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US stocks rallied in May outperforming most asset classes:

  • S&P 500 (+1.80%)
  • Non-US equities (-0.78% in USD / +2.0% in local terms)
  • Small cap US equities (+2.25%)
  • Corporate bonds (-0.06%)

While the S&P 500 managed to beat only a handful of assets like:

  • Cash (unchanged)
  • Long-term Treasury bonds (+0.88%)

Commodity-oriented sectors were the best performers

  • Energy sector declined -2.17 % for the month
  • Gold declined -5.72 %

Growth stocks slightly beat Value this month ending the longest streak of Value outperformance since early 2013.
Emerging Markets were down -0.78% in local currency but were down -3.71% in US dollar terms for the month.
Excluding selected specific sectors, Long Term Treasuries continue to outperform all major global equity indices both YTD and for the last 12 months. An interesting phenomena considering recent FED discussion is about raising interest rates.
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Year-to-date through April gold was up 21.6%. It was the strongest first quarter on record and its best quarter in 30 years.* A real Gold Rush!  Gold investors are revved up, it seems, because of the near-zero – and in some cases negative – interest rates overseas like we discussed in last month’s Monthly Insights. So why pay to stash money in banks for little to no return when you can own gold? Hmmm.

So why is gold doing so well and why is it getting so much attention recently?

  • Is it because it has done so poorly the last 5 years, returning -3.6%* per year, and it’s due a rebound?
  • Fund flows do show that investors are initiating and/or rebuilding long-term holdings after the wash-out of positions since early 2013.
  • A weak dollar and early-next-year recession worries could be a factor – a weaker dollar tends to be good for gold because it makes the commodity/store of wealth/currency more attractive to overseas buyers.
  • Although institutional investors were reportedly the driving force behind this flood of inflows, retail investors were also considerable contributors, looking to gold for diversification and wealth protection
  • Even China is getting gold fever. Chinese gold-backed ETFs attracted large inflows during the first quarter, more than doubling their holdings in the process**

But is gold a good investment? Is it really the diversifier and wealth protector many advertisers like to proclaim?

A picture can be worth a thousand words.

Below are two charts, each dating back 100 years. On the left is gold, on the right is the Dow Jones Industrial Average (DJIA). In 1915 gold was trading at $19.47 and the DJIA 55.02. ***

chart1

Source: Goldprice.org

chart2

Source: Macrotrends.net

Recently gold was at $1225 and the DJIA was at 18,000. So since 1915 gold has appreciated 6192%. Ok, not bad. But contrast that with the DJIA that has appreciated a whopping 32,615% (and that does not include dividends!). So, which do you think is the better wealth protector?

Can you make money investing in gold? As a long term investment, we are not so sure. Would we ever consider gold? Maybe, in our Tactical Strategy, but only as a small percent for a short term commodity sector trade. And this would only happen if our research led us to believe the demand for the commodity would last for an extended period and the risk/reward potential made sense.

So before you go out and “invest” your hard earned money or even worse your IRA nest egg like some advertisers out there want you to do, consider this real life gold rush: the Klondike Gold Rush of 1896. Of the 30,000 that arrived in the Klondike, only approximately 4,000 actually found gold. Who really made the fortunes?

Yes, you guessed it, the people and companies providing goods and services to the miners. Take Harriet Pullen, a widow with four young children who arrived there with $7 to her name, but parlayed it into a fortune by driving a freight outfit all day and, at night, baking apple pies in pans hammered out of old tin cans. Or Joe Brooks, one of the most successful ‘packers,’ who owned 335 mules and raked in $5,000 a day. ****

Like then, maybe during this current gold rush the purveyors of the yellow metal, not the investors, will make the fortunes.

What do you bet this guy invests his serious money in stocks?

William Devane, Rosland Capital

William Devane, Rosland Capital

Until next month……

* BofA Merrill Lynch Performance Monitor

**Source: The World Gold Council 

*** Charts are shown for illustrative purposes only

**** Source: Klondike Gold Rush/nps.gov