An independent professional's take on the latest news and trends in global financial markets

Archive for the ‘Gold’ Category

New Year hopes

My suspicions back in the autumn that a market rally was on the way have, I am happy to say, been borne our by events. Not for the first time, the peak of rhetorical despair – this time about the dire outlook for the world economy should the Eurozone crisis not be resolved – has turned out to be the moment to turn bullish. The rally since the failure of the Cannes summit has been impressive.

The MSCI world index is up by more than 20 per cent since its October low and has risen for seven straight weeks in a row, something that has not happened since the spring of 2009, according to the equity strategists at Societe Generale. Equity markets have made an even stronger start in 2012, with January producing one of its best monthly returns for many years. Contrarian sentiment indicators, such as the venerable Investors Intelligence survey of investment advisors in the United States, once again proved invaluable in identifying a turning point back in the autumn.

Read the rest of this entry »

The best shorting opportunity for 20 years

According to Doug Casey, the well known American investor and commodities analyst, interviewed by the Sunday Times in London, the bonds issued by developed market governments are “the best short sale since Japan twenty years ago”.  US Treasuries, he says,  are “a triple threat to your wealth. Interest rates are going to go up, the currency is going down and there is the default risk”.

He has been buying more hard assets and topping up his holdings in gold and silver, “mainly as a store value”. He doesn’t believe the Federal Reserve when it says it will not restart quantitative easing.

Most US government debt is short term – either of one or two years duration – and is paying less than 1%. Its deficits, on the other hand, are more than a trillion dollars a year for as far as the eye can see. Who’s going to be stupid enough to lend money to a bankrupt entity at less than 1% a year? Only the Federal Reserve is going to buy the debt, hence more QE”.

Asked about the best value commodities, he says only two are currently cheap – natural gas and cattle. He owns cattle directly these days, on his farm in Argentina, though he used to own an ETF, and natural gas exposure through exploration companies in North America.

Written by Jonathan Davis

June 12, 2011 at 8:36 AM

Woodford and McLean Q and A

Colin McLean founded his fund management business, SVM Asset Management, 20 years ago in Edinburgh. He is one of the professional investors who was featured in my book Money Makers. An experienced stockpicker, he summarises his market views and how he is positioning his portfolios in the latest Independent Investor Q and A, which has been posted to the Independent Investor website today.

Here is a short extract:

How generally do you see the equity markets at the moment?

The global economy will slow next year, but still deliver robust growth.  Many companies have yet to get back to peak margins, but are cutting costs sufficiently to do so.  Quantitative easing will drive the US Dollar lower, and continue to boost most asset classes; emerging markets in particular. Equities are not over-valued, and more M&A activity is possible given the low returns on cash held in corporate balance sheets.  I see an analogy with the period post the initial recovery in 2003, when it was followed by a good further three years for equity markets and a lot of UK M&A in 2004 and 2005.  I am not sure if the rally will last three years, but I do think we are still in the recovery stage for many businesses.

This is a link to the whole interview. All Independent Investor Q and As are currently free to view. As expected gold has corrected this week after its recent strong run and the dollar has also paused from its previous oversold condition. However the long term prognosis – bullish for the former, bearish for the latter – remains unchanged. The case for owning large cap equities with strong cash flow and balance sheets is however clearly now becoming more widely held than it was earlier this year. Read the rest of this entry »

Written by Jonathan Davis

October 22, 2010 at 2:17 PM

Unusual correlations

I am grateful to Dhaval Joshi of RAB Capital for the observation that something unusual happened in the month of September – bonds, equities and gold all went up together. This is not something that is meant to happen, and rarely does. In fact, according to RAB Capital, the last time this happened was in the early 1980s.

He comments:

Such a conjunction of asset returns is a rare event in the financial markets. In the 123 calendar quarters since 1980, there have been just 4 other quarters, each in the 1980s, when all three asset classes have gone up by 4% or more. The rarity of this event is because there are virtually no economic or financial scenarios that favour equities, government bonds and gold at the same time – at least under normal circumstances.

