For most Wall Street participants, the broad markets have been nothing but a sour spot. Yes, the blue-chip indices did swing north Thursday, yet overall, they remain deep underwater.
The benchmark S&P 500 index is down exactly 6% for the year, while the Nasdaq Composite is nervously approaching correction territory with a precipitous 8% drop.
Individual winners have been few and far apart, but in the midst of the fear, one indicator has conspicuously stood out from the crowd — gold prices.
Just take a look at the performance of the gold exchange-traded fund SPDR Gold Trust ETF (GLD).
In the first four days of the new year, the GLD had gained nearly 5% against the final close of 2015. Even with a near-term pullback in gold prices, the GLD ETF is still up 3% year-to-date as of this writing.
Not stunning numbers by any stretch of the imagination, but we have to look at gold prices contextually. In 2015, the GLD’s strongest week-over-week trade measured only 4.5% in the middle of January. Thus, the recent momentum is a cause for a little celebration.
More importantly, gold prices are finally appearing to do what investors think it ought to do — be a safe haven in times of economic and social uncertainty.
Back in November of 2010, The Wall Street Journal delivered perhaps one of their most succinctly blunt headlines — “Fear Drives Gold Higher”. A little over five years ago, the leap forward in gold prices was attributed to Europe’s sovereign-debt crisis and saber-rattling between North and South Korea.
This isn’t a ringing of a bell more so than a call to mass at Saint Peter’s Basilica. In fact, one could make the argument that — in terms of a fear trade — the fundamentals today are more bullish for gold prices and the GLD than it ever was during the past decade.
For instance, the recent hydrogen bomb test by North Korea was quickly followed up by an audacious claim that the rogue terrorist nation could obliterate the United States. Meanwhile, conspirators backing the Islamic State claimed responsibility for a murderous attack in Jakarta — Indonesia’s first major terrorist attack since 2009.
As social turmoil expands dangerously beyond its points of origin, the global financial markets remain an utter basket case. Germany’s DAX Composite index is down 9% YTD, while a short trip across the Atlantic, the United Kingdom’s FTSE 100 is in the red by 5%.
The European relief rally that some investors were banking on failed to hold true and sentiment is moribund. Of course, suspect number one is China, where economic growth has fizzled compared to previous highs, and there are new concerns about their government’s ability to manage its rapidly bloating sovereign debt.
In theory, all of this is supportive of fear trade investments like the GLD ETF.
Many people, however, have been badly burned by the widely assumed inverse correlation between gold prices and societal disaster.
Even up to last year during August’s sharp equities correction, the GLD ETF failed to capitalize on the feeling of impending doom that had held the markets at gunpoint.
Between the start of the troubles on Aug. 18 until Sept. 30, the GLD actually lost some value. Obviously, the priority here is to avoid repeating such mistakes.
Unfortunately, gold prices are notorious for not following decorum — its inherent volatility is what it is. That said, GLD investors can likely depend upon a few favorable tailwinds.
First, the potential of broader panic and conflict is very much palpable — China is in financial crisis, terrorism has hit us at home, and the U.S. is becoming increasingly polarized.
Second, gold prices are technically beginning to stabilize. In 2013, the average price of the GLD dropped nearly $28 from the prior year. In 2015, the decline was less than $10.
Finally, there is peace of mind. While some view gold as a barbaric relic, it undeniably has universal appeal, and therefore, demand. In some circumstances, gold has a measure of certainty that a debt instrument simply lacks.
Let’s be clear — gold and the GLD are not likely shortcuts to riches — they’re insurance.
No one goes out on a Sunday drive expecting to get into a car accident. But if something were to happen — and the odds are very much for this — insurance can help buffer a financial disaster. A small, reasonable portion of one’s portfolio allocated to the yellow metal is just smart business sense.
Will gold prices move higher in 2016? Recent technical momentum combined with serious concerns of global economic stability suggests that the answer is a cautious yes.
Investors can play off the fear trade by buying into the liquid GLD ETF, which is essentially selling at a discount. However, the GLD should be considered a hedge, not a lottery ticket.
Whether we’re talking bail bonds or gold, the same principle applies — it’s better to have it and not need it, than need it and not have it.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.