It’s that time when research analysts and market mavens make predictions for the upcoming year. Often times these are lighthearted productions with a fair bit of levity thrown into the mix (e.g., “The New York Football Giants will win the Super Bowl”) and a premium on controversial or non-consensus views (e.g., “Short IBM because their stock is going down 50% this year”). Other market analysts, especially traditional sell-side research analysts, write year ahead outlooks for the asset classes they cover. These tend towards conservative targets so that the recommendations are feasibly met (e.g., “Interests rates will rise in 2014 therefore you should buy variable rate types of credit products”). More often than not, year ahead outlooks and predictions are less valuable in and of themselves than for any independent idea generation that they may spawn. For example, a prediction list for 2014 technology companies might be disagreeable at each and every turn yet be valuable for prompting further investigation into issues underlying the predictions. Remember that this is not investment advice and the purpose of this list is to alert of themes that should be further analyzed.
Gold may temporarily trade up in 2014, but is trending down.
Gold had a rough year in 2013 down almost 30% year to date. Much of the selling was based upon the “fear trade” leaving gold. As we encountered the “Great Recession” in 2008, many investors piled into gold in anticipation of highly accommodative monetary policy by the world’s central banks and a generalized fear that world financial systems were more vulnerable to collapse than previously thought. The nagging fear that only one more Lehman Brothers type event was needed to crush fiat currencies resonated at the highest intellectual levels for some time and this increased the luster of gold. That fear-based trade is dead now. Central bankers and politicians have slowly shown a better understanding of global finance with the likes of Mario Draghi promising to “do whatever it takes” to avoid further crises. To boot, these aggressive monetary policies have not increased the rate of inflation for which gold has traditionally been a hedge. With low inflation in developed economies and risks of a geopolitical blow up in the Middle East decreasing with active dialogue between the US and Iran, the traditional reasons to own gold have lessened.
Measured by the SPDR Gold Trust ETF (ticker: GLD) gold has gone from $86 to $115 in five years, a 33% increase in price terms. That means that in five years, the average yearly gain for gold on a non-logarithmic nor compounding basis has been just 6.66%. In 2014, gold may trade up to $1350 on unexpected European economic weakness and further commitments by the Japanese to stimulate inflation via Abenomics. However, such a price increase is probably transient at best and gold will likely trade much closer to $1050 an ounce towards the end of 2014. Of course, it takes only one nasty geopolitical event to change the calculus on gold. In the meantime, owning an asset class that is out of favor and has no dividend will continue to be unattractive in 2014.
The US 10 year Treasury Bond will yield 3.50% in 2014 and is in a longer term bear market.
Bond yields have generally increased in 2013 as investors contemplated the actions of the Federal Reserve and the beginning of end of quantitative easing. For 2013, the US 10 year Treasury Bond increased in yield terms from 1.85% to 3.00% for a roughly 65% gain yield percentage.
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