Tag: bitcoin

WHEN GOLD BEGINS TO SHINE

Posted on by Nicholas Peart

So much has been written about gold. Over the last decade it has been a frustrating asset to own. My own view on gold is that it is currently an unfashionable and misunderstood commodity. I also find that a lot of what is written about gold to be cliched and the truth is more nuanced.

Many say that gold is a hedge against inflation, but this is far too simplistic. It is also not enough to say that gold is a hedge against the US dollar. Although, generally speaking I find the latter point to have more truth in it than the former.

I also find it interesting when people compare gold with prominent cryptocurrencies like Bitcoin; the main argument being that Bitcoin has the same scarcity properties as gold. In the case of Bitcoin, it has a supply cap of 21 million coins – thus it can act as a store of value; a kind of ‘digital gold’.

I think this digital gold comparison is flawed. Although gold can be volatile, it has nowhere near the same levels of volatility as Bitcoin. During the last decade Bitcoin as an asset has performed extremely well. If you had purchased some Bitcoin in 2012, today you would still be sitting on an eye watering return. The period from around 2009 to 2021 has seen assets, notably many technology and growth stocks, increase exponentially in value. It is also no coincidence that during this same period interest rates have been at mostly rock bottom levels. This period of loose monetary policy and cheap and easy money has resulted in a dazzling stock market boom in the USA. If you look at the chart of the NASDAQ index, which is full of tech and growth stocks, you will see that in 2009 it was trading at less than 1500 points. Towards the end of 2021 it had reached an all time high in excess of 16000 points. That is some unbelievable asset inflation in a period of just over a decade.

Although many staunch Bitcoin supporters will deny this, it also seems to do very well when interest rates are low and money is cheap and abundant. Rather than being a safe haven against financial meltdowns, it behaves like a speculative technology stock that goes to the moon with interest rates at 0%. A vast proportion of Bitcoin supporters are young people whose only real experience of the financial markets is the landscape over the last 12-13 years since the Financial Crisis. They have never experienced high interest rates or any long lasting bear market. I think this point is very significant; many Bitcoin holders have never experienced a prolonged bear market and high interest rates. They have never been in the eye of a catastrophic financial meltdown.

Although the returns of gold and other precious metals like silver have been poor compared to Bitcoin and many high profile growth stocks over the last decade, it should also come as no surprise. When markets are performing well and there is abundant liquidity in the financial system, gold is not one of the primary assets that tops investors lists of assets to invest in. It is more enticing to invest in speculative high risk assets that are going gangbusters. When Bitcoin and some flavour of the month tech stocks are on a tear in this loose financial environment, positive feedback loops are created as more and more investors pile in. Investors see the returns being made on these assets or they see some of their friends making a fortune and they want in too – thus the FOMO (Fear Of Missing Out) bug enfolds them.

So when does gold shine? Gold will begin to shine when feelings of total despair and hopelessness are at it’s zenith. Since the beginning of this year, the more speculative areas of the market that have been performing very well for many years until 2021 have now been experiencing dramatic falls in their market values. Inflation has roared towards double digits in the US, the UK and the Eurozone and central banks have had to increase interest rates. Yet, interest rates are still nowhere near current inflation rates. If central banks were to dramatically hike interest rates to match inflation rates I believe this would cause a financial meltdown like no other – it would far eclipse the carnage of the Great Financial Crisis of 2008-9. Although markets have fallen, they are far from this stage. There is still lots of speculation going on and inexperienced investors still playing foolish games. Inflation may have reached 40 year highs, but because interest rates are still low lots of speculation continues. The price of gold has actually been drifting downwards over the last few months and this has resulted in some commentators stating that it is a poor hedge against inflation. Yet, these commentators are missing the point. Although inflation is at high levels, there is still a lot of liquidity in the markets. There is no real urgent reason to hold gold. However, there may just come a time when interest rates increase to unforeseen levels and liquidity begins to totally dry up as money becomes more expensive. Investors panic and thus begins an amplification of negative feedback loops and FUD (Fear, Uncertainty and Doubt) kicks in. It is the moment when investors swear that they will never invest in the stock market again and that they will never ever again touch cryptocurrencies that I believe gold and by extension other precious metals like silver and platinum etc will begin to perform very well.

By Nicholas Peart

24th September 2022

(c)All Rights Reserved

Insurance Assets In A World Of Rising Uncertainty

Posted on by Nicholas Peart

bitcoin-and-gold

‘Todo es posible nada es seguro’. These words came from the lips of a fellow local passenger during a hair raising bus trip through the narrow winding mountain roads of the Andes in Peru many years ago. Yet they could be applied today to the current state of the whole world.  When I try, as hard as I can, to envisage the global landscape over the next 10-20 years, I realise there may be a stronger case than ever before for holding insurance assets or Off-The-Grid Assets (OTGAs)©. These are defined as assets that not only act as a safe haven or store of value during a major economic crisis, but are not directly connected to the global financial system. Central banks cannot control their supply or price nor can they create more of them.

There are two principle categories of OTGAs. The first and most obvious category are precious metals. Gold, silver, platinum and palladium would all fit the bill. They are as old as the hills and are finite in quantity. Even though there exists quantities of these metals yet to be mined, their quantity cannot be enlarged as easily or cheaply as that of fiat money.

