Exploration Hub

Webinar Highlights: Gold as your market hedge

April 30, 2020

Evrim put together a webinar on April 28th, inviting Mark Stacey from AGF Investments and Jaime Carrasco from Canaccord Genuity to discuss their views on adding gold as a  market hedge. They brought great arguments in favour of this precious metal, especially bringing urgency to the decision to add gold to our investments during this time of economic uncertainty in the world.

You may watch the presentations and the Q&A session here, and find the highlights of the presentations below.

Time breakdown:
00:00:01 - 00:03:44  Introductions
00:03:44 - 00:20:44 Mark Stacey, AGF Investments
00:20:44 - 00:44:00 Jaime Carrasco, Canaccord Genuity Wealth Management
00:44:40 - 01:12:00  Q&A

 

Presentation highlights:

 

Why are investors not buying gold?

  • The dollar has been strong for the last 10 years (USD up 36%)
  • Inflation has been muted for the same period, and gold is seen as an inflation hedge
  • Investors have been drawn to markets that are less commodity related. The U.S. market has gone up 351% since 2009, more than double any other market in the world. 

Why are we at a tipping point?

  • Signs of waning U.S. dollar since 2016. The US dollar decreasing returns over other currencies (12 month rolling return at 0%). This is good news for commodities.
  • Governments cutting interest rates, inflation isn’t overly high but high enough to generate negative real yields, which are positive for gold. Any time we have seen real yields turn negative we have seen gold go high.

  • Fed’s balance sheet increasing dramatically, especially now as the pandemic has pushed to increase the money supply.
  • Gold was moving higher than US equities from 2007 until pass the credit crisis of 2009 gold was moving higher than US equities but for the last years gold has been underperforming the US equities. Recently we have seen gold and gold stocks outperforming the US equities.

  • Since the end of last year, gold has been outperforming information technology stocks, similarly to the internet bubble times.  Popular investments such as FANG stocks (Facebook, Amazon, Netflix, Google) may be a riskier investment at this stage.
  • 10 year rolling return of gold shows a potential bottom at the bottom. The last time gold stocks started to rally in 2002 there was still a huge upside all the way to 2011.

Why add gold to your portfolio?

  • Asset allocation decisions have changed. Equities and fixed income will have a harder time generating returns.
  • Gold moves in a different direction than the rest of your portfolio, diversifying your risk. Any time the U.S. equity market has been down 5% or more, gold has fulfilled its role as a safe haven. There was an inflection point in 2016, generating positive returns in down markets.

Gold or Gold Stocks?

  • Both provide protection but they move differently.
  • Gold is underperforming gold stocks at the moment.

  • The volatility of gold stocks has decreased since 2016, besides the last two months where all sectors saw a spike in volatility.

 

Jaime Carrasco: Those that don’t learn history are bound to repeat it

  • One of the problems with gold today is the generational gap. Since 1971 we have forgotten what gold is and how to invest in it.
  • Gold is money, all else is credit.
  • Throughout history gold has had a connection to debt.

A parallel between 1933 and today

The 1930s was a period of ultimate debt growth. There was a point where more debt wasn’t creating further growth (point of maximum utility).

Massive unemployment rates and populist governments arose around the world.

The gap between rich and poor getting bigger and bigger. The big problem was economic debt.

Sounds familiar?


1930s - Currency Reserve Shift

Roosevelt transferred the power from the British pound by creating the new dollar.

The U.S. had 8,900 tonnes of gold of the circulating 29,000. In May 1933 Roosevelt backed the dollar by the amount of gold the U.S. had in reserves. This gave rise to the U.S. dollar as we knew it until 1975.

Periods of economic danger brought both risk and opportunities: $7,000 worth of gold at the beginning of the depression became $35,000 at the end of this period through the currency adjustment. The main beneficiaries were gold companies. An example: Homestake Mining. Investing $7,000 in their stock at the beginning of the depression would have given investors $85,000 plus 10% dividends by the end of the depression.

 

Today

Jaime started investing in gold in 2006 after noticing central banks globally increasing the rate of printing money.

More than a gold bug, Jaime considers himself a debt bear. He’s concerned about the levels of debt we see at this time, similar to 1930s, but greater.

In 2006 gold had a great rise from $600 to $1800. The decline of the correlation between gold and money is seen as an opportunity. He believes this is due to manipulation within the gold future contracts by allowing the selling of paper contracts that are not backed by physical gold. As a game of musical chairs, you have less and less gold chairs but more people running around the chairs because they are buying the contracts that give them participation in gold.

In March 2020, the London Bullion market sold 32,000 tonnes of gold in paper contracts. This is the amount of gold held by all central banks. How can this be if that gold isn’t trading? It’s just paper trading.

This is where the biggest opportunity lies; gold has to catch up.

Like in the 1930s, today we are at 0% rates, which means we are again at a point of maximum utility; new debt does not equal economic growth

Looking at the chart of Gold vs HUI, gold hit a bottom and started moving higher around 2015, however the producers saw a spike but then started going sideways. This has opened an opportunity to invest in producers, since they need to catch up to the price of gold. Central banks at zero rates will not be able to stimulate the economy. Gold needs to keep rising. Producers have started to spike but there is still a long way to catch up to gold prices.


HUI index in blue and Gold in yellow

Looking at the DOW vs Gold vs HUI

Investing $1 in the Dow, gold and HUI in October 1 2018, Dow would have yielded a negative return of 12%, gold up 46% and HUI up 92%. The bull market for gold has began but no one has noticed.

Look out for producing companies that are picking up projects and rebuilding old projects.

Have a good selection of producers and royalties on your foundation. There is very little risk there.

Four criteria for adding a producing company to your portfolio:

  • best management
  • high reserves on the ground
  • low cost to production
  • geopolitically safe places
  • extra: those paying dividends

Flow through investment for this sector also makes sense.

Gold needs to rise a lot more to deal with the debt.

Last piece of advice: Have good positions and wait on them. As multimillionaire trader Jesse Livermore said “It never was my thinking that made big money for me. It was my sitting tight.”

Jaime is diversifying his equity income portfolio by putting 30% in precious metals.

 

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