The obvious reason for this anomalous turn of events lies in the prospect of further quantitative easing by central banks in the US and UK, allied to monetary stimulus elsewhere – which together are creating massive distortions in asset prices. These are not normal markets and as always when asset prices move in mysterious ways, plausible rationalisations are always at hand. The trick is not to be conned into believing that a distorted market can endure indefinitely.

On the previous occasions that equities, bonds and gold moved up together, at least one of the assets ultimately proved to be mispriced. At the end of 1980, bond prices declined by 20%, while gold plummeted by 40%. In 1983, bond prices fell 10%. And in the middle of 1986, bond prices again dropped by almost 10%. This time too, the assumptions underlying the simultaneous rallies may eventually turn out to be inconsistent with each other.

Note that for equities, both deflation and rising inflation are ultimately enemies. Deflation is a threat to the nominal value of profits, while rising inflation normally means a declining profit share of income. Hence, a portfolio of long dated deep out-of-the money put options on equities, bonds and gold could produce handsome returns. One, or even two, of the options could expire worthless. But for the asset that breaks down, the value of its put option could multiply several times over.

Well, the idea is smart enough. To judge the value of the put option strategy depends on how the relevant options are priced. It is simpler to take a view about which asset class is wrongly priced. Short term, both gold and equities look overbought, so corrections are likely after their strong recent momentum moves. Bonds are the obvious midterm casualty, as they were on the previous occasions.

Written by Jonathan Davis

October 13, 2010 at 1:14 AM

Unarguable Sense From Philip Gibbs

Some bullet points and a telling slide from a recent presentation by Philip Gibbs, the  fund manager and financials expert at Jupiter Asset Management. Not much need to comment, as it is hard to argue with anything in it (although the recent performance of Philip’s funds has been somewhat disappointing by his own exalted standards).

Medium term investment outlook:

  • Emerging market assets and currencies are by far favoured over the developed world.
  • On a view of a few years it seems highly probable that a crisis will ensue as a result of developed world indebtedness.  Governments may have to print so much money that they will unleash inflation.  US and Japanese government bonds will probably perform terribly.
  • Western equities relying on Western consumers will face many problems as a result of this situation.
  • The Swiss Franc and gold will probably perform exceptionally well.  The dollar and the yen and sterling and the Euro look to have a dismal outlook.

Read the rest of this entry »

Written by Jonathan Davis

September 27, 2010 at 9:27 AM

Quick Thought on Gold

The news this week is  that gold has once again made a new high. It has broken the $1250 an ounce mark for the first time. While I do not count myself as a gold bug, the arguments for owning gold as a store of value and insurance against monetary instability continue to be compelling. I have a significant exposure to physical gold ETFs in my portfolio, having bought in when the price was between $700 and $800, and no intention of selling at these prices.

It may be worth taking a look at the longer term price chart of gold for understanding where we are in the gold cycle. The upturn in gold’s fortunes begain in 2001, not coincidentally around the time that Alan Greenspan, in an attempt to offset the consequences of the Internet bubble and (later) the 9/11 atrocities,  embarked on his disastrous cheap money policy, the consequences of which we are still having to deal with today.

Gold price - standard graph

Read the rest of this entry »

Written by Jonathan Davis

September 15, 2010 at 9:39 PM

Posted in Gold, Uncategorized

A Struggle For Hedge Funds

This item from the Financial Times caught my eye today:

Paulson & Co, the world’s third-largest hedge fund manager, has seen another painful month thanks to growing fears over the health of the US economy. The firm’s $9bn Advantage Plus fund, which aims to profit from trading corporate events, lost 4.26 per cent in August, according to an investor, wiping out gains made in July. The fund, Paulson & Co’s largest, is down 11 per cent so far this year.

Paulson & Co is far from alone in having had a difficult year. Very few hedge fund managers have reported strong performance in the past eight months.  The average hedge fund manager made just 0.17 per cent in August, according to Hedge Fund Research, and has returned just 1.29 per cent so far this year. Pressure is now on for many managers to deliver stronger returns in the next four months.