The second category of OTGAs are premium grade supply-capped cryptocurrencies (PGSCCs)©. This category is limited only to a handful of cryptocurrencies which are both of premium grade and a store of value. By ‘premium grade’ I take into account factors like trust, reputation and adoption. And by ‘store of value’ I mean that a cryptocurrency has a finite and capped supply. Bitcoin is, by far, the principle cryptocurrency and it should represent at least 50% of a cryptocurrency portfolio. It is the oldest cryptocurrency, has a supply cap of just 21 million coins, and its current value represents at least 50% of the entire global cryptocurrency market. Only two other cryptocurrencies make the cut as a PGSCC. They are Litecoin and Z-Cash. Litecoin is one of the oldest cryptocurrencies and has a supply cap of 81 million coins. Z-Cash is a more recent cryptocurrency established in 2016. It is very similar to Bitcoin with the same supply cap yet unlike Bitcoin it has the additional option of being a privacy coin. Monero is a pure privacy coin yet Z-Cash has a better reputation. The second largest cryptocurrency, Ethereum, is not a PGSCC since it does not have a supply cap.

Although there are a lot of unsavoury people and entities operating in the crypto space, one of the few important crypto related organisations is the Gemini exchange founded by the Winklevoss brothers who both have an enormous personal stake in Bitcoin. This is arguably one of the most, if not the most, trusted and safest cryptocurrency exchange currently in existence. Gemini also offers the option of insuring any cryptocurrency holdings on their exchange. Unlike other cryptocurrency exchanges, only a very selective number of cryptocurrencies can be traded on their exchange but these include all three PGSCCs; Bitcoin, Litecoin and Z-Cash.

Precious metals in bullion form can be stored and insured securely in the vaults of reputable dealers such as Sharps Pixley. This works very well if you have large quantities of gold which is currently trading at over $1400 per troy ounce. However for cheaper precious metals like silver, storage and insurance becomes more costly. Precious metals only count as OTGAs in physical coin and bullion form. Precious metal ETFs or shares in gold and silver miners are not OTGAs. In the case of PGSCCs, they become true OTGAs when they are kept in cold storage on a hard drive in a secure location and not all on a cryptocurrency exchange where they are then vulnerable to hacking attacks.

Land and edible commodities like crops are not OTGAs for the following reasons. Land is highly illiquid and carries the added risk of expropriation if a tyrannical government ever came to power in its jurisdiction. Edible crops, on the other hand, are much more liquid yet they are perishable. Even tinned foods with a longer shelf life do eventually perish. Precious metals and PGSCCs are immune from these limitations.

Precious metals and PGSCCs each have their own unique advantages. The most obvious ones for PGSCCs are the negation of physical storage costs and cross-border transportation hurdles, and of course their finite supply caps. Since PGSCCs are digital assets, unlike precious metals, one doesn’t have to worry about physical storage or transporting them between borders. They can be stored in digital wallets either on a cryptocurrency exchange platform or in cold storage on a hard drive. Even though precious metals are rare, their supply is not fixed and who knows how big potential deposits of gold and silver are not just on this planet but on other asteroids and planets throughout the solar system. It is entirely possible that at some point in the future asteroid mining could dramatically increase the current supply of these metals. Yet whether this occurs in my life time is debatable.

The advantages precious metals have over PGSCCs are their tangibility and lack of need to be powered by electricity and by extension the internet. What’s more, precious metals have been around for thousands of years whereas Bitcoin has only been around for ten years and it still remains to be seen whether Bitcoin will endure as a store of value in spite of its unique advantages and current position as the dominant and leading cryptocurrency.

Yet we are currently living in a world of ballooning public and private debt and high equity valuations fuelled by low interest rates and quantitative easing. At the same time levels of inequality have risen along with a palpable sense of discontent across the world bringing with it an emergence of populism and radical parties and politicians. The final paragraph from a recent short article entitled How I Learned To Love Gold by Alasdair McKinnon, who manages an investment trust in the UK called The Scottish Investment Trust, is very succinct and prescient in describing this current environment and its future consequences…

Today, we are more than 10 years into a monetary experiment that ‘saved the system’ but is losing popular consent. Cheap money has driven asset prices but has increased wealth inequality, especially between generations. Demographics dictate that, in the not too distant future, those without assets are likely to be running the institutions and making the rules. In the interim, a new breed of politician is prepared to rip-up the economic rule book in their quest for power. This shift won’t necessarily prove a bad thing but, regardless, it seems a favourable environment for gold.

Such a situation is likely to manifest in the future and would create a very favourable environment not just for gold but for all types of OTGAs as more people lose trust in owning devalued fiat currencies and worthless government bonds.

 

By Nicholas Peart

(c)All Rights Reserved 

 

 

 

Reading/Sources

How I Learned To Love Gold

 

 

Image: http://www.birchgold.com

Why Silver Is Currently Fundamentally Undervalued

Posted on by Nicholas Peart

Silver-Bars

Silver is currently an interesting commodity and precious metal to be watching. During the last spike in the price of gold over the previous two weeks, the silver price barely moved. In fact, the silver price has been depressed for some time now.

Below I am featuring three charts. The first chart shows the silver price per ounce in dollars over the last 50 years, the second chart shows the gold price per ounce in dollars also over the last 50 years, whilst the last chart shows the silver to gold ratio over that same time frame. The last chart is more interesting to me, as the current silver to gold ratio stands at 92. In other words, one unit of gold is currently equal to 92 units of silver. During the last 50 years this ratio has traded at a range between 100 and less than 20.

