Stocks Rise; Gold Falls over 5%

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Market Digest – Week Ending 4/12

Capital Markets Overview:

Stocks rose on mixed economic news. Fed minutes showed significant disagreement on when to begin slowing bond purchases, but confirmed any change to the current program is extremely unlikely before the end of the second quarter. Treasuries fell for the week but recouped most of their losses on Friday. Gold fell over 5%, most of it coming on Friday. It is not immediately clear what caused the drop. A recent fall in the Yen may be causing some Japanese to take profits on gold, and the Bank of Cyprus may be selling some of its gold holdings to help with the bailout program.

Weekly Returns:

S&P 500: 1,589 (+2.3%)

MSCI ACWI ex-US: (+2.2%)

US 10 Year Treasury Yield: 1.72% (+0.02%)

Gold: $1,486 (-5.9%)

USD/EUR: $1.312 (+0.8%)

Major Events:

  • Monday – Margaret Thatcher, Britain’s prime minister from 1979 to 1990, died at age 87. She is regarded as playing a major role in reviving Britain’s economy and ending the Cold War.
  • Tuesday – While some question the validity of the report, R.L. Polk declared the Ford Focus to be the best-selling car in the world in 2012, a major victory for Ford.
  • Tuesday – Job openings climbed in February to the highest level in almost five years, signaling U.S. employers are preparing to expand.
  • Wednesday – The Fed released minutes from its March 19-20 meeting, showing “all but a few” Fed officials prefer to keep the current bond buying program going “at least through midyear”.
  • Wednesday – Obama released his budget plan, which included a proposal to curb the growth of Social Security and Medicare.
  • Thursday – Initial weekly jobless claims fell to 346,000, below expectations.
  • Friday – US retail sales in March dropped 0.4%, worse than expected.

Our Take:

Gold fell nearly 5% on Friday and is down over 20% from its 2011 peak. The popular media’s explanation for Friday’s move was a “lack of buyers”. While not particularly insightful, it is an accurate observation. For the moment, few people want to add to gold positions. Rumors that the bank of Cyprus may sell some of its gold holdings to satisfy the country’s bailout obligations also created fear that selling gold will become a common part of future European debt crisis solutions.

Anything that goes up for 12 straight years is ripe for a meaningful fall. Unlike stocks or bonds, it is difficult to have intelligent discussion around how gold should be valued. For thousands of years it has been either the definition of money itself, or has been worth whatever people have been willing to pay – usually a lot more than its intrinsic value. This is unlikely to change now, and therefore gold remains a reasonable hedge against paper currency devaluation. The consequences of unprecedented central bank stimulus are impossible to predict. Last week’s aggressive action from the Bank of Japan only adds fuel to the fire. Gold may continue to lose value in the short to mid-term, but timing these cycles is very difficult. We continue to believe low single digit exposure is a good way for most individual investor portfolios to increase diversification and hedge potential inflation.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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