It has been just over 7 years since the largest monetary policy experiment in modern history began. Most of us know this experiment by its American incarnations: ZIRP (zero interest rate policy) and QE (quantitative easing), though there have been variants of both across Europe and Japan. The result of this experiment has been an unprecedented period of cheap money, negative savings, and rampant asset inflation, and a quiet crisis in the investment community where many have resigned themselves to the belief There Is No Alternative to stocks.
Since QE began in earnest in the US in late 2008, we have warned against what we saw as a massive weakening in the government’s balance sheet. As a result, Gold has been a core defensive holding in our annual portfolios since 2009, a position that has largely, until now, been an anchor on the portfolios. Through it all, we have remained steadfast in our belief that the artificial asset inflation and inevitable monetary inflation brought on by the Federal Reserve would come back to haunt the US economy, with similar outcomes across Europe and Japan.
Over the past month, we have started to see the chickens come home to roost. The hard realities of a global economy stuck in neutral are finally starting to sink in, exacerbated by the implosion in oil and many commodities that have wrecked havoc on government balance sheets. For the second straight quarter, year-over-year earnings for the S&P 500 are down, and significantly so, with dwindling optimism for a rebound outside of a select handful of industries.
Amidst the general market carnage, Gold is on a 30-day tear. We can hardly be in a position to gloat, as our gold positions are still collectively down since we introduced them in the 2015 portfolio, but we are observing that the tide of sentiment is starting to finally shift.
But this is well trodden ground for our long-time subscribers. We have always believed gold to be an insurance policy, and while this policy has been expensive to carry over the past few years, we remain even more convinced of its importance in 2016 and beyond. Instead of listening to us pound the table yet again, we are recommending readers watch a highly entertaining, extremely well researched, and thoroughly engrossing presentation by Grant Williams, Portfolio & Strategy advisor to Vulpes Investment Management in Singapore.
In the YouTube presentation below, Williams offers some ideas and thoughts which parallel, but do not necessarily intersect, with our own thinking on gold. This is one of the best pieces that we have seen for some time on the subject – and may be more timely than many, if not most, are thinking right now.
Certainly, one thing caught our eye which was his discussion on the amounts of gold China is buying, and the comparison of those amount with the amounts of bullion available on the Comex exchange.
For those who are thinking of increasing their positions in Gold, we offer a few alternatives. The first is to add to existing holdings, whether in the 2016 North American Value Portfolio trio of Alamos Gold (AGI), IAMGOLD (IMG), and Goldcorp (G).
The second alternative is to broaden Gold holdings to include a couple more stocks at attractive valuations. New Gold (TSX: NGD) has just reached its LC Price, and could easily reach its Normal Price with continued strength in Gold prices. Although more expensive at its HC Price, Kirkland Lake Gold (TSX: KGI) has a very robust balance sheet, positive earnings, and (gasp) positive Fair Market Value upside! It hit its Bubble Price back in 2011, so it is still a long way from its peak. The low Canadian dollar has also been a huge benefit, as KGI largely has costs in $C, but sells in a US-dollar spot market.
The third alternative is to diversify a bit into Silver producers, which are highly correlated with their gold mining brethren. First Majestic Silver (TSX: FR) has taken off from its Blue Price and broken out over its Normal Price. In early 2011 it was at its Bubble price, so it offers huge upside if it can regain its lofty heights once again. An option in the large-cap space is Silver Wheaton (TSX: SLW), which is breaking out over its HC Price on the way to the Growth Price (~35%). With a modest uptick in earnings, SLW will have a positive FMV, and also carries a small dividend. In the US, Hecla Mining (NYSE: HL) looks quite attractive coming out of the Blue Zone. In late 2010 it topped out above its MG Price, more than 400% from its current price.
With most stocks up sharply from their mid-January lows, there is a risk that short-term momentum could sputter and cause some reversion. Gold remains a long-term insurance policy, and despite the recent surge, most stocks remain well below their historical highs, offering tremendous upside potential. For those comfortable with their current gold holdings, there is certainly no compelling reason to buy more. For those underweight and looking to add, their are still plenty of options to build long-term positions. We do not trust the markets enough to suggest trading gold stocks, as there are too many ways the price of gold can get shocked by exogenous factors.