 

The silver price per ounce over the last 50 years (as of 9th July 2019)

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The gold price per ounce over the last 50 years (as of 9th July 2019)

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Silver to gold ratio chart over the last 50 years (as of 9th July 2019)

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Silver has been derided many times as a ‘poor man’s gold’. It is a misunderstood commodity and is currently not very fashionable. In fact, precious metals generally are not really in vogue, especially amongst a lot of younger people who have more of an interest in cryptocurrencies. I am also interested in cryptocurrencies, but they are very hot right now, whereas precious metals are generally not. The recent price rise in gold was very modest when one compares the price rise of Bitcoin over the last few months, which propel some to deem Bitcoin and other cryptocurrencies as the new store of value assets and gold and silver as store of value assets of the past. Bitcoin has many times been hailed as the new gold or ‘digital gold’; a supply-capped gold powered by electricity. On the other hand, one could also argue that gold is Bitcoin without electricity or the internet.

But all the noise aside, lets get back to the fundamentals. There is an insightful article on the Royal Mint website regarding the scarcity of precious metals on this planet. The article entitled, How Rare Are Precious Metals?, discusses the ‘mass fraction’ of precious metals or how many kilograms of precious metals exist in the Earth’s crust per billion kilograms of crust material. According to the statistics in the article, gold represents 4kg per billion kg of crust material and silver 75kg per billion kg of crust material. This means that gold is around 18-19 times scarcer than silver. Yet today it is priced 92 times higher. One reason for the depressed price of silver could be that in many countries the purchasing of silver coins or bullion from a registered dealer such as Sharps Pixley incurs additional VAT costs. This also explains why the price of silver coins and bars in those countries are higher than the spot price of the metal. However in some cases silver is exempt from VAT charges if it is kept in a vault provide by the dealer. Gold, on the other hand, is exempt from VAT either way, which explains why the price of gold coins and bars is closer to the spot price.

Both gold and silver are insurance assets in an unstable, unpredictable and financially indebted world. Yet right now it is silver that arguably has greater potential upside. Even though gold is used to a small degree in industry, silver is used on a far greater scale, meaning it is not purely just a store of value. As with crude oil, a severe disruption to its supply would cause the price to spike in a very short space of time.

As silver can be quite impractical and costly to store in great quantities, an alternative way of investing in pure silver is via an Exchange Traded Fund or ETF. It is important though to select an ETF where each unit is directly backed to a physically held unit of silver. The added beauty too of a silver ETF is that you are investing in silver at pretty much the spot price. The ETFS Metal Securities Ltd Physical Silver (PHSP) is a good one with a modest annual charge of 0.49%. Vanguard specialise in ETFs and their silver ETF may have even lower charges. I also highly recommend purchasing silver via Bullion Vault. You can invest in silver very close to the spot price and have it stored in a vault in selected cities around the world. Their monthly storage charges are also very reasonable.  Yet one of the advantages of a pure ETF is that it can be put in an ISA meaning you want have to pay capital gains tax.

Investing in silver mining companies is another way of gaining exposure to the price of silver. Sometimes the gains can be higher than owning physical silver or an ETF. Yet you take on additional risk such as political risk and also company mismanagement. One of the largest publicly traded silver mining companies is the Mexican based company Fresnillo (FRES). There are also a bunch of smaller publicly traded silver mining and exploration companies, but these carry more risk.

There are many places to purchase physical silver coins and bars. I like Sharps Pixley and Bullion By Post. The latter is a little more expensive but has a greater range of silver products. The Royal Mint is the UK’s official precious metals mint but prices are also not cheap. A smaller silver trader I like very much is the Newcastle based Silver Trader run by Martin Whitehouse. He sells silver coins and bars, which other leading dealers don’t stock. Furthermore, he also sells silver coins and bars via Ebay and has lots of positive feedback.

 

By Nicholas Peart

(c)All Rights Reserved

 

 

Sources:

Main image: atlantagoldandcoin.com

Graphs extrapolated from the website Bullion By Post

How Rare Are Precious Metals?

 

 

 

Could Gold And Silver Bullion Be The Best Place To Invest Your Money For The Next Few Years?

Posted on by Nicholas Peart

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This is not going to be an easy article to write. Almost two years ago I wrote a similar article focusing on why investing in gold could be a smart move. This was around the time of Donald Trump’s surprise US presidential victory. Like the result of the UK Referendum to remain or leave the European Union, it was a classic black swan event, which very few foresaw. Around that time the conventional wisdom was that the world was going to go to hell in a handcart and that gold or anything seen with ‘defensive’ qualities was the place to invest your money. Gold in fact did not do much after Trump’s surprise win and actually went down in value. By the end of 2016 gold was just trading at less then $1200 an ounce. As of today gold is trading at $1232 an ounce.

