Gold remains generally well bid, seemingly poised to notch an eighth higher weekly close out of the last nine. A softer dollar provided some support.
The dollar index has made a couple of attempts to push higher this year, but gains fizzled ahead of the 81.48 high from last November. The more recent highs at 81.39 and 81.32 now constitute a formidable barrier on the upside.
For now, the dollar remains right about at the midpoint of the broader range defined by the March 2008 low at 70.79 and the March 2009 corrective high at 89.62. While the tone has been consolidative since that range was established, the underlying long-term bias remains to the downside.
Interestingly, the greenback failed to garner much support from the Fed’s commencement of the taper. That is in large part attributable to yields remaining fairly well contained, despite the taper. Flows in the FX market chase yield, and there’s not much yield to be had anywhere these days; a situation that will assuredly persist for some time to come.
The artificial suppression of interest rates by the world’s major central banks via über-accommodative monetary policies have pushed individual investors and institutional investors alike out along the risk curve in a quest for yield. The institutional investors (for the most part) understand that risk. They have sophisticated models that can hedge exposures if things suddenly turn sour.
Individual investors all too often do not hedge, and many remain far overexposed to shares at this point. If the equity market does in fact turn sour, it may well turn into another bloodbath for those investors.
John Hussman of the Hussman Funds succinctly summed up this reality in his latest report, blaming the Fed for “depriving investors of safe yield.” I wonder how many retirees, who would typically be weighted toward fixed income products at this stage of their lives, now own ultra-long geared index products? Willing to risk their entire retirement because the Fed has had interest rates locked at 0% for years.
There are certainly still many stock market cheerleaders out there. And while central banks may well succeed in pushing risk assets higher yet as a result of their ongoing policies, I think everyone would acknowledge that this can’t be sustained indefinitely.
It doesn’t take much searching to find all sorts of research that shows just how vulnerable shares are at these levels. Make sure you have both sides of the story, and if you feel that you are currently over-allocated to equities, I encourage you to consider some diversification in the form of physical gold. The time to do that, is before the stock market rolls over.