Jim Rogers on fear, gold and the one sector to be bullish on today
Earlier this week, we shared some of Jim Rogers’ insights from his recent interview with Real Vision Television. Jim is a legendary investor, best-selling author> READ MORE
Earlier this week, we shared some of Jim Rogers’ insights from his recent interview with Real Vision Television. Jim is a legendary investor, best-selling author> READ MORE
The U.S. government is getting closer and closer to running out of cash… for real this time. The government has until the end of September to raise the U.S. debt> READ MORE
The Doomsday Clock keeps ticking… First created in 1947, the Doomsday Clock is meant to symbolise the risk of man-made global catastrophe. The clock ticks> READ MORE
In June last year, we wrote that the price of platinum was going to go up. And it did: By 18 percent over the next seven weeks. Now, after the> READ MORE
Is gold a good investment? If you’re looking for some stability for your portfolio, the answer is a resounding yes. Conventional wisdom holds that gold is a> READ MORE
“May you live in interesting times” is an old Chinese proverb. While it may sound like a blessing, the saying is actually a subtle curse, something you might> READ MORE
Black swans – events that are unpredictable and which have an outsized impact – are by definition unpredictable. But that doesn't mean you shouldn't still take> READ MORE
If just 2 percent of current Islamic finance assets are allocated to gold, a huge new source of demand – roughly equal to China's total purchases in 2015 – will> READ MORE
Earlier this week, we shared some of Jim Rogers’ insights from his recent interview with Real Vision Television.
Jim is a legendary investor, best-selling author and Guinness World Record holder. So when he speaks, smart investors listen.
Today, we’re sharing a few more of Jim’s insights… on fear in the market, how to buy gold and the one sector Jim is bullish on today…
Millennials (or, for that matter, young people – regardless of the generation) often get a bad press. But, in a bull market, Jim Rogers believes that under-35s can make serious gains because of their fearlessness.
“When things are going right, we all need a 26-year-old. There’s nothing better than a 26-year-old in a great bull market, especially in a bubble, because they’re ’fearless‘. To youthful investors, a bull market will never end…”
Now, that’s great in a bull market. But in stormier weather when things are going south, Jim thinks that older (and perhaps wiser) heads should take the helm because fearlessness can be very dangerous in a bear market.
As Jim says, most of these under-35s don’t know why they made money in the first place. So they don’t know why they lose money.
“The most dangerous time is when you’ve had a great success because you really think you’re smart, and you’re immediately looking for what’s next. And that’s when you should close the windows and go to the beach or do anything to get away.”
In short, during uncertain times, sometimes the best thing to do is nothing. And part of doing nothing is holding what’s maybe one of the most-hated assets of all: Cash. It doesn’t earn anything, inflation eats away at it, central banks can’t stop printing it, and you’re denying yourself the magic of compounding if you’re holding cash.
But cash is the perfect hedge. You don’t have to worry about the market crashing if you have a lot of cash.
Now, we don’t recommend ever pulling out of the market completely, as we’ve written before. But if the market starts looking uncertain, think about raising a little cash.
Markets are more predictable than most people think. Stocks, sectors and markets rise and fall over time on repeat (as we’ve written before). For investors, it’s tempting to think that because a sector has been rising for some time… it will keep going up. Or that because another has been bearish for a while… that it won’t ever improve. This is called “status quo bias” – and it’s one of the most dangerous emotions in investing.
One sector that has been bearish for a long time is agriculture. It is down around 30 percent over the last two decades. But what goes up must come down (and vice-versa). Jim understands this, and that’s why he’s bullish on agriculture.
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“Often throughout history if you find things that are disasters and you buy them, you may lose money first or you may go bankrupt first, but usually you make a lot of money in the end. It’s not the first time we’ve had big cycles in agriculture, in real assets, and probably not be the last time either.”
We’ve said something similar before: Often the best time to invest is when things are at their worst. That’s because shares are cheap when market confidence is low. And, since markets move in cycles, those cheap shares are bound to rise in value sooner or later.
If you want to follow Jim’s lead and buy into agriculture, he recommends the ELEMENTS Rogers International Commodity Agriculture ETN (New York Stock Exchange; ticker: RJA).
Jim has been a long-time gold holder. And he believes everyone should hold gold – at least as an insurance policy.
“Everybody should have coins, physical coins, as an insurance policy, as an emergency, if nothing else. You hope you never need them. But you’ve got to start by owning gold coins, coins that are recognized all over the world.”
History has proven time and again that gold is one of the best ways to hedge your portfolio – that is, to protect it when stock markets everywhere fall. And, unlike paper money, gold is a permanent store of value. Gold has withstood history and maintained its inherent value. It’s durable, easy to transport, looks the same everywhere, and it’s easy to weigh and grade. In short, gold is insurance against financial calamity.
But what about investing in gold today? Jim says he’s not selling, but he’s not buying right now either.
“I’ve owned gold for many, many years. I’ve never sold any gold. I haven’t bought any serious gold since 2010. Before this is over, gold is going to turn into perhaps a bubble. It’s certainly going to get very, very, very overpriced. I’m not buying it now. But short of war, I expect another opportunity to buy gold and silver. And if it happens, I hope I’m smart enough to buy a lot.”
