Please ensure Javascript is enabled for purposes of website accessibility

Friday's Market: Gold Is Winning; Bank of America Pays It Back

By Alex Dumortier, CFA - Mar 18, 2016 at 11:19AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The "fear trade" in gold has been a winner; Bank of America ups its buyback authorization.

Yesterday was something of a milestone as the S&P 500 (^GSPC 3.06%) and the Dow Jones Industrial Average (^DJI 2.68%) (DJINDICES: $INDU) climbed into positive territory for the first time in 2016 (but only the latter index managed to close there). The indexes are adding to those gains in later morning trading on Friday, with the S&P 500 and the Dow up 0.55% and 0.66%, respectively, at 11:10 a.m. ET.

Don't let gold's new luster (small-f) fool you. Image source: Giorgio Monteforti, republished under CC BY 2.0.

Ten days ago, this column highlighted an unintended consequence of Japan's negative interest rate policy. The following four headlines, dated yesterday and today, further illustrate the risks associated with historically low and, in many cases, negative interest rates:

Study finds public pension promises exceed ability to pay  -- The New York Times

Japanese Government Bond hits record low  -- Financial Times

Bond returns imperiled by modest moves  -- Financial Times

Gold tracks for best quarter in 30 years  --

That's right: Gold, which had been left for dead, has recovered some of its luster and is currently the best-performing major asset in the world this year.

Little over a month ago, with gold at around $1,150, Goldman Sachs, arguably the most closely followed bank in the commodities markets, predicted that gold would fall to $1,100 within three months, and to $1,000 within a year. Instead, the price of the yellow metal has risen to close at $1,266.50 yesterday.

The following graph shows the year-to-date performance for the SPDR Gold Shares (NYSEMKT: GLD) versus the SPDR S&P 500 ETF (NYSEMKT: SPY) and the iShares 10-20 Year Treasury Bond ETF:

GLD Total Return Price Chart

GLD Total Return Price data by YCharts.

Goldman's three-month prediction now looks wrongheaded, but don't let positive price momentum deceive you: Gold prices at their current level reflect investor fear and market dysfunction rather than a rational assessment of the risks investors face.

You'd be better off seeking reasonably priced productive assets that are a claim on a stream of cashflows than following the timorous into ultimate fiat currency.

Bank of America: Would you like cash back with those shares?
And speaking of reasonably priced assets, cashflows, and capital return, Bank of America Corp (NYSE: BAC) announced in a regulatory filing this morning that it had received the go-ahead from the Fed (or, in official terms, "the Federal Reserve did not object to...") to repurchase $800 million of shares. This is on top of the bank's existing $4.0 billion share repurchase authorization announced in March 2015.

This authorization is not related to the results of the annual Comprehensive Capital Analysis and Review (commonly known as the stress tests), which is administered by the Federal Reserve. Those results are due to be released this month, but today's announcement bodes well for Bank of America in that regard.

This Fool is looking for the Fed to authorize a substantial increase in B of A's dividend payout, which has been a long time coming. If that does occur, it would likely produce an upward rerating of the stock's price multiples. At 9.6 times the next 12 months' earnings-per-share estimate, B of A is not as attractive as it was in the first half of February, but it still looks like an attractive value.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,500.68 (2.68%) $823.32
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,911.74 (3.06%) $116.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.