By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Everyone wants the gold. Around the world, athletes train for years to compete for a gold medal. In Hong Kong and China, the Love Trade seeks gold coins, bars and jewelry.

Gold
Gold

We found out this week the extent that gold is sought in the East. For the first time since 1980, Switzerland released monthly gold trade data, providing a more transparent picture of physical gold flows.

In January alone, the Swiss report showed an incredible 80 percent of gold shipments went to Asia.

Switzerland plays a key role in the gold market because it is home to many big gold refiners, so its report confirms what we’ve been saying about gold’s move out of the West to the strong hands of the East.

So even though the gold price fell in 2013, the smart money tuned into this flow of physical gold that was moving into the East. Meanwhile, naysayers were distracted by the Fear Trade’s selling out of gold ETFs.

“Gold flooding onto the market as a result [of large-scale ETF selling] was used to feed the voracious appetite for physical metal among consumers in India, China and numerous Asian and Middle Eastern markets,” says the World Gold Council in its latest report. You can see in the chart that gold demand reached record levels in the jewelry, bar and coin areas of the market last year. In fact, there was a 21 percent increase in demand from consumers, which was in contrast to the outflows from gold ETFs, per the WGC.

Gold Jewelry, Bar and Coin Demand Resilient in 2013
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Along with this continued demand in January, Daniela Cambone from Kitco and I discussed the factors that could drive gold to $1,400 an ounce. Find out what those are now.

Opportunities Found by Rejecting an Old Investing Adage?
Following a great 2013, many U.S. stocks (an exception being gold stock indices) likely disappointed investors in January. For those who follow the investing adage, “as January goes, so goes the year,” the stock market may not be looking so bright for the rest of 2014.

But research suggests there are opportunities to be found.

“Negative Januarys do have interesting implications” for U.S. stocks, says Brian Belski of BMO Capital Markets. He recently dissected monthly S&P 500 performance, taking a look at the years when the market declines in January.

Stocks That Underperform in January Outperform the Rest of the Year
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I think you’ll be surprised at his results.

Going back 24 years, the stocks that performed the best in January significantly lagged for the rest of the year compared to the stocks that did the worst. See the results below, which show that the companies in the bottom quartile for January performance rose a significant 20 percent from February through December. The stocks that did the best in January rose only an average of 12 percent during the rest of the calendar year.

Belski’s analysis aligns with the recent poor performance in sectors that we previously identified as having strength over the past several months. Of the 10 sectors in the S&P 500, our models have identified consumer discretionary, health care and industrials sectors as having sustained leadership.

But in January, industrials and discretionary stocks were among the worst-performing sectors. Energy and materials were also in the bottom half.

Will the Sectors that Lagged in January Outperform the Rest of 2014?
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While past performance does not predict future results, BMO’s research suggests stocks in the lagging sectors could outperform for the rest of 2014. We are especially bullish on those dividend-paying companies experiencing robust fundamentals, including strong revenue and earnings growth.

 

Index Summary

  • Major market indices finished mixed this week.  The Dow Jones Industrial Average fell 0.32 percent. The S&P 500 Stock Index dropped 0.13 percent, while the Nasdaq Composite advanced 0.46 percent. The Russell 2000 small capitalization index rose by 1.34 percent this week.
  • The Hang Seng Composite rose 0.59 percent; Taiwan gained 1.04 percent while the KOSPI advanced 0.90 percent. The 10-year Treasury bond yield fell one basis point this week to 2.73 percent.

Domestic Equity Market

The S&P 500 Index was virtually unchanged this week. The market bounced around in a narrow range without making much real progress. Health care led the way on the back of merger and acquisition (M&A) activity while financials trailed as some of the big banks experienced modest declines.

S&P Economic Sectors
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Strengths

  • The health care sector was the leader this week as generic drug maker Actavis agreed to acquire Forest Laboratories. Both stocks rose on the news with Actavis rising 13.8 percent and Forest Labs jumping 35.7 percent, posting the best performance in the S&P 500 this week.
  • The utilities sector was not far behind with strong performances from Ameren and Public Services Enterprise. Both companies beat earnings expectations and rose by more than 5 percent for the week.
  • Nabors Industries rose 21.6 percent this week. The company released quarterly earnings results, which were ahead of expectations, and is communicating enhanced visibility for its North American land drilling business.

Weaknesses

  • The financials sector underperformed as index heavyweights Bank of America and Citigroup both fell by roughly 2.5 percent.
  • The consumer staples sector was also a laggard as Coca-Cola fell 4.5 percent and Wal-Mart fell 3.5 percent on poor earnings results.
  • US Steel was the worst performer in the S&P 500 this week, falling 8.19 percent. A U.S. Department of Commerce ruling on anti-dumping duties for tubular products was a disappointing development for domestic steel producers.

Opportunities

  • The current macro environment remains positive as economic data is robust enough to give investors confidence in an economic recovery, but not so strong as to force the Fed to aggressively change course in the near term.
  • Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets.
  • The improving economic situation could possibly drive equity prices well into 2014.

Threats

  • A short-term market consolidation period after such strong performance over the past six months cannot be ruled out.
  • Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and there is a large potential for policy error.
  • A lot of good news potentially is priced into the market and the economy will need to deliver to maintain the positive momentum in the market.

The Economy and Bond Market

Treasury bond yields were little changed this week.  It seemed all the focus was on the Olympics as both stock and bond markets ended the holiday-shortened week little changed from the prior week. Economic data was mixed and inflation data remained benign.

10-Year Treasury Yield
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Strengths

  • Inflation data remains benign with producer prices up 1.2 percent and consumer prices up 1.6 percent on a year-over-year basis.
  • The Conference Board’s leading index rose 0.3 percent in January, ahead of expectations and pointing to a reasonably good economic outlook.
  • Japan’s central bank continued to add to its monetary policy accommodation by increasing the loans available to commercial banks.

Weaknesses