Saturday, February 27, 2016

The Bull market in Gold started mid 2013

What planet do you live on, a bull market in Gold? Don’t you know that we are in a commodities bear market? Maybe we’re near the bottom but a bull market that started in June 2013?
Yes, dear reader, the gold bear market started in late 2011 when gold peaked and it bottomed in mid-2013!  I am not talking about gold mining companies but about the bullion. This is one of the best examples showing that asset valuation is in the eye of the beholder and that, as pointed out in previous posts, you should not compare your total portfolio performance with that of the TSX or the Dow. That is comparing apples with oranges.
So I will state it a bit more specific: Gold is in a bull market since mid-2013 for Canadian investors like you and me and recently this bull market has accelerated. It bottomed around Cdn $ 1250 and today it is, sit tight, at Cdn $ 1703. Oops that is a nearly 36% gain in 3 years and the party is going to get hotter! So should you take profits? Probably not, because the precious metal has barely started its upwards momentum. Remember you let your winners run and sell your losers (when triggered by a 25% or so price loss from its high).
So I live in the Canadian universe and we should always look from our perspective, in this case in Canadian dollar terms. That also means that when investing in the TSX over the last 3 to 5 years you feel like a moron but if you’d bought U.S. stocks you may think you’re a genius. Probably even last year your holdings of S&P500 ETFs in Canadian dollar terms still made money.  Over the long term, currency effects seem to even out. But short term, say 3 to 5 years, you may be able to take advantage of broad currency swings. Not by trading them but by trying to divine their general trend.

Right now, I think the U.S. dollar is peaking and, thus when possible, hedge your U.S. investments for a decline in U.S. dollar valuation. The U.S. economy is doing reasonably well with GDP growth around 2.5 to 3.5% and low unemployment but I don’t think they will raise their central bank interest rates (Fed Funds rate) a lot. Compared to the rest of the world, the U.S. economy is peaking and so, in my view, is the U.S. dollar. Probably the rest of world will gradually catch up and thus their currencies will catch up.
Also, interest rates are turning the corner with governments starting to lose their fears of incurring budget deficits. Instead many governments will probably increase their debt over the coming decade to 'stimulate' their economies and with that, interest rates and inflation will rise. This combined with the millennium generation starting to have families spells the end of low interest. Also, don’t forget the enormous losses corporate bond investors will incur because of debt funded, nearly wasteful, over-investment in growth. In particular debt related to oil and other commodities are likely to collapse - due to past low interest rates and the deluded expectation of 'never ending' high Chinese growth rates. In the future, investors will think twice to chase higher yield without scrutiny - they will become more risk averse and demand higher interest rates.

During the last couple of years Chinese growth has slowed and today it is paying the price and trying to convert to a more service oriented market depending less on exports. In the meantime, all kinds of resource producing companies ranging from potash to gold, copper and oil have created enormous overcapacity that will have to be worked off. That is why Canada’s mining industry has suffered so horribly over recent years, not because of low gold prices which, in terms of Canadian dollars bottomed and gradually improved since 2013 but because of over-expansion regardless of price. A similar process is going on with oil right now.You may think that the Canadian oil industry is currently suffering, but because of their currency (costs in U.S. dollars rather than Canadian dollars) many local U.S. oil and gas producers are suffering worse.

 So, if you had the stomach to buy gold over the last five years, you bought probably low. The same for silver. That is also why companies like gold streamer Franco Nevada never crashed over the last 4 years or so but now it is really taking off. Silver Wheaton, in spite of its tax dispute with Revenue Canada, is probably not far behind. So if you’re wondering whether you missed the boat, I would suggest that there is still plenty of time left for this bull market to run, especially for rightsized medium to large gold miners. So, here we thought the world is coming to an end and then there is, yet again, opportunity. Enjoy the ride.
Sourced from YCharts,com. Click in image for more detail.

No comments:

Post a Comment