Many analysts and others have been mystified by the lack of movement in the gold price over the last two years when one takes into account much of the geo-political situation and volatility engulfing the world. During that time period the biggest winners have been cryptocurrencies. 2017 was the year when Bitcoin and interest in other cryptocurrencies exploded. I mentioned Bitcoin briefly in my article from two years ago yet my understanding of the currency was limited. From January 2017 until the end of that year, the price of Bitcoin went mad shooting from $1000 a coin to almost $20,000 by December of that year. I remember being in a café in Amsterdam in June 2017 investigating Bitcoin further. Around that time the price was $2500 a coin. It had already more than tripled in value since the time I wrote my last article on gold around the start of November 2016. Even at that time I thought the price was overvalued and I was sceptical, especially since a new kind of herd mentality was manifesting. By that time interest in other cryptocurrencies was also taking hold. Ethereum, for many months just the preserve of hardcore crypto-heads and early adopters, was also exploding in value. It was my sister who first made me aware of Ethereum back in April 2017. Around that time the price was $50 a coin. At the start of the year the price was only $10 so it had an even bigger rise than Bitcoin. Yet two months later at the café in Amsterdam I was flabbergasted to witness the price shoot up even further to almost $400 a coin. Litecoin, the silver to Bitcoin’s gold, only around $4 a coin at the start of 2017, was trading at $30 a coin in June 2017. When the first surge of mainstream interest hit Bitcoin towards the end of 2013, Litecoin was by far the second most popular cryptocurrency. But since that first spike of interest, Litecoin (and Bitcoin) crashed and was in the doldrums for over three years before the next spike in 2017.

Since the start of 2018, the bubble burst for crypto and many cryptocurrencies lost a lot of their value. Interest still remains high and compared to the others, Bitcoin has held its value the best trading around the $6,500 mark over the last couple of months. You may be thinking why am I mentioning cryptocurrencies when the focus of this article is supposed to be on gold and silver? It is because there are some who think that certain cryptocurrencies take away the monopoly that precious metals have traditionally always had as a so-called ‘store of value’. It has been said that all the gold in the world amounts to the capacity of just three Olympic size swimming pools. It is scarce. Yet some argue that Bitcoin (and also Litecoin) is also a store of value since it has a supply cap of just 21 million coins. Two of the biggest investors in Bitcoin, the Winklevoss twins (also known for their association with Facebook), have gone as far as saying that Bitcoin will replace gold as a traditional store of value and that in the future, the scarcity of gold will be eroded by asteroid mining. It is true that Bitcoin has certain advantages gold doesn’t have. If you own lots of physical gold or silver you may have to store it in a vault and there will be storage charges. Moving it around with ease may also prove tricky. There is none of that with Bitcoin since it is digital and can also be used for swift payments. But that can also be its undoing; the fact that it is digital. In some countries such as Bolivia, it is illegal to trade Bitcoin or to use it as a payment method. At the end of the day, global governments can very easily outlaw it. Even if you had lots of Bitcoin in cold storage on an external hardrive in your bedroom it would be useless if that happened. That doesn’t mean to say I am against Bitcoin and crypto. I kind of have a secret admiration for it as, despite its volatility, it has enabled many ordinary citizens in some countries like Venezuela, which has been devastated by hyperinflation, to protect their hard earned savings from being further decimated in value. It isn’t always easy to acquire precious metals or even hard fiat currency for ordinary citizens in those parts of the world, so crypto can fill that gap in its accessibility.

I cannot predict the future of Bitcoin or where it and other cryptocurrencies may be heading. One of my biggest concerns regarding Bitcoin is that it is still far from being widely adopted and the people that own it are only doing so for speculative purposes. What’s more, I can only think of one place where I used Bitcoin and Litecoin to purchase something and that was at a Bitcoin café in Prague last year. Then again, more fool me if cryto goes an another epic bull run reaching dazzling new heights.

The reason why I like gold and silver is because neither are really in vogue at the moment. They are not as sexy or hot as crypto and I like the fact that the prices haven’t moved much and are still depressed compared with the new heights they both reached during the early part of this decade. Yet gold and silver can be frustrating assets to hold. If you go on YouTube there are no shortage of ‘gurus’ forecasting how gold will go to $10,000 an ounce and silver $1,000 an ounce. There is a lot of cynicism regarding gold and silver. Some argue that all those so called experts have been saying that gold will go to the moon for many years and it just hasn’t happened. Gold and silver haven’t moved much since the last spike around 2011-12 and so many gold and silver holders are understandably experiencing a heavy dose of fatigue and impatience.

Gold and silver prices are very difficult to predict and can sometimes move strongly for no rational reason at all. Traditional factors such as inflation, political instability, low interest rates, a weakening US dollar or a global stock market crash are no guarantee that a rise in the price of gold or silver will follow. Yet one thing is as clear as day; global debt levels are at an all time high. Not just in the developed world but also in the developing world especially in China. Most global stock markets have also been on a long bull run since 2009, yet this month we have witnessed the first signs of this bull market being derailed. In the process the price of gold began to rise, albeit very modestly. I would like to think that now the fortunes of gold and silver are finally about to change and I wouldn’t be surprised if at some point over the next few years, gold and silver prices started to go on a dazzling bull run similar to the one in the crypto space last year. If this happens sentiment towards these precious metals will change with a lot of ordinary investors wanting in to avoid FOMO (fear of missing out) syndrome thus enabling the price to rise higher. The beauty of the insane crypto bull run last year was that very few people saw it coming. If you read most of the comments on YouTube videos dated before 2017 relating to Bitcoin, most are negative and completely write off Bitcoin. A lot of that sentiment has changed now.

Generally, I prefer gold and silver bullion to owning shares in gold and silver mining companies. Yet on the other hand, just a modest rise in the price of gold and silver can cause an even bigger rise in the share price of gold and silver mining companies. What’s more, some of these companies also pay a dividend. But then you are also exposed to things like political risk if the mines are located in politically unstable parts of the world. Or company mismanagement etc. Owning gold and silver bullion protects you from these risks.

