Gold has been on the decline since July 2016, when it made its last recent highs. With the unexpected "Trump" Rally nearly reaching 20,000 on the Dow-Jones Industrial Average (^DJI), investors are trying to disseminate what to expect for 2017 as well as the next four years while Trump is in Presidency. Numerous moving parts currently contribute to the markets excessive increase in value. The rise of interest rates to .5 - .75% by Yellen on December 14th is one factor that plays a role. Interestingly enough, the markets did not react much to the news and still maintained a decent level from highs, which produced a -1.61% drawdown since SPDR S&P 500 ETF ( SPY) reached $228.34. Investors are still in the wind as to what the market will do for the next one to four years. Investors are also wary due to the increased P/E multiple in the stock-market which leaves room for concern on whether stocks are way over-priced.
With the market near highs, one must wonder who is buying at these extreme highs. Volume on SPY has decreased significantly over the past few months. The Average volume on SPY has gone below the 100 million mark. Small size seems to connote participants temporarily leaving the markets, possibly for the exact reason of the recent rally. However, if investing at highs makes you cringe, don't worry! There are still opportunities to find to increase your portfolio. An example would be hedging opportunities for your portfolio when the Dow-Jones has touched just below 20,000. Additionally, this enables you to cap some of your portfolio risk for uncertain times. Indeed, these are uncertain times in the markets. Trump who enters the office on January 20 th, has a different financial outlook for the country which could influence new financial and tax policies that could hinder and even wipe out the current bullish market momentum for the long term. Consider the Obamacare policy which has totally changed the way our healthcare system is running and how it impacted the market as a whole. With the possibility of Trump changing the Obamacare system, could cause the market to pull lower or move higher. No one can know for certain what the effects will be, but an investor can prepare for tentative times such as today by purchasing (NYSEARCA: GLD).
Although SPDR Gold Shares has not seen happy days in a while, it has some unique qualities that make it perfect for a good buy for long-term or portfolio investing. It is also the right time since SPY is near all-time highs and looks to pull back. What makes it ideal for portfolio investing is the negative correlation it has to the SPDR S&P 500 (NYSEARCA:SPY). Negative correlation helps reduce the risk in a bearish market and help increase your expected earnings. I will provide three reasons as to why GLD is a great buy for one year plus. Below you can find the alpha in the Risk Statistics section for 3, 5, and ten years for GLD:
Alpha For SPDR Gold Shares (NYSEARCA: GLD)
The Alpha on GLD for three years is 1.43. Any Alpha that is greater than 1 gives sentiment of an under-valued financial asset (even though the stock is undervalued, does not mean it cannot decrease in price). It is imperative to remember that alphas tend to go back to 1 quickly, which makes this opportunity even more appealing.
Negative Correlation to SPY provides an excellent hedge against total risk:
You can see that GLD and SPY are negatively correlated. As the SPY's continue to make high's GLD should decrease in value. Moreover, the Beta of GLD for three years is .19 which is less than its counterpart which is the gold bullion. This enables you to take on GLD which has less magnitude compared to the returns on SPY. If SPY continues to rise, you should not be affected by the direct price of the gold bullion. Furthermore, GLD is also negatively correlated to the dollar, which can be a better benchmark in our current financial situation. With Yellen's FOMC speech, she stated that there would be three rate hikes in 2017. FOMC news can directly affect the market and the dollar while inflation may increase due to interest rate hikes. Below you will find a chart with SPY, GLD, and PowerShares DB US Dollar Bullish (NYSEARCA: UUP).
Comparison Charts Of GLD, SPY, and UUP: (NYSEARCA: UUP, NYSEARCA: SPY, NYSEARCA: GLD)
UUP is also negatively correlated with GLD but positively correlated to the SPY, which provides a better illustration of the effects of GLD to SPY and UUP. UUP had an increase of 11.33% in two years while GLD decreased -4.34% for the last two years can give clues to the growing spread between GLD and UUP. Within a five-year time frame, the range has increased 31.84%. This spread should not be taken lightly, as it can signal a new retraction to decrease the spread between the two ETFs. This illustration only adds substance to a bullish view of GLD. Whether the markets continue to move higher, your portfolio now consists of precious metals that outperform when the market is in a bearish outlook. Precious metals such as gold do not have a significant chance of ever reaching threatening values nor could it go to zero.
Investors seem to ignore Gold for some time due to the theatrics of the stock market rally. While investors were mainly paying attention to consistent increases in indexes may have eclipsed GLD as an excellent opportunity. Although annual total returns have decreased since 2010 and went negative at 2013, the losses per year have been gradually decreasing. Currently, Year to Date GLD has increased 3.78% which brings GLD's current return into positive territory, possibly hinting at growth in GLD in the upcoming years.
With today's global economy and blurred relationships, we can expect to see some volatile events. Tensions between global nations and leaders are heating up and can play a huge role in the future of the market. For America as an individual component in the stock market, we can only continue to gauge President Elect Trump's actions in the upcoming years. Whether the stock continues to rise or begins to fall, GLD for a portfolio play is a great opportunity for the current economic position.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Let me know if you have any issues with this article. And please, provide a bit of detail for me to work with. Thanks!