Tag Archives: undefined

Low Inflation And Higher Growth Keep GLD Down

Summary The recent higher-than-expected GDP report may also suggest the rise in U.S. economy will steer investors away from gold and into other assets. The recent PCE report showed a core inflation of only 1.4%. The ongoing lower inflation is likely to keep dragging down the price of GLD. The gold market continued to show a high level of volatility in the past several weeks. Nonetheless, the SPDR Gold Trust (NYSEARCA: GLD ) is nearly flat for December and only 1.2% during 2014. But the ongoing low inflation and signs of recovery in the U.S. economy are likely to further drive down GLD over the coming months. This week didn’t offer a whole lot of news items but there were two reports that came out from the Bureau of Economic Analysis: the final update on the U.S. GDP for the third quarter and the PCE monthly update. On the one hand, the GDP growth rate was revised up again to 5%. The revision was from 3.9% back in the second estimate. Even after subtracting the change in private inventories, the growth rate remains at 5% – so the growth mostly came from private and public sectors. Part of this revision came from higher real nonresidential fixed investments that grew by 8.9%. The recovery of the U.S. economy is a step in the direction towards the FOMC raising rates next year, which is likely to bring down the price of GLD further. Another issue to consider is the progress in the U.S. inflation: The recent PCE report showed that the core PCE annual rate slipped to 1.4%. The relation between GLD and inflation concerns is a close one and may have played a major role in the progress of GLD. (click to enlarge) Source of chart is from FRED’s web site Albeit the U.S. inflation remained low in the recent year, the progress in other measures, most notably the U.S. money base, drove bullion bugs towards GLD. Even M1 showed a sharp rise. If we were to examine the change in M1 and the progress of the gold during the past few years, we can see that following the economic recession, as the growth rate in M1 picked up, so did gold rally. (click to enlarge) Source of chart is from FRED’s web site But after the end of QE2 and then QE3, the growth in M1 has tapered down, which also coincided with the drop in GLD. This doesn’t mean we are in a situation where inflation actually substantially increased. Only that the steps the FOMC implemented, including low rates and QE programs, led to higher concerns over a potential rise in inflation – all the rise in M1 and U.S. money base had some people think prices are about to pick up anytime soon (some still think so) and may reach double digits. The last time U.S. inflation reached double digits was back in the early 80’s – back then gold prices reached their highest level, for that time. This high inflation led the Fed to raise rates, which soon brought down inflation expectations – and then gold soon followed. This time around, however, the circumstances are a bit different. Some were concerned about higher inflation that led to higher GLD prices. Nevertheless, the U.S. inflation remained low. (click to enlarge) Source of chart is from FRED’s web site But the current depressed prices, which are likely to come further down considering oil is at its current low level and the FOMC’s decision to end QE3 and perhaps even raise rates by mid-2015 have only reduced the fear factor of the U.S. inflation rearing its head. Some still think that the FOMC’s cash injections to the U.S. economy may eventually result in a spike in inflation down the line – like a time-release bomb. But this scenario seems, for now, less likely. As times passes, the price of GLD is likely to further suffer from U.S. inflation remaining well below 2%. The potential rise in the Federal Reserve’s cash rate is also likely to raise the yields of U.S. treasuries, which could diminish the appeal of GLD as an investment. I have referred to this point in the past . It’s a competing theory but it too plays the same role the inflation based theory plays. So where does it leave GLD? The recovery of U.S. economy and a little growth in inflation don’t vote well for GLD. The FOMC’s policy is still likely to play the main role in the progress of GLD. This year, the tapering of QE3 didn’t have a strong adverse impact on GLD as it slipped by only 1.2% (year to date). Most of the impact was already priced in when Bernanke announced this decision back in June 2013. The main change will be the rate hike and subsequent raises. For now, the FOMC keeps dropping hints of a rate raise soon but keeps us guessing because, well, perhaps some FOMC members aren’t so sure about making this rate hike next year. Until we get a clear guidance, the price of GLD isn’t likely to do much and only slowly come down. For more see: What are the advantages of GLD?