One site I like as a UK resident is called Bullion Vault. It enables one to invest in gold and silver bullion with no minimum limit. You can invest in just £10 worth of gold (which at current prices means owning less than a gram). And you can also choose the location of your vault in cities like London, Zurich, New York, Singapore etc. There are storage costs yet the storage costs are greater for silver than for gold. You do not own your metal physically in your hands (although there are bars you can purchase), but rest assured that the metal you purchase is yours safely in a vault and you would still own it even in the unlikely event that Bullion Vault itself went bust.

You can of course purchase gold and silver bars and coins, yet its your responsibility where you decide to store them. The Birmingham based BullionByPost is the largest online bullion dealer and a good contact to have.

 

Nicholas Peart

(c)All Rights Reserved

 

Disclaimer: The opinions expressed in the article are mine and shouldn’t be taken as gospel. It is always important to do your own research before making investment decisions. 

 

Image: mining.com

 

 

Just Gimme Some Secrets

Posted on by Nicholas Peart

light-trees-wood

In his book Zero To One, the visionary entrepreneur and investor Peter Thiel asks the following question whenever he interviews someone for a job; ‘What important truth do very few people agree with you on?’

I find this question interesting. On the surface it may seem simple, but it’s a difficult question to answer. Here are some statements I hear a lot;

‘Protect yourself from the sun using sun cream’

‘Brexit will cause long lasting damage to the UK economy’

‘The art world is rigged and corrupt’

‘Bitcoin is a bubble’

‘Donald Trump voters are racist and uneducated’

‘Artificial Intelligence will destroy the whole human race’

‘Sugar is bad for you’

‘Eat at least five portions of fruit and vegetable a day’

‘Astrology is pseudoscience’

Whether or not these statements may be true or false, a lot of people already agree with them. With such common consensus views, it is important to challenge them. Regarding the fourth statement in response to Thiel’s question, one could argue, ‘Most people believe Bitcoin and other cryptocurrencies to be a bubble and it is most certainly demonstrating all the classic attributes of one. Yet the truth is that it is a revolutionary and game-changing technology, which has the power to disrupt the entire global banking sector.’ Now I am not suggesting you got out and buy Bitcoin. Bitcoin could still become obsolete, but nevertheless this view is a contrarian one.

John Lennon once sung, ‘Just gimme some truth’. But sometimes truth alone is not enough. Especially if it is the same truth that almost everybody agrees on. John should have really sung, ‘Just gimme some secrets’. Give me some enlightening golden wisdom that isn’t common knowledge.

Consensus views can change. For a long time most people believed that tobacco was a medicine (and it was advertised as such) beneficial to one’s health. Now its seen as harmful to one’s health. Before the 2017 snap election in the UK, the consensus view on the Labour Party leader Jeremy Corbyn was that he was ‘unelectable’. But when the results of the election were announced, the party did nowhere near as badly as most people had originally forecasted and in fact prevented the Conservative Party from winning with a majority of votes. The consensus view on Corbyn subsequently shifted from someone who was ‘unelectable’ to someone who had a decent chance of becoming the next prime minister should he still be leading the Labour Party when the next elections take place.

Challenging consensus views enables one to stay ahead of the curve. When Google acquired YouTube in 2006 for $1bn many people thought Google overpaid. Likewise, when Facebook acquired Instagram for the same amount of money in 2012, many wondered what Zuckerberg and co had been smoking. With hindsight it is easy to say that they were incredibly shrewd and deft investments. Yet at the time, even though the leaders of both companies had the unique foresight to see the game changing potential in both those companies, most didn’t share their visions and ridiculed them for the amount of money they spent on acquiring them.

Many investors believe that Amazon stock is overvalued. If we were to value the company by its PE (Price to Earnings) ratio alone you could not unreasonably come to the conclusion that it is extremely overvalued. However, if one were to look at Amazon as a unique and powerful monopoly business in the e-commerce space, constantly disrupting traditional industries like no other company one could develop a different point of view and maybe deduce that its trading at a high premium for a reason.

The legendary US investor Warren Buffet’s often quoted mantra is to buy stocks when investors are fearful and panicky and sell when they are greedy and irrationally euphoric. Easier said than done of course. But if you can separate facts, reason and logic from emotion it could set you in good stead. One day in 1929 a wealthy US investor called Joe Kennedy was given some stock tips by a shoeshine boy. Kennedy immediately sold all his holdings and just a short time later the beginnings of the Great Depression unfolded. The stock tips from the shoeshine boy were God’s way of saying the financial markets were dangerously overheating.

Contrarian behaviour may not always work of course, especially in the case of making investment decisions. However, challenging deeply ingrained consensus beliefs is an important way of breaking out of unconscious stagnation, questioning your own conditioned beliefs and habits, developing vision and foresight, and thinking in a more balanced and broad-minded way.

 

 

By Nicholas Peart

©All Rights Reserved

Image: jplenio

Forget Bitcoin, Is This A Stock Market Bubble I See Before Me?

