Tag: Gold

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

Fishing For Bargains In The Market Carnage (UK MARKETS)

Posted on by Nicholas Peart

deep sea fish

Disclaimer: All financial recommendations in the article are those of the author and should not be taken as financial advice. It is best to do your own research before investing in any security or to speak with a financial advisor. 

The market crash since February has been painful for all long term investors. Yet at the same time it has presented opportunities to buy several good quality stocks and securities at a lower price than normal. In this article I will focus on some of those, which I think may be worth a look at.

Travel Industry

Lots of the big multi billion pound FTSE 100 blue chip companies are currently trading at much lower valuations than before the crash. One of the industries most affected by the current coronavirus pandemic has been the travel industry, which includes airline and cruise ship stocks.

On the FTSE 100, three companies springs to mind; International Airlines (IAG), EasyJet (EZJ) and Carnival (CCL). The share prices of all three companies have been heavily impacted and currently look very cheap. However, as cheap as they may be, they now carry a lot of risk as there’s no guarantee that, despite their size, they will have enough cash to see them through this difficult period before they are back to operating at normal capacity again.

International Airlines group owns multiple airlines in its portfolio including British Airways, Iberia, Aer Lingus and the low cost airline Vueling. Out of the three companies, this one is in my view the safest bet if I had to chose, which one I would invest in. The principle reason for this is, because of the fact that it owns multiple airlines rather than just one. Furthermore, it also employs the greatest number of people (over 60,000) and it is likely, although not guaranteed, that it would be at the receiving end of a government bailout should it really struggle to remain a going concern in the coming weeks and months. Allowing the firm to go bust, would result in a lot of people out of work.

Easyjet carries more risk than International Airlines. Although it has decent cash reserves, it has entered into an agreement with Airbus for £4.5bn to purchase 107 aircrafts. Considering that Easyjet’s current market cap is less than half that amount, such a transaction puts the company in a very difficult situation at a time when precious cash reserves are king. Unless the company scraps the Airbus deal and temporarily suspends it’s dividend, it runs the risk of becoming insolvent in no time and is unlikely to be bailed out either.

But Easyjet is not the riskiest of the three. That prize would go to cruise ship company Carnival. In the wake of all the well publicized coronavirus cases occurring on cruise ships, I cannot see that industry recovering for at least several months. Unlike flights, which are a necessity, it is not a necessity to take a cruise. It’s share price has reacted accordingly falling from a 52 week high of £41.75 in May 2019 to a 52 week low of just £6.06 earlier this month. The share price is currently £8.69. If the company wants to ride out this crisis, it will need to embark on some pretty substantial cost cutting measures going beyond simply cutting the dividend. Earlier this month, the company increased it’s borrowings to give it more financial flexibility, but the consequence of this is that the company has got itself into debt even more.

Personally, I would think very carefully about investing in either company as cheap as the shares may be. The trick is to find high quality blue chip stocks that are beaten down, but fundamentally have a robust enough margin of safety that will see it through the worst of a crisis without having to resort to options such as taking on more debt or any kind of dilutive rights issue.

Oil and Gas Industry

The other industry that has taken a hammering is the oil and gas (o&g) industry. As the market crash began to develop steam, the price of oil fell a whopping 30% in just one day. Towards the end of March, the two largest UK listed oil and gas companies, Royal Dutch Shell (RDSB) and BP (BP.), were both trading at discounts of more than 50% of their share prices at the start of the year. As I write this, their share prices have recovered a bit off their recent lows, yet they still have a way to go to reach their previous levels from the beginning of the year.

I think o&g prices will be incredibly volatile over the new few years and long after the worst of this current coronavirus pandemic is over. Even though o&g prices may currently be at very low levels, it doesn’t take much for prices to suddenly spike again in very little time. In the coming weeks and possibly months, o&g prices may continue to stay low or go even lower to lows that are unthinkable. When investing in o&g companies, especially when prices are low, it is always important to invest in companies that have very low production costs and/or a large downstream business. Such companies are able to weather lower o&g prices better than those that are either producers with high production costs or worse o&g exploration companies.  The latter are much more vulnerable to lower o&g prices and a prolonged slump in these prices can have a very real existential impact on these businesses as their operations become economically unviable.

For those reasons, I am attracted to the more solid players in this industry who will be able to get through this challenging period the best. I already mentioned the two main players, Shell and BP. Their share price erosion has now meant that both companies now pay even higher dividends. Yet there is always the very real possibility that these dividends get temporarily cut, which I actually think is a good thing in the short run if only to boost essential cash reserves. There is currently a lot of negative sentiment in the o&g industry and its not a popular industry. I have a contrarian mindset towards this industry and believe that in due course there will come a time when o&g prices will be much higher than their current levels.

