5 New Year Investment Resolutions
17 January 2020
Precious Metals CommentaryAfter a sell-off earlier in the week to USD$1,535, gold has managed to recover back above the $1,550 level for now with silver trading just under USD$18 per ounce. The AUD/USD remains ever so close to 0.69c, giving gold and silver some stability around the AUD$2,250 level and $26 respectively.
Platinum is one to watch as it just recovered above USD$1,000 an ounce this week for the first time since February 2018 and appears to be developing a long-term upward trend off the recent lows.
The world’s biggest hedge fund re-iterated its pro-gold position this week saying that due to “so much boiling conflict” and the US Fed being willing to let inflation run hot for a while, gold could gain as much as 30% in 2020 reach a record high above $2,000.
A research report by fund manager Myrmikan Capital argues that “gold will shoot into the multi-thousands of dollars per ounce” when the market eventually realises that “much of society’s wealth has become entrapped in non-cash flowing malinvestments”.
They agree with Jim Rickards’ approach of looking at how much of the money supply was backed by gold historically. At our National Conference a Global Case for Gold, Jim said gold would need to be revalued to circa $10,000 to get money supply back to the 40% backing it used to have in the past.
Myrmikan Capital say that when US banknotes were freely exchangeable for gold, the average backing was 54% - equating to a gold price above $8,500 today. However, they note that the peak of a dollar panic in 1980 resulted in gold backing reaching 135% (equivalent to $20,000) and “shows how crazy the gold market can get”.
T.I.N.A. Investment StrategyThe chief investment officer of industry super fund Hostplus, Sam Sicilia, said that while stock prices and company valuations were “sky high” and that “there will be a correction and we will get volatility”, and that there is no alternative for investors searching for yield.
The phrase “there is no alternative” (abbreviated as TINA) was used by British prime minister Margaret Thatcher to point out that the market economy was the only economic system that works. TINA is used derogatively these days by investors unhappy to be forced into investments because other asset classes offer even worse returns.
Sam’s argument is based on the idea that investors will not be seeing any interest rate rises as technology had effectively killed inflation. Alan Greenspan disagrees, saying “right now, there’s no real inflation at play. But if we go further [regarding US budget deficits] than we are currently, inflation is inevitably going to rise”.
At the same time, Sam wonders why businesses aren’t borrowing, saying they should be doing so with “ears pinned back”. We’d suggest that maybe that low interest rates have more to do with the RBA forcing them down rather than underlying technology or demographic drivers. There is some irony then in Sam using the TINA phrase when that was originally referring to free markets.
Possibly Hostplus should listen to former Australian treasurer Peter Costello (chairman of our $166 billion sovereign wealth fund) who said that individual investors and superannuation funds must focus more on “risk-adjusted returns” as low interest rates push investors into risky financial products.
US advisors Real Investment Advice reduced portfolio risk and raised cash levels on Friday, saying the current market “is nuts” and in a “melt up” phase as indicated by the market being more than two standard deviations above their long-term average.
With put/call ratios and valuation metrics at historic extremes and indicators like momentum and relative strength “all suggesting risk substantially outweighs reward currently” they see a reversion to the mean occurring shortly.
Nevertheless, they note that investors are continuing to buy based on FOMO (“Fear Of Missing Out”). A good example of TINA driven FOMO and MOMO (“Momentum”) – one happy acronym family of blind optimism – is this chart from investment research firm Gavekal.
Such a lack of market depth is not an encouraging sign and Gavekal tweeted that they can see these stocks becoming “ever-more mispriced relative to fundamentals such as earnings, increasing the probability of an eventual mega-cap market crash”. Looking back, the last time we saw concentration near this level was 1999 at the peak of the dotcom bubble. It could likely be the result of lazy investors just throwing money at the stock market and just picking household names they are comfortable with, as opposed to choosing via valuation, but end result is that concentration won’t help with equity market volatility in 2020.
Having precious metals in a diversified portfolio is one way to reduce portfolio risk, as it tends to perform well under environments when equities and property underperform. A gold holding can reduce the size of overall portfolio drawdowns and sap up some of the potential volatility. Anton Siluanov, Russia’s Finance Minister agrees, saying that their $124 billion National Wealth Fund should consider investing in gold as he sees it as more sustainable in the long-term than financial assets. Given the current absence of gold investment for large institutional investors, we think this cycle has a long way to play out before peaking and expect the tide to turn and larger institutions to start reallocating into gold in 2020.
