- Gold Is The Top Performing Asset. Gold is currently in an unloved rally, but there is reason to believe it could continue into year-end, writes portfolio analyst, Josh Rudnik on Seeking Alpha homepage.
According to him, a way to gauge the true strength of gold is by looking at it relative to other asset classes. Outperformance of the yellow metal signals it is a preferred investment in the current market environment.
Gold has outperformed U.S. equities in recent weeks as investors fear geopolitical risks as well as the stretched valuations in broader equity markets. Moreover, the low interest rate environment has made Treasury bonds unattractive, also leading investors to favor gold over safe-haven bonds. Gold is trading at depressed levels and could see further upside as investors park more funds in the metal.
The chart below is of SPDR S&P 500 Trust ETF (SPY) over SPDR Gold Trust (GDL). This indicator measures the true strength of U.S. equities. When the indicator rises it signals investors are seeking risk, and the trend higher in equities is a healthy one. What has been seen this year, however, is that U.S. equities have trended higher, but at about the same pace as gold, meaning investors are cautious.
Investors have reason to be cautious as the North Korea situation escalates, and valuation multiples remain stre North Korea is said to be testing hydrogen bombs that could fit on to a long-range missile. This comes weeks after North Korea conducted intercontinental ballistic missile tests, sending one over mainland Japan into the Pacific Ocean. The country has also threatened to fire missiles towards the U.S. Pacific territory of Guam. It is still unclear what the future holds for the North Korea/U.S. conflict, but investor sentiment is becoming more fearful.
Moreover, the U.S. stock market is trading near record levels, on top of stretched valuation multiples. Price to earnings multiples have surpassed their highs just prior to the financial crisis, and are now trending higher towards levels last seen during the technology bubble of the early 2000s. High valuation multiples require that things go right for the economy, or multiples compress and the market falls lower.
