Gold prices may not have moved much in March, but the 15.6% gain in the first three months of the year was the biggest quarterly gain in three decades. While gold futures may be down, there is more than enough global economic uncertainty and stock market volatility to suggest gold’s first-quarter run isn’t over yet.
U.S. Stocks Slide as Central Banks Lose Control
U.S stocks are retreating and gold is advancing as investors begin to digest the fact that monetary policies enacted by central banks around the world are not working. And it doesn’t look like they have any other financial engineering tricks left.
The S&P 500 has been trading in a tight range since the Federal Reserve’s dovish comments that central bankers would “proceed cautiously” with plans to raise rates. At the March 16 meeting, Federal Reserve Chair Janet Yellen held the key lending rate target unchanged at 0.25%–0.5%, noting that global economic weakness poses a problem for U.S. growth. (Source: Federal Reserve press release, Board of Governors of the Federal Reserve System, March 16, 2016.)
With weak fourth-quarter results in the rearview mirror, all eyes are now on first-quarter earnings. But investors cannot be expecting anything positive. In the fourth quarter, S&P 500 companies posted a blended earnings decline of -3.3%. Overall, U.S. profits fell by 3.1% in 2015—the most since 2008.
On top of that, fourth-quarter gross domestic product (GDP) came in at a lackluster 1.4%, supported by financially strained U.S. consumers. They are, by the way, becoming increasingly pessimistic and losing confidence in the U.S. economy. (Source: “Survey of Consumers,” University of Michigan, April 1, 2016.)
To add salt to the wounds of central banks, the International Monetary Fund, which lowered its 2016 outlook from 3.6% to 3.4% back in January, is expected to lower its outlook once again next week amidst ongoing geopolitical risks. (Source: “Weak Pickup in Global Growth,” International Monetary Fund, January 19, 2016.)
Not surprisingly, first-quarter earnings are expected to be abysmal. In the first quarter of 2016, the expected earnings decline is -8.5%. If the S&P 500 reports a decline in earnings for the first quarter, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since the start of the fourth quarter of 2008. (Source: “Key Metrics,” FactSet, April 1, 2016.)
Ever-optimistic economists do not expect earnings and revenue growth to return until the second half of 2016. Keep in mind that these are the same economists who had access to the same economic data as you and me, but were forecasting earnings and revenue growth to return in the second half of 2015 and the first quarter of 2016. So…
Failed Monetary Policies Bullish for Gold
Weak economic projections and failed monetary policies from the central banks continue to haunt Wall Street—and Main Street.
Investors are increasingly concerned that global economic headwinds (hurricanes) will further dampen the already fragile U.S. economy that President Obama is so fond of championing. Despite Obama’s Pollyanna view of the U.S. economy, the Federal Reserve, as we have already seen, is in no rush to raise rates. In fact, the chance the Fed will raise rates in July has dropped from 79% at the beginning of the year to just 36% as of today.
Lower interest rates are bullish for gold because they suggest the U.S. economy is not doing well. It’s also bullish because gold becomes more attractive compared to interest-bearing assets.
Gold is also getting a boost from a weakening U.S. dollar. In February, the U.S. dollar was down more than four percent against a basket of 10 currencies before rebounding and ending the month flat. In March, the U.S. dollar posted its biggest monthly loss (-3.8%) since 2010.
Central banks have proven there isn’t really much they can do to help the ailing global economy. Last year was a bad year for stocks. Nothing has changed to suggest 2016 is going to be any better. If anything, 2016 is shaping up to be much worse.
It may be time for investors to reassess their portfolios with an eye on precious metals. For reference, while physical gold prices are up 15.5% this year, gold mining stocks are up almost 50.0%.