Federated Launches New Fund, Expands Alternatives Division

On December 17, Federated announced it was putting the Federated Prudent Bear Fund (MUTF: FVOAX ) under its alternatives/managed-risk product umbrella, expanding that fast-growing division. Federated’s alternative and managed-risk products, which are overseen by Michael Dieschbourg, include managed volatility, absolute return, and managed-tail risk strategies, in addition to the recent arrival of the Prudent Bear Fund. Federated’s Managed Volatility Fund had just launched on December 15, two days prior to the migration of Prudent Bear to Federated’s alternatives division. Both moves are seen as efforts by Federated to enhance its alternatives and managed-risk product team, on the heels of the explosive growth of liquid alts in 2014 and ahead of what’s likely to be another big year for the category in 2015. The Federated Managed Volatility Fund’s objective is to provide total return while minimizing volatility. Its co-advisors pursue this goal by investing in equity and fixed-income securities “with total return potential,” and overlay a managed volatility component to achieve a long-term volatility target of 10%, according to its prospectus . The fund has three co-advisors: Federated Equity Management Company of Pennsylvania (FEMCO), which specializes in the equity portion of the fund’s portfolio, including equity-based derivatives; Federated Investment Management Company (FIMCO), which specializes in the fixed-income portion of the fund’s portfolio; and Fed Global, which along with FEMCO, implements the fund’s managed volatility portion using futures contracts. A couple key points from the prospectus regarding the allocation to equities and fixed income securities : Regarding the composition of the Fund’s portfolio, under normal conditions, it is anticipated that approximately 40% of the Fund’s assets will be invested directly into equity securities and 60% of the Fund’s assets will be invested in fixed-income securities and other investments. Fed Global and FEMCOPA may vary this allocation by +/- 10% for each asset class depending upon its economic and market outlook, as well as a result of favorable investment opportunities. A couple key points from the prospectus regarding the volatility overlay : The Federated Managed Volatility Fund is available in three share-classes: A (FVOAX), C (MUTF: FVOCX ), and IS (MUTF: FVOIX ); with a management fee of 0.75% and respective net-expense ratios of 1.05%, 1.8%, and 0.8%. The minimum initial investment for A- and C-class shares is $1,500; the minimum for institutional-class shares is $1 million. Although the growth in the liquid-alts product category is leading the launch of more alternative mutual funds and ETFs, and the expansion of many large firms’ alternatives divisions, not everyone is experiencing the growth equally. Douglass Nolan, a former manager of the Federated Prudent Bear Fund, has left or is leaving the fund. A December 17 SEC filing from Federated instructs investors to delete the information referencing Mr. Nolan from the Prudent Bear Fund’s prospectus “in its entirety,” but that the change won’t take effect until December 31.

Competition Heats Up In The Global Tactical ETF Space

With the launch of the Cambria Global Asset Allocation ETF (NYSEARCA: GAA ), Cambria Funds looks to compete with the AdvisorShares ETF that Cambria previously managed; and with the new zero-management fee alternative mutual fund offered by Aspiration Funds. The Cambria Global Asset Allocation ETF debuted on December 9. The ETF’s objective is to replicate the results of the Cambria Global Asset Allocation Index, which allocates assets across asset classes in pursuit of absolute positive returns. Investing in the new ETF will provide investors with exposure to stocks, bonds, commodities, and currencies, diversified across geographic markets and economic sectors. While Aspiration Funds made headlines with their innovative “name your own price” management fees, the new alternative ETF from Cambria Funds goes even further, with a flat management fee of 0.00% (that’s not a typo). Being an ETF, the new Cambria fund doesn’t charge a 12b-1 fee, either, and its net-expense ratio is just 0.29%. The only catch to the ultra-low fees is that the new ETF invests in other ETFs, some of which are managed by Cambria, and the underlying ETF managers will collect management fees. The Cambria Global Asset Allocation ETF typically invests in other ETPs (exchange-traded products), with roughly 40% of its assets allocated to equities, 40% to fixed-income, and 20% to other asset classes such as commodities and currencies. The goal is to gain diversification benefits through asset allocation, in order to dampen volatility, limit drawdowns, and keep investors in the market, long-term, so that their gains can compound. Cambria Investment Management serves as the new ETF’s investment advisor, and its portfolio managers are Mebane Faber and Eric Richardson. Previously, Cambria managed a similar ETF for AdvisorShares, now known as the AdvisorShares Morgan Creek Global Tactical ETF (NYSEARCA: GTAA ) and managed by Mark Yusko of Morgan Creek Capital. Through December 22, GTAA had gained 4.6% in 2014, but its net-expense ratio of 1.63% is 134 basis points higher than GAA’s. 2015 is shaping up to be a big one for liquid alts, and the competition between these ETFs likely foreshadows many similar showdowns to come. Liquid alts investors, who gain additional investment options and benefit from the downward pressure on fees, have reason to look forward to the New Year. For more information, visit the new fund’s website .