Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Speculations Reversed - Gold Price Stealth Rally 2014

Commodities / Gold and Silver 2014 Apr 02, 2014 - 05:10 PM GMT

By: Peter_Schiff

Commodities

So far, 2014 has been a paradoxical year for gold. Many investors aren't even aware that it has rallied almost 8%. On the rare occasion that the financial media mentions the yellow metal, it is only in the context of comparing the recent rise to last year's decline.

In spite of this overwhelming negative sentiment, gold is experiencing a stealth rally as one of the best performing assets of the year. Let's look at some important metrics of the most under-valued sector in this market.


Speculations Reversed

So many investors want to believe that last year was the death knell for the yellow metal that they've stop paying attention to the technical metrics responsible for driving the price down. These metrics have already started to reverse.

Last year, technical speculators - and everyday investors trading behind them - influenced gold's price more than anything else. Notably, 2013 was the first year since their creation in 2003 that gold exchange-traded funds (ETFs) experienced a net outflow of their gold holdings. This played a pivotal role in driving down both the gold price and investor expectations for the yellow metal.

Gold ETFs sold off their holdings by a whopping 881 metric tons last year. GLD, the largest fund, sold 550 of those tonnes on its own. This was influenced by, and then compounded, the effects of extremely bearish gold futures speculators, whose large net-short positions were responsible for some landmark drops in the gold price throughout the year. As is typical with markets, negative sentiment became a self-fulfilling prophecy.

For the previous decade up until last year, physical gold demand had driven the gold bull market. However, ETFs have over this time accumulated a greater and greater share of the market. Thus, last year's sudden ETF sell-off was enough to drive total global gold demand down 15% year-over-year. Even 28% growth in bar and coin demand - resulting in record-breaking total demand - couldn't counter the market's bearish turn. But ETFs are getting back in the game. GLD started adding to its holdings again in February, the first increase since December 2012. And by mid-March, COMEX gold futures contracts had the most net-long positions since November 2012.

Gold Versus Equities

Why are ETF and futures traders reversing their previously bearish positions?

Prices are up in every area of the gold sector. GLD and COMEX futures are both up more than 6% this year. GDX, one of the broadest gold-mining ETFs, is up more than 12%. Even with a sell-off in the last week of March, physical gold was up almost 8% in the first quarter.

Meanwhile, the general stock market is barely performing at all. The S&P 500 and the NASDAQ are up barely 2% YTD, while the Dow is down.

Most importantly, when measured in terms of gold, the Dow has actually started to drop significantly. At the end of March, the Dow was about 12.5 times the gold price. This is already a 9% decline since December. For the majority of the last 100 years, the Dow has traded far below this level.


To get back to its historical average, either the Dow is going to have to drop significantly or gold will have to skyrocket. I believe it will be a combination of both.

Overpriced and Under-Earning

Anyone who really buys the story of economic recovery is likely riding a wave of irrational exuberance after a year in which the major indices hit record high after record high. They don't express the slightest concern that the stock market is already in dangerous bubble territory.

However, one of the most important metrics of stock market valuation completely contradicts this.

The Shiller Price/Earnings Ratio (Shiller P/E) is well-respected for helping analysts like me identify one of the most over-valued markets in history - the dot-com bubble. This metric gauges the return on investment for someone buying into the broader stock market. A higher ratio indicates investors are paying more for shares of companies that are earning less; therefore, they are receiving less value.

At the end of March, the Shiller P/E stood at 25.60 - almost 55% higher than the historical average of 16.5. As you can see in the chart below, the only previous times the ratio has breached 25 were during the 1929 stock craze, the dot-com bubble, and just before the '08 financial crash.

I would not want to be anywhere near an investment with such poor yield.


Don't Look Back

Investors often make the mistake of investing in the last trade, the same way that governments always fight the last war. After a year in which stocks brought in about a 30% return while gold was pummeled, nobody wants to be the first one to jump back into hard assets.

But fortunes are often made by ignoring the popular trend and buying underpriced assets when nobody else sees their value. Sometimes this is a risky maneuver, but in the case of today's gold market, it's as close as we can get to a sure thing.

It's hard to predict what will trigger the next collapse of stocks, but gold is already on the road to new highs. Janet Yellen is gearing up to unleash a new torrent of freshly printed dollars onto global markets. I'd recommend building your ark well in advance.

Peter Schiff is Chairman of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.

Peter Schiff Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife