Monday, August 1, 2016

G what do you do in these difficult markets?

It seems like we always have ‘difficult markets’ and that in the past investing was so simple. That has something to do with ‘hindsight is 20/20’’, I guess.
For years’ investors have been worrying about ‘Helicopter Ben’ and whether QE worked or not. Well in my books it worked… a bit. It was probably better than let everything go the hell as so many true ‘capitalists’ seemed to prefer. That maybe easy to say when you are in the 1% but what if you live on one or two minimum wage jobs, or if you have a young family to feed?  Yes, the strong may benefit – probably just like the banker crooks did in 2008... I recently saw ‘The Big Short’.   But this society is supposed to take care of the not-so-strong and the outright disadvantaged as well. QE and other stimulating measures helped maintain a semblance of economic stability and kept job losses to a minimum.
But now we have to deal with the fall out of those measures. Who in their right mind is lending money to over-indebted governments and corporations today and pay them for holding your money (negative interest rates)? You might just as well let your money stand in a checking account. Maybe diversify by putting the money in a U.S. Dollar, Canadian Dollar, Euro and Yuan account. That would make a bit more sense to me!  In the meantime, we have distorted currencies, anemic earnings and overextended share prices; especially super expensive share prices of dividend paying stocks.

This is a risky investment environment. George Soros and many other prominent investors seem