By William Patalon III
And Jason Simpkins
Money Morning
Gold prices rallied to their highest level in 27 years Friday, fueled by the continued decline of the U.S. dollar. Meanwhile, crude oil surrendered early price gains, but still managed to stay above the $82 level.
Friday marked the close of a quarter that saw pricing volatility that spanned almost all the top asset classes - including stocks, bonds, precious metals and crude oil.
U.S. stocks finished the third quarter on a slightly downbeat note on Friday. The Dow Jones Industrial Average fell 17.31 points, or 0.12%, to end the week and the quarter at 13,895.63. The broader Standard & Poor's 500 Index fell 4.63 points, or 0.3%, to 1,526.75. The tech-laden Nasdaq composite index was off 8.09 points, or 0.3%, to 2,701.5.
Gold Prices Surge
Gold's price surge is almost directly related to the dollar's plummet. The dollar hit yet another record low against the euro Friday, the seventh straight trading day it has done so.
As a result gold for December delivery rose $11 (1.5%), to $759.90, on the New York Mercantile Exchange. In intraday trading it soared as high as $752.50, a new 27-year high.
Gold first surged into this rarified level two Thursdays ago, when spot gold touched $738.10 an ounce. That was its highest price since January 1980, when the yellow metal hit an all-time high of $850 an ounce.
The dollar's decline has been fueled by a ballooning trade deficit and rate cuts by the U.S. Federal Reserve, which are expected to resume in the coming months.
Greg Wilkins, chief executive of Barrick Gold Corp the world's biggest gold producer, told Reuters-U.K. on Sept. 21 that current U.S. conditions of low interest rates and potential inflationary pressures had created a "perfect storm" for gold prices.
In yet another sign that the Western world has become economically "decoupled" from some of the newly capitalist markets in Asia and elsewhere, Wilkins noted that jewelry demand had been coming largely from developing countries that have enjoyed strong economic growth - and that even a 'global chill' from a worst-case scenario U.S. recession would not derail that demand.
"Gold is returning to its historical attribute as a monetary instrument," Peter Spina, an analyst at GoldSeek.com, told MarketWatch.com. "With the U.S. dollar falling to new lows, capital is looking for a preservation of wealth asset. As foreign currencies become more expensive and suspect themselves, gold is quickly becoming an asset choice," he went on to say.
Mining and metals stocks and indexes all moved higher on Friday. The CBOE Gold Index (GOX) rose 0.7% to close at 169.24. Philadelphia Gold and Silver Index (XAU) surged 0.8% to close at 168.81.
If you are searching for gold-related investments, there's Barrick Gold Corp., (ABX), the world's No. 1 gold producer, whose shares closed Friday at $40.28, up $1.10, or 2.81% each.
If exchange-traded funds (ETFs) are more to your liking, there's the Market Vectors Gold Miners ETF (GDX), which closed Friday at $45.35, up $1.02, or 2.3%. There's also the streetTracks Gold Trust ETF (GLD), which closed at $73.51, up 81 cents, or 1.1%.
Understanding that overseas growth is responsible for the surge in gold prices, an indirect way to play gold is to invest in the broader story of China's record expansion. To do that, a good China-focused mutual fund is your best bet. One fund our analysts like a lot because of the company that runs it is the U.S. Global Investors China Region Opportunity Fund (USCOX).
Outlook for Oil and Stocks
Crude hit an intraday high of $83.76 before retreating to $82.58 a barrel on the NYMEX. Because oil is priced in U.S. dollars this jump can also be attributed to the sliding currency.
After moving higher Thursday and early Friday, crude oil prices shifted lower. November West Texas Intermediate crude oil fell $1.22 to $81.66 per barrel.
From what Standard & Poor's Equity Research Chief Economist David Wyss characterized as a "surprising" move by the U.S. Federal Reserve on September 18, S&P's Investment Policy Committee upped its year-end target for the S&P 500 index to 1,560, from a previous forecast of 1,510. Wyss said that he and his fellow S&P forecasters are now predicting the S&P 500 to deliver full-year gains of 10%, not including dividends.
To take advantage of the changed market circumstances, S&P Equity Strategy changed its sector-allocation recommendations: Technology is now overweight (previously marketweight), and materials and utilities are now marketweight (previously underweight). At the same time, S&P Equity Strategy reduced its allocation recommendation on health care to marketweight.
The two sectors that historically perform the best in the six months after an initial Fed rate cut are technology and consumer discretionary. However, S&P Equity Strategy still advises an underweight allocation to consumer discretionary, specifically citing concerns about housing and auto sales.
S&P Economics says the Fed move reduces the risk of recession in the next 12 months to a 33% chance, down from a previous forecast of 40%. Wyss expects another Fed rate cut, to 4.5%, in October.
The big even on the data calendar this week is the release of September employment report, planned for Friday. Weak numbers from the August report were a key catalyst behind the Fed's Sept. 18 decision to cut interest rates by half a percentage point. Other reports scheduled for release include September ISM and vehicle sales today (Monday), pending home sales tomorrow (Tuesday); the September ISM non-manufacturing index, the ADP employment report, Challenger job layoffs, and the weekly MBA mortgage data on Wednesday; Monster.com employment index, jobless claims, and factory goods on Thursday, according to S&P.
A report released Friday showed consumer spending rose 0.6% in August, better than the market had expected. U.S. personal income rose 0.3%.
News and Related Story Links:
- The Outlook/Standard & Poor's: Market Snapshot:
Stocks End Modestly Lower. - MarketWatch.com:
Gold Rallies to 27-Year Peak as Dollar Tumbles. - Money Morning Investment Analysis:
The Baywatch Effect: Can China's Growth Help Gold Prices Triple? - The Outlook/Standard & Poor's:
A Fed-Fueled Sector Shift. - Reuters:
Despite Gains, Gold Lacks Broad Investor Appeal.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.