When the time comes, Jim believes gold coins are the best way to buy gold. But if you want to make big profits, look at gold futures and miners.
“You should have physical possession of some gold coins. After that, gold futures are the best way if you want to make money and you’re a good trader. Gold futures, that’s where you can get the most leverage, unless you can find the right gold mine. But there are hundreds of gold mines. So if you find the right gold mine, do it. But otherwise, have some gold coins in your closet or in your safety deposit box or both. And then learn about gold futures because that’s the way to make a lot.”
Like Jim, we’re fans of owning physical gold. But if you can stomach the volatility, my preferred way to invest in gold stocks is through a gold-mining ETF like the Sprott Gold Miners Fund (New York Stock Exchange; ticker: SGDM).
As I told you earlier, it pays to listen to Jim. So I hope his latest ideas will serve you well.
Publisher, Stansberry Churchouse Research
The U.S. government is getting closer and closer to running out of cash… for real this time.
The government has until the end of September to raise the U.S. debt ceiling – that is, the total amount the government is allowed to borrow. Otherwise, it won’t be able to pay its bills. The U.S. government spends more than it earns, and it funds the difference by borrowing.
Political infighting could result in a standoff on raising the ceiling. That would be bad news for the United States, for the global financial system and for anyone with a lingering hope that the U.S. political system is vaguely functional. But if history is any guide, it could be good for the price of gold.
Countries have gone insolvent around 800 times over the centuries… Argentina, Puerto Rico and Greece are some of the many nations that have operated under debt repayment plans that were put into place when they were unable to make good on what they owed.
The U.S., by dint of having a global reserve currency, hasn’t had that problem. The U.S. can just print more money – an option that isn’t available to countries that don’t have a currency upon which investors place enough value.
Even if the U.S. government can print the cash it needs, though, it can’t necessarily pay what it owes, such as interest on U.S. Treasuries. The U.S. government has a limit to how indebted it can be, and it periodically hits that ceiling (as it did already in March – see below).
In the U.S., Congress (the two houses of parliament) has the power to raise the debt ceiling. But in recent years, increasing the ceiling has become more difficult. Most notably, political infighting within Congress in August 2011 nearly resulted in the debt ceiling not being raised. This reared the catastrophic possibility that the U.S. government could default on its debt.
Eventually, the ceiling was hiked. But four days after the vote to raise the debt ceiling passed, credit rating agency Standard & Poor’s downgraded the U.S. government’s credit rating from AAA to AA+.
This was the first time that the U.S. government was given a rating below AAA (the highest possible rating of creditworthiness).
The U.S. hit the latest debt ceiling in March this year. Since then, the U.S. Treasury has taken a number of stop-gap measures to pay the government’s bills.
But these financial Band-Aids can only do so much. The debt ceiling needs to be raised past US$20 trillion to cover the current debt outstanding. And if the ceiling isn’t raised by October, the government could run out of money.
But just like in 2011, infighting in Congress and with President Donald Trump could risk a new debt-ceiling hike not being passed.
And let’s not forget: As a U.S. presidential candidate, Donald Trump suggested that the U.S. government might consider negotiating a partial repayment with creditors. He later revised his remarks, but there is a risk that Trump may create the impression – which would deeply spook markets – that he views U.S. government debt as repayment-optional. Also, in his business dealings, Trump has viewed bankruptcy as a tool in the financial strategy toolbox – which is fine in the American capitalist context, but not in the global capital markets context.
There’s no way to know for sure how markets would react – but it wouldn’t be good for nearly any financial market, anywhere. U.S. Treasuries are the financial definition of a safe investment.
You see, the world’s economy depends on U.S. treasuries. As the New York Times explained, “The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money.”
Since the U.S. government can print more money or raise taxes when it needs more cash, the chances of the American government defaulting on its loans is almost nil.
But the growing possibility of default could cause investors to flee to even “safer” assets.
During the 2011 near-default episode, one-month Treasury bill yields climbed to a 29-month high. That means that, as U.S. government debt was viewed as riskier, investors demanded a higher yield to hold it – and prices of bonds fell. (For bonds, the yield increases when the price falls, and vice-versa.)
Historically, in times of uncertainty, investors and traders sell their higher-risk assets, and “flee to safety”. Usually, U.S. Treasuries are considered a “risk-free” asset. But when U.S. Treasuries themselves are the subject of uncertainty, there’s another asset that has traditionally been a safe haven: Gold.
In the summer of 2011, as the political dispute that led to the standoff over U.S. government debt simmered, the price of gold soared 25 percent from early July through mid-August. On August 22, the price of gold hit US$1,889 per ounce, its highest level since 1980.
It wasn’t a coincidence that the price of gold spiked as uncertainty over the notion of “risk-free” became a topic of debate. As we’ve written before, there are lots of good reasons to own gold… it’s insurance against financial calamity. And with a debt crisis looming, now is the time to buy.