Consumer brands companies

There are some consumer brands companies that are presently very under-priced. A neglected industry that immediately springs to mind is the tobacco industry. Like the oil and gas industry, it is a very unpopular industry and sentiment continues to be poor. What I find interesting is that whilst sentiment has been poor for some years now, there was a period not so long ago where there was a lot of hype in the nascent cannabis industry. I recall the share prices of exotic hot Canadian pot players such as Tilray ascend to ridiculous valuations that were very debased from their fundamentals. I fortunately stayed well clear of all the hype and I am glad that I did as today the current share price of Tilray is a mere fraction of what it was at the apex of the hype.

Rather than chase these hot pot plays, there was and is far more value to be had investing in some of the large public tobacco companies such as British American Tobacco (BATS) or Imperial Brands (IMB). Both companies have been depressed for some time and currently pay very large dividends. In the case of Imperial, it’s dividend is now more than 10%. In the current economic turmoil we are all experiencing, there is no guarantee that these dividends will not be cut, yet I remain certain that the share price of these companies will recover. Whilst it is true that less people are smoking traditional cigarettes than before, these companies will increasingly become entities where they do not have all their eggs in one basket. Going back to the much hyped cannabis industry; who’s to say that once cannabis becomes increasingly legalised in a growing number of jurisdictions across the world and there is more robust consolidation in this industry, those large players don’t also get a piece of the action?

I am also interested in those large consumer brands companies of essential products. The two biggest ones on the FTSE 100 are Unilever (ULVR) and Reckitt Benckiser (RB.). Both are global, robust and defensive non cyclical companies. Yet there is one smaller company, which I think offers a lot of upside to long term investors. This company is called PZ Cussons (PZC). It has been undervalued for a while now and currently has a total market cap of less than £1bn, which I think is very cheap. What’s more, it is well exposed to emerging markets with high growth potential. It is best known for owning the Imperial Leather soap brand and also the Carex brand too. This is important to know since as this current coronavirus pandemic has escalated there has been an acute shortage of hand sanitiser products. Carex is one of the leading producers of hand sanitisers in the world and whilst it may not have a monopoly, I expect record sales for PZ Cussons’ Carex brand when their next financial report covering the last few months is published.

Index Funds and Investment Trusts

Rather than focus on picking individual company stocks, I also like looking at index funds that track entire stock markets and also well run investment trusts. Investing in index funds is ideal for those who don’t want to invest in individual companies and undertake all the fundamental analysis that goes with it. What’s more, by investing in a small select number of index funds rather than lots of individual stocks, you are also cutting down on your dealing costs, which can eat into precious cash.

In the UK, the two principle stock markets are the FTSE 100 and the FTSE 250. The FTSE 100 contains the largest 100 UK companies by market capitalisation and the FTSE 250 the next round of large UK companies, which are not part of the FTSE 100. The FTSE 250 companies, although smaller than the FTSE 100 ones, have generally more growth potential. Yet what the FTSE 100 companies may lack in the growth potential of the FTSE 250 ones, they make up for by paying generally larger dividends. Both indexes are trading at vast discounts to their levels befor the start of the crash. If you are a long term investor, buying some units in both a FTSE 100 and FTSE 250 index fund at current levels could be a very smart move. One could also slowly drip feed money on a weekly or monthly basis. This may also be a good move if these markets continue to fall before they recover.

I have selected a few LSE listed investment trusts, which I consider sound and well managed. One investment trust which I recommend more for income than growth and is currently trading at quite a discount is the City Of London Investment Trust (CTY). It consists mainly of large multi billion pound FTSE 100 companies paying good dividends and thus the trust pays a decent dividend. Some of these companies have temporarily halted their dividend payouts and that is I feel reflected in their current share prices. I expect this trust though to recover strongly when the markets recover and for the companies in the trust that have cut their dividends to reinstate them. The trust also has one of the lowest fees in the industry.

Another LSE listed investment trust I like which is focused more on smaller FTSE 250 companies is the Henderson Smaller Companies Investment Trust (HSL). This trust also pays a dividend although its smaller than what CTY pays and the trust’s fees are also higher. However it has much more potential for growth, without it being reckless.

Both CTY and HSL are currently trading at discounts of more than 30% of their January highs.

The Templeton Emerging Markets Investment Trust (TEM) is also trading at a large discount and is one of the best trusts invested in some of the largest emerging markets comapnies in the world. I prefer this trust over ones focused on just single emerging market countries and I recommend drip buying on any dips in this current downturn.

Finally, I am always keeping an eye on the largest LSE listed investment trust by market cap, the Scottish Mortgage Investment Trust (SMT). This trust contains many high growth companies in its portfolio from holdings in some of the largest tech companies in the world to several promising unlisted companies. NASDAQ listed tech stocks have been some of the best performing stocks during the ten year plus bull market. However it remains to be seen whether the next ten years will be equally generous to these companies. Like other stocks, SMT has also suffered during the current downturn although its held up better than others. I have included this trust as although I still think it is rather richly valued, it may wobble more over the coming months and could present a very good buying opportunity for the long term.

Precious Metals

I continue to remain very bullish on precious metals. In particular, gold and silver. Rather than typical investments to make money, precious metals for me are a form of insurance in a world simply awash in debt, cheap money and uber low interest rates. One of my biggest fears is the effect all this accumulated debt will eventually have on the world’s major currencies, especially the US dollar. Several economists are predicting many years of deflation and sustained low or even negative interest rates, but I beg to differ and think that all this debt and enormous current stimulus packages to soften the blows inflicted by the current coronavirus pandemic could likely lead to inflation rearing its ugly head. As I explained in my previous articles, this will lead to central banks raising interest rates and all this outstanding global debt becoming more expensive to service.

All these factors considered I think gold will do very well over the coming years and even from its current high levels, I don’t think the price is expensive. Silver, on the other hand, is very cheap compared to gold and perhaps for value investors, there is more upside and an even stronger case for silver. I like silver very much for those reasons and think it could rally much harder than gold.

Regarding investment opportunities for exposure to both metals, I think the best mining companies are the biggest ones, Barrick Gold and Newmont Mining, which are both listed on the Toronto and New York stock exchanges. I am not so keen on the smaller mining companies with high production costs and too much exposure to politically unstable countries. One can of course buy physical gold and silver from a dealer and keep it in a vault. Bear in mind though that storing silver, especially in modest amounts, will be more costly than storing gold. I like very much gold and silver ETFs, which are backed by physical bullion in a vault. It is very important that each unit of such an ETF is directly backed to a portion of the physical metal in a vault. Two precious metal ETF securities I recommend are the Wisdom Tree Physical Gold ETF (PHGP) and the Wisdom Tree Physical Silver ETF (PHSP).

 

By Nicholas Peart

(c)All Rights Reserved 

 

Image: PublicDomainPictures

The Present Risks Of Holding Government Bonds

Posted on by Nicholas Peart

BankNotes photo

For a long time it has often been assumed that government bonds of developed countries are a safe investment. Whenever there has been a stock market correction, one always benefited by holding government bonds. Especially if they had a decent yield and it was above the rate of inflation. The difference now is that before the current market crash towards the end of February, interest rates in most developed countries were already at very low levels. Yet as the crash unfolded both the Bank of England (BoE) and the Federal Reserve (Fed) reduced interest rates even more to stimulate the economy. As I write this article, the current BoE rate is just 0.1% and the Fed rate is at 0%. Since 2016, the European Central Bank (ECB) interest rate has remained unchanged at 0% and so far there has been no plan to drop it down further towards negative territory, yet that could easily change in the coming weeks or months if the current crisis exacerbated by the Coronavirus pandemic shows no signs of improving.

The current yields on ten year government bonds in the following countries are just 0.8% in the USA, 0.39% in the UK, 0.02% in Japan, and in some countries such as France and Germany they are already negative at -0.03% and -0.37% respectively. For those bonds to increase in value these already pitifully low yields would have to fall even further. By investing in bonds with negative yields, you are essentially paying for the privilege of holding the bonds. And I have always wondered what would make one invest in bonds with negative yields?

In the case of Germany, if one had a lot of cash which they didn’t want to invest in other securities or deposit in a bank account, they would invest it in those negative -0.37% yielding government bonds. They may be too scared to deposit it all in a bank, which is financially not in great shape and may even be faced with the very real risk of going under Lehman Brothers style. The two main German banks, Deutsche Bank and Commerzbank, are both currently not in great shape financially and may need a bailout to save them. If a bank goes under, your money in a bank is safe up to a certain threshold and if you have savings deposits, which exceed the threshold amount, you will likely lose the entire excess amount if the bank goes bust. In contrast to other Eurozone (EZ) countries, Germany is in better shape than many other EZ countries. Furthermore, it’s national central bank, the Bundesbank, is running a massive surplus against the national central banks of most of the other EZ countries.

Unlike Germany, the yields on the ten year government bonds for Italy and Greece are positive at 1.21% and 1.43% respectively. Yet both countries have enormous and unsustainable levels of debt and are thus at a much higher risk of default. As I explained in some of my previous articles, I continue to remain of the view that it is becoming increasingly likely that the Eurozone will not last and that all Eurozone countries will revert to their own currencies. If this were to happen, it is highly probable that within the EZ area, there will be a huge flight of money to those countries such as Germany who will be least affected by any great devaluations of their new currencies. For example, the New Mark is likely to strengthen in value whereas the New Lira or New Drachma is likely to fall in value quite sharply against the new currencies of other stronger former EZ countries. Thus within the framework of the entire EZ, negative yielding German bonds are probably one of the safest securities to invest your Euros into despite the fact they come with a price. If the EZ falls apart and most EZ banks go under, those negative yielding German bonds will immediately be denominated into strongly valued New Marks. By contrast, those positively yielding Italian and Greek bonds will be converted into new weaker currencies.

In spite of all this, I think government bonds are overall very expensive where their risks vastly outnumber their rewards. Of course, their low yields reflect the low interest rates of their countries. However, if one were to look at the chart of the yields of ten year UK and US bonds over a 40 year period, it is clear they’ve been in a huge bubble for the duration of this time frame. In September 1981, the yield on 10 year US treasury bonds was over 15% and in that same year in October, the yield on 10 year UK gilts was over 16%. Yet since that time, the yields on both bonds has been in a downward trend and currently they both yield less than 1%. Some are predicting that the interest rates of both countries will fall into negative territory and therefore the yields of both bonds will also be negative suggesting that if one were to buy such bonds even with their extremely low yield, the yield may get even lower.

An unpopular opinion I hold, which many don’t share, is the real risk of dramatic and unexpected inflation. Many are predicting a long period of negative interest rates and deflation, but I am not so sure. What concerns me greatly is the huge amount of debt in many countries. Much of this debt is a result of an unusually long period of low interest rates. Since the middle of the last financial crisis in 2008, total levels of global debt have increased over 50%. And now with the current new crisis triggered by the coronavirus pandemic, this already staggering level of global debt is only going to get bigger as national governments plan huge rescue packages to prop up vulnerable businesses and households. In the USA, the Trump government is planning a $2tn stimulus package. In the past years since the 2008 financial crisis, large rounds of Quantitative Easing (QE) haven’t had too much of an affect on inflation. However this time it could well be different as the amounts of money printing rounds that national central banks will embark on could easily result in a great spike in inflation. This is very worrying as not only will this lead to central banks massively raising interest rates to tame this inflation, it will also make all outstanding government, corporate and household debt much more expensive to service. It is for those reasons that I think buying so called safe government bonds at current yields is a much more risky exercise than many realise.  Furthermore, as all those big accumulated existing debts become more expensive to service with rising interest rates, there will be lots more defaults which in turn will weaken the purchasing power of the currencies of major economies including the USA.

All these concerns naturally make me more attracted to precious metals like gold and silver, which, as tangible forms of insurance, will increase in value as the purchasing power of major currencies like the dollar and the euro declines. As precious metals are commodities, it is hard to predict their price movements. Yet if like me, you believe that they are a viable hedge against a world that is increasingly becoming smothered in debt, you will realise that there is quite a compelling case to owning some precious metals as a form of insurance against these economic vulnerabilities. Precious metals are the new safe havens rather than government bonds.

 

By Nicholas Peart

30th March 2019

(c)All Rights Reserved

 

Image: NikolayFrolochkin

 

MARKETS UPDATE: Thoughts On The Current Market Crash

Posted on by Nicholas Peart

comic-1296117_1280 (1)

The last two months have been an exceptionally volatile period for global stock markets. The current COVID-19 pandemic has taken many by surprise and its consequences have had a clear affect on the markets during this period. For a long time, I thought that markets were overvalued and due for an eventual correction. The roots of my worries were based on the increasing levels of global debt since the last financial crisis of 2008 that have been fuelled by an unusually long period of low interest rates. With low interest rates money is cheap and cheap money has been the cause of the high valuations of many stocks and other assets such as property. All this concerned me. I knew it wasn’t sustainable and that eventually something would have to give. Yet little did I know that the catalyst for this current market crash would be a virus, which is now affecting citizens and the economies of every country on the planet.

