Why gold has become a ‘weapon of choice’ for investors


Gold prices have climbed to their highest levels in nearly nine years, with the precious metal seen as a ‘weapon of choice’ for gold investors dealing with pandemic-related uncertainty in the stock market, clearing the path to a fresh record in the second half of the year.

In Wednesday trading, the most-active August gold futures contract
GCQ20,
-0.00%

was up $13.20, or 0.7%, at $1,823.10 an ounce after tapping a high of $1,829.80. Futures prices haven’t traded or settled at levels this high since September 2011.

The settlement record for most-active gold futures stands at $1,891.90 from Aug. 22, 2011, based on records going back to November 1984, according to Dow Jones Market Data. The record intraday level was seen at $1,923.70 an ounce on Sept. 6, 2011.

Gold breezed through the $1,800 level and “seems to have recovered its mojo,” said Ross Norman, chief executive officer of precious metals news and information provider Metals Daily. Bulls will also be “much encouraged that silver is performing at last.”

September silver
SIU20,
+0.14%

was up 44.1 cents, or 2.4%, at $19.14 an ounce in Wednesday dealings. It’s poised for the highest most-active contract settlement since September 2019.

Norman told MarketWatch that gold is “neither responding to either the U.S. dollar nor the virus, but the second quarter economic impact,” with massive M2 money [supply] growth leading to concerns about future inflation, debt and negative real yield on U.S. Treasurys. M2 is a key measure for U.S. money supply.


‘The weapon of choice has clearly been the gold ETF and purchases year to date have exceeded anything seen in any previous full year.’


— Ross Norman, Metals Daily

To gain exposure to gold, “the weapon of choice has clearly been the gold ETF and purchases year to date have exceeded anything seen in any previous full year,” said Norman.

The World Gold Council said that global net inflows for gold-backed exchange-traded funds reached $39.5 billion, topping the previous annual inflow record of $23 billion from 2016, according to a report issued Tuesday. North American funds accounted for 80% of the global net inflows in June, adding $4.6 billion in assets under management.

“Gold ETF investment demand shattered numerous records this year as investors sought safety from the economic turmoil created by COVID-19,” Juan Carlos Artigas, head of research at the World Gold Council, said in a statement. Gold ETF investment demand is likely to continue its “strong momentum” in the second half of the year as concerns over the economic impact of COVID-19 and infection rates of the virus linger, he added.

Year to date, most-active gold futures trade higher by nearly 19%.

Ed Moy, who was director of the U.S. Mint from 2006 to 2011, during the financial crisis, said that many of the same factors that lifted gold from around $600 in 2006 to $1,900 in 2011 are leading the current rise in gold prices.

There’s a “huge amount of monetary and fiscal stimulus without a clear path to unwind and an uncertain and choppy path to recovery from an unprecedented economic crisis,” Moy, who is currently chief strategist at gold retailer Valaurum, told MarketWatch. “This has caused a flight to safety and fear of inflation, which has benefitted gold.”

Still, there are some differences between today and the 2006 to 2011 period of the Great Recession.

Among those, “the amount of both monetary and fiscal stimulus is, and will be, greater in magnitude and done in a shorter time period,” said Moy. “Domestic protests, riots and unrest, and the upcoming presidential election cast uncertainty over the traditional view of the U.S. being an island of stability during an economic storm.”

The pandemic, meanwhile, has “caused government mints who produce precious metal bullion coins to partially or fully shut down production on a periodic basis due to COVID infections in their manufacturing plants,” disrupting normal supply chains to the mints, he said.

Gold prices may still see some downward pressure from profit takers, warned Moy, but fundamentals indicate that higher gold prices ahead. “We have a long uncertain road ahead to recovery and that will be gold for gold prices.”

As for how high prices may go, Norman said his forecast issued to the London Bullion Market Association in December 2019 still stands, calling for a 2020 high of $2,080 an ounce for gold.



