The stock market is behaving extremely well considering the huge amount of investment risk in the global marketplace. There is, however, no other place for investors to put their money and be able to generate income (dividends) that beats the inflation rate. All assets are risky: real estate, gold, the stock market and even cash. Investor sentiment is all over the map these days and it’s the new reality in a slow growth environment.
I wrote previously about the Federal Reserve’s potential for new policy action, and while it’s total guesswork, I repeat my view that some new monetary policy action would not be a surprise. (See The Stock Market and Investor Sentiment Tank—QE3 Anyone?) It is an election year and the economic news of late hasn’t been inspiring. I think the stock market is now betting on this, and this speculation is contributing to stronger spot prices for gold.
The price of gold is looking really good in my view, and I think it won’t be long before we break $1,700 an ounce. I’ve been looking at a lot of gold stocks lately, and the stock market has come back to this speculative sector. Trading action in many small- and mid-tier gold stocks has been robust over the last couple of weeks.
With the same fervor that gold stocks have had going up, oil stocks have hit hard with the spot price below $85.00 a barrel. That’s the thing you always have to deal with when you’re speculating in resource stocks; you have the operational business risk and the commodity price risk. Even if business is booming at a gold mining company, the stock market is much less inclined to buy its stock if the spot price is going the other way. It’s supply and demand, just like everything else.
I have a good feeling that Goldman Sachs’ view on gold will turn out to be correct. The firm has been quite good with its predictions on gold specifically. Goldman Sachs is calling for a substantial year-end rally in spot gold. The firm recently predicted that the S&P GSCI Enhanced Commodity Index will produce a 29% return over the next 12 months, largely due to price strength from energy and industrial precious metals.
If you’re a speculator and you believe in the commodity price cycle, inflation and that gold can go higher, you can make big money playing the stock market’s ever-changing affinity for the commodity. Institutional investors follow a herd mentality when it comes to precious metals and gold stocks in particular; they love it or leave in a flash.
It does take a lot of courage to be a buyer when the stock market is going down. The most recent stock market correction was a gift for gold stock speculators. I think the gold trade is going to continue to be profitable for the next several years. The World Gold Council forecasts China will beat out India this year to become the largest bullion market because of rising incomes. If you want to know more about the market for gold and its fundamentals as a commodity, just read up on what the World Gold Council has to say. The numbers are amazing.