I wrote an article back in 2017 and another one last year stating my fear that markets were overheating. Throughout all of 2019, I almost became resigned to the fact that we were in a ten year plus long bull market that seemed to show now signs of slowing down. Save for a sharp but very brief correction in equity markets from October to December 2018, the markets duly recovered and subsequently continued to hit new highs. Earlier this year, the NASDAQ index hit over 9,000 points and by mid February it had hit a new record of over 9,700 points. Back then I decided to view a longer term chart of the NASDAQ index and had discovered that back in March 2009, in the wake of all the wreckage of the last financial crisis, the NASDAQ index had collapsed to just under 1,300 points. In almost 11 years, the index had increased over 7 times in value. In the UK, only the FTSE 250 index comes close to matching the NASDAQ’s performance, but even the FTSE 250 has been no match. During that same time frame, the index went from under 6,000 points in March 2009 to a record high of almost 22,000 points in January this year. That represents an almost four fold increase in value. Impressive but still falling short of the NASDAQ’s run.

The reason for the NASDAQ’s epic performance is quite simply the unbelievable success of many of the biggest technology companies in the world, which are all listed on it’s exchange. The following NASDAQ listed companies: Amazon, Apple, Facebook, Alphabet, Netflix and Microsoft: have all been quite simply ‘crushing it’ throughout the last decade.

In the UK, the two principle stock market indexes are the FTSE 100 and the FTSE 250. Even though the UK doesn’t have anywhere near the kinds of innovative and exponential tech companies that come out of the US, the UK has a lot of thriving successful growth businesses and lots of these are listed on the FTSE 250. The FTSE 100, on the other hand, is made up more of long established big businesses with multi billion pound market capitalizations. Examples of such companies include Royal Dutch Shell, BP, Rio Tinto, HSBC, Unilever, Vodafone and British American Tobacco. These are big behemoth companies, which may lack the growth prospects of the smaller businesses listed in the FTSE 250. Yet what they lack in growth potential, they make up for by paying quite large dividends to their shareholders as their businesses generate a lot of cash. The FTSE 100 overall has, by comparison, not been a great performer. Even though from March 2009 until the January 2020, it went from less than 3800 points to almost 7700 points. Even though the index more than doubled during this period, it’s also worth bearing in mind that just before the turn of the new millenium, on December 10th 1999, the index was over 6700 points.

What is noticeable about this particular market crash is just how dramatic it’s been. Before the very beginnings of this market crash, when the markets closed on Friday 21st February, the NASDAQ was trading at over 9500 points, the S&P 500 was over 3,300 points, the FTSE 100 was over 7,400 points and the FTSE 250 was just a few points short of 21,800 points. By the time the markets closed just a few days ago on Monday 23rd March, the NASDAQ was below 6,900 points, the S&P 500 was a little higher than 2,200 points, the FTSE 100 had gone below 5000 points, and the FTSE 250 was trading slightly north of 13,000 points. In fact, just a few days previously on March 19th, the FTSE 250 had hit almost 12,800 points.

In the space of little over a month, the NASDAQ had fallen around 27%, the S&P 500 had lost around 33%, the FTSE 100 had shed 32% and the FTSE 250 had lost over 40% of it’s value. Since these lows from last Monday, markets have made some gains owing to stimulus from central banks, yet at the close on Friday yesterday, a good chunk of these gains were erased.

Going forward

The question now is, how will markets behave over the coming weeks and months? Will the lows hit last Monday be retested? It is always hard to predict the future, but I think they will be. The difference between this crisis and others is that this virus has been very disruptive. Since there is still currently no cure for the virus, the only measures to contain the virus have been for governments to impose lockdowns and restrict the movement of people. The most affected industries include the airline and travel industries. The airline industry in particular has been greatly affected as the number of flights have been severely diminished. It is likely that even the most established airline companies will struggle going forward without some form of a government bailout. With their cash flows from operations dramatically reduced, they will be drawing on their precious cash reserves to keep the lights on. But the truth is, with the restriction of movement, most industries will be affected. If a lot of the most affected companies struggle to remain a going concern they will go bust and as a consequence many people will lose their jobs. As an increasing number of people lose their jobs, they will have no income and likely also little to no cash savings to keep them going. There will be a frantic need to create liquidity to free up emergency cash. And this is why there has been a sell off of almost everything, even the most defensive of assets such as gold. When people are desperate for cash they will sell anything. This notion that cash is trash is a myth. In a difficult crisis such as this one, hard cash is king.