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Full recovery is two long years away, says June’s top economic forecaster


Christophe Barraud

The economies of the United States and the eurozone are recovering now after the severe shock of shutting down in response to the coronavirus pandemic, but no one should think that conditions will return to normal any time soon, says Christophe Barraud, chief economist for Paris-based Market Securities and the winner of the Forecaster of the Month contest for June.

“I’m a bit pessimistic,” he says. “A full recovery will take a long, long time.”

Read more about Barraud’s views: Award-winning forecaster says U.S. economy might not heal by next year, putting stocks at risk of correction

While he’s quite uncertain about exactly how the pandemic and the economy will evolve, he’s convinced that there won’t be a full recovery until the first half of 2022 at the earliest — two years away.

By “full recovery,” he means that gross domestic product gets back to the pre-COVID levels of the fourth quarter of 2019. A full recovery in the labor markets will take even longer, he predicts.

“Life won’t return to normal until an effective vaccine is found and distributed worldwide,” he says.

While Europe seems to be keeping the pandemic under control at present, the intensification in the United States is dragging down the economy. “The recovery has stalled,” he says. “People are avoiding restaurants” and other high-risk businesses.

In this environment, businesses and consumers are being particularly cautious. Many businesses will fail if they can’t attract more business soon.

Most businesses are waiting for clarity before committing to major capital investments or hiring, he says. There are too many uncertainties now revolving around a second wave of the pandemic, the U.S. presidential and congressional elections, Brexit, how well China will recover, and how fast global trade will revive.

In the meantime, the demographic challenges that were already pushing on the U.S. and European economies haven’t gone away. On the positive side, the failure of weak businesses and industry segments could make way for more vibrant business models in the longer term.

Barraud has won MarketWatch’s monthly forecasting contest three times, and he’s consistently been near the top of yearly rankings, finishing third the past two years. He’s won Bloomberg’s forecaster of the year contest eight times.

On five of the 10 U.S. indicators we track — nonfarm payrolls, retail sales, durable goods orders, consumer confidence and new home sales — his forecasts were among the 10 most accurate out of 44 forecasting teams.

Barraud’s forecast

Number as reported*

ISM manufacturing index

44.7%

42.1%

Nonfarm payrolls

-3.50 million

2.51 million

Trade deficit

-$49.9 billion

-$49.4 billion

Retail sales

11.1%

17.7%

Industrial production

2.9%

1.4%

Consumer price index

0.1%

-0.1%

Housing starts

1.16 million

974,000

Durable goods orders

16.6%

15.8%

Consumer confidence index

95.9

98.1

New home sales

666,000

676,000

*Subject to revisions

The runners-up in June were Michelle Meyer’s team at Bank of America, Brian Bethune of Tufts University, Ellen Zentner’s team at Morgan Stanley, Jim O’Sullivan of TD Securities, and Andrew Hollenhorst of Citi Research.

The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who have earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest.

The economists in our consensus forecast: Jim O’Sullivan of TD Securities, Christophe Barraud of Market Securities, Andrew Hollenhorst’s team at Citigroup, Ryan Sweet of Moody’s Analytics, Seth Carpenter’s team at UBS, Jay Bryson’s team at Wells Fargo, Michelle Meyer’s team at Bank of America, Jan Hatzius’s team at Goldman Sachs, Lou Crandall of Wrightson ICAP, Stephen Gallagher at Societe Generale, Peter Morici of the University of Maryland, Brian Wesbury and Bob Stein at First Trust Advisors, Spencer Staples of EconAlpha, Douglas Porter’s team at BMO Capital Markets, and Avery Shenfeld of CIBC.



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Will Vanguard step on the SPDR? This technology ETF just dethroned the industry leader


In mid-May, assets in the Vanguard Information Technology ETF
VGT,
-0.10%

overtook those in a competing fund from the company that’s long dominated exchange-traded fund sector investing, the SPDR suite from State Street Global Advisors.

It was a small industry shift that perhaps only an ETF enthusiast would have noticed, yet it may speak volumes about how the investment-management world is evolving.