Posted on by Nicholas Peart

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Bitcoin has had a stellar year rising from a low of under $1000 a coin at the start of the year to an unprecedented high of almost $20,000 just last week. The general consensus is that Bitcoin is in a dangerous bubble that will pop very soon akin to the Dutch Tulip and South Sea bubbles of many moons ago. Yet the price keeps on rising. Analysts have been pronouncing the death of Bitcoin ever since the price was just a mere $0.23 a coin back in 2010. You can visit the website 99 Bitcoins to view the countless botched BTC obituaries. No matter whether you believe Bitcoin will continue on its dizzy heights or crash and burn, there’s no denying that the underlying blockchain technology will play a paramount role in the transition towards a cashless society.

 

A look at UK Fund manager Neil Woodford

With every person and their Jack Russell engulfed in the current crypto-mania epidemic, it is easy to overlook other potential red alerts on the financial landscape. Earlier this month, top fund manager Neil Woodford went on record stating that financial markets are entering a bubble phase yet elaborated on this by saying that while many stocks are overvalued there are also many companies, which are undervalued. Woodford has come under a lot of heat these last few months after a number of stocks in his CF Woodford Equity Income Fund portfolio have fallen substantially in value. Yet the stock selection of his portfolio is interesting. While the portfolios of other fund managers are weighted more towards large multinational and defensive companies such as consumer brands company Unilever or alcohol goliath Diageo, and are minimising exposure to the UK in the wake of all the uncertainty created by the 2016 Referendum result (as well as the possibility of an anti-business Jeremy Corbyn led Labour government abruptly coming to power), Woodford’s portfolio is heavily exposed to the UK. Woodford thinks that there is too much negative sentiment towards the U.K. economy and as a result many domestic U.K. companies are very attractively priced (due to panicky investors reducing their exposure to UK stocks) with potentially minimal downside and plenty of upside should sentiment towards the U.K. economy improve.

 

Warren Buffett, NASDEQ all time highs, and the 2000 dot-com crash

Any good student of the world’s most famous living value investor Warren Buffett would spot these opportunities and at the same time be very cautious of stocks with high valuations trading at close to all time highs. In the USA, the FANG (Facebook, Amazon, Netflix and Google) stocks fit the bill as well as several other stocks trading on the NASDEQ index which has been on an off the charts bull run. The incredibly high valuation of the NASDEQ Index combined with the mesmerising new highs breached by Bitcoin and other cryptocurrencies like Ethereum and Litecoin create the perfect storm for a repeat of the spectacular Dot.com crash of the early 2000s. At the height of the dot.com bubble, the NASDEQ composite shot up to a high of 5000 points around the turn of the new millennium before crashing to almost a 1000 points in 2002. Since the beginning of 2009, after the 2008 Financial Crash, the NASDEQ has been on an incredible run motoring from 1200-300 points to almost 7000 points reaching an all time high of 6,914 points this year. It is today trading very close to that high in the range of 6,840-80 points. Whether history has a habit of repeating itself or not it sure has a habit of rhyming, to quote Mark Twain.

 

Market sentiment and looking beyond it

One of Buffett’s most famous and often quoted mantras is; ‘be fearful when others are greedy and greedy when others are fearful’. Yet the Buffett pearl of wisdom I’ve always taken to my bosom is; ‘the market can remain irrational longer than you can stay solvent’. One would like to think that stocks are priced according to their fundamentals but it is always sentiment that is the winner. The current Bitcoin craze is the perfect example. Sentiment is incredibly positive and gung-ho towards this creation that is seen as revolutionary and a disruptive game changer in the world of money, and consequently many want in whatever the price. The FOMO (fear of missing out) bug is very strong. But sentiment can always change at the flick of a switch and when that happens it will be the fickle inexperienced investors with weak hands who bail out the first even if that means incurring staggering losses.

Neil Woodford is the quintessential student of Warren Buffett who is periodically on the look out for undervalued and unloved stocks whilst steering clear of expensive and hot overvalued stocks. If positive sentiment towards the U.K. economy returns at some point in the future and Sterling makes further gains against other major currencies, Woodford’s fund will end up not only beating the FTSE index but substantially outperforming the funds of other star fund managers. (Note from June 10th 2020 – I more than realise that I got my prediction on Neil Woodford horribly wrong. To be clear, I am referring here to his ‘value investing’ strategy of finding unloved, but robust dividend paying blue chip companies. A huge part of his downfall was due to him straying away from his investment strategy that for so many years had worked very well for him. Instead, he decided to allocate a substantial percentage of the portfolios of his new funds towards highly speculative start-up growth companies mostly in the biotech field.)  

 

Why has the FTSE been reaching all time high levels?

The root of the FTSE trading at a very high level is because of the high valuations of big multi national companies such as Unilever, Diageo and British American Tobacco trading at (or at least close to) all time high levels and their current combined market caps representing a humongous slice of the total FTSE 100 pie. At around the beginning of 2000, shares in Diageo were trading below £5 a share. They recently reached a high of almost £27 with a total market cap in excess of £65 billion. Shares in British American Tobacco were also trading at below £5 a share around that same time period and over the years have performed very well reaching an all time high of £56.43 earlier this year with a market cap in excess of a whopping £120 billion. Unilever shares less than ten years ago in 2009 after the 2008 Financial Crisis could be snapped up for under £15. Earlier this year they reached a record high of £45.57 a share with a market cap almost nudging £60 billion.

