Why Gold Looks Good to Me in 2014

Just the other day, I was talking to a friend of mine who seemed extremely cheerful. I asked why, and he said that his investments have performed well over the past few months and he saw no reasons to worry.

This is a common problem with investor sentiment; people tend to become complacent and only look to the recent past as an indication of what tomorrow will bring.

This is quite dangerous. Investor sentiment is often wrong and can be used as a contrary indicator, buying when others are dumping their stocks and taking profits when others are blissfully unaware of the changing landscape around them.

Americans need to be careful of becoming too complacent in their bullish investor sentiment, because the U.S. is not isolated from the rest of the world.

When the real estate bust and financial crash occurred here in America several years ago, the effects spread to many nations around the world, including the emerging markets.

With the Federal Reserve pushing the gas pedal on money printing here in the U.S., it has created a shock absorber to some extent, temporarily keeping global pressures at bay, especially in relation to the emerging markets.

However, investors do need to be aware that there is much uncertainty around the world. Investor sentiment for global institutions has been aware of these potential issues and is now running for the exits.

Last week this began in Asia, as economic growth appears to be slowing and reports of a financial crisis in China are beginning to grow. With the Chinese shadow-banking sector showing signs of cracking, this is creating negative investor sentiment among other emerging markets.

Turkey has been one of the hardest-hit emerging markets, as investor sentiment is fleeing that nation on the heels of one of the biggest corruption scandals in recent times. The Turkish currency has continued to plummet, with the central bank holding emergency meetings to try and stem the flow of negative investor sentiment.

Argentina is a complete mess. The country’s currency has dropped by much more than 20% in just a couple of days. Inflation is beginning to run rampant—up more than 25% in 2013—and is possibly set to rise even further as the currency continues to drop.

With more riots occurring in many emerging markets, investor sentiment has begun moving into safe havens, such as gold bullion.

I know what you are thinking: “These are factors affecting the emerging markets, and not the U.S.” I wouldn’t be so quick to make that assertion. You have to remember that never before has the world been as interlinked as it is today.

For better or worse, the U.S. depends on the rest the world for growth. After all, looking at the latest data from retailers, it’s clear that U.S. consumers are not ramping up their spending.

If the U.S. consumer is pulling back on spending and the emerging markets are having issues, this can’t be a good combination for investor sentiment in America, especially if the Federal Reserve continues reducing its monetary stimulus.

Chart courtesy of www.StockCharts.com

The above chart shows the massive divergence between investor sentiment in America, represented by the SPDR S&P 500 (NYSEArca/SPY) exchange-traded fund (ETF), and the emerging markets, represented by the iShares MSCI Emerging Markets (NYSEArca/EEM) ETF.

I believe that the Federal Reserve has pushed investor sentiment higher over the past year, primarily due to monetary stimulus, which is why there is such a divergence between our markets and the emerging markets.

The question you have to ask yourself is: Can investor sentiment continue pushing our stock market higher even though the emerging markets are showing signs of cracking, the Federal Reserve is beginning to pull back on money printing, and corporations are having trouble increasing revenue and are reporting a decelerating rate of earnings growth? I don’t think so.

Part of the diversification for emerging markets investors is to allocate funds into safe haven assets, such as gold bullion. As international investor sentiment remains weak amid uncertainty throughout the world, I think we could see continued strength in gold in 2014.

This article Why Gold Looks Good to Me in 2014 was originally published at Daily Gains Letter

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