Here are a few items I spotted over the weekend that might interest you:
“Why Gold May Take a Breather” in Barron’s (subscription might be required) presented reasons why gold’s price is too high and is likely to slide soon, perhaps by as much as one third. I’ve been issuing warnings since gold’s recent parabolic rise, which usually precedes a decline. But gold should stay about where it is as long as there are major concerns about currencies and debt in Europe and the U.S.
I support that cause, but what we sound-money advocates would prefer to see must be distinguished from what is likely to happen. The roaring bull market in gold seems ripe for a downside correction—assuming it didn’t already begin with the $100-plus selloff from Monday’s high.
According to the metals-consulting firm CPM Group, if gold were bought only for its industrial and ornamental uses—the attributes that make it a commodity—its price would run about $600 an ounce today. The last time gold saw $600 was nearly five years ago (see chart below), so other factors must have propelled the price to highs of more than triple that level. The main factor has been net buying by investors, aided by the advent of exchange-traded funds that make it easy to acquire the metal.
One of our go-anywhere funds makes the news. Barron’s did a profile of manager Steven Romick of FPA Crescent, which is in our hedge fund portfolio. In the interview, Romick said he’s been buying stocks as they declined the last few weeks. But he wasn’t loading the portfolio with them and is cautious about the U.S. economy and its political process.
It’s tougher to diversify. That’s the message in an article on The Huffington Post. The article points out that this week almost all stocks have been moving up and down together, with a corelation of 0.83, where 1.0 is perfect correlation between individual stocks and the index. Correlations between all assets have been rising. It’s largely because politics and politicians are now major players in the economy and investment markets.
“When you have overriding political considerations hanging over the market, all stocks are going to respond in kind,” said Andrew Lo, a professor of finance at the MIT Sloan School of Management.
“It’s not just stocks. It’s actually all asset classes,” said Lo, who is also the chairman and chief investment strategist of a hedge fund. “The U.S. dollar relative to other currencies, gold, oil and hedge fund returns have now all become very highly correlated.”
Investors continue to flee high yield bonds. Though the bonds usually have a high correlation with stocks, they didn’t participate in last week’s recovery in stocks, says Bespoke Investment Group. The spread in high yield bonds over treasuries is at the same level it reached in December 2009. It’s likely a sign that investors fear a recession and rising defaults.