Thursday, August 20, 2020

August 2020 Monthly Report

I have the pleasure to make a small announcement. By now, with the strong performance of Treasury bonds, equities, and especially precious metals, all my readers who even had just a small allocation in gold and silver, have earned far more than the subscription price of this commentary.

Although we gold holders should all be happy about its performance, other assets such as US equities have also done fabulously well and have actually outperformed gold over the long term – this especially if we were to include dividends.

I just read an interview by Kate Welling with Joel Greenblatt, a well-known deep-value investor According to Greenblatt, stocks like Amazon, Google, and Microsoft, all stocks which he holds in his portfolio, were inexpensive.

However, Greenblatt adds that, “it just seems quite unlikely that we have hundreds of companies that will match the performance of the best of all time. But people are giving them advance credit, in terms of their stock valuations, for being the next Amazon, the next Google. So, we are short hundreds of those companies.”

Maybe we are in a period during which a value stock is a company such as Microsoft, selling for 10-times sales and 31-times estimated earnings but not according to my value criteria. Noteworthy is that whereas the tech sector now accounts for 37% of the S&P market capitalization, aggregate sales for the sector make up for only 10% of the index. In other words, the ownership of FAANG and related stocks seems to be an extremely "crowded" trade.

Actually, I believe asset markets reflect closely what is occurring in the world. Take precious metals markets. They are moving up not necessarily because they expect high consumer price inflation but because investors realize that the purchasing power of paper money is being eroded through the excess creation of money and negative interest rates.

Also, a safe assumption is that central bankers around the world will continue to print money. In other words, the central banks' balance sheets will further expand. How does an investor protect himself from this monetary inflation? He seeks refuge in assets, which cannot be multiplied at the same rate that money can be printed, such as precious metals or crypto-currencies. The investor may also choose to move money into assets whose supply cannot be increased at all such as Rembrandt, Picasso, van Gogh, etc. paintings or old stamps.

I concede that precious metals are near-term overbought, and that the bullish consensus is high. But, at the same time, there is huge pool of potential investors which do not own any precious metals at all and could come into the market – most likely at far higher prices.

My advice is to hold a basic allocation to precious metals, and if desired take occasionally trading positions. Should confidence in the system erode (I am surprised there is still any confidence left) it would take little money in the context of the entire size of global financial assets and of the liquidity, which central bankers create, to boost precious metal prices much higher.

Via Gloomboomdoom