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Equities May Have Limited Upside: Could There Be Room for Gold?

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Equity markets

It’s no secret that US equity markets (SPY) (SPX) seemingly hit higher highs every other day in 2017. The S&P 500 rose 19.4%, reaching record highs. Therefore, it comes as no surprise that market participants are worried about valuation getting stretched. While higher valuation doesn’t automatically mean assets are overvalued, the perception of risk rises.

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Risk becoming more pronounced

If nothing else, analysts have been talking about the limited upside left in the market. According to CNBC, Blackstone Private Wealth Solutions vice chairman Byron Wien is warning investors that a 10%–15% correction in the stock markets is “virtually unavoidable.” Morgan Stanley’s (MS) cross-asset strategists increased their suggested exposure to European equities and changed their stance on US equities. They believe that their recent outperformance leaves limited upside room.

Overbought?

According to CNBC, Allianz CEO Oliver Bate believes that “a correction in the stock market is not a question of ‘if’ but ‘when.'” If this downside potential materializes, gold could benefit greatly. Investors usually flock to gold when other investment alternatives aren’t doing well. A positive sentiment for gold could also affect miners such as Royal Gold (RGLD), Barrick Gold (ABX), Kinross Gold (KGC), and Coeur Mining (CDE), which are leveraged plays on gold (JNUG).

Although royalty companies such as RGLD did well in 2017, other miner categories lagged behind. ABX and CDE returned -9.4% and -17.5%, respectively. KGC has been an outlier, with returns of 39.9% in 2017.

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