The Sector SPDRs were the first ETF products to track the S&P 500’s sectors — groupings of companies according to their business activities — and remain the industry giants, in large part because their scale enables institutional investors to use them to make big trades, said Todd Rosenbluth, head of ETF and mutual fund research for CFRA.

If Vanguard’s assets are catching up to State Street’s, it means one of two things, Rosenbluth told MarketWatch: either institutional investors are starting to get comfortable enough with Vanguard to rely on it as a trading tool — or that individual investors, who have traditionally comprised most of Vanguard’s customer base, are turning to “tactical” ETF strategies.

Vanguard cut its teeth in what the fund industry calls “core” products — simple index funds that track the overall S&P 500
SPX,
+1.04%
,
for example. But individual investors are getting increasingly comfortable with exchange-traded funds, and increasingly using them to express more targeted views.

The attached chart shows 10 fund pairings of the currently existing 11 sectors. The 11th sector, real estate, was created in 2016; SPDR launched a fund to track the sector shortly before that. In contrast, Vanguard’s original sector lineup, which dates from 2004, has always included real estate. That fund has nearly $29 billion in assets, compared with $4.1 billion in the newer SPDR fund.

It’s only fair to point out that Vanguard’s footprint in the other sector funds remains quite small, compared against the corresponding SPDR funds. Next to real estate
VNQ,
+0.32%

and technology
XLK,
-0.03%
,
health care
VHT,
-0.20%

is the sector in which it has the largest presence, and there, its assets are still less than half those of the SPDR fund.

But Vanguard’s explosive growth rate is a story unto itself. The firm, once considered a financial-services underdog, now has more assets under management than its next three competitors combined. That’s thanks largely to individual investors.

See:Three fund managers may soon control nearly half of all corporate voting power, researchers warn



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The cost of Biden’s economic plan to the stock market is more than you might think


While momentum investors are increasingly focused on ever-higher stock prices, prudent investors should start focusing on the presidential election.

Democratic front-runner Joe Biden released his “Buy American” economic plan to challenge President Trump. Still, investors need to ask how Biden would pay for the plan. He could take away Trump’s tax cuts for corporations and the rich. But Biden and Trump might also share a strategy: Borrow more and influence the Federal Reserve to print more money.

Readers know that I am politically agnostic. My sole job is to help investors. Let’s explore the issue with the help of a chart.

Chart

Please click here for an annotated chart of the Dow Jones Industrial Average ETF
DIA,
+0.92%
,
which tracks the Dow Jones Industrial Average
DJIA,
+0.92%
.
Note the following:

• The chart is monthly, giving investors a long-term perspective.

• The chart shows the middle support zone.

• The chart shows that based on Biden’s tax policies, the stock market in theory should drop to the middle buy zone. This is about a 20% drop in the stock market.

• Prudent investors should protect themselves from the tail risk of the stock market falling to the “mother of all support zones” shown on the chart.

• The chart shows Arora buy signals and calls for the Dow Jones Industrial Average to reach 30,000 points. From 2012 to today, the majority of the rise in the stock market is attributable to the Fed’s enlarged balance sheet and lower interest rates. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”

• The big money is hiding in the five large-cap tech stocks of Apple
AAPL,
-0.30%
,
Amazon
AMZN,
+0.06%
,
Microsoft
MSFT,
-0.42%
,
Alphabet
GOOG,
+0.43%

GOOGL,
+0.14%

and Facebook
FB,
-0.93%
.
Those five stocks are experiencing a significant “pile-on” effect — buying for reasons that have nothing to do with fundamentals.

• Keep an eye on stocks that would benefit from the Biden plan. Examples include Tesla
TSLA,
+6.14%
,
Canopy Growth
CGC,
+5.74%

and Centene
CNC,
-0.74%
.

Five contributors to a stock market drop

Here is a simple calculus of what, in theory, should happen with Biden’s tax policy.