One of the principle reasons why many FTSE companies have been reaching all time high levels in the last 12 months is because, since they are global companies, their earnings are received in many different currencies. When the Referendum result was announced in the U.K. last year Sterling dropped to a 30 year low of 1.34 against the dollar. Since this time, the value of Sterling continued to decline bottoming around the 1.20 mark against the dollar before returning to that initial 1.34 level against the dollar that it was just after the Referendum result. During the last 18 months, these multi national companies have benefited enormously from a weak Sterling valuation and yet in spite of this some are still trading on PE (A company’s share price against it’s earnings per share) ratios of 20 or more. Now what would happen if sentiment towards the U.K. economy were to improve and consequently Sterling were to climb to pre Referendum valuations of 1.40 to the dollar or higher? This would affect the foreign earnings of these multi national companies when converted back into stronger Sterling. And by extension lower their earnings per share. Their share prices would likely cool down quite significantly

 

Out of the Sinking: Recent performance of recovering blue chip miners

The Holy Trinity of Unilever, Diageo and BAT are all solid bullet proof defence companies but cheap they are not. At the height of the commodities slump less than two years ago around the start of 2016 all of the blue chip mining companies were trading at unimaginably low levels. Today with sentiment towards these mining companies vastly improved, they are trading at much higher levels and, consequently, are not the bargains they once were not so long ago. During that time one could have hovered up shares in Australian mining titans BHP Billiton and Rio Tinto at just over £5 and £19 a share respectively. Earlier this year BHP shares were trading at over £15 each (with an LSE market cap on the LSE in excess of £30bn) whilst Rio shares went over £38 (with an LSE market cap at one point breaching £50bn). Even more impressive is Anglo-Swiss multinational commodity trading and mining juggernaut Glencore. Today the shares are trading at over £3.50 (LSE market cap over £50bn). At the height of the slump Glencore shares could have been snapped up at less than 70p. Many junior mining companies with higher production costs didn’t survive the slump in iron ore prices but the blue chip mining companies with lower production costs got through this difficult period. Sentiment towards all miners at the time was very bearish and that was reflected in the share prices. But those investors brave enough to take the plunge are now, providing they are still holding their shares, sitting on enormous paper profits.

 

Hunting for bargains

Although some companies are trading at, or close to, historic highs and thus pushing the FTSE index close to record high levels and fuelling fears of a stock market bubble, a large number of companies are trading at heavy discounts. Interestingly the vast majority of these companies are UK domestic companies where sentiment towards the U.K. economy is poor. For example, many of the UK house-building companies, while not trading at the very low levels they once were after the Referendum result was announced, are trading on low PE ratios in the region of 10-11, which is less than the accepted fair value PE of 15. These include FTSE 100 companies Barratt Developments and Taylor Wimpey (both firmly in Neil Woodford’s fund) trading today at £6.28 and £2.03 respectively and both with similar market caps around the £6.5bn mark. If there is any future further weakness in the share prices that would obviously make them even more attractive as investment opportunities.

Two other UK companies in Neil Woodford’s portfolio which are currently very depressed are the FTSE 100 company Capita and the FTSE 250 company Provident Financial. The share price of the latter company collapsed spectacularly back in August this year from a high of close to £35 a share to at one very brief interval sinking to below a fiver. Since then they have currently been trading in the £7-£9 range and can currently be bought for around £8. The crash was rooted in the problems encountered in the business’s Home Credit division. It is a risky share and more downside cannot be ruled out but the potential upside if the business were to recover is huge. Woodford has taken a lot of criticism for the performance of this share yet he remains unfazed and in fact has been accumulating more shares at these new depressed levels. The business support services company Capita has also experienced a huge share price decline tanking from a high two years ago of over £12 a share to its current price of £4.74 a share. The decline in the share prices of both companies means that they now pay very generous dividends. Whether they will be maintained is anyone’s guess but in the case of Provident the current yield is too good to be true at over 15% and for Capita it’s just under 7%.

Two enormous British multi billion pound companies trading at depressed levels are BT Group and energy giant Centrica. BT shares have almost halved in value from a high of around £5 back in 2015 to a low of £2.42. The shares are currently trading at £2.70 with a current market cap of close to £27bn (with nearly that same amount wiped off its from its all time high – quite a dent to the overall FTSE index) and paying a generous dividend yield of over 5%. Centrica has been experiencing an even rougher ride falling from a high of over £4 in 2013 to a low of just £1.33 this year. The last time the share price was below £1.50 was over ten years ago in 2003. Currently the shares are trading at £1.45 and at this level paying a dividend of more than 8%. And at this price the market cap of the company is over £8bn (with around £14bn wiped off the company’s value from its high in 2013). The root of BT’s fall from grace is an accounting scandal at the Italian division of the company. Centrica is struggling with the prospect of political intervention via price caps for its customers and increasing competition. Both companies display certain levels of risk and sentiment is poor for those reasons. One could also come to the conclusion that much of these risks are priced in to the depressed share prices. There is also the risk that those companies now experiencing huge dividend yields because of their low share prices risk having their dividends cut. That cannot be ruled out.

Not all big multinational companies are trading at close to all time highs. The pharmaceutical giant GlaxoSmithKline has a huge global presence and is currently trading at above £13.14 after having fell to £12.70 from a high of over £17 all within the space of this year. At its current level it still has a collosel market cap at around £64.5bn and is now paying a dividend yield in excess of 6%. The company does come with quite a lot of risk despite its size. It has very high levels of debts and the pharmaceutical industry is very competitive. In spite of this GSK is a diversified pharmaceutical business and a huge money spinner. However I think it can still fall further especially if the dividend is cut (which may be a sensible idea to reduce the company’s debt pile) which I see as very likely. This would probably create further weakness in the share price and would be an absolute steal if £10 or less were breached (being a huge company further deterioration in the share price would dent the FTSE 100 composite substantially – every time the share price loses a pound in value, GSK – and by extension the FTSE 100 – becomes £4.9bn poorer).