The SPDR Gold Shares ETF (New York Exchange; ticker: GLD, Singapore Exchange; ticker: O87 and Hong Kong Exchange; ticker: 2840), is one of the easiest ways to get exposure to gold. But you can find a list of others right here.
The important thing is that you get some gold exposure today… it will help protect your wealth no matter what happens in the future.
Publisher, Stansberry Churchouse Research
The Doomsday Clock keeps ticking…
First created in 1947, the Doomsday Clock is meant to symbolise the risk of man-made global catastrophe.
The clock ticks forward or backward based on how close scientists believe we are to a global catastrophe (represented as midnight).
At just 2 minutes and 30 seconds to midnight, the clock hasn’t been this close to midnight since 1953, when the Soviet Union tested its first hydrogen bomb.
And with the threat of a fast-nuclearising North Korea … the clock seems to be edging closer and closer to midnight.
(Uncertainty in the U.S. White House, a weak U.S. dollar, and a string of recent terrorist attacks further underscore the high levels of uncertainty of recent months that are threatening to become a “new normal”.)
Now, I don’t believe Armageddon is imminent. I’m not stashing bottled water and canned goods in an underground bunker. But today’s uncertain times have me thinking about risk – and how investors should position themselves.
One of the best assets to own during times like these is gold… and though you may have heard it before, it bears repeating.
History has proven time and again that gold is one of the best ways to hedge your portfolio – that is, to protect it when stock markets everywhere fall.
That’s because gold and stock markets are negatively correlated assets.
Correlation is the relationship between two or more assets. It measures what happens to the price of one asset when the price of a different asset changes. When they are negatively correlated, their prices move in opposite directions. This evens out your overall performance when things get bumpy.
The table below shows the correlation between gold and major Asian equity market indices. Over the past ten years, returns on gold have exhibited a negative correlation with stock returns. That means when equity markets go down, gold usually goes up – and when gold goes down, equity markets tend to go higher.
For example, over the past 10 years, the correlation between the S&P 500 and the MSCI Asia ex Japan index has been 0.78… and between the U.S. index and the Singapore stock market index, it’s been 0.96. This means that there’s a close correlation of both of these indices with the S&P 500.
But the correlation between the price of gold and the S&P 500 is close to zero. That means that their prices move with virtually no relationship to each other at all. Of the indices below, the price of gold moves most closely to the STI – and even then, it’s only a correlation of 0.29.
How does this work in practice?
During the financial crisis of 2008-2009, the world’s stock markets fell an average of about 50 percent peak to trough. Around the world, more than US$34 trillion in value was wiped out. That’s more than the 2008 economic output of the U.S., European Union and Japan combined. It was the biggest crash since the Great Depression in the 1920s.
But anyone who held gold during that period was better able to withstand the market volatility because they knew they had “insurance”.
As shown in the graph below, from June 2007 (when the financial crisis first broke) to the bottom in March 2009, the price of gold rose from about US$670 to US$938 an ounce, a gain of about 40 percent. Over the same period, the S&P 500 dropped about 65 percent. Many markets across the world were down more.
But gold’s bull run didn’t end in March 2009. Fear and uncertainty remained at extreme levels until August 2011, when global central banks opened the floodgates of money for more than two years. Eventually, confidence slowly returned to the global economy. By that time, gold had risen to over US$1,900. From the onset of the financial crisis to the start of global easing, gold prices appreciated more than 150 percent.
As the crisis came to an end, investors who had diversified with gold avoided gut wrenching portfolio losses and panic selling… and they were positioned to take advantage of the many value-priced investment opportunities in the post-crisis world.
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People have used gold as a currency or medium of exchange for thousands of years. Meanwhile, other forms of money – livestock, shells, enormous stones and tulips – have come and gone.
Gold has withstood history and maintained its inherent value. It’s durable, easy to transport, looks the same everywhere, is easy to weigh and grade [is it?]… it’s the perfect store of value.
Unlike gold, which is finite, the supply of cash is infinite. Every form of paper money (U.S. dollars, euros, yen, etc.) has a potentially unlimited supply. All central banks have to do – and they’ve been doing this madly for years – is to turn on the printing press.
Paper money can be printed and printed until it’s worthless. It’s legal tender backed by nothing more than faith in the government that prints it. Governments are free to print money as they want.
However, if a government prints too much money, its currency will lose eventually lose value. In a worst-case scenario, a country’s paper money can become worthless. It has happened in France, China and Germany. It happened much more recently in Zimbabwe. And in Venezuela today, the Bolivar is as good as worthless.
But governments can’t print gold. Gold isn’t based on government promises – it’s a real asset that holds real value. That is why gold is an attractive storage of wealth.
Proponents of the gold standard (which the U.S. abandoned in 1971) think that money printing by central banks is out of control and will end in disaster. The gold standard is never coming back. The world doesn’t have enough gold, and it would deeply disrupt the entire global economic system.
But as a store of value, gold will continue to trump paper. And the more money the world’s central banks print, the more valuable gold will become.
In short, gold is insurance against financial calamity.
By owning it, you’re simply protecting your wealth if (or when) things fall apart. And with geopolitical uncertainty… a weakening U.S. dollar… and massive money printing, everyone should own a little gold today.
