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An Interest Hike Doesn’t Mean That Gold Price Must Crash

Summary The Fed chairwoman Janet Yellen stated that the U.S. economy is strong enough for the Fed to start raising the benchmark interest rate. The pace of the U.S. GDP growth and the inflation rate don’t indicate that there is any need to raise the interest rate. Any interest rate hike will be probably only symbolical and it won’t be followed by another interest rate hike anytime soon. History shows that gold and GLD prices often react on the interest rate changes in contrary to the theory and general expectations. Gold price has been in a strong downtrend for the last couple of weeks. The SPDR Gold Trust ETF (NYSEARCA: GLD ) reached a new multi-year low, just shy of the $100 level. It represents a more than 10% decline since the middle of October. The decline was driven by increased expectations that the Fed will raise the key interest rate as soon as in December. The probability was further supported by a very strong October job report . Although the November data are a little weaker and some of the economists, including Peter Schiff claim that the state of the U.S. economy is worse than the numbers show, statements of the Fed representatives still indicate that the interest rate may be hiked this month. According to Janet Yellen, chairwoman of the Fed, the U.S. economy is strong enough for the Fed to start raising the benchmark interest rate. Is an interest rate hike needed? The probability of a December interest rate hike is high, although I don’t see any good reason why to raise it. Yellen explained why the Fed wants to raise the interest rate when she stated : Were the FOMC to delay the start for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from overshooting. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into a recession. Yes, the reason is good. The above-mentioned statement makes sense. But the officially-presented data don’t indicate any risk of an overshooting anytime soon. The annual pace of the GDP growth rate is only slightly above 2% and the inflation rate is at 0.2%! Actually, the deflation is much more probable than overheating of the economy, according to the official data. There are a lot of discussions about the accuracy of the officially-presented data. For example, according to John Williams and his website Shadowstats.com , the current inflation rate is close to the 4% level using the 1990 methodology, and it is around 7.5% using the 1980 methodology. In this case, we can start to speak about overheating of the economy. It really seems that the Fed publicly presents one set of macroeconomic data and it makes policy decisions based on another one. (click to enlarge) Source: Trading Economics Moreover, raising the interest rate too much may damage the U.S. economy. The strong USD already has a negative impact on the U.S. exporters. It may also damage the foreign economies, as a lot of the companies around the world have big USD-denominated debts, and they are dependent on revenues denominated in other currencies. As the value of these currencies falls, the companies will have more and more problems with the debt service. There are a lot of reasons why to expect that if there is any interest rate hike this December, it will be only symbolical and it will probably take quite a lot of time before another hike will occur. There are various economists who have the same opinion and they don’t see any good reason to increase the interest rate right now. One of them is Peter Schiff who expects that the Fed will leave the interest rate unchanged or it will raise it by 0.25%. He assumes that both of the outcomes will be positive for gold, as the markets have already factored in substantially more than a 0.25% interest rate growth. How did GLD share price react in the past? Although theory says that GLD price should decline after an interest rate hike and it should grow after an interest rate cut, history shows that this anticipation is often wrong. The financial markets always try to predict the future development, and the interest rate change is often reflected by the asset prices before the rate change itself is officially announced. And if there was a strong trend before the rate change, the trend may get disrupted for some time, although it tends to resume after the dust settles down. 22 interest changes occurred since the inception of GLD. In 12 cases, the interest rate was increased and in 10 cases it was decreased. The table below shows the development of GLD share price 20, 10 and 5 trading days before the rate change and 5, 10 and 20 days after the rate change. It is interesting that on average, GLD price grew before the interest rate change and it was in a slight decline 5 and 10 trading days after the rate change. But 20 trading days after the rate change, it was back in green numbers. Only in 4 out of 12 cases (33.33%), the GLD price recorded any losses 20 trading days after the interest rate hike. It declined by 4.73% on average. On the other hand, in 66.66% of cases, the GLD price recorded gains (5.08% on average). In 4 cases (33.33%), the GLD price just kept on growing, without any reaction on the interest rate hike. After the Fed started to cut the interest rates, GLD was down in 50% of the cases after 20 trading days. After the interest rate cuts on March 18, 2008, October 8, 2008 and December 16, 2008, a strong growth trend turned into a steep decline. It shows that GLD often reacts contrary to the theory not only after interest rate hikes but also after interest rate cuts. (click to enlarge) Source: own processing, using data of Yahoo Finance and the Fed Conclusion If the Fed hikes the interest rate during its meeting on December 15/16, it doesn’t mean that gold and GLD prices must crash. The official macroeconomic data don’t indicate that the U.S. economy should start to overheat anytime soon; moreover, a too strong USD may hurt not only the U.S. economy. Any rate hike will be only symbolical and it will probably take a long time before another one will occur. The markets may actually welcome that the more than a year long saga is finally over, and the GLD price may react positively. As the not-so-distant history shows, it wouldn’t be the first time when GLD price grows after an interest rate hike. Adding to it the problems the gold miners have to face at the current gold prices and the high demand for physical gold, GLD presents an interesting contrarian opportunity.

