Streetwise
SATURDAY, DECEMBER 24, 2011
It's a Holiday Tinged With Gold
By KOPIN TAN
Gold has lost a bit of its glow after a remarkable run, but as many economic woes persist, the commodity play still gleams.
Unlike frankincense and myrrh, gold possesses an allure that has only increased over the years, and 2011 will mark the 11th straight time gold prices will end a year higher.
Lately, however, it has lost some of its blinding gleam. In mid-December, the price of gold fell below its 200-day average to finally end a remarkable 732-day streak—the longest since at least 1975—of consecutive finishes above its 200-day trend line. Since peaking near $1,895 a troy ounce in September, spot gold prices have skidded as much as 17%. Corrections of 15% or more are rare and unsettling. There have been only four the past decade, the longest being 2008's eight-month swoon, and concerns are rife that 2012 might finally bring a bigger meltdown.
Yet gold's recent slide smacks more of profit-taking than a fundamental reversal. As one of the best-performing assets, gold has been an easy place to cull profits. Is it any wonder gold's steepest slippages—an 11.2% tumble from Sept. 20 to 26, and a 10.2% retreat over December's first two weeks—came just before each quarter ended, when hedge funds often had to raise money to meet liquidations?
Drooping futures further dissuaded the momentum crowd, and some weaker Asian currencies didn't help. For example, the jewelry market drives much of the demand for gold, particularly in China and India, and while gold is up 12% this year in dollar terms, it has jumped nearly a third when measured in Indian rupees, which makes those gold bangles suddenly a lot pricier.
THE CASE FOR HOLDING GOLD hasn't really changed. "In our mind, gold has one key enemy: high sustained real interest rates from a highly liquid currency," notes Michael Purves, chief market strategist at BGC Financial. "We find it hard to imagine that the Federal Reserve will reverse its very low rate strategy in the next three years." Sure, the dollar has held up lately, and housing starts and jobless claims have improved, but U.S. Treasuries still look more like a liquidity harbor than a true safe harbor. Purves, for one, thinks gold could reach $1,800 by next June, from a tad above $1,600 Friday.
For all the forecasts for a 2012 U.S. economic rebound, few of our woes have been resolved. With the U.S. waist-deep in trillions of debt, European banks flailing and the developed world spending beyond its dwindling means, there is no quick fix except for central bankers to print more money to pay off loans and prop up the planet's frail financial system.
The bottom line: "We don't trust paper money," notes John LaForge, Ned Davis Research's commodity strategist, and "gold's bull run reflects a lack of trust and credibility in governments and central banks world-wide to stop printing money at will."
DECEMBER DOESN'T BRING just crowded malls, forced cheer, and strained conversation with long-shunned relatives. In the stock market, it's a chance to get a jump on January—and the January Effect, which describes the tendency of struggling small stocks to rebound early in a new year. On cue, Wall Street brokers have been reminding us how small stocks have outrun big caps in three out of every four Januarys. Since 1926, small stocks have ended a year lower just 27 times.
The following January, they have bounced back with gains averaging 6.7%. Over all years, the average return in January for small stocks is a robust 4%—far better than 1.1% for large stocks that same month, or 1.2% for small stocks over all other months.
With such persuasive numbers, the chill toward small caps is thawing a little. The Russell 2000 index of small stocks is down almost 5% in 2011, worse than the large-cap Standard & Poor's 500 index, but the chart of small stocks relative to large has started to turn up slightly since it bottomed this fall.
In a recent quarterly survey of 128 small- and mid-cap investors conducted by Credit Suisse, 41% believed the Russell had bottomed in early October, and another 36% say any further downside probably won't exceed 5%.
Yet it's a little curious that small stocks that have been hardest hit earlier this year haven't rebounded much in November or December, notes Steven DeSanctis, Bank of America Merrill Lynch's small-cap strategist. For example, the quintile of small stocks that held up best through Oct. 31 have fallen another 2.1% since October, while the quintile that fared worst earlier this year gave up another 8.3%.
This year, with investors fatigued by the market's feral swings, "size and quality matter," DeSanctis argues. Macro concerns in the U.S. and Europe and heightened volatility don't bode well for the January Effect, which hasn't come early this year and may not come at all.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
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