So how can you own some?
Some people have gold bars or coins that they can hold in their hands or hide under the floorboards of their house.
But stick to buying gold from a firm that sets your metal bars in a high-security vault, where you can verify that your gold is segregated and safe.
And obviously, storing your gold bullion with a firm in a politically stable country is preferable to holding it with one on the verge of a coup.
My preferred dealer for gold coins (and other precious metals) is a U.S.-based firm called Asset Strategies International. They’re scrupulously honest and fair (by no means a common thing in this corner of the investment world). And they’ll give you a good price.
My number one recommendation for physical gold purchase and storage is a firm called Silver Bullion. Despite its name, the Singapore-based company provides segregated ownership of gold, silver and platinum.
(Just so you know… we don’t have any commercial relationship with either of these two firms. I personally know the founders of both, and I’ve referred friends and family to them any number of times. I’m recommending them only because I know they’ll give you great service at a great price.)
One of the easiest ways to get exposure to gold is through a gold ETF like the SPDR Gold Shares ETF (New York Stock Exchange; ticker: GLD, Singapore Stock Exchange; ticker: O87 or Hong Kong Stock Exchange; ticker: 2840), which tracks the price of gold. It’s the largest physical gold ETF in the world.
Investors who want to own gold but don’t want the hassle and expense of physical ownership can choose to own GLD.
GLD isn’t the same as owning gold, though. You can’t decide you want a few gold bars instead of your shares and cash them in.
The SPDR Gold Shares ETF asserts that every share of the ETF is backed by a bar of gold held in a vault that’s completely separate from the custodian bank’s own stash of gold.
If you want to bet aggressively on the price of gold rising, buying gold stocks will likely produce more bang for your buck. But maintain stop loss levels – because if gold tanks, gold stocks will do much worse.
If you can stomach the volatility, my preferred way to invest in gold stocks is through a gold-mining ETF like the Sprott Gold Miners Fund (New York Stock Exchange; ticker: SGDM). The portfolio of gold stocks in an ETF offers diversification from betting on one or two companies. The Sprott Gold Miners Fund holds the 25 large and mid-cap mining stocks most correlated with the price of gold. SGDM also bases each stock’s weighting on fundamental attractiveness, such as growth and strong balance sheets.
No matter how you choose to own gold, just make sure you stock up on a little now. It will help protect your wealth no matter what happens in the future.
Publisher, Stansberry Churchouse Research
In June last year, we wrote that the price of platinum was going to go up. And it did: By 18 percent over the next seven weeks.
Now, after the price of platinum has fallen again, an almost identical setup is presenting itself. And there’s an easy way to position your portfolio to benefit from a rebound in platinum.
The reason why, and mean reversion
Mean reversion is one of the most powerful mathematical forces in the universe. (The “mean” is just another word for the “average”.)
In mean reversion, extreme or random events may take you one way – but then they usually revert back to normal, or the average, over time.
Mean reversion refers to the universal tendency of almost anything – luck, the weather, markets – to, with time, return to average, or normal, levels. You’re on a hot streak at the blackjack table? Great… but you’d better cash out soon because it won’t last. Has it been an unusually chilly winter so far? Chances are good it will warm up soon. Are markets on a roll? Enjoy it while it lasts, because the rally will eventually end.
The idea of “availability bias” is central to mean reversion. This is the tendency to pay too much attention to new or easily remembered information when making decisions. We remember that the chicken rice at that hawker center around the corner was good last time – even if it was cold and chewy the previous three times. We’re hardwired to evaluate risk at the “gut” level, rather than use our brains and process it logically.
The platinum-to-gold ratio
Mean reversion helps explain why the price of platinum is likely to rise in the coming weeks.
The graph below shows the platinum-to-gold ratio. It shows the relationship between the price of platinum and the price of gold.
(Why do we look at this ratio, and why does it tend to move in a certain way? There’s no particularly good reason. But markets, like history, tend to move in cycles. So these sorts of patterns are worth paying attention to. And while the gold-to-silver ratio is more closely watched, the platinum-to-gold ratio is worth keeping an eye on as well.)
Over the past 30 years, the price of platinum (sometimes called “the rich man’s gold”) has historically traded well above the price of gold itself. On average, an ounce of platinum has cost 35 percent more than an ounce of gold.
In recent years, though, this ratio has flipped. During the past five years, gold has been on average more expensive than platinum – five percent more expensive. The average platinum-to-gold ratio has moved from 1.35 over the past 30 years, to 0.95 over the past five years.
Is this time different? It doesn’t matter
This leads to an important caveat to the theory of mean reversion. Sometimes, there’s a structural change that forever alters the dynamic between two variables. For example, climate change might lead to summers that are hotter and hotter – and to every year boasting of a “record-breaking” hot summer. In this case, the mean never reverts. Instead, the mean is forever changed.
However, these structural shifts don’t happen very often. And the biggest danger is uttering those four dreaded words: “This time is different.” Perhaps it is… but mean reversion suggests that almost always, it’s not different. You just have to wait for mean reversion to kick in.
