David Einhorn’s views on current market scenario
In the previous part of this series, we discussed how market participants are losing confidence in central banks’ ability to spur economic growth. Central banks’ policies aren’t proving effective in the current scenario.
According to Einhorn, some day, any of the central banks could go too far. He said that when such a situation occurs, “I think we’re going to want to own a bunch of gold.”
In the past, we’ve seen that when global turmoil increases, investors’ focus shifted towards safe-haven assets like gold and the yen. In the last five years, the S&P 500 Index (SPY) (SPXL) (QQQ) had a correlation factor of -0.89 with the SPDR GoldShares ETF (GLD), suggesting that investors normally prefer gold during an equity market rout.
After the subprime crisis, gold (GDX) (RING) rose about 145% from the lows of September 2008 to its highs in July 2011. Since July 2011, the S&P 500 Index has risen about 62%. It touched its high of 2,130 in July 2015. During the same period, gold lost about 92%. When equity markets start to outperform, gold loses its shine.
Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch, also said that every drop in gold’s (GLD) (GDX) (RING) price is a buying opportunity. Gold, a safe-haven asset, has seen a huge sell-off in the past three weeks. It touched a high of $1,384.40 per ounce on July 4, 2016.
The recent fall in gold prices is mainly due to the stronger dollar (UUP). The increasing expectations that the Fed will hike rates at its December 2016 meeting and the stronger US dollar (UUP) aren’t helping gold’s movement in the present scenario. A weaker US dollar is a boon for dollar-denominated assets. It makes them cheaper for buyers of other currencies, while a stronger dollar has the opposite effect.
Read Here Are Some Investment Ideas from Bill Miller for more information.