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Wanted: Stable price for gold

by Community Manager

‎08-06-2014 12:26 PM

Market commentaryBy Dan Denbow, assistant vice president of equity investments


After a lousy 2013, the price of gold is up this year. That gain, however, has come in an erratic fashion. Bullion started 2014 at just under $1,200 per troy ounce, climbed to nearly $1,400 by the middle of March and since then it has followed a jagged path down to around the $1,300 level.


As we watch the gold price now, what we are mostly hoping to see is stability after a period of higher-than-normal volatility for a notoriously volatile asset class.


Greater price stability could indicate that the downward trend for the past three years or so — since gold’s peak at $1,900 an ounce in September 2011 — may be nearing its end. At that point, we could see more investors looking at gold-mining companies as buying opportunities, and more buyers in the market generally support stock prices.


Gold equities have outperformed bullion so far this year, as can be expected when the gold price is rising. By concentrating on cost control, the producers have made themselves more attractive as investments even as the gold price has fallen by nearly a third from its 2011 high. New management teams are spending smarter; the focus is now on mining the most profitable rock, rather than seeking growth for growth’s sake. Labor expenses are down, mostly as a result of lower head counts. By pulling back on marginal projects, capital outlays have been reduced, operating leverage has increased and more cash could be returned to shareholders.


Stable prices could also give the miners a chance to prove up some of the solid projects that they now have in development. When the gold price was climbing, the miners were rescued time and again from their spendthrift ways. A little austerity has been good for these companies by forcing them to streamline their businesses. At this point, a significant rise in the gold price could actually be counterproductive by threatening to undermine the hard-earned gains the companies have made.


There’s reason to think that we could see the gold price stabilize in the near term. Last year’s sale of bullion by exchanged-traded funds added about 900 tons to available supply, and this weighed heavily on the price. There hasn’t been a similar supply spike this year. On the demand side, consumers in China and India (together accounting for 70 percent of global gold demand) are expected to increase their buying as their local economies improve.


In the longer term, a key driver for the gold price will likely be the Federal Reserve and other major central banks. The Fed is close to winding down its quantitative easing program, and the clearer signs of an improving U.S. economy portend higher interest rates. If rates rise quickly, it could pose a potential headwind for gold by strengthening the value of the dollar.


On the other hand, the European Central Bank is said to be considering a QE effort of its own to fend off deflationary pressures in the eurozone. If the ECB ends up going in that monetary-loosening direction, it would offset the Fed’s tightening to some degree and thus likely be supportive of gold.


Given the number of moving parts, we don’t try to predict the future gold price or even the direction that price may move from where it stands now. We believe exposure to gold (and other precious metals) should be viewed as a potential portfolio diversifier, as it has low correlation to other asset classes. Even with the recent volatile environment for gold, the rationale for maintaining a small exposure to the metal through mining stocks remains in place.


USAA Investments Managed Portfolio Outlook

Our view of caution toward U.S. equities remains unchanged — we are underweight U.S. large caps and small caps. While signs point to continued recovery of the U.S. economy, valuations are no longer cheap, and profit margins are near record highs.



We are tactically underweight fixed income, primarily to fund a deployable cash position. Within fixed income, we prefer areas of the market that are more credit-sensitive and less sensitive to changes in interest rates, such as investment-grade corporate bonds and high-yield bonds. The USAA Intermediate-Term Bond Fund and the USAA High Income Fund fit this profile.


We are overweight to assets that are positively correlated to inflation expectations. The USAA Real Return Fund provides potential protection against the risks of long-term inflation.


We are overweight non-U.S. developed markets and emerging markets based on relative valuations. Though they have been hit especially hard recently, we believe that emerging markets remain attractive. Along with compelling valuations, they offer an interesting long-term prospect for growth. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.


As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for your individual goals, objectives, risk tolerance and time horizon.


This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.


Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Contact us at 1-800-531-8910 for a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.


Investing in securities products involves risk, including possible loss of principal.


Past performance is no guarantee of future results.


Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.


As interest rates rise, existing bond prices fall.


Non-investment grade securities are considered speculative and are subject to significant credit risk. They are sometimes referred to as junk bonds since they represent a greater risk of default than more creditworthy investment-grade securities.


Some income may be subject to state or local taxes or the federal alternative minimum tax.


Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. Emerging market countries are most volatile. Emerging market countries are less diverse and mature than other countries and tend to be politically less stable.


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Standard & Poor’s 500 Index and S&P are registered trademarks.  The S&P 500 Index is an unmanaged index of 500 stocks.  The S&P 500 focuses on the large cap segment of the market, covering 75% of the U.S. equities market.  S&P 500 is a trademark of the McGraw-Hill Companies, Inc.


The Russell 2000® Index is an unmanaged index which consists of the 2,000 smallest companies in the Russell 3,000 Index, and is a widely recognized small cap index.


USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.


High double digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future.


USAA Managed Portfolios-UMP™ is a service of USAA Investment Management Company, a registered investment adviser and broker dealer.


Financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), and USAA Financial Advisors, Inc., a registered broker dealer.


Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.


The Real Return Fund may be subject to stock market risk and is non-diversified which means that it may invest a greater percentage of its assets in a single issuer. Individual stocks will fluctuate in response to the activities of individual companies, general market, and economic conditions domestically and abroad. When redeemed or sold, may be worth more or less than the original cost.


Managed Accounts is a service of USAA Investment Management Company (USAA), a registered investment adviser and broker dealer.


Diversification does not guarantee a profit or prevent a loss.




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