Perhaps the platinum-to-gold ratio is structurally lower, and won’t move above 1 again anytime soon, or ever. Maybe recycled platinum will be used more and more, which means more supply – and hence a lower price over time.
But even if that’s the case, right now the ratio, at 0.76, is almost lower than it’s ever been… it’s very close to 50-year lows. In late June, it reached a low of 0.74, before rebounding to 0.88… and rising 21 percent over the following five weeks.
Notably, the ratio has been around 0.76 for the past few weeks. Over that period, the price of platinum has moved up modestly – as has the price of gold, so the ratio has remained steady. In the coming weeks the platinum-to-gold ratio could increase if the price of gold falls and the price of platinum stays flat, or if the price of platinum falls less than gold. While both of these would cause the platinum-to-gold ratio to rise, neither would lead to a higher platinum price.
I think it’s more likely that the price of platinum rises in the coming weeks. “History doesn’t repeat itself, but it often rhymes” as American humourist Mark Twain may have said. And at around this level in the platinum-to-gold ratio in the past, platinum has risen.
How to invest in platinum
If you want to buy platinum, the easiest way is to use an ETF, which is a lot more efficient than going to your local jeweler. The Physical Platinum Shares ETF owns physical platinum bullion to track platinum prices. It is listed on the New York Stock Exchange (ticker PPLT). A very similar ETF is listed in London (ticker PHPT). Currently, there are no vehicles to invest directly in platinum on the Hong Kong or Singapore exchanges, but we will keep you posted if and when it becomes available.
The ETF has low trading volumes, though. So specify your buy (or sell) price, rather than allowing your broker to buy at the market.
Is gold a good investment? If you’re looking for some stability for your portfolio, the answer is a resounding yes.
Conventional wisdom holds that gold is a good safe haven. When markets look wobbly, a bit of gold can help steady your portfolio.
And it’s not always the case, but here, the conventional wisdom is in fact correct.
Conventional wisdom is often wrong. Take the idea of diversification, for instance. The cliché is “Don’t put all your eggs in one basket.” Is this good advice for everyone? Not necessarily, according to investing legend Jim Rogers. And viewing diversification strictly in terms of asset allocation – rather than a function of your “personal equity” – is maybe even more dangerous.
Another bit of conventional wisdom is that investors should follow their investments closely – watching prices like a hawk, tracking the latest news and developments. However, fixating on the “noise” in your portfolio can lead to bad and emotional decisions.
And here’s another bit of conventional investing wisdom we often hear (from me as well): In times of panic, gold is a safe haven. Gold in your portfolio can help insure against losses when the stock market falls.
As it turns out, this is one piece of conventional wisdom that’s correct. A recent study proved it.
Precious metals are safe havens
Two researchers in Ireland recently wrote a paper entitled Reassessing the Role of Precious Metals As Safe Havens – What Colour Is Your Haven and Why? They conclude that relative to many other assets, and in many countries, precious metals – including gold – act as safe havens in turbulent markets.
The researchers found that precious metals can indeed be portfolio “insurance” against unexpected events or “fat tail risk”. Fat tails are statistically rare events with bad consequences – like a hundred-year flood, or a once-in-a decade market crash, for instance. Even worse are Black Swans – catastrophic events with no precedence. Because they’ve never happened before, they blindside investors, causing extreme losses.
Especially during times of stress, gold marches to its own drummer
The researchers confirmed that gold is generally uncorrelated with most other financial assets. Correlation refers to the degree assets or securities have similar price moves. When two assets have a positive correlation (approaching 1), their prices tend to move in the same direction at about the same time. When assets have a negative correlation (approaching -1), they tend to move in opposite directions. A correlation close to zero means two assets move independently. As you can see in the chart below, gold’s correlation with other assets is very low. That’s exactly why gold works so well in a portfolio when markets are weak.
The researchers’ work confirms decades of academic research that gold and the other precious metals are uncorrelated both during normal times and during times of economic and market stress. Gold is a hedge – its price doesn’t usually follow other assets during normal times. It is also a safe haven – during abnormal times, when the prices of other assets crash, precious metals tend to rise.
Gold is a good investment, particularly in times of political uncertainty
The researchers studied different kinds of economic and market events that cause precious metals to become safe havens. They identified three general types of market stress indicators: financial market stress, political stress and consumer sentiment.
They found that political and policy risk is “a positive and robust determinant across countries when precious metals are safe havens against stock and bond markets tail events.” In other words, in the many countries studied, precious metals tend to rise the most – offering the strongest safe haven protection – during market distress triggered by government policy uncertainty.
Both last year’s Brexit and the 2007-2008 global economic crisis are recent reminders of the value that gold holds during economic earthquakes.
Last June, Britain’s vote to exit the European Union caused unexpected, extreme economic policy uncertainty. On June 24, 2016, the day after the surprise vote, London’s FTSE 100 fell 12.5 percent, German DAX skidded 6.8 percent, the broad Stoxx Europe 600 index fell 7 percent and France’s CAC 40 was off 8 percent. Meanwhile gold was UP 5 percent.
