(Bloomberg) -- Investors 12-year love affair with gold ended in 2013 as they abandoned the precious metal for stock markets in the worlds developed economies, lifting global share prices by the most in four years.
While the Standard & Poors 500 Index surged to a record in the broadest-ever advance and bonds worldwide lost money for the first time since 1999, it was the 28% plunge in gold, the worst in more than three decades, that stunned investors the most, according to Quincy Krosby, a market strategist at Prudential Financial Inc.
Investors were heartbroken by gold, Krosby, whose firm oversees more than $1 trillion, said in a telephone interview from Newark, New Jersey. The selloff was one of the deepest purges in an asset class that Ive seen. They went into gold because they saw the momentum continuing. Until it stopped. And it stopped violently.
Demand for bullion as a preserver of wealth collapsed as the global economy showed signs of improving and central bank stimulus, led by the Federal Reserve, failed to ignite the runaway inflation that billionaire hedge fund manager John Paulson and other gold buyers anticipated. Instead, investors poured into equities, spurring a 20% advance in the MSCI All-Country World Index.
Gold had gained more than 600% from the start of 2001 to its peak of $1,923.70 an ounce in September 2011. The rally accelerated after the Fed dropped interest rates close to zero in 2008 and began its unprecedented bond buying, which flooded the U.S. economy with more than $3 trillion and raised the specter a weakening dollar would accelerate inflation.
GOLD EXODUS
The decline in gold in 2013, which pushed its price to $1,202.30, was the first annual drop since 2000 and the deepest since 1981. Gold futures in New York closed at a three-year low on Dec. 19, a day after the Fed said it would curtail stimulus as the U.S. economy strengthened and joblessness decreased.
Investors pulled $38.6 billion from gold funds in 2013, the most in data going back through 2000, according to EPFR Global, a research company. Paulson, the largest holder in the SPDR Gold Trust, the biggest exchange-traded product backed by bullion, said on Nov. 20 that he personally wouldnt invest more money into his own gold fund because its not clear when inflation will quicken. U.S. consumer prices were unchanged in November after a 0.1% drop the prior month.
Billionaire George Soros sold his entire stake in the SPDR Gold Trust in the second quarter, according to a filing with the U.S. Securities and Exchange Commission.
GLOBAL STIMULUS
Global growth, buoyed as central banks around the world suppressed borrowing costs, rebounded in the third quarter to its fastest pace since the first three months of 2012.
In April, the Bank of Japan started buying 7.5 trillion yen ($78.6 billion) of bonds a month to fuel lending and spending in the worlds third-biggest economy. The euro area exited its longest-ever recession after the European Central Bank President Mario Draghi pledged to do whatever it takes to keep the region from fracturing and dropped its benchmark rate to a record 0.25% in November.
In the U.S., the Fed said last month it would reduce its monthly bond purchases to $75 billion from $85 billion. The worlds largest economy expanded in the third quarter at a 4.1% annualized rate, the fastest growth since 2011.
Evidence that the U.S. is finally recovering from the worst financial crisis since the Great Depression prompted investors to embrace equities. The S&P 500 rose 30% for the best year since 1997 and surpassed 1,800 for the first time as data on housing and jobs improved.
BROADEST ADVANCE
Home prices in 20 U.S. cities rose by the most in more than seven years in October from a year earlier, the S&P/Case-Shiller index showed yesterday, while the unemployment rate fell to a five-year low of 7% last month.
A total of 460 stocks in the S&P 500 advanced in 2013, the most since at least 1990, data compiled by Bloomberg show. Netflix, Micron Technology and Best Buy more than tripled to lead the gains as all 10 industry groups rose in 2013. Consumer-discretionary, health-care, industrial and financial companies all jumped more than 30%.
The advance attracted investors to stock funds. They deposited $140 billion into U.S. equity exchange-traded funds last year, more than double the total from 2012, according to data compiled by Bloomberg. Inflows to bond ETFs plummeted 78% to $10 billion, the data show.
WINNERS, LOSERS
As the Fed announced its intent to reduce asset purchases, you really came up with one game in town, said Robert Pavlik, New York-based chief market strategist at Banyan Partners LLC, which manages about $4.5 billion. There was really nothing else for investors to do with their money than put their money into equities.
The MSCI All-Country World Index of 44 markets rallied for the biggest gain since 2009. Stock indexes in all 24 developed countries rose and 11 recorded advances of more than 20%, including Greeces ASE Index and Germanys DAX Index.
Japanese stocks climbed the most among industrialized nations as confidence increased that Bank of Japan Governor Haruhiko Kurodas stimulus plan would end 15 years of deflation and that a weakening yen would boost profits for exporters.
The Topix index soared 51% for the biggest annual surge since 1999.
Developing countries accounted for the 10 worst-performing stock markets as the pace of Chinas economic expansion slowed and speculation deepened that higher borrowing costs from Brazil to India would restrain growth.
FRONTIER MARKETS
The MSCI Emerging Markets Index declined 5%, the second annual loss in three years.
Perus Lima General Index, Turkeys Borsa Istanbul National 100 Index and Brazils Ibovespa all plunged more than 25% in dollar terms, the worst among 94 equity benchmark indexes tracked by Bloomberg globally.
Smaller and less mature economies fared better as investors went beyond the so-called BRIC countries -- Brazil, Russia, India and China -- in search of faster growth.
The MSCI Frontier Markets Index, which measures stocks from banks in Nigeria to telecommunications providers in Egypt, climbed 21% in 2013, outpacing the broader emerging market index by the most since 2005.
