Back

Bond-Buying Binge Leads to Golden Spike

September 24, 2012

The markets for risk assets such as stocks have recently decoupled from underlying economic conditions. The world economy is clearly slowing - led by Europe, which is in recession - yet risky assets such as stocks have been rising for several weeks.
-Matt Freund, senior vice president, Investment Portfolio Management

It is not surprising to us that gold hit a 2012 high in dollar terms this week, as investors sought to protect themselves from the potential long-term inflationary impacts of the most aggressive monetary policies the world has ever seen.

In this week's surprise move, the Bank of Japan announced an increase in the size of its bond purchase program (effectively printing money to purchase government bonds) to 80 trillion yen from 70 trillion, and extended the program's deadline to the end of 2013. Including last week's U.S. Federal Reserve announcement of an increase in its bond buying program, most of the world's major economies (the United States, Japan, Europe and the United Kingdom) are aggressively manufacturing currency to stimulate their economies and to defend their export sectors.

 

 

The markets for risk assets such as stocks have recently decoupled from underlying economic conditions. The world economy is clearly slowing - led by Europe, which is in recession - yet risky assets such as stocks have been rising for several weeks. We view this time as an opportunity to trim risk at the margin and have positioned our global diversified managed portfolios to be modestly underweight in stocks, with overweight positions in bonds and gold. We are not necessarily bearish; we just think that markets have gotten ahead of the underlying fundamentals, and investors are not being as well-compensated for the potential risks.

Stocks were nearly flat on the week, closing down 0.36 percent at 1,460 on the S&P 500 index. U.S. Treasury bonds rallied, with the yield on the 10-year falling 0.11 to end the week at 1.75 percent. Gold broke out to a 2012 high, closing the week at $1,773 an ounce, up 0.15 percent from last Friday.

Economic data releases again show the U.S. economy growing slowly, with the possibility of a recession on the rise. This was highlighted by the Empire State Manufacturing Survey and the Philadelphia Fed Business Outlook Survey, both of which registered negative numbers in September, indicating a manufacturing contraction in the New York and Philadelphia regions. The Index of Leading Economic Indicators, designed to predict future U.S. economic growth, measured a slight 0.1 percent decline and has been negative for two of the past four months.

Read the Full Report