Equities Should Outperform Gold in the First Half of 2013- Here’s Why

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As mentioned earlier, the primary objective of this discussion is to underscore the importance of portfolio diversification. [While] I am bullish on gold long-term…if [I had]… 100% [of my portfolio in] gold,…[it] would be down by 30% at a time when a diversified portfolio might [likely] be performing well or [even]outperforming. Investors, therefore, need to create a portfolio having a mixed asset class exposure such as gold, equities, industrial commodities, agricultural commodities, real estate and corporate bonds among others.

Given the current expansionary policy environment, I would suggest 20% exposure to gold and precious metals, a 20% exposure to domestic equities, 20% exposure to emerging market equities, 20% exposure to industrial and agricultural commodities and 20% exposure to cash and investment grade corporate bonds. The portfolio diversification might differ depending on age and other factors.

Coming [back] to the expected trend in gold and equities, I expect [a] further decline in gold in Dow terms and, as such, investors [would be well advised to] be overweight in equities and underweight in gold and precious metals for the first half of 2013.

One of the primary reasons for being bullish on equities is related to the global economic performance. An improving or stable global economy will result in more liquidity flowing into equities. As the chart below shows, there has been a meaningful improvement in the global purchasing manager index in the recent past. With this improving trend likely to continue, equity market sentiment will remain bullish.

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In the U.S., an increase in durable goods orders has resulted in an uptick in investments, which is positive for the economy. At the same time, retail sales growth has been robust and ensures that the first quarter will be decent in terms of economic growth. I am not suggesting that economic activity is the only factor that can lead to upside in equities. However, given the current bullish sentiment and liquidity scenario, equities can witness further upside.

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In terms of economic activity and financial market risk, an improvement in the Euro zone PMI gives yet another reason to believe that equities can sustain at current levels or trend higher. Higher bond spreads for the PIIGS did result in declining equity markets in the past. Currently, the bond spreads for PIIGS is on a decline and should decline further if economic activity improves in the Euro zone.

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Besides the economic fundamental factors, I personally don’t see any irrational exuberance in equity markets at this point of time. Investors can expect…a robust rally before any healthy and meaningful correction.

Conclusion

Given the above factors, I expect gold to move sideways or trend down in the first half of 2013 [and, as such,] I would consider this as a good opportunity to buy gold as there is still no long-term fix in place for the economic and financial problems [that the U.S., and indeed the world, face].

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://seekingalpha.com/article/1163591-gold-down-30-in-dow-terms-more-correction-likely

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