One more solid British company, which I like that is trading at a low valuation is the defence and engineering service company Babcock. In 2008 after the Financial Crash, the shares were trading under £4 before going on an upward trend reaching an all time high above £14 in 2014. Since that high was reached the shares have been on a downward trend and are now priced at £6.76. This is a substantial discount to it’s all time high. As well as the attractive price its trading on a forward PE of less than 10 and currently offers a not to be sniffed at 3.89% yield. Babcock is also featured in Neil Woodford’s portfolio. What’s more, I see plenty of potential upside to the current price and even the possibility of the dividend being increased.

 

Disclaimer: For the record I am not a qualified financial adviser. I am not Nostradamus. I have no crystal ball. As always it is very important that you do your own research before making any investments. Never ever make investment decisions based solely on what someone says.

 

By Nicholas Peart

Written: 11th – 12th December 2017

©All Rights Reserved

Image: Clipart

 

 

 

Is Now A Good Time To Buy Gold?

Posted on by Nicholas Peart

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This is something I’ve been thinking about a lot these last few months. Looking at all the current global events including the upcoming US elections and the sense that the world is becoming increasingly unhinged, could gold (and by extension other precious metals such as silver) be a good place to put some of your savings/hard earned cash into?

Gold has traditionally been the place to put your money into during times of global unrest. Out of all the world currencies, the US dollar is often seen as the main currency. If you live in a country where the local currency is notoriously unstable, it is often seen as a smart idea to have any cash savings in US dollars. Especially since, unlike other major currencies such as the Euro or British Pound, the US dollar is accepted absolutely everywhere. Yet what happens when even the US dollar becomes unstable? This is where gold comes in.

All paper currencies, whether you have US dollars or Zambian Kwacha, are all just that; paper currencies. Furthermore, if the government wanted to, it could print more and more of its currency thus increasing the money supply and triggering inflation which reduces the value of a country’s currency against other currencies. Unlike paper money, gold is highly prized for its scarcity.

Gold can be seen more as a security to protect your money as opposed to making money. Of course if you buy gold at $1,300 an ounce and the price a few months later is $1,600, you would have made a nice profit if you ever decided to convert some of your gold back into cash (and conversely, if the gold price went down to $1000 and you needed cash you would be selling your gold at a loss).

There are also of course digital currencies out there with Bitcoin being the the most well known, established and traded of all the global digital currencies. Even if digital currencies may be seen as the future of money especially with the Bitcoin (which was once the pariah of the financial world) becoming increasingly accepted and recognised as a legitimate global currency, this is a world where my expertise is limited. I am also scared by the high chance of wild fluctuations and the whole intangibility of it all. Gold just seems less complicated. It is a precious tangible metal with a limited supply and that is all I need to know.

Looking at the gold price chart of the last twenty years, gold has already had a hell of a run going from a low of just $252 an ounce in 1999 to a high of $1889 an ounce in 2011. The current gold price as I write this article is $1307 an ounce; still several multiples of its 1999 low yet a good chunk lower than its 2011 high. Some say that the gold price could surpass its 2011 high and breach the $2000 an ounce mark if the world really did begin to tilt off its axis and spin in some crazy time signature. Yet predicting the future price of gold is a fool’s game. What I can say with ‘certainty’ though is that during times of ‘uncertainty’, gold is a good thing to have.

 

How To Purchase Gold

Gold can be purchased physically in the forms of established gold coins and gold bars. It can be good to personally own some bits of physical gold and keep them in a safety box (or dig a deep hole somewhere in your garden to hide and store them – just make sure you don’t forget where you put them!). On the other hand having lots of physical gold in the house can create a feeling of insecurity. If you are lucky enough to have a big gold pile, it would be best to keep it in a robust security vault by an established and reputable firm. Below I am listing some useful contacts…

Apmex based in Oklahoma, USA, is the world’s largest online retailer of precious metals selling more than 10,000 gold, silver, platinum and palladium products in the form of bars, coins, bullion, rare collectible editions etc.

BullionByPost based in Birmingham, UK is the UKs largest online gold dealer and a good contact to have if you are a UK resident.

For Australian residents, The Perth Mint is a good contact.

Other established global gold/precious metals dealers include the Canadian company Kitco and the Indian company RiddiSiddhi Bullion Limited.

The London based company BullionVault is an online peer to peer gold and silver bullion exchange. Since its founding in 2005, the company has been very successful. This is also a great place to trade gold and silver if you don’t have much money at your disposal since there is no minimum amount of gold or silver you can trade. BullionVault charges a flat 0.5% – 0.05% fee per trade depending on the amount of gold or silver you buy or sell. The other additional costs are the annual fees for storing and insuring the gold and silver you purchase which are 0.12% (0.01% per month – $4 minimum) of the value of your gold and 0.48% (0.04% per month – $8 minimum) of the value of your silver

 

By Nicholas Peart

5th November 2016

(All rights reserved)

 

image source: http://www.therealasset.co.uk