Lehigh University vs. Princeton University
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THE MARKETS |
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The S&P 500 index jumped 4.5% last
week as a weakening dollar and a positive earnings report from Alcoa helped
keep the bulls in charge.
Early last week, Australia
surprised the world and became the first central bank of the Group of 20
Nations to raise its benchmark interest rate during this economic cycle,
according to MarketWatch. This helped send the dollar lower as currency
investors realized that countries such as Australia
may offer better growth prospects - and higher returns on interest-bearing
investments - than the United
States.
Alcoa, traditionally the first
company in the Dow Jones Industrial Average to report quarterly earnings,
started the reporting period with a bang as it reported revenues and earnings
that exceeded Wall Street expectations, according to CNBC. As an aluminum
maker, Alcoa's products are used in manufacturing and the company's results may
provide a glimpse on how that sector of our economy is performing. While the
quarter was above analyst expectations, the expectations were low. Alcoa's
revenue was down 37% from a year ago while its earnings per share were off 89%,
according to CNBC.
The economy still has a long way to
go before it regains its former glory days, but the financial markets are
wasting little time in trying to recoup their bear market losses.
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Data as of 10/9/09
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1-Week
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Y-T-D
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1-Year
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3-Year
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5-Year
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10-Year
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Standard
& Poor's 500 (Domestic Stocks)
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4.5%
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18.6%
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19.2%
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-7.4%
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-1.0%
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-2.2%
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DJ
Global ex US (Foreign Stocks)
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4.8
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37.4
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27.3
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-3.3
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5.4
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1.8
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10-year
Treasury Note (Yield Only)
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3.4
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N/A
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3.8
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4.7
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4.1
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6.1
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Gold
(per ounce)
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4.8
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20.9
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19.0
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22.3
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20.0
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12.7
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DJ-UBS
Commodity Index
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4.0
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10.2
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-14.8
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-7.4
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-3.9
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3.9
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DJ
Equity All REIT TR Index
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5.5
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17.3
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3.8
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-13.0
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1.2
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9.8
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Notes: S&P 500, DJ
Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends
(gold does not pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT TR Index does include reinvested dividends
and the three-, five-, and 10-year returns are annualized; and the 10-year
Treasury Note is simply the yield at the close of the day on each of the
historical time periods.
Sources: Yahoo! Finance,
Barron's, djindexes.com, London Bullion Market Association.
Past performance is no
guarantee of future results. Indices are
unmanaged and cannot be invested into directly.
N/A means not applicable or not available.
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GOLD PRICES HIT AN ALL-TIME HIGH
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Gold prices hit an all-time high last week driven by
a weak dollar and concerns over potential inflationary pressure, according to
CNBC. Many people consider gold to be a good inflation hedge. Is it true? Let's
look at some examples.
Way back in
January 1980, gold prices peaked at approximately $850 per ounce. Last week, it
closed at $1,051 per ounce according to the London Bullion Market Association
(LBMA). This represents a gain of about 24%. By comparison, between January
1980 and August 2009, inflation, as measured by the consumer price index, rose approximately
179%, according to the 2009 Ibbotson® SBBI® Classic
Yearbook and the Bureau of Labor Statistics. Score one for inflation beating
gold.
If gold prices
had kept pace with inflation since January 1980, gold would sell for roughly
$2,400 an ounce in today's dollars, according to MarketWatch. This is one
reason why some investors feel gold could move to $2,000 an ounce without too
much trouble.
However, before we
get too carried away, let's look at the other side of the story.
Like many
statistics, what you pick as your starting point can greatly influence your
results. By picking the January 1980 gold price peak as the starting date - after
gold had already risen more than 2,000% in the previous 10 years - the returns
between 1980 and today look weak.
A more
representative analysis of the inflation-fighting benefits of gold would start
in June 1973. By June 1973, all currencies were allowed to "float" freely
without regard to the price of gold and the U.S. was a couple years past
exchanging dollars for gold at a fixed price, according to the National Mining
Association. In other words, by June 1973, we had a market-based price for gold
that reflected supply and demand and we were just prior to the start of a major
inflation binge in the U.S.
The price of gold that month was approximately $120 per ounce, according to the
LBMA.
Here are a
couple numbers to consider.
First, between
the June 1973 price of $120 per ounce and the January 1980 price of $850 per
ounce, gold had risen 608%. By contrast, inflation rose 76% during that same
period, according to the 2009 Ibbotson® SBBI® Classic
Yearbook. Clearly, gold was an excellent inflation hedge during the
inflationary 1970s. Score one for gold beating inflation.
Second, between
the June 1973 price of $120 per ounce and last week's price of $1,051, gold had
risen 776%. By contrast, inflation rose approximately 385% during that same
period, according to the 2009 Ibbotson® SBBI® Classic
Yearbook and data from the Bureau of Labor Statistics. Clearly, gold has been
an effective hedge against inflation since 1973, although past performance is
no guarantee of future results. Score another one for gold beating inflation.
Here are some
conclusions to ponder.
First, gold has
historically been a solid inflation hedge over
a long period of time. However, there is no guarantee this will hold true
in the future.
Second, between
the 1980 gold price peak and last week, gold has significantly underperformed
inflation. However, it is misleading to say "gold is selling well below its
inflation-adjusted 1980 price" as a reason why gold should easily move to
$2,000 per ounce. It is misleading because gold had already moved up more than
2,000% during the 1970s, as measured from gold's January 1970 price of $35 per
ounce.
Third, gold has
historically moved in long cycles. In the 1970s, it had a strong up move. In
the 1980s through the early 2000s, it was in a down move. Since the early 2000s,
it has been in a strong up move.
Presently, gold
could be on the rise due to inflation expectations or as a hedge against a
declining dollar. Most likely, it is a combination of both.
Because of its
long history, gold enjoys a special place in society. It can be an investment. It
can be a hedge. It can be worn on your body as jewelry. It can be exchanged for
cash. And, because of its special place, we will likely still be talking about
gold over the next millennium.
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THINK ABOUT IT
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"Thinking to get
at once all the gold the goose could give, he killed it and opened it only to
find - nothing."
-- Aesop
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Mary L. Nothelfer, CFP® Emilio
J. Morrone, CPA, CFP®
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Securities
offered through LPL Financial, Member FINRA/SIPC.
*
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities
considered to be representative of the stock market in general.
*
The DJ Global ex US is an unmanaged group of non-U.S. securities designed to
reflect the performance of the global equity securities that have readily
available prices.
*
The 10-year Treasury Note represents debt owed by the United States Treasury to
the public. Since the U.S. Government is seen as a risk-free borrower,
investors use the 10-year Treasury Note as a benchmark for the long-term bond
market.
*
Gold represents the London
afternoon gold price fix as reported by the London Bullion Market Association.
* The
DJ Commodity Index is designed to be a highly liquid and diversified benchmark
for the commodity futures market. The Index is composed of futures contracts on
19 physical commodities and was launched on July 14, 1998.
*
The DJ Equity All REIT TR Index measures the total return performance of the
equity subcategory of the Real Estate Investment Trust (REIT) industry as
calculated by Dow Jones.
* Yahoo!
Finance is the source for any reference to the performance of an index between
two specific periods.
*
Opinions expressed are subject to change without notice and are not intended as
investment advice or to predict future performance.
*
Past performance does not guarantee future results.
*
You cannot invest directly in an index.
*
Consult your financial professional before making any investment decision.
* This
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