My long-held sceptical views about hedge funds as a group have not, shall we say, been tested by this latest news. The very best hedge fund managers are terrific, but they are a small minority, so you have to pick them with care (if that is, they allow you to invest with them in the first place). There is sufficient academic evidence to show beyond reasonable doubt that many hedge funds are charging very high fees for performance that they don’t really earn, while the risk-reward structure is heavily weighted in favour of the manager at the expense of the client.

Read the rest of this entry »

Written by Jonathan Davis

September 9, 2010 at 9:10 PM

The Bubble in Gold Still Lies Ahead

There are many reasons why sensible columnists prefer to steer clear of writing about gold. One is that you get the weirdest responses. Twenty years ago they would arrive in funny shaped envelopes, often in green ink, often from individuals with extraordinarily peculiar views about the world. These days the risk is that anything you say will be instantly picked up, recycled and commented on in a thousand online blogs. Not all of that community, shall we say, are interested in constructive dialogue. Gold retains its capacity to excite the most extreme polarised views.

A second reason for thinking better of writing about gold is what one might call the Warren Buffett problem. When asked for his views about gold, he typically replies with the same answer, along the lines that gold has never been a good store of value and is unlikely ever to interest him as a home for his money. Gold, he says, ” gets dug out of the ground in Africa or some place. Then we melt it down, dig another hole, transport it halfway round the world, then bury it again and pay people to stand around guarding it”. It has, he argues, “no utility”. There will always be other things that he would rather own.

Although doing back-flips when circumstances change is one of Buffett’s greatest strengths, he appears to have been true to his word in never having made a significant investment in gold or gold shares. In the late 1990s, he did briefly place a large bet on the price of silver, based on a personal analysis of the supply and demand equation for the metal which turned out to be quite flawed. He has been known also to recycle Mark Twain’s famous description of a gold mine as a “hole in the ground with a liar at the top”.

If the world’s greatest investor doesn’t think gold deserves consideration, has he got a point? A serious criticism of gold is that it may not in the strictest sense be an investment, in the Ben Graham sense of generating returns that can be analysed and valued. It can be lent out, for sure, albeit for meagre returns, but that has to be set against storage and insurance costs. While physical supply and demand clearly play a part in determining the price of gold, its performance is increasingly influenced by fluctuations in demand from investors (which a Grahamite purist might label as speculative interest).

The arrival of liquid, freely tradeable exchange traded funds in precious metals, some but not all of which are backed by physical collateral, is further encouraging this trend. With the sharp run up in the dollar price of gold this year, coupled with a notable recovery in equity markets, new gold funds are emerging by the week. John Paulson, the hedge fund manager who did so well out of the credit crunch, is the latest to launch a gold fund. Such high profile launches can only heighten interest in gold and more highly geared gold shares, and might in normal times be seen as early evidence that gold is entering a speculative bubble and must therefore be heading for a nasty fall.

However these are far from normal times. While the seeds of a future bubble in gold are being sown, and the gold price will remain volatile, if only to relieve momentum-chasers of some of their money, on most measures we are a long way away from any kind of climax. Despite growing media attention, gold remains surprisingly underowned by private investors. More people talk about it than actually own it in volume. Every trend-following speculator who is buying gold today for bandwagon reasons is, I suspect, comfortably matched by seasoned wealthy and professional investors accumulating gold for traditional defensive reasons, not to mention central banks desperate to reduce their dollar dependency.

Whether or not you care to define it as an investment, gold offers protection against the devaluation of the dollar and the eventual re-emergence of inflation that Buffett himself has identified as the inevitable consequences of the financial crisis and governments’ response to it. While he may be right that buying the Burlington Northern railroad is a better way to profit from eventual recovery in the global economy, the rest of us mere mortals will not be easily convinced to dump our gold and other commodities for some while yet.

Putting your head above the parapet and admitting to owning the barbarous relic and inviting all the unwanted attention that comes with such a public confession of unorthodoxy is one of the costs of ownership. The point about gold is not to own it for some ineffable or intrinsic reason, as gold bugs do, but because today’s unprecedented economic conditions make it a sound and defensible two way bet on the future. If gold’s time is ever going to come, we are living through just such a time now. The real gold bubble still lies ahead.

Written by Jonathan Davis

November 22, 2009 at 10:35 PM

Posted in FT Columns, Gold