has climbed through the first two days of trading in 2014 against the SPDR S&P 500 (SPY) decline, and why we say the GLD remains a conviction short-term buy. But be careful, because other factors will develop and require the long trader in these securities to be nimble.
In the first two days of trading, the SPDR Gold Shares is up 2.8%, and over that same short span, the SPDR S&P 500 fell by 1.0%. In fact, all market barometers, including the SPDR Dow Jones (DIA) (-0.7%) and the PowerShares QQQ (QQQ) (-1.5%) are all in the red this year after sharp gains in 2013. Similarly to the GLD's contrasting gain to the market, other precious metal losers of 2013 are up significantly to start 2014; see the significant gains of the Market Vectors Gold Miners and the iShares Silver Trust in the table below. The driver of this action appears to be capital flows on tax relative issues. It's as simple as that. You need not study currency markets nor demand for physical gold in India, or otherwise complicate the matter.
SPDR S&P 500
SPDR Gold Shares
Market Vectors Gold Miners
iShares Silver Trust
In our article discussing our expectation for a missing January Effect this year, we said that gains were so widespread throughout the market that even the weakest performing sector of the economy, telecommunications, had still closed in the green. We also noted that just 38 of the S&P 500 stocks had closed out the year out in the red. Market gains were so widespread, we said, that there should be few places for capital to flow to within the equity market. But we were speaking of stocks in that article, and recommended the sale of them and the SPDR S&P 500. What we failed to note became obvious in the first two trading days of this year.
While stocks had mostly gained all year long and were likely going to be the victims of tax-strategy-driven profit taking to start 2014, precious metals were beaten down throughout 2013. In fact, gold, silver and relative securities likely suffered even more toward the close of the year because of tax loss selling, especially in the ETFs including the SPDR Gold Shares. At least that is what this three-month chart seems to show.
Of course, the Federal Reserve's tapering action and the build up to it offered reason for investors to back the dollar, which also harms gold and other commodities priced in dollar terms, like oil. Still, the contrasting action in the GLD and the SPY to start 2014 solidifies the evidence that capital flows are running to and fro on the tax relative issues I've proposed here. Thus, I suggest investors consider buying the SPDR Gold Shares for the short term, which I want to emphasize - the short term.
I do not expect the run to last throughout the year or even for longer than a few weeks maximum, assuming no dramatic and unforeseen disruptive event occurs to impact current economic trends. Eventually the capital flow factor that is causing this action in favor of gold and the GLD should fizzle out. Replacing it would be continued favor of the dollar due to Fed direction and U.S. economic improvement, and renewed growth in stocks driven by growing EPS and also new capital flows into pension fund portfolios. So go ahead and ride the gravy train in the GLD and other metals issues now, but be nimble in your GLD long-trade and prepared to close it out when the factors favoring it fizzle.