Dividend Power Week In Review – Gold Is At A Record

Gold is at a Record

Something interesting happened this past week. Gold is now trading at a record. The price of gold is now $,1897.50 an ounce for August gold on the Comex. The Comex is a futures and options market for metals including gold. The price even briefly went over $1,900 an ounce before settling lower. The current price of gold is still a record. Gold prices are up about 50% since Summer 2018 when it bottomed out at roughly $1,200 per ounce.

Gold is not an income generating asset like dividend stocks, CDs, or even savings accounts. For those seeking income gold really is not an appropriate investment. However, gold is viewed as valuable and a store of value for many people around the world. In some countries it is also viewed as a way to transfer wealth between generations. The two largest gold consuming countries by far are China and India at about 984 and 849 metric tons per year, respectively. The U.S. is a distant third at roughly 193 metric tons per year.

Why is Gold Trading at a Record?

Why is gold trading at a record? First, there is the global financial uncertainty of COVID-19. The price of gold often rises during crises. Along these lines’ geopolitical tensions also generally causes gold prices to rise. The increasing rhetoric and back-and-forth between the U.S. and China are likely helping to drive gold prices up. One does not have to look far in the news to see stories of military drills in the South China Sea, consulate closures, trade conflict, sanctions, etc. Arguably, this adds to geopolitical tension.

Gold prices also tend to rise due to fiscal and monetary drivers such as rising debt, increase in money supply, negative interest rates, and U.S. dollar correction. From a global perspective all of these factors are in place. This is why gold is trading at a record. Let’s take a look at some of these briefly.

The total debt and the money supply of many countries is increasing. This is being driven by stimulus to offset the damage of the COVID-19 pandemic to economies. In some countries the stimulus packages have been small. On the other hand, in countries like Japan, the U.S., Brazil, and Canada the stimulus package has been roughly 10% or more as a percentage of the gross domestic product or GDP. Take a look at the chart below through June 2020. If you want more details on stimulus by country take a look at the International Monetary Fund or IMF site that is tracking policy responses to COVID-19. Clearly though, the amount of stimulus is not yet done in many countries.  But the effect of more money in an economy tends to drive up prices of other assets such as gold.

Some countries have negative real yields at the moment. To get the real yield take the nominal rate and subtract the inflation rate. This was an effect of the last global recession from 2008 to 2009. However, negative real yields are back again due to the pandemic. Essentially the bonds from some countries are not paying you a return. You are parking money in the bond and accepting that you will lose money after accounting for inflation. Germany and Japan have had negative real yields for some time. But U.S. real yields are also negative on the expectation that the U.S. economy is weak and monetary policy will very accommodating for a while. The chart below shows the real yield rates for U.S. Treasuries. The point here is that money in economies will go to other assets if cash is paying a low rate. One of those assets is gold.

List of Dividend Aristocrats in 2020

I updated the List of Dividend Aristocrats in 2020. There were several changes over the past few months. Ross Stores (ROST) was dropped from the list due to a dividend suspension this year resulting from COVID-19. You can take a look at my article on Ross Stores (ROST): A Dividend Aristocrat Suspended Its Dividend. The other change was that United Technologies Corp. (UTX) merged with Raytheon (RTN). The new company is called Raytheon Technologies Corp (RTX). As part of the deal, Otis Worldwide Corporation (OTIS) and Carrier Global Corporation (CARR) were spun off. All three companies are now in the list of Dividend Aristocrats.

I am providing a bonus to my readers. You can click here to get a spreadsheet with select data of the List of Dividend Aristocrats.

Coronavirus Dividend Cuts and Suspensions List in 2020

I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 318. We are now over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.

This past week the only new dividend cut, or suspension was by The Macerich Company (MAC). This is the second cut for Macerich. The dividend was cut by roughly 70% to $0.15 per share from $0.50. Macerich is giant commercial retail real estate investment trust or ‘REIT’. The REIT owns about 51 million square feet of real estate. The REIT has a major presence in the West Coast, Arizona, Chicago, and from NYC to Washington DC. It is no secret the REITs focusing on commercial retail are suffering during the COID-19 pandemic.

I also added several REITs to the list that I previously missed. This includes Retail Properties of America (RPAI), Weingarten Realty Investors (WRI), American Assets Trust (AAT), Southerly Hotels (SOHO), Xenia Hotels & Resorts (XHR), Sunstone Hotel Investors (SHO), Condor Hospitality Trust (CDOR), Braemer Hotels & Resorts (BHR), and New Senior Investment Group (SNR).

Stock Market Volatility – CBOE VIX

The CBOE VIX finished the past at pretty much the same value as the prior week. It still remains elevated relative to the long-term average. The long-term average is approximately 19 to 20. Volatility dropped a bit but then ticked back up during the week.

I still continue to feel that news on COVID-19 vaccine, new infections, and unemployment are the current drivers of the volatility. This past week adjusted initial unemployment claims ticked up to 1,416,000 and increase of 109,000 from 1,307,000 in the prior week. This was the first increase since the March and April timeframe. Further, rental housing eviction bans, the $600 in extra weekly unemployment insurance, and student loan forbearance are all expiring. A replacement federal stimulus package is not expected to be in place when key parts of the CARES Act expires.

Fear & Greed Index – Gold is at a Record

I also track the Fear & Greed Index. There are seven indicators in the index. These are Stock Price Breadth, Put and Call Options, Stock Price Strength, Junk Bond Demand, Safe Haven Demand, Market Momentum, and Market Volatility.

The current reading is now at 63, which is in Greed. This is the same as last week. The index has been in Greed now for two straight weeks. Note that this index rarely stays above 60 for an extended period of time. Typically, once this index goes over 60 there is a move down. However, this is not a hard and fast rule. Sometimes the index does go higher. I think the strength of the index is due to market momentum and breadth combined with lower junk bond demand.

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 27.6X and the Schiller P/E Ratio is at about 30.0X. These have ticked down since last week. I continue to believe that the market is largely overvalued at this juncture. In my opinion caution is warranted for investors.

We are in the middle of earnings season right now. For the most part companies are beating a very low bar for the top and bottom lines resulting from COVID-19. However, sales and profits are still down for most companies. Ten of the 11 sectors in the S&P 500 are showing negative earnings growth rates. The worst performer has been the Energy sector. The Utilities sector is still showing a positive earnings growth rate.

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