The financial markets have been showing signs of increasing volatility over the last month. This is hardly surprising, given the near vertical five-month rally in stocks since mid-November. The run-up in stock prices is directly attributable to the continuing and unprecedented levels of government bond purchases by the central banks of the developed countries around the world. The stock market rise is despite the International Monetary Fund’s recent reduction in their growth estimates for just about every major region on the planet. The European Union remains stagnant, as their ongoing recession, bailouts and forced austerity become increasingly challenging for a growing list of Mediterranean countries. While China’s pace of growth is no longer quite as robust, the U.S. economy’s momentum is also slowing and possibly illusory. We firmly believe the large scale financial market manipulation, through massive bond purchase programs, has artificially inflated security values and will ultimately lead to an increase in future volatility for these same markets.
Last month gold declined dramatically and gave back some of the appreciation from recent years . We still believe gold has a viable role in in our diversified portfolios. As the central bankers continue their extraordinary amount of bond purchases and further debase their currencies in the process, we anticipate the emerging countries of the world will view gold as a currency alternative to their investments in U.S. $ denominated Government bonds and the European Union’s € denominated bonds. This hedge offers China, India, South Korea, Brazil, and the other emerging economies with trade surpluses, some insulation to the depreciating $ and €. These ongoing policies of the big central banks will likely stoke demand for gold as long as the Ben Bernanke’s of the world continue their extraordinary amount of money creation. In addition, demand for physical gold appears strong in all markets of the world and seems to have even increased since the price decline.
Our recent investments into energy infrastructure and an absolute return fund are performing well. Rather than Sell in May and Go Away, often embraced by much of Wall Street, we will continue managing risk through prudent diversification.
James C. Kuntz, CIMA