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Summary

  • Gold had a difficult session Monday.
  • Given concerns in Europe, tepid growth in the US, and creeping inflation, it is prudent to take a look at the yellow metal.
  • What can we learn from gold's performance relative to stocks?

Forecasting vs. Paying Attention

A few weeks ago, forecasters were almost ready to hand the World Cup trophy to Brazil. The future is difficult to predict, and thus, Germans are celebrating today. In recent weeks, it has been easy to find bullish comments related to gold based on inflation worries, European banking risk, and Iraq. Should we consider gold over stocks?

Gold Falling Hard Monday

As of 1:00 p.m. EDT Monday, the gold ETF (NYSEARCA:GLD) was down 2.40% on strong volume. GLD normally trades 6.1 million shares in a full trading day. With three hours to go Monday, over 7 million shares had exchanged hands. From Bloomberg/Businessweek:

Gold headed for the biggest decline in almost seven months as Portuguese banking concerns eased and equities advanced, diminishing demand for haven assets. Portuguese 10-year government bonds were set for the biggest two-day advance in a month on speculation that Portugal would contain financial woes at one of its banking groups. The Standard & Poor's 500 Index added as much as 0.6 percent after Citigroup Inc. reported profit that topped analysts' estimates.

Observable Evidence Has Favored Stocks

As noted in this video clip dated July 11, from an investing (longer-term) perspective, stocks (NYSEARCA:SPY) have looked more favorable relative to gold. The chart below allows us to monitor the performance of gold relative to stocks. Despite the gains made by gold in recent weeks, the longer-term evidence has continued to say, "I'd rather own stocks."

The zoomed-in version of the same chart (see below) allows us to see the moving averages, which have been in the longer-term bearish camp for gold relative to the S&P 500 Index. The charts are always subject to change; thus, maintaining a flexible and open mind is always important.

Indian Demand For Gold Hampered

India is an important market for the yellow metal. From gold-eagle.com:

"In India, gold is religion. India's love affair with gold is timeless, spanning centuries and millennia."

Recent developments in India tend to put a drag on gold. From MarketWatch:

Overall, we believe that physical demand has remained short of expectations, the latest price increase having been driven largely by speculation," wrote Eugen Weinberg, commodity strategist at Commerzbank in Frankfurt, in a note. Pointing to India, Weinberg said the country's decision to maintain a 10% import duty on gold and silver "is also likely to have a dampening effect on future gold demand expectations. In conjunction with a rather below-average monsoon season, this points to below-average gold demand from India."

Investment Implications - Evidence Will Guide Us

On July 10, we noted that despite last week's Europe-driven pullback in stocks, the longer-term outlook for equities was still favorable. Monday's intraday gains in the stock market have done nothing to change that view. While many investors are concerned about stocks being overpriced, the evidence we have in hand continues to call for an allocation to U.S. stocks (NYSEARCA:VTI) and leading sectors, such as technology (NYSEARCA:XLK). We will continue to monitor the incoming data with an open mind. Tuesday morning brings a report on retail sales.

Disclosure: The author is long SPY, VTI, XLK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: Stocks Or Gold? The Choice Has Been Relatively Easy