Could Gold Investors Dump Gold for Equity Markets?



US equity markets

US markets (SPY) (SPX) (DIA) (DOW) have moved upward since the US election in November 2016. Hopes of deregulation, tax cuts, and spending spurred the markets. Although the initial euphoria has weakened, markets are still quite strong—equity market valuation is high compared with historical levels.

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What market participants think

Although market participants were concerned about high equity valuation, which was outpacing earnings growth, some of those concerns were alleviated in 1Q17. The blended earnings growth rate of S&P 500 companies that have reported their 1Q17 results is 13.6%, the highest rate for the index since 3Q11, according to FactSet. Analysts’ growth forecasts for the rest of the year are also quite strong. While equity valuation remains stretched compared with historical valuation, a higher growth forecast could support it.

Outlook for gold

If earnings growth starts weakening, not justifying high valuation, you could consider other investment options. Gold could be one of those alternatives, especially as inflation picks up. Gold’s strengthening could buoy gold miners such as IAMGOLD (IAG), Kinross Gold (KGC), Hecla Mining (HL), and Coeur Mining (CDE). Miners comprise 4.6% of the VanEck Vectors Gold Miners ETF (GDX). Gold miners (JNUG) are a leveraged play on gold. They can appreciate more than gold prices in the event of an upturn, and vice versa.


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