Changing Investor Sentiment

The stock market has increased for the last 4 weeks while unemployment rates have gone up. This seems rather unusual at first glance. Why would the stock market continue to increase with bad unemployment data? The answer is shifting investor sentiment.

Four commonly used investment categories are stocks, short term bonds such as money market funds and bank CDs, long term bonds, and gold. Last week, investors started shifting from long term bonds, as these rates increased, and gold as the price of gold continued to decline. The question is will this trend continue? My answer is yes and here is why.

Last week's blog covered the direction for long term interest rates and bonds. Long term rates should continue to increase which will drive investors to sell long term bonds and give money to invest in other investment categories.

Gold has once again dropped below $900 per ounce. While some financial experts forecast gold to continue to rise above $2,000 per ounce, this makes no logical sense. Gold prices increase in periods of financial uncertainty, as a hedge against inflation, when investors shift into commodities, or a shortage of supply. Let's look at each point.

• Since this bank induced financial crisis is being resolved, this should be a factor to reduce gold prices.
• Since we are in a recession, a period of deflation, this should be a factor to reduce gold prices.
• Last summer investors generally shifted away from all other commodities like oil, gas, and copper with one exception being gold. This also should be a factor to reduce gold prices.
• Since gold has been at elevated levels for an extended period this would cause gold producers to increase supply with time. This should also be a factor to reduce gold prices.

From a fundamental perspective, gold prices should continue to decline which would incent investors to sell and give money to invest in other investment categories. The 2 remaining investment categories that should benefit from this shift are stocks and short term bonds such as money market funds and bank CDs. Risk taking investors will continue to shift money into the stock market with time. Now is a good time to sell you broken and unwanted gold jewelry to raise cash.

Enjoy the important things of life. Avoid listening to the news. Contact me if you have any financial questions or if you want to invest.