We should put Peter Costello in contact with Anton, as it doesn’t seem the Future Fund has any allocation to gold from what we tell and it could probably benefit from some if the goal is risk-adjusted returns, given gold’s negative correlation to equities.
Rapid RhodiumIf you are looking for an ears pinned back investment experience, rhodium would have been the bet. Bottoming around $575 in mid-2016, it is currently trading at $7,400 for a total gain of 1,187%. Compare that to palladium (popping over $2,000 ten days ago) which is only up 374% since its bottom at $480 in early 2016.
Highly resistant to corrosion and extremely reflective, it is used as for plating jewellery, but 80% of rhodium demand comes from autocatalysts.
Platinum group experts Heraeus note that palladium and rhodium demand has been boosted by tightening emissions legislation in China, Europe and the US and see prices rising for some time yet as tighter emissions legislation offsets falling auto sales.
A factor in the price squeezes is that around 80% of rhodium supply comes from South Africa and is a by-product of platinum and nickel mining. The result is that supply cannot respond to high prices as would other commodities where mines can ramp up production.
Heraeus note that historically rhodium rallies don’t last with the price collapsing back to where it started. Rhodium is currently close to matching its 1992-2001 run where is rose 1,321% but still has room to move based on the 2003-2008 period that booked a 2,195% gain.
The main problem with physical rhodium investment is the fact that due to it being such a small market, it is incredibly hard to sell it when you want to take profits – since there are not many market makers, ridiculous buy/sell spreads often occur.
With rhodium reliant on automobile demand, it shouldn’t be surprising that rhodium prices get spiked by recessions, as Jeroen Vandamme from newsletter Analyse tweeted this week.
Maybe rhodium is predicting another recession?
New Year Investment ResolutionsDean Fergie from Cyan Investment Management had an article suggesting five investment new year resolutions. Below we run through them as they apply to precious metals.
1. Temper your expectations
Given we started this update referring to $10,000 gold, this is good advice. We would note that these big figure forecasts are worst case scenarios and speak more to gold’s role as insurance.
With all three metals posting good returns in 2019 (see the full table of yearly returns since 1992 here) it makes it less likely we will see such a stellar result in 2020, as any bull market needs pullbacks on profit taking along the way. Although we see prices rising, investors should temper their expectations across the board given 2020’s performance across many asset classes.
Yes, we are back in a bull market but the last one ran for 11 years, so precious metal investors need to pace themselves.
2. Critically review your portfolio
With those double digit returns, there is a good chance that gold and/or silver are now a higher proportion of your overall investment portfolio. We would suggest reviewing your allocation to gold and rebalancing if necessary.
Yes, you heard right, we are saying you may want to trim holdings from time to time if gold and silver are now a disproportionately large part of your investments. We believe in setting a target percentage to allocate to precious metals and rebalancing back to that.
This would mean selling when the metals have had a run but also buying when they are weak. It is tough to do, but sticking to a rebalancing discipline can boost returns in the long run because it results in selling at highs and buying lows (which is generally considered one way to make money).
Of course your target allocation will differ from one person to another depending on individual circumstances.
3. Clean out the junk
Dean here is referring to looking at companies you have invested in that have disappointed fundamentally and/or operationally. In the case of precious metals, their fundamental and insurance reasons are still valid, but it may be worth taking a look at your stock portfolio because if you are sitting on some losers despite the market being up over 20% you may need to take a long hard look at them.
4. Actively seek out opportunities
On this point we would suggest looking at silver, which is still relatively cheap compared to gold when looking at the gold:silver ratio. See our analysis of the ratio and silver from June 2019 for more details on the case for weighting your precious metals allocations towards silver. From a risk/reward perspective we see silver and platinum as potentials that could surprise in 2020, with platinum just starting to develop an uptrend in 2019, and coming off some very oversold and unloved conditions.
5. Hit the ground running
Dean said that the lack of liquidity and scarcity of investors in January could lead to investment opportunities. This is less of a factor for precious metals, which are highly liquid and traded globally.
However, there is some seasonality in the metals, with January and February being strong months on the back of Chinese New Year (which starts on January 25th this year).
If you are overweight gold or silver, the next few weeks may be a good time to rebalance. Despite gold’s seemingly high starting point for 2020, the best times to buy in recent years have been at the start of the calendar year. Particularly relevant for those who are currently not invested in precious metals at all, and are watching the price. They say ‘time in the market is more important than timing the market’ and in our opinion it is more important to have a core position in metals to ride out the next few years rather than trying to channel Nostradamus and pick the absolute short term low.
Until next time,
John Feeney and Bron Suchecki
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.
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