Weekly Commentary April 29th, 2013

The Markets

If anyone doubted the power of Twitter, their skepticism was laid to rest this week. Early Tuesday afternoon, a tweet from the Associated Press reported President Obama had been injured by explosions in the White House. Stock, bond, and commodity markets fell sharply on the news and then rebounded when the Associated Press communicated that its Twitter account had been hacked. This wasn’t the first time such a thing had happened on Twitter or the first time false and market moving information had been posted. In February, the stocks of Burger King and Jeep moved after a post on each company’s Twitter account indicated the company had been sold to a rival firm. The lesson to take from these events? Everyone may want to be wary about buying or selling investments based on news reported through Twitter or any other social media feeds.

Economic and earnings news was mixed during the week. Durable goods orders were off by almost 6 percent which was a mark in the negative column. There were fewer jobless claims than analysts expected which was a positive. The initial estimate of U.S. GDP growth for first quarter was released by the Commerce Department. Growth was about 2.5 percent annualized during the first quarter. That was significantly above fourth quarter’s 0.4 percent annualized growth, but below expectations for 3.0 percent growth. An above average number of companies beat expectations for the quarter. Sixty-nine percent of the companies in the Standard & Poor’s 500 beat analysts' expectations, according to Thomson Reuters data reported on Yahoo! Finance. Since 1994, about 63 percent of companies have beaten expectations on average.

Markets generally recovered from Twitter trickery and were unfazed by mixed economic news. Stock markets finish the week higher with the Standard & Poor's 500 gaining 1.7 percent, the Dow Jones Industrial Average rising by 1.1 percent and NASDAQ Composite Index up 2.3 percent. Treasury prices were higher by the end of the week. According to Bloomberg.com, that’s an indication the world still believes U.S. Treasuries are a safe haven.

what’s the story with gold? According to an April 2012 Gallup Poll, Americans believe gold is the best long-term investment. Overall, real estate, stocks, and savings accounts were near-followers. When Gallup broke the statistics down demographically, they found men prefer gold while women prefer real estate, independents prefer gold while Democrats and Republicans prefer stock, and wealthier people prefer real estate and stocks while middle and lower income Americans prefer gold.

Gold’s popularity is interesting because research suggests investors hold less than 20 percent of the world’s $9 trillion gold supply. Much of the world’s gold is held by central banks – the U.S. Federal Reserve, the European Central Bank, and others – and other financial institutions. One of the world’s largest holders of gold is the International Monetary Fund (IMF). The IMF is “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

The IMF and central banks hold gold as foreign exchange currency reserves because gold is universally accepted and highly liquid, according to The Economic Times. The World Gold Council reports developed countries often hold a significant portion of their reserves in gold. The United States has 75.1 percent of its reserves in gold, Germany has 72.1 percent, Italy has 71.3 percent, France has 69.5 percent, and the Netherlands 58.7 percent. In addition, central banks in emerging countries hold gold reserves although their reserves are often smaller than those of developed countries. Early in 2013, 9.5 percent of Russia’s reserves were gold, 9.6 percent of India’s, and 1.6 percent of China’s.

Some experts believe high demand for gold from emerging countries combined with limited gold supply may push gold prices higher. Other experts have compared the recent highs of the gold market to the dotcom and housing bubbles. Who’s right? Only time will tell.

 

Weekly Focus – Think About It

“Faith consists in believing when it is beyond the power of reason to believe.”

--Voltaire, writer, historian, and philosopher