MARKETS UPDATE: Thoughts On The Current Market Crash

comic-1296117_1280 (1)

The last two months have been an exceptionally volatile period for global stock markets. The current CORVID-19 pandemic was a quintessential black swan event, which took everyone 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 root 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?

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…

https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/s3fs-public/atoms/files/mcs-2019-coppe.pdf

Iron Ore production 2018 link…

https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/s3fs-public/atoms/files/mcs-2019-feore.pdf

Aluminium production 2018 link…

https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/s3fs-public/atoms/files/mcs-2019-alumi.pdf

Nickel production 2018 link…

https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-nicke.pdf

Lithium production 2018 link…

https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-lithi.pdf

Silver production 2018 link…

https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-silve.pdf

Gold production 2018 link…

https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/s3fs-public/atoms/files/mcs-2019-gold.pdf

Insurance Assets In A World Of Rising Uncertainty

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

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

Silver-Bars

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

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

 

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

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

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

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?

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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