US Stock Markets Are Looking Frothy

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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

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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?

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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