So going back to my earlier question; will markets continue to fall? I think they will as I don’t see lockdown measures easing any time soon. I also see an increasing number of people continue to lose their jobs and as a result an increasing need for emergency cash as more incomes dry up. In this situation, markets will continue to sell off. Shares that may seem like a bargain now will get even cheaper. I think the situation is serious enough to say that it is likely that some of the lows of the 2008-9 financial crisis will be tested. Yet do I think there are currently bargain shares to buy? Of course. But at the same time one should ask themselves the following; how much free cash do they currently have to invest? Not essential cash to survive, but cash they can either afford to lose or not have any need to draw upon for at least five years. If the latter than I would recommend periodically drip-buying a select number of quality companies (that are not over leveraged, that generate a lot of cash and have sufficient liquidity to be able to ride out this crisis and thus recover once its over), investment trusts or tracker funds over the coming weeks and months.

Cheap money 

It is likely that as the current crisis continues to bite, they will be a lot of government intervention to help citizens and business. One solution that has been doing the rounds is the idea of creating ‘helicopter money’ whereby central banks print money which is then given directly to households to help them and keep them solvent. In the USA, the current Trump government is planning on putting together a $2tn rescue package to aid businesses and households most affected. With interest rates at close to zero, the idea of printing staggering sums of money is a tempting one. As mentioned at the beginning of the article, since the 2008 financial crisis we have had a long period of low interest rates. And since the first shocks of the current crisis began to appear, both the Fed and Back of England reduced interest rates even further. As of now, the current Fed interest rate stands at 0% and the Back of England interest rate is 0.1%. With such rock bottom rates, the temptation to just keep printing money to infinity is very strong. As previous rounds of Quantitative Easing (QE) since the 2008 financial crisis have barely had an impact on triggering inflation, the current conventional wisdom is that even bigger rounds of money printing will also barely stoke inflation. Even the former head of the European Central Bank (ECB) Mario Draghi who back in 2012 vowed to do ‘whatever it takes’ to save the Euro, recently commented that interest rates will remain low for a very long time. Others also share this belief. But what if, out of nowhere, in the midst of all this money printing, a tsunami of inflation catches everybody off guard forcing central banks to abruptly increase interest rates to control it?

In gold and silver we trust

If you have read some of my other articles you will see that I have always been a big fan of precious metals. And this is especially true now in our current economic climate where uber-low interest rates and cheap money have been reigning supreme. A consequence of more than a decade of low interest rates has been that total levels of government, corporate and household debts have increased dramatically. To exacerbate an already fragile economic situation, the current crisis has triggered central banks of major economies to drop interest rates to zero. On top of this, humongous rescue packages are being created to aid affected households and businesses. Although this may create short term relief, it will further accelerate already staggering levels of global debt, which have already been allowed to get out of control for too long. Taking on debt is fine when interest rates are low, but what happens if all of a sudden interest rates increase? I say this, because as I previously mentioned, not many people are taking into account the very real threat of inflation, which may finally be awakened out of its slumber in a big way as a consequence of larger than normal levels of money printing. When interest rates increase to control this inflation, suddenly all this cheap money floating around will seize to be cheap and all this gigantic debt will become more expensive to service.

I can’t help but think that all this will be nothing but beneficial towards the prices of gold and silver. Over the last several months, gold has been slowly increasing in value. It recently hit $1,700 an ounce and is currently hovering in the $1,600s. In my view, I think any dips in the gold price should be taken advantage of. It is unavoidable that there will be dips in the gold price as households scramble to free up cash, but over the coming months and years I think gold will do very well.

I am equally keen on silver. It is less scarce than gold and is more sensitive to industrial demand, but compared to gold it is currently extremely under-priced. For many years the silver to gold ratio (SGR) oscillated between around 20 and 100, and it was an incredibly rare moment if it ever went above 100. Over the last two weeks, this ratio broke the 100 ceiling and spiked to over 125 at one point. As I type, the ratio is 112. A consequence of this further distancing between the gold and silver price has caused some to say that silver is done and has lost its appeal as a store of value. Yet I disagree strongly. If anything, I think this is an incredibly good buying opportunity to have exposure to silver as I can foresee it playing catch up to gold in an epic way.

 

By Nicholas Peart

29th March 2020

(c)All Rights Reserved   

 

Image: OpenClipart-Vectors

 

Could Copper One Day Become A Precious Metal?

Posted on by Nicholas Peart

copper bullion

Copper is an important and much needed commodity. It is classified as an industrial metal. However, what if at some point in the future it became scarce enough to be reclassified as a precious metal?

Such a scenario seems inconceivable at this stage. After all copper is much more abundant than precious metals such as silver and gold. Most view it in the same light as other industrial heavy weight commodities such as iron ore or crude oil; fundamental resources in the movement, development and growth of the world.