Bond investors suffered the first declines in more than a decade, leaving holders that reaped a 24% return over the prior four years with a 0.31% annual loss.
Gains of 1.7% through the first four months of 2013 evaporated as investors unloaded debt securities in anticipation the Fed would curtail its own bond purchases.
BOND ROUT
Average yields on $45 trillion of debt, which includes U.S. Treasuries, Japanese government bonds and worldwide corporate debentures, climbed from a record-low 1.51% in May to 2.1% as of yesterday, according to Bank of America Merrill Lynchs Global Broad Market Index.
The jump was the first annual increase in global borrowing costs in seven years. U.S. government bonds of all maturities slumped 3.4%, the first decline since Treasuries posted an unprecedented 3.7% loss in 2009.
Yields on the benchmark 10-year note, used to help set interest rates on everything from car loans to mortgages, rose 1.27 percentage points, the most in four years, to end 2013 at 3.03%. Based on the median estimate of 64 forecasters surveyed by Bloomberg, 10-year yields will increase to 3.38% by the end of 2014.
Securities that are more sensitive to interest rates such as 30-year Treasuries fared among the worst, with U.S. government debt due in more than 10 years losing about 12%, index data from Bank of America show.
JUNK DEMAND
Speculative-grade corporate bonds, which offered investors greater returns to compensate for the increased risk of default, rose 7.6% based on the Bloomberg Global High Yield Corporate Bond Index. Speculative-grade debt is rated below Baa3 by Moodys Investors Service and lower than BBB- at S&P.
The demand supported a record $1.5 trillion of company bond sales in the U.S. along with a ballooning market for junk-rated loans, which can offer protection from rising rates.
You were really trying to hide out in market sectors that have historically shown some resilience in higher interest-rate environments, said Lon Erickson, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management Inc., which oversees about $90 billion and favors corporate debt. People were flocking to things viewed as good places to avoid pure interest-rate risk.
PERIPHERAL RALLY
Greeces bonds had the biggest returns in 2013 among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, posting a 43% gain after doubling in 2012. Italy had the second-biggest increase, climbing 16%.
South Africas sovereign bonds suffered the biggest loss with a 19% decline, the data show.
Emerging-market dollar-denominated debt securities dropped 5.3% last year, the most since 2008, according to JPMorgan Chases EMBI Global Diversified Composite Index. Local-currency notes fell 9% in dollar terms, the most since 2002, the GBI-EM Diversified Composite Index showed.
The Bloomberg Dollar Index, which tracks the currency against 10 major peers, appreciated 3.5%, the most since 2008. The euro rose 4.1% in its best year versus the dollar since 2007, while the yen plunged by the most against the U.S. currency in 34 years.
Israels shekel gained 7.5%, the biggest advance among 31 major currencies tracked by Bloomberg.
WIDENING DEFICITS
The Argentine peso led declines among emerging-market currencies with a 25% drop as the central bank allowed the tender to depreciate faster in the face of estimated inflation exceeding 26%.
Indonesias rupiah, South Africas rand and Turkeys lira declined at least 15%. Indonesias current account deficit in probably widened to 3.5% in 2013, which would be the worst in Asia and the deepest since at least 1991, according to economists estimates compiled by Bloomberg.
South Africa had the deepest current account shortfall since 2007, while Turkeys 7.2% deficit is almost eight times the 0.93% average for eastern Europe and Africa, the estimates show.
There havent been sufficient economic reform efforts in some of the emerging markets and the start of the Fed tapering cycle leaves them in very vulnerable positions as they have large funding requirements in their current accounts and fiscal shortfalls, said Desmond Soon, a Singapore-based fund manager at Western Asset Management Co.
RECORD CROPS
Favorable weather after the worst U.S. drought since the Dust Bowl caused corn prices to plunge. Futures fell 40% to $4.22 a bushel on the Chicago Board of Trade, the biggest drop since at least 1960, as the U.S. Department of Agriculture estimated domestic output jumped 30% to a record.
Were coming out of a year when we had pretty bare-bones supplies of corn, said Shawn McCambridge, senior grains analyst with Jefferies Bache in Chicago. It looks like were going to have a record crop.
The U.S. surplus on Aug. 31, the end of the marketing year, will be 1.792 billion bushels, up from 824 million a year earlier, the USDA said Dec. 10.
Wheat touched a 19-month low of $5.99 a bushel in Chicago yesterday and ended the year with a 22% drop. Soybeans slid 8.3% to $12.925 a bushel.
The S&P GSCI Total Return Index, which tracks 24 commodities, advanced 1.9% in December, paring its 2013 loss to 1.2%.
ENERGY BOOM
Natural gas had the biggest gain in the GSCI, rising 26% to $4.23 per million British thermal units on the New York Mercantile Exchange as a supply surplus of 17.7% above the five-year average in February plunged to a 9.2% deficit by December, the widest in data that starts in 2005.
Were seeing a lot more natural gas consumed for heat than in the past, said John Kilduff, partner at Again Capital, a New York-based hedge fund thats focused on energy. The big rally has occurred over the last month. The withdrawals from storage have been really large.
West Texas Intermediate, the U.S. benchmark oil contract, also rose, advancing 7.2% on the New York Mercantile Exchange, to $98.42 a barrel, the largest increase since 2011.
A boom in U.S. oil production kept domestic prices cheaper than international grades, boosting demand from U.S. refiners and pushing fuel exports to a record high.
Brent futures traded on the ICE Futures Europe exchange in London, a benchmark price for more than half the worlds oil, fell 0.3% to $110.80 a barrel last year.
