When an investment manager uses meaningful data and reasonable assumptions to formulate his investment theses, and is successful at executing his strategies, he will attract my attention. Most managers are too short-sighted in that what they present as evidence either does not prove reliable over various time periods or is not the most important data that should be used. Some of my favorite managers, who have demonstrated the ability to construct logical investment theses and profit from them, are Jeremy Grantham, John Hussman, Peter Schiff, and PIMCO’s team (headed by Mohammed El-Erian and Bill Gross). Moreover, each of them views capital markets from a slightly different perspective, which include history, econometrics, currency, and fixed income (respectively). Add in The Economist (international perspective), and the eclectic mix of brainpower provides me with a good overall sense of how capital markets will move.
Today, I am primarily using John Hussman’s research, and I corroborate it the best I can. In his article Going for the Gold, Hussman explains the scenario in which investors should own gold. To accomplish this, he uses meaningful market data points with safe assumptions, which are backed by statistical correlations. His explanation is a more complete description (which you should read), but I will attempt to summarize it here.
First, gold should be owned when either world inflation is rising or the US Dollar is falling. These can be observed when inflation is rising, long term yields are falling, AND the economy is softening. The assumptions that tie some of these together are based on foreign exchange parity relations, but again, for the full story in his words, see Hussman’s article.
Currently, we have all three factors in play. Inflation is rising (3.6% over that past 12 months), yields are falling (graph), and the economy is weak.
(Image from MarketWatch)
Furthermore, I believe these general trends are likely to persist. The Federal Reserve will continue to purchase long-term securities, which keeps yields low. Meanwhile, inefficient fiscal policy will continue to propel inflation, and confidence (or lack thereof) will constrain production.
The final variable is a matter of execution. We know that given the current situation, gold is likely to perform. To determine the best method for acquiring gold, two main ownership options exist: actual gold and gold stocks. Recently, gold has rallied significantly relative to gold stocks.
(Image from MarketWatch)
Gold is the main export for gold producing companies, so increased gold prices means more revenue will flow through the income statement. The disparity in the graph above shows that this increase in gold companies’ earnings, relative to gold, is not accounted for. Therefore, gold stocks appear to be lagging gold, and are relatively more attractive.
To participate in this opportunity, I purchased the gold stocks exchange traded fund, GDX, 100 shares at $55.20 per share. This is one of my larger positions and is reflected as such on the Top Five page.
Here are some other stories of interest that compliment the thesis above:
Switzerland and Japan are weaking thier currencies to remain competitive
Opinion piece arguing US should be downgraded (hence money looking for a new safe like gold)
Opinion piece arguing long gold stocks and short gold
BNY Mellon imposes fee on rapidly growing deposits indicative of lots of cash looking for a home (perhaps gold)
