The gold rush of 1849 -- whence the "49er" moniker derives -- may be long over, but might the San Francisco 49ers' loss during Super Bowl XLVII signal the beginning of the next move higher for the gold market?
According to a fanciful stock market prognostication tool known as the Super Bowl indicator, if the NFC wins, the market should be up for the remainder of the year, while an AFC victory signals a market decline. One of the biggest enemies of gold's attempts to go higher over the last few months has been the strength in the stock market. By losing Sunday's close-fought battle, the 49ers may have struck again.
Just to be clear, I am being tongue-in-cheek by suggesting that this is an indicator on which to base real trading decisions, but as it does have some psychological influence on how traders will at least start the week, it's worth a brief look. The Super Bowl indicator, which was accurate 28 out of 31 years between 1967 and 1997, has an overall accuracy rate of about 75%. Adding to the fun is that it poses an interesting dilemma for this year's winner.
But it gets confusing when you consider that the Baltimore Ravens' history can be traced to the first Cleveland Browns franchise, which was in the original NFL before the AFL-NFL merger. Most teams in the old NFL became NFC teams after the merger -- but not the Browns, which entered the consolidated NFL as an AFC team. If you wanted to take a purist position, you might argue that the team should be counted as an NFC team. However, as the San Francisco 49ers proudly represented the NFC, the honors this year must go to the AFC. As such, the uptrend in stocks should reverse if the indicator holds.
Good news for gold
Looking at a chart of gold, as represented by the SPDR Gold Trust (NYSEMKT:GLD), relative to the S&P 500, as represented by the SPDR S&P 500 (NYSEMKT:SPY), there has been strong negative correlation between the two markets. As stocks have ticked higher, gold has taken a break from its extended uptrend. A correction or reversal in the direction of the stock market should be seen as a major positive for precious metals such as gold.
Other positive news for the gold market is the general weakness that exists in the economy. Last week saw a negative print for the U.S. gross domestic product (GDP) and an uptick in the unemployment rate. While the market ignored the news, surging higher to close above 14,000 on the Dow for the first time since October 2007, it's unlikely that the Federal Reserve missed the report. Remember that the Fed has vowed to keep the money-printing machine, also known as bond buying and quantitative easing, running full tilt until the unemployment rate falls below 6.5%. At this rate, I expect that the printing will continue until heavy inflation kicks in and sends gold higher.
Of additional note, the U.S. dollar was mixed after last week's jobs report. The consensus had been for a gain of 160,000 jobs and a steady unemployment rate at 7.8%. The actual number came in at 157,000, with an uptick to 7.9% for the unemployment rate. The dollar fell against both the euro and the Swiss franc. The strength of the dollar has been another bearish factor for gold in recent weeks. Signs of weakness for the U.S. currency should be seen as a positive for gold.
All that glitters
In additional to a straight allocation to the commodity or the gold ETF, my favorite gold miner remains Barrick Gold (NYSE:GOLD). With a dividend yield of 2.5%, an operating margin of 35%, and its remaining status as the largest gold miner on the planet, it is well positioned to weather the drags facing the entire sector. While Newmont Mining (NYSE:NEM), for example, is also addressing the ballooning production costs and environmental concerns that face Barrick, the numbers are not as solid. Newmont carries a current trailing P/E of 201, relative to Barrick at 10. Newmont has a slightly higher dividend yield at 3.2% and matches Barrick's 35% operating margin, but its overall portfolio is not as attractive in my opinion.
Ultimately, gold appears to be very well positioned to rise as various global macroeconomic factors play out over the next several weeks and months. The glimmers of positive news in the economy are overshadowed by continued weakness. The stock market's failure to acknowledge this weakness is a buying opportunity, not a major cause for concern. I am not advocating blindly rushing into gold, but a healthy allocation is still warranted.