Friday, June 5, 2020
League of Power

The League of power

"Freedom by Friday"

The State of the Union

The speech always sounds better during a bull market. The Dow broke 12,000 but people aren’t feeling the love. Maybe it’s because many investors who have made back losses in the market saw those very same gains evaporate with the plunge in their home equity? Worse, the market has basically gone nowhere for a decade so even losses that have been recouped are nothing less than a phyric victory. At the end of the day we can ask the question are we better or worse off than we were a decade ago – after-all that is what really counts. The answer for most people is NO. Our national debt is worse, our net worth is lower, unemployment is much higher, and housing seems more like a burden than a dream. Is there hope? Always!


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As a frequent traveler to different parts of the globe it is important to take a global perspective every once in a while. Take Asia for example. We hear that it is booming, and it is. But that boom means that per capita income in places like Vietnam have jumped to around $3,000 per year, about what one can make in two months in a low wage job in California. South America is no that far ahead with some countries rivaling the poorest in the world. In Nicaragua for example $3,000 per year would be a princely sum for many.

The problem with the US is not that our economy is stagnant it’s that our population, especially the younger generations are not focused on educating themselves to compete for the future of the globe. Here again we must go back to Asia and understand the type of work ethic and educational ethic that is pervasive in even the poorest of economies. That is the threat. That Asians work hard is no secret. Six-day workweeks are commonplace and commerce does not end with a 5 o’clock bell. Education though is the key. On a recent trip to the region I was amazed to see that it wasn’t just children who were learning, but also adults. In places like Vietnam, adults go to school after work en masse to better their education and chances for success – these are adults who may already possess the equivalent of a college degree. What are they studying? They are learning about technology and how to use it, programming, computer sciences. But, by far the most popular courses are for learning English to compete on the global st
age with the global language of commerce. How many kids or adults do you know who are studying Chinese after school? We have become a nation that seeks leisure more than knowledge and that is not what will move the US forward in the coming decades.

Is Gold dead?

It’s amazing how many pundits are calling the current correction in gold the end of the story. It’s no different from when the market corrects. The loudest voices come out of the woodwork with their “I told you so’s”. Markets correct and gold is not immune from a short-term correction. What were you asking yourself a month or so ago when gold broke $1,400 per ounce? Truthfully now, were you wishing you had bought more at lower prices? Your chance is coming.

Gold stocks will soon be in bargain territory. They actually did not follow the metal higher. While gold doubled in price during the past three years, from low to high, gold stocks barely matched that performance with many still trading at the same level as when the metal was trading at $600 per ounce. This is astounding considering the leverage that is intrinsic in gold mining companies. When gold was at $680, companies like Goldcorp were mining an ounce of gold for less than $400 per ounce. At gold $1,400 that cost had not changed. Profits however, were much higher. I am still quite puzzled by this lack of action in metals shares. What should have happened across the board, and what still should happen is a rise in gold shares like the rise that occurred in shares of Silver Wheaton, a major silver producer that was spun off from GoldCorp.Two years ago you could have bought a share of Silver Wheaton for about $4. Silver prices were at $12 per ounce. Late last year silver prices broke $30 per ounce, up about
150% from the $12 level. Silver Wheaton shares came close to the $40 mark before correcting down the $30 level, a move of more than 600%….something to consider.

Gold is still in demand in the US and around the world. But, the market for gold, like the market for oil is quite illiquid at the margins. Metals prices are set by what is trading in the financial markets and when more sellers are in the market prices move lower. Remember the oil markets in 2007-2009. Prices shot up to $150 per barrel, only to correct to less than $50 per barrel and then rally back to over $90 per barrel. If gold were to experience a similar correction, we could see prices drop to the mid $600 level – don’t bet on it. Unlike oil, gold is a metal in lower supply and with a greater reputation as a de-facto global currency and a store for wealth. Gold will correct, but there is very strong support for it just above $1,000 per ounce. If you bought the metal or shares as a hedge against what is happening in global financial markets and what is happening to the US dollar or Euro, then you should be looking at the correction as an opportunity to ADD to your positions and not as some crisis that wil
l send prices lower. The case for buying gold as a long term hedge has not changed and may get better if the US and Europe fail to print their way out of the current malaise and continue to inflate.


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