By The Numbers: ETF Investment And The Indian Market

By Utkarsh Agrawal Since the introduction of ETFs, the dynamics of investing has changed dramatically. Apart from being more transparent, with lower costs and improved tax efficiency, ETFs have helped create the opportunity for smaller investors to access asset classes previously available only to institutional investors. Emerging markets tend to be riskier than developed markets, but can also offer diversification opportunities. With emerging market ETFs, it has become possible to incorporate the objectives and constraints of investors who desire exposure to emerging markets in their portfolio construction process. Among emerging markets, India has been one of the preferred countries. The assets under management (AUM) and the number of the ETFs that provide exposure to India have increased tremendously. All of these ETFs are based on Indian equities. As of July 2015, there were 27 of them, with combined AUM of USD 12.80 billion, domiciled across seven countries (see Exhibit 1). The U.S. has been the greatest contributor in terms of both AUM and the number of ETFs, followed by France, Singapore, and other countries. Since August 2015, the combined AUM has decreased by more than USD 2.27 billion, amounting to a decline of almost 18%, and it stood at USD 10.53 billion as of September 2015. This reduction in AUM has also contributed to the volatility of the equity market and the exchange rate in India. Exhibit 1: International Equity ETFs That Provide Exposure to India Source: Morningstar. Data as of Sept. 30, 2015. Chart is provided for illustrative purposes. As opposed to the international Indian ETFs, India’s domestic ETFs are not only limited to equities. They also include commodities, fixed income investments, and money markets (see Exhibit 2). As of September 2015, the total number of domestic ETFs was 51, and the combined total AUM stood at USD 2.09 billion. The proportion of domestic equity ETFs in the combined total AUM was almost 48%, at USD 1.00 billion as of September 2015. The AUM of the domestic equity ETFs in India account for just 10% of that of the international equity ETFs that provide exposure to India. The recent rise in AUM of India’s domestic equity ETFs can be attributed to the introduction of the Central Public Sector Enterprise (CPSE) ETF, as well as the investment by the Employees’ Provident Fund Organization (EPFO). The Central Board of Trustees (CBT), the apex decision-making body of the EPFO, has recently decided to invest in India’s domestic equity ETFs within the prescribed limit of 5%-15% of the total corpus. Exhibit 2: Domestic ETFs in India Source: Morningstar, Association of Mutual Funds in India and Reserve Bank of India. Data as of Sept. 30, 2015. Chart is provided for illustrative purposes. The S&P BSE SENSEX , India’s heavily tracked bellwether index, is designed to measure the performance of the 30 largest, most-liquid, and financially sound companies across key sectors of the Indian economy. As of September 2015, it has served as the underlying index to one international equity ETF, which provides exposure to India, and five domestic Indian equity ETFs. Over the past 10 years, ending in September 2015, the S&P BSE SENSEX has yielded an annualized total return of 13.32% in Indian rupees (see Exhibit 3). Apart from domestic Indian equity ETFs based on other indices, the EPFO will also invest in the domestic S&P BSE SENSEX ETF, leading to expectations of a further boost to the AUM of this established index. Source: S&P Dow Jones Indices. Data as of Sept. 30, 2015. Chart is provided for illustrative purposes. Past performance is no guarantee of future results. Disclosure: © S&P Dow Jones Indices LLC 2015. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to S&P DJI. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI and to see our full disclaimer, visit www.spdji.com/terms-of-use .

Where The Smart Money Is Investing

When it comes to investing, there are no bonus points for originality. Returns are returns, regardless of whether the trade was your idea or a hot tip from your brother-in-law. The good news is that the SEC makes available far better trading moves than those of your brother-in-law. Large institutional investors are required to disclose their portfolio holdings at least quarterly, giving the investing public a chance to look over their shoulders. You don’t want to mindlessly ape another investor’s moves because you have no way of knowing their rationale for buying or selling. But it never hurts to see how your own portfolio stacks up against some of the best in the business. So with that said, let’s take a look at the asset allocations of three managers that have left the competition in the dust over their long careers. I’ll start with Baupost Capital’s Seth Klarman, a man whose reputation in value investor circles makes him close to demigod status. Klarman runs a multi-billion-dollar portfolio with just 40 stocks in it. That’s how confident he is in his picks. So, what is Mr. Klarman betting on? Try energy. Lots of energy. 39% of his portfolio was invested in energy as of quarter end with nearly half of that amount in a single stock. It’s worth noting here that Klarman isn’t betting on the price of oil rising or on “Big Oil” stocks in general. His bet is a targeted one on liquefied natural gas exportation. But it goes to show that, even in a full-blown crisis, there can be pockets of opportunity. Next, let’s take a look at Dan Loeb, principal of hedge fund Third Point. Loeb is not a passive investor. He’s a notorious activist investor known for taking large stakes in companies and then agitating for major change. You and I don’t have that kind of power, but we can still take a peek over his shoulder and see where he sees the most value. Today, it’s in healthcare. About 40% of his portfolio is currently invested in health and biotech stocks. I don’t have the stomach to invest 40% of my portfolio in the volatile biotech sector. But my good friend Ben Benoy is something of an expert on the matter. And finally, we get to Mohnish Pabrai , a well-respected value investor and the author of one of my favorite books on investing, The Dhandho Investor . Pabrai runs the most concentrated portfolio I have ever seen among large managers. He has just seven stocks in his portfolio, and global auto stocks make up nearly 70% of the total. Longer term, autos are a bad bet. Demographic trends suggest that, at least in the US and Europe, auto sales are looking at a major reduction in demand. But any stock can be an interesting short-term opportunity if priced right, and Pabrai is currently showing a handsome profit on the trade. So, what’s the takeaway here? Buy energy, biotech and auto stocks? Not exactly. For all we know, these superinvestors might dump these stocks tomorrow… if they haven’t already (we typically get the ownership data on a 45-day lag). No, the takeaway is that it’s fine to bet big on a high-conviction trade if your system or research tells you to. You should have an exit strategy, of course, and you should be prepared to sell if your investing thesis fails to pan out. But don’t be afraid to bet big when the odds are in your favor. This article first appeared on Sizemore Insights as Where the Smart Money is Investing. Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post