Stocks or Gold: Best Investments for 2014

Stocks or Gold:  Best Investments for 2014

If you had your money in stock markets over the last five years, you more than likely experienced significant gains in one of the strongest bull markets in history.  But the year 2014 will probably see some significant market changes in the second half of the year, and it makes sense for investors to start positioning for these moves before they occur.  Most of the market tends to focus its attention either on stocks or on precious metals.  And there are some very clear events that will be seen in the next few months that should price direction in these areas.

When tracking activity in these areas, there are several ETFs that are closely watched by a majority of the market.  Key names here include the SPDR Gold Trust ETF (GLD) and iShares Silver Trust ETF (SLV) in the precious metals space, and the SPDR S&P 500 Trust ETF (SPY) in stocks.  The energy space can also be accessed using the United States Oil Fund LP ETF (USO).  All of these instruments offer convenient way to gain exposure to some of the most important market assets.  But which is the best way to position for what is to come in the second half of the year?  The answer to this question likely rests on the next policy actions at the US Federal Reserve.

The End of QE Stimulus

“Currently, the Federal Reserve makes monthly asset purchases equal to $55 billion,” said Rick Bartlett, markets analyst at Orbex.  “The trend, however, suggests that these QE stimulus purchases will be ending in the next few months.”  This presents clear negatives for stock markets, as it is going to be much more difficult for companies to generate earnings growth at the same rate.  Stocks are already trading at elevated levels, and this limits prospects for further rallies into next year.  

But does this mean that is makes more sense to gain exposure to gold and precious metals?  Not necessarily.The reason for this lies in the fact that a discontinued QE program is highly positive for the US Dollar and the PowerShares DB US Dollar Index Bullish ETF (UUP).  Since gold is priced in Dollars, this presents some very clear obstacles for potential rallies in precious metals.  With an end to QE, the real winner is the US Dollar because this means that there will be fewer Dollars running through the system at any given time.  This has limited impact on stock valuations.  

But it can have a major impact on assets that are priced in Dollars (such as gold, silver, or oil).   And this is the reason why it makes sense to steer clear of precious metals for the time being.  On a comparative basis, this means we are much less likely to see significant declines in stocks, despite the fact that an end to QE presents difficulties for companies in generating strong revenue growth.