There are two types of gold investors: Those trying to make money on short-term market timing and those looking for long-term asset preservation. It was the fear-driven trading of the former that helped gold break $1,900 in 2011, and for good reason -- stormy markets steer investors to safe havens
But gold's fortune has shifted in the past two years, and finishing 2013 down 28% seems to have sealed its fate -- at least in the eyes of the short-term speculators. In reality, the same forces that are stabilizing stocks and suppressing gold are also the fundamental reasons long-term investors have been buying gold since the turn of the new millennium. The so-called recovery we're now experiencing is just a lull in a storm that hasn't yet abated.
Losing Touch With Reality
From the fiscal cliff at the beginning of the year to the budget stalemate and government shutdown in the fall, the U.S. was not exactly a model of financial stability in 2013. Yet with each of these stories, the markets shrugged off any large dips and went on to reach record high after record high. The stock market exceeded most expectations -- the S&P and Dow rallied 29.6% and 26.5% respectively, with the volatility index staying remarkably low.
The official explanation for this market behavior is that the economy really is improving. A growing GDP and improving jobless rate are the leading economic indicators that support this conclusion.
However, the real reason behind 2013's stability in spite of mixed economic news was the extremely accommodating Federal Reserve policy. Markets have become hyper-aware of this Bernanke Put over the course of the year.
Compare the markets' taper tantrums earlier in the year to their reaction to the Fed's December announcement of "taper-lite."
In both June and August, with the mere talk of tapering, the S&P and Dow tumbled. The assumption was that when the Fed started tapering their Quantitative Easing (QE) program, interest rates would also start to rise. Overvalued stocks plunged in preparation for a higher interest rate environment.
However, this December, when the Fed set an official January date for tapering, these indexes did not drop as they had before, but immediately jumped to new highs. Why the different reaction to essentially the same news?
Because the Fed's December announcement was not the same.