Much of the world’s copper sources are also concentrated in just a few areas of the world most noticeably in Chile, which is the world’s largest copper producing country. Peru is the second biggest producer of copper followed by China and the USA. In 2018, the total global production of copper was 21 million tons. By comparison in that same year, the total global production of usable iron ore was 2.5 billion tons. For aluminium it was 60 million tons, for nickel it was 2.3 million tons, for lithium it was 85 thousand tons, for silver it was 27 thousand tons, and for gold it was 3.26 thousand tons.

A United States Geological Survey (USGS) global assessment of copper deposits around the world conducted in 2014 stated that there contained 2.1 billion tons of copper resources (note resources and not reserves) discovered under the ground while the number for ‘undiscovered resources’ of copper came at 3.5 billion tons. As of 2018, total global reserves of copper were 830 million tons. 

In 2018, total global reserves for the following commodities were as follows…

Iron Ore: 170 million tons of ‘crude’ ore reserves containing 84 million tons of iron reserves. *However it should be noted that the total amount of identified iron ore resources under the ground currently stands at 800 billion tons of crude ore resources containing 200 billion tons of iron resources. 

Aluminium: Global resources of bauxite (from which aluminium is extracted) are estimated to be between 55-75 billion tons.

Nickel: 89 million tons. *Total global resources of nickel are currently identified at 130 million tons 

Lithium: 14 million tons. *Total global resources of lithium are currently identified at 62 million tons

Silver: 560 thousand tons. *Silver is primarily extracted as a by-product mostly from lead-zinc mines, then from copper mines and then thirdly from gold mines 

Gold: 54 thousand tons.

So in light of all my findings, could copper one day become a precious metal? In my view, this is unlikely to happen anytime soon. Even if there is a growing demand for copper, the fact is, compared with silver and even other industrial metals like nickel and lithium, there is simply an abundance of copper. The current total global copper reserves are nearly ten times greater then the current total global nickel reserves and over a thousand times greater than the total global silver reserves, never mind gold.

Still, copper is aesthetically a very attractive metal and I rather like the novelty value of owning a few pieces of copper bullion. You can often buy a 1kg bar of copper via most bullion dealers for a very modest sum and the German bullion company Geiger Edelmetalle has a number of copper coins and bars you can buy from their online shop.

However, if you wanted exposure to copper in your portfolio, as with other industrial commodities such as iron ore, crude oil or aluminium, you are better off investing in blue chip mining stocks such as Rio Tinto or Antofagasta, which produce a lot of copper. What’s more, both companies also pay a dividend. Alternatively, you can invest in a copper ETF, where you have direct exposure to the copper price, but without the added stress of having to worry about factors such as company mismanagement or political issues when investing in copper related mining companies.

Both these options are far more practical than owning physical copper, which is just not feasible at current prices if one wanted to accumulate a large position. Even accumulating a growing stack of physical silver at its current prices can incur high storage costs if you wanted to store it with a reputable bullion dealer.

By Nicholas Peart

(c)All Rights Reserved

 

 

 

SOURCES/FURTHER READING

Main USGS link for commodity stats…

https://www.usgs.gov/centers/nmic/commodity-statistics-and-information

 

Copper production 2018 link…

Click to access mcs-2019-coppe.pdf

Iron Ore production 2018 link…

Click to access mcs-2019-feore.pdf

Aluminium production 2018 link…

Click to access mcs-2019-alumi.pdf

Nickel production 2018 link…

Click to access mcs-2019-nicke.pdf

Lithium production 2018 link…

Click to access mcs-2019-lithi.pdf

Silver production 2018 link…

Click to access mcs-2019-silve.pdf

Gold production 2018 link…

Click to access mcs-2019-gold.pdf

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

US Stock Markets Are Looking Frothy

Posted on by Nicholas Peart

Frothy-beer-960x540

Back in December 2017, I wrote an article focusing on the toppy valuations of equity markets around the world. Back than the NASDAQ stock exchange in the USA, which consists of mostly growth stocks, was trading at around 7000 points. Considering that the NASDAQ was at less than 1500 points just over 8 years ago during the Financial Crisis, I thought 7000 points was an extraordinary valuation over such a limited timeframe.