During the global economic crisis, gold was also a safe haven. From June 2007, when the financial crisis first broke, to the March 2009 bottom, the U.S. Dow Jones Industrials dropped about 45 percent. Many global stocks markets were down over 50 percent. However, during that period, the price of gold rose from about US$670 to US$938, for a gain of about 40 percent, as shown below.
The winning metals
You might be surprised to learn that while gold, silver, platinum and palladium all typically provided safe havens against severe market declines, silver was often a better safe haven than gold.
According to the researchers, in many countries, silver has been the best safe haven against stock and bond market falls, followed by palladium, then gold and platinum. As we’ve written before, when gold goes up, silver tends to rise even more. Likewise, when gold declines, silver tends to fall more. (Not long ago we wrote a special report about investing in silver that you can access… here.)
We’ve discussed both platinum and palladium in the past. These metals also provide safe haven during turbulent times. However, given their easy accessibility and superior liquidity, gold and silver are probably the better options for most investors.
Why gold is golden during periods of uncertainty
While this paper establishes that precious metals have been a good place to park your money during turbulent times, it doesn’t address why this should be the case. Why aren’t – say – oil or wheat safe haven assets?
The main reason for this is that physical gold has been used as a currency for thousands of years – whereas paper, or “fiat money,” is a historically recent experiment. In 1971, the U.S. abandoned the gold standard – the last country to do so. Since then, all global currencies are backed by nothing more than faith in the government that prints the money.
Thus, when there’s heightened uncertainty about global economic policy, and faith in government falls, gold as the unofficial world currency rises. Contrary to paper currencies, gold is a tangible asset which cannot be printed or destroyed. To use yet another saying that is (true) conventional wisdom, gold is a “currency of last resort.”
Should I invest in gold now?
As we wrote about recently, fear among investors has recently hit all-time lows. This is in sharp contrast to rising uncertainty related to economic policy in the world. Now is a good time to purchase some gold insurance for your portfolio.
This latest piece of research confirms what wise investors have known for hundreds of years: In times of trouble, precious metals are safe havens.
(In the latest issue of the Asia Alpha Advisory – which was released yesterday – I delve into gold… and talk about two ways to invest in gold. One of them even allows investors to buy gold at a discount to its market price. If you’re not a subscriber, click here to learn more.)
“May you live in interesting times” is an old Chinese proverb. While it may sound like a blessing, the saying is actually a subtle curse, something you might wish upon an adversary. The implication is that “interesting times” are chaotic and painful.
2017 is shaping up to be very interesting. Since the victory of Donald Trump in the U.S. presidential elections in November, global stock markets have surged higher, with the S&P 500 up about 8 percent since the U.S. election and 2.6 percent year-to-date. Meanwhile, the MSCI Asia ex-Japan index, after dropping in the wake of Trump’s victory, has reversed course and is up 6.7 percent in 2017 so far.
However, as I’ve written before, I think that the so-called Trump rally is due to reverse soon, as mean reversion comes into play. And with high levels of uncertainty in markets, now is also a good time to buy one of the assets that performs best during times of uncertainty – gold.
As the graph below shows, gold prices are up nearly 6 percent so far in 2017. Precious metals had a bout of weakness after Trump’s surprise victory. Global investors bought U.S financial and manufacturing stocks and sold “defensive” assets like gold.
From the election to mid-December, gold dropped about 13 percent. However, since then, it’s rallied to about US$1220, a gain of 9 percent. Gold remains nearly 8 percent below its highs from June of last year – a level it’s likely to revisit before long. It’s not going to happen immediately, but I don’t think it’s a stretch for gold’s 2011 highs – of US$1,837/oz, or about 50 percent above current levels – to be in sight.
Three reasons why 2017 could be a big year for gold
The U.S. dollar is likely to weaken
Trump recently said the U.S. dollar is “too strong.” He has accused China of manipulating the yuan lower relative to the dollar to benefit China’s exports. The dollar is up 2 percent since the election, but for Trump to bring manufacturing jobs back to America, he will need it to weaken. As gold and the dollar usually trade in opposite directions, a softening dollar will be positive for gold.
The “Trump Rally” will eventually succumb to mean reversion
As I mentioned, global stocks have been strong since the election. Investors have been anticipating Trump’s anti-regulation, pro-growth plans will stimulate global corporate profits. But these policies face political obstacles and will take time – if they are ever enacted. It’s only a matter of time until the current “risk-on” environment turns to “risk-off.” Gold—the fear asset – will benefit.
Odds of a “Black Swan” event that will ignite gold prices are increasing
Black swan events are unexpected events that have outsized and serious ramifications – such as the global economic crisis of 2008, for example. The unpredictability of some of President Trump’s early actions in office, and the poorly thought-out implementation of some of the new government’s policies, suggest that a black swan (which by definition is almost impossible to predict) may emerge from the depths. (Last week we talked about another possible black swan, here.)
I believe it’s crucial as an analyst and investor to be objective. Letting your political views cloud investment decisions is a good way to go broke. It makes a lot more sense to position your portfolio to profit from what may happen (see here for one idea that’s working out) – and protect it at the same time.
