A few months ago, with a mischievous look in his eyes, Charles Gave noticed the S&P 500 was paying one gram of gold per annum in dividends!
What kind of hidden information lies behind this coincidence? Scarcity, efficiency, and the competition between them in asset markets.
One year ago, facing the largest bond bubble in history, Gavekal-IS published “Bonds. Which Bonds?” focusing on four investment alternatives to US fixed-rate treasury bonds to protect income portfolios:
The four positions generated more than 20% alpha against US bonds, on average, which now raises the question of a possible over-extension of their outperformance.
Keep? Sell? Who knows?!
As for any economic indicator, monetary polices can be viewed from two interdependent yet different angles:
A major “price” signal took place two years ago, announcing the debasement of major fiat currencies and the awakening of gold. Since then, gold has spiked 40%. A “volume” signal took place just one week ago, announcing a second wave of world liquidity in USD intimately correlated with the second wave of the COVID pandemic.
The consequences of the “volume” signal on asset allocation (if it lasts) could be as significant as the one on “price” some two years ago.
« All the things I could do, if I had a little money » chantait ABBA en 1976.
Aujourd’hui, ce n’est plus l’argent qui manque. Les grandes banques centrales des EtatsUnis, de l’Europe et du Japon, en ont imprimé entre 6 et 7 billions de dollar américains depuis le début de l’année 2020. Comment comprendre cette monnaie ? Est-elle surévaluée, sous-évaluée ?
« All the things I could do, if I had a little money » ABBA sang in 1976.
Today, there’s no shortage of money. Since the beginning of 2020, the major central banks of the United States, Europe and Japan have printed between six and seven trillion US dollars combined. How can we approach this currency? Is it overvalued or undervalued?
In recent weeks, attention has focused on the surge, and subsequent correction, in US technology stocks. Yet an asset class that has greatly outperformed the Nasdaq 100 this year is gold-mining equities. In this piece, Charles seeks to develop firmer investment rules for managing gold and gold-mining stocks within a portfolio.
Since the 1980s, OECD government bonds have tended to be negatively correlated with equities, but during the pandemic that relationship seems to have broken down. Given that the Federal Reserve is embracing a new policy framework aimed at juicing up inflation, there are plenty of reasons to think that bonds cannot continue to play an “anti-fragile” role in portfolios. In this first installment of a two-part series looking at what…
Unconventional monetary policy has led to the largest bond bubble in history; some 15 trillion dollars’ worth of debt globally, now providing negative yields. Bond holders from developed economies may have reason to worry about the future of their savings. History tells us, however, that perhaps they should simply put their feet up, and take a look at less crowded bond markets for inspiration.
As the year draws to a close, we have taken time to reflect on our Theory of Financial Fragility. As its track record develops day by day, it has highlighted certain lessons. In the new year, we recommend paying close attention to the two best-remunerating currencies of the past twenty years; Gold, and the Chinese Yuan. Their leadership will soon become particularly symbiotic.
Balanced investment portfolios intuitively combine fragile assets, such as most equities, and antifragile assets, such as government bonds from developed economies or precious metals, gold or silver. However, how does one choose the right antifragile asset? The answer depends on monetary policy.
We cannot fill our car tanks with letters of credit, and we can’t have banknotes for dinner. This is because ‘Wealth’, and ‘Money’, are fundamentally different. This is an issue we have considered in many of our papers, defining asset value and wealth out of free energy, not money. Today, we argue that cash rates set at artificially low levels by major Central Banks for too long deeply affect developed economies’ wealth creation.
Gold is the ultimate antifragile asset. Unlike fragile assets such as equity indices, antifragile assets react positively to stress. Does it make sense to constantly hold gold in a diversified investment portfolio? ‘No’, is the answer. 50% of the time, when currencies act as stores of value, gold is a useless asset. However, the other 50% of the time, when currencies are debased, gold is a vital asset, insofar as it is the centre of pricing of all other financial assets. This paper will take the former 50% of the time to be ‘Wicksellian times’, while the latter 50% to be ‘Keynesian times’. World economies re-entered ‘Keynesian times’ on January 31st, 2019, following the monetary policy reversal of the FED. Statistics on portfolio allocation advocate a switch in these periods: from bonds to gold, from developed economy equities to emerging equities, and from cash to real estate. Gold, however, is not antifragile by nature; it has only turned antifragile since the end of the Gold Standard in 1971 because of its pricing in currencies. And currencies are fragile assets