However 2018 was the first year in a while to really test global markets. The first wobble occurred in February followed by a more rocky period between the months of October and December of that year. During the latter time period, the NASDAQ fell to around 6,300 points having reached an all time high of over 8000 points earlier in the year. Yet what is extraordinary is that since December 2018, the US stock markets have rallied back towards all time highs. As I write this article, the NASDAQ is currently trading at close to 8,200 points, whilst the S&P 500 (featuring the 500 largest publicly traded US listed companies) has just hit 3000 points for the first time ever. Much of these rises have been driven by the performance of large tech companies such as Amazon, Google, Netflix, Facebook, Microsoft and Apple. Amazon is back to trading at its all time high of over $2000 a share on a very high P/E (a company’s share price to its earnings per share ratio) multiple of over 80. Amazon along with Apple and Microsoft currently have market caps close to $1trillion – in fact, as I write, Microsoft is now trading at $1.05trillion. Microsoft has a lower P/E than Amazon (around 30), whilst Apple has the lowest (17). The P/E metrics of this trio of trillion dollar behemoths mean currently Apple is generating the most cash.

Yet what is interesting when analysing the multi year charts of the NASDAQ and S&P 500 indices, is that they have both been in a bull market for ten years. This is the longest bull market of all time for a stock market. The reason why I am currently rather concerned and on my guard is due to multiple factors. I cannot neglect that a low interest rate environment for many years coupled with quantitative easing have contributed to this lengthy bull market. Yet when I look at many tech companies and other growth companies that make up the NASDAQ, I cannot help but feel that a lot of them are being propped up by positive sentiment and lots of goodwill in relation to their fundamental net asset valuations. Some companies are just simply too powerful and potential amounts of thorough government regulation in the future cannot be overlooked. Facebook, Google and Amazon, no matter how much it may be denied, are in their own ways powerful monopolies. Facebook has the largest social media empire in the world, Google the largest search engine and Amazon the largest e-commerce business. Because of these unique characteristics, to some, their valuations are justified, and some would even argue that in spite of their already high valuations, the scope for even further upside continues to be vast. This belief in the continuing bright futures of these companies, is also taken into account in their current valuations.

When I wrote my article in December 2017, I mentioned the well known British fund manager Neil Woodford who at the time went on record to say that many growth companies were trading on very high valuations and that value investing had been neglected. Over the last couple of months Woodford’s funds have run into problems regarding unquoted and illiquid investments and his main fund is currently suspended. I am surprised with some of these unquoted and non-dividend paying companies in his portfolio, especially as they contradict his value investing philosophy, which has in the past set him in good stead. However, I do believe that value investing has currently gone out of fashion, like a has-been popstar. Some of the largest holdings in Woodford’s portfolio at one point (before he had to sell large chunks to generate liquidity) were Imperial Brands and housebuilders like Barratt Homes and Taylor Wimpey. These are stocks in unfashionable industries paying large dividends. The tobacco industry has had a torrid couple of years with the main companies trading at depressed valuations yet paying very high dividend yields. Fears over a declining number of smokers and more regulation on the tobacco industry have spooked investors. Yet what I find deliciously ironic is that many high growth publicly traded cannabis companies like Tilray and Canopy Growth are trading at very high valuations and neither pay any dividends. Dividends are an important source of income, especially in a low interest rate environment with low yielding government bonds. Investing in high growth tech companies often deprives one of this valuable source of income and even when tech companies do pay a dividend, it is not very much (Apple pays a very modest dividend of 1.50%). I can understand that tech companies that start to generate cash prefer to reinvest much of their profits to further grow their businesses and there is nothing wrong with that. In fact I admire this, yet all this means is that for solid dividend income one has to look elsewhere.

Black Swan events aside, perhaps the greatest thing to derail this current bull-market is another financial crisis related to the enormous levels of global public and private debt, which are at all time high levels. The current debt in the US is at a record $22.5 trillion. It’s quite funny for this record US debt level to correlate with new record highs for both the NASDAQ and S&P500 stock markets. At some point the resident party DJ will have to pull the plug on the beats. When this will happen don’t ask me. Furthermore, I hesitate to predict when as I’ve been wrong more times than I have been right. I do believe though, that in times like these it is always a wise move to have some insurance assets. Some say one should have 5% of their assets in gold bullion. Others prefer safe government bonds, arguing that the price of precious metals are driven by sentiment and there is no guarantee that their prices will go up in the event of a financial crisis. They are of course not wrong and I will even further add that precious metals don’t pay any income. Yet I like gold and silver. Silver even more since it is fundamentally more undervalued than gold. Instead of the conventional wisdom that one should allocate 5% of their portfolio to gold bullion, I would allocate at least 10% of ones portfolio towards precious metals with 70% in silver and 30% in gold. For more information on why I am particular bullish on silver, you can read my last article here.

 

By Nicholas Peart

(c)All Rights Reserved

 

Disclaimer: This article reflects my opinions and should not be taken as professional financial advice.

 

Image: golf.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)

USD-

 

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)

alltime-

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

gold-and-silver-bars-finance-economy-admin-900-x-506

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

 

 

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