It’s true: The recent monster rally on Wall Street, with the Dow closing at its highest point in more than four years, was led by the big banks. Yes, we repeat: Banks.
The market’s optimism was pinned on hopes that Ben Bernanke would come out with a soothing statement at the conclusion of the Federal Reserve’s two-day policy confab. And the clever professor did just that.
Bernanke managed to sound upbeat on the economy (“expanding moderately”) while promising that money-market rates would remain at “exceptionally low levels…at least through late 2014.” Logically inconsistent, perhaps, but Gentle Ben knew it was what investors wanted to hear.
Then J.P. Morgan Chase (NYSE:JPM) tossed a bouquet into the arena. Having passed the regulators’ latest stress test, JPM is boosting its dividend 20%, to 30 cents a share quarterly from 25 cents a share. Morgan also plans to buy back a whopping $12 billion of stock during the remainder of 2012.
As soon as that news hit the wires, there was no stopping the market.
After the market closed, another bank, US Bancorp (NYSE:USB), announced an even bigger dividend increase (56%) than Morgan’s.
In the broader market, real bargains have become scarcer than honest politicians. However, one industry is fairly begging to be bought: gold-mining shares.
Bullion plunged after the Fed announcement, dropping almost $40 an ounce from its midday New York peak. But the panic was hardly justified.
Indeed, by insisting on zero interest rates even in an expanding economy, Bernanke has cemented his credentials as an inflationist of the first order. If there was ever a time for investors to hedge against reckless monetary policy, this is it.
Meanwhile, gold shares (versus bullion) are as cheap today as they’ve ever been in the past 30 years, with the sole exception of a few weeks at the height of the 2008 financial crisis. Barrick Gold (NYSE:ABX) is an astonishing value at less than 9X this year’s estimated earnings.
If you prefer to own a diversified basket of gold shares, take a look at Market Vectors Gold Miners ETF (NYSE:GDX), which contains 32 leading miners.
Aggressive investors might take a modest grubstake in Market Vectors Junior Gold Miners ETF (NYSE:GDXJ). GDXJ focuses on small and mid-cap stocks, a group that could soar if speculators get caught up in an old-fashioned gold fever like that of 1979-80.