• Biden would be likely to increase the capital gains tax, perhaps as high as 39% for upper-income individuals. That could lead to selling before such a law were passed.

• Due to higher corporate tax rates, S&P 500
SPX,
+0.57%

earnings would take about a 7% hit.

• Due to more regulation, S&P 500 earnings would take a 2%-3% hit.

• Potential restrictions on buybacks and also less free cash flow due to higher corporate taxes would be a negative for the stock market.

• With wealthy individuals paying more taxes, they would have less money to buy stocks.

All in all, the foregoing calculates to about 20% hit to the stock market.

New stock market highs

None of it may matter, and the stock market may hit new highs, if the following two factors take hold:

• If Biden starts surging in the polls along with the possibility of a “blue sweep,” expect market professionals and hedge funds to build up short positions. Short positions act as fuel for a rally if subsequently a short squeeze takes hold. The chart linked above shows the 65% of the first leg of the rally from March 23 coronavirus low was short-squeeze-related. The chart shows that the second leg of the rally was 35% short-squeeze-related. If a short squeeze takes hold again, it could easily take the stock market to new highs.

• An up move due to a short squeeze these days goes a lot farther due to the momentum crowd jumping on. The momentum crowd has already formed a habit of buying stocks aggressively on the news of more government borrowing and more money printing. With more borrowing under the Biden administration, the prevailing wisdom among the momentum crowd that more borrowing and more money printing is good may lead to new stock market highs.

What does it all mean?

Prudent investors need to stay extra alert and nimble as well as have protective measures in place while positioned to take advantage of potential new stock market highs. Protective measures should be dynamically adjusted. Of course, if you are part of the momentum crowd, it is real easy — celebrate borrowing and money printing with more buying in the stock market. Please read “Here’s the secret sauce to handle the stock market’s election and virus fears.”

Disclosure: Arora Report portfolios have positions in Apple, Amazon, Alphabet, Microsoft and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at Nigam@TheAroraReport.com.



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Weekend reads: A breakdown of all the COVID-19 relief programs for consumers


Even after many months of tragedy and shutdowns, the coronavirus crisis continues to unfold. It was easy to expect a steady, organized reopening of businesses, state by state, but the new outbreak of infections has complicated the economic recovery.

Joy Wiltermuth shares a guide that lists various assistance programs for people suffering financial losses from the coronavirus crisis, and eligibility requirements.

Related:Coronavirus is changing us — but which of these lessons are we learning?

Where to retire

Silvia Ascarelli continues her series offering readers retirement destinations to fit their personal circumstances. This couple is eyeing North Carolina and South Carolina — but not along the coast.

Where should you go? Try MarketWatch’s retirement location tool for a customized set of answers.

Avoid these mistakes when selecting a retirement destination

Don’t focus just on low taxes, writes CD Moriarty. And consider whether your vacation spot truly works for everyday life.

Ready to head back to the office?


iStockphoto

Will you really have to go back to the office when the boss says it’s time?

Elizabeth Tippett, an associate professor at the University of Oregon’s School of Law in Eugene, explains what your options might be if your employer insists you stop working from home.

How to protect yourself when you lend money to a family member

Even with the best of intentions among everyone involved, you can take a painful financial hit if you lend money to a family member. Bill Bischoff explains how to make a tax-smart loan.

Will you ever achieve financial independence?

Alessandra Malito helps a reader who feels overwhelmed with debt, a growing family and the need to move for work.

An overlooked investment opportunity brought about by COVID-19

Michael Brush says stocks in this industry are overly discounted and that this is the time to buy.

More from Brush:Five ways to beat the stock market — from a fund manager who’s done this for years


FactSet

Bank earnings season

The KBW Bank Index
BKX,
+2.62%

has fallen 38.6% this year (with dividends reinvested), while the S&P 500 index
SPX,
+0.28%

is down only 1.4%. Some investors see an opportunity in cheaply valued bank stocks, while others steer clear amid the economic uncertainty. Here’s what to expect when the largest U.S. banks report their second-quarter results next week.

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