Fresh demand from Islamic Investors is hitting the gold market
As we discussed here and here, Islamic investors in modern times have shied away from gold-related financial products. This is because the legality of gold investments has long been unclear under Islamic Finance law.
However, as anticipated, a Sharia Gold Standard was approved on December 5. The Accounting and Auditing Organization for Islamic Financial Institutions and the World Gold Council teamed up to clarify the rules for Islamic gold investing under Sharia Law.
The Standard allows gold-based Sharia-compliant products, like ETFs, to be offered throughout the Muslim world. Indications are that the SPDR Gold Trust – the largest gold ETF in the world – qualifies under the guidelines.
The Sharia Gold Standard will stimulate gold demand across Muslim markets like Malaysia, the UAE and Saudi Arabia, where Islamic Finance is well established. Indonesia and Pakistan are pushing for Islamic Finance to play a greater role in their economic infrastructure.
Islamic savers and investors currently hold almost US$2 trillion in assets, an amount that is expected to grow to US$6.5 trillion by 2020, according to the Islamic Finance Stability Board.
President Trump’s ban of immigrants from seven predominantly Muslim countries, and the ensuing backlash, underscores the uncertainty many Muslims face around the globe. The world’s 1.6 billion Muslims may increasingly be able to invest in gold as a hedge.
Just a 1 percent allocation to gold among Islamic investors would equate to nearly US$65 billion, or 1,700 tonnes, in new demand. That’s almost double China’s estimated total 2015 demand for gold.
So as the Trump rally loses steam, and investors get a reality check from political and geopolitical risks, expect risk-on to become risk-off. Meanwhile, the chances of a black swan of some sort are rising. Finally, a major new source of gold demand is arriving via Islamic Finance.
One easy way to own gold is through the SPDR Gold Shares Trust ETF (code O87 in Singapore; ticker GLD on the New York Stock Exchange) or the Value Gold ETF on the Hong Kong exchange (code: 3081).
Black swans – events that are unpredictable and which have an outsized impact – are by definition unpredictable. But that doesn’t mean you shouldn’t still take steps to protect your portfolio against them.
Black swans aren’t usually mentioned in the same breath U.S. Treasuries, which are one of the basic building blocks of modern finance. U.S. government debt is viewed as the one truly “risk-free” asset (although it actually isn’t, as we wrote here). The cost of capital for almost every asset in global markets is linked to U.S. Treasuries – making them the oxygen of the global economy.
U.S. President Donald Trump, though, suggested on the campaign trail the idea of reducing government debt by getting creditors to accept less. It’s unlikely that President Trump will go down this path, which would unleash a black swan to end all black swans.
(To read our free special report on how to protect your portfolio under a Trump presidency, click here.)
Applying Trump’s business approach to government debt
Donald Trump, the businessman, declared bankruptcy four times. In American business, declaring bankruptcy – which often leads to paying creditors only a fraction of what is owed – is widely viewed as just another tool in capitalism’s toolbox. Trump appeared to look at debt repayment as optional, and subject to negotiation. And unfortunate creditors paid the price.
So it’s not surprising that Trump sent jitters through the financial world when he told CNBC during his campaign in on May 5, 2016:
“I would borrow, knowing that if the economy crashed, you could make a deal.” He added, “And if the economy was good, it was good. So, therefore, you can’t lose.”
As Bloomberg explained, Trump was suggesting that “he might use his business skills to reduce America’s debt burden by pushing creditors to accept write-downs on their government holdings.”
U.S. debt default would be unprecedented
Countries have been insolvent around 800 times over the centuries. Argentina, Puerto Rico and Greece are some of the many countries currently operating under debt repayment plans that were installed after they were unable to make good on what they owed. The International Monetary Fund (IMF) recommends that if a country can’t pay what it owes, that it pay back less.
But the world’s economy didn’t depend on those countries’ debt repayments like it does on U.S. debt today. As the New York Times explained, “Such remarks by a major presidential candidate have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money.”
The prevailing opinion is that since the U.S. government can print more money or raise taxes when needed, the chances of the American government defaulting on its loans is almost nil.
Trump later “clarified” his statement with a suggestion that was no more palatable. When asked if he was talking about renegotiating issued sovereign debt, he said,
“No, I don’t want to renegotiate the bonds, but I think you can do discounting. I think depending on where interest rates are, I think you can buy back… at discounts, you can do things at discounts. I’m not even suggesting that we don’t borrow money at very low rates long term so we don’t have to worry about when they come due.“
Where investors can find solace
Although the U.S. making good on its debt is viewed as sacrosanct, there have been some close calls. In August 2011, partisan infighting in Congress nearly resulted in a default on government debt. During the episode, one-month Treasury bill yields climbed to a 29-month high. Thus, as U.S. government debt was viewed as riskier, investors demanded a higher yield to hold it – and prices of bonds fell. (For bonds, the yield increases when the price falls, and vice-versa.)
In times of uncertainty, investors and traders have historically sold their higher-risk assets, and “fled to safety.” Usually, this means U.S. Treasuries, as the only “risk-free” asset. But when Treasuries themselves are the subject of uncertainty, there’s another asset that has traditionally been a safe haven: Gold.
In the summer of 2011, as the political dispute that led to the standoff over government debt simmered, the price of gold soared 25 percent from early July through mid-August. In the following month, the price of gold hit its highest level since 1980.
It wasn’t a coincidence that the price of gold spiked as uncertainty over the notion of risk-free became a topic of debate. As we’ve written before, there are plenty of reasons to own gold… and Donald Trump just happens to be another catalyst to support the argument. With President Trump, there is a greater-than-zero chance that U.S. debt is viewed as subject to a deal. If this were to happen, the price of gold would move up fast.
Investors looking to gain exposure to the precious metal can easily do so with the “equity-like” SPDR Gold Trust ETF (ticker: GLD on the New York Stock Exchange; code: O87 on the Singapore stock exchange; and 2840 on the Hong Kong Stock Exchange).
For other ways to invest in gold, click here to download our free special report.
If just 2 percent of current Islamic finance assets are allocated to gold, a huge new source of demand – roughly equal to China’s total purchases in 2015 – will soon enter the market. And this could push gold prices higher… a lot higher.
As we’ve discussed previously, Islamic investors have shied away from gold-related financial products. This is because religious laws have been offering conflicting advice about gold investments. As a result, Islamic financial institutions – which hold over US$2 trillion in assets – don’t have a lot of money invested in precious metals.
However, a “Sharia Gold Standard” – which will clarify and streamline Islamic gold-investing rules – is on track to be implemented by the end of the year. This means that the approximately 100 million active Muslim investors will soon have gold as an investment option.
Once the Sharia Gold Standard is adopted, it’s very likely asset managers in key Islamic finance countries like Bahrain, Qatar, Indonesia, Saudi Arabia and Malaysia will start aggressively offering gold investment products like ETFs – which are already wildly popular in the rest of the world.
If only a small percentage of the US$2 trillion in Islamic finance assets move into gold products in 2017, the gold market – currently undergoing a pullback in its ongoing bull market – will have a huge new source of demand.
An October 10 press release by the developers of the gold standard – the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the London-based World Gold Council (WGC) – announced the release of the standard’s “exposure draft.” After accepting public feedback and suggestions, the organisations will meet in mid-November to finalise the gold standard draft, and set the implementation schedule, expected to be around year-end.
Muslim gold buyers have the potential to be a force in the global gold market
For comparison, in 2015 China was a huge gold buyer. The Chinese government is secretive about exact numbers, but gold imports verified to pass through Hong Kong last year into mainland China amounted to nearly 1000 tonnes.
At current prices, if Islamic financial institutions allocate to gold just 2 percent of the assets they manage, it would equal roughly 1000 tonnes of extra demand. So that would be equivalent to another China – for starters. This new demand could help push gold prices higher in 2017.
And while this initial allocation may be a one-off event, Islamic finance is growing rapidly. It will be an ongoing source of gold demand into the future. Standard and Poor’s projects the industry could reach US$5 trillion by 2020. Some industry forecasts say that the number will be as much as US$6.5 trillion in four years.
Yet despite this rapid expansion, Islamic banking only accounts for a small fraction of the world’s investment assets – even though Muslims account for nearly 1/3 of the world’s population.
A big problem has been the lack of standardisation in the products available due to different interpretations of what’s acceptable under Sharia law. The new Sharia gold standard, along with other investment standards in the works, should help.
Under Sharia law, gold is generally considered a “Ribawi item,” meaning Muslims can’t trade it for future value, or for speculation. They can, however, use gold as a currency and own it as jewelry. Whether Muslims can trade gold as a commodity has been an ongoing source of debate among Islamic scholars. The new standard seeks to solidify agreement among scholars.
As Yusuf DeLorenzo, an AAOIFI member, told me in July, “The hesitation about investing in gold when credible Sharia standards are unavailable is nearly universal in the Islamic world. On the reverse side of the equation, however, gold has historically been the choice of individual Muslims desirous of preserving wealth and value.”
Given its long history as a currency and storehouse of wealth among Muslims, expectations are high that the Islamic finance industry, and Muslim investors, will quickly embrace gold investments. This would include gold savings plans, gold certificates, physically-backed gold ETFs, certain gold futures and gold mining equities.
Gold’s pullback to its 200-day moving average offers a good entry point
The added demand expected from Islamic investors comes as gold has pulled back from a big 2016 rally. It was consolidating around its 200-day moving average – a popular measure of a market’s long-term trend – last month. But it has since climbed above the 200-day moving average and is now up 23 percent for the year.
The catalysts for gold to climb higher are still there. Central banks’ zero interest rate policies and bouts of global currency instability are driving investors to gold’s stable embrace. Also, global political uncertainty – like the Brexit vote and the crazy U.S. election – has added to gold’s allure.
All indications point to gold’s 5 percent correction since mid-summer as a pullback in an ongoing, and historic, bull market.
The fundamental reasons for gold’s long-term bull market remain in place. And 100 million Islamic gold investors are waiting in the wings to start buying. So, investors should buy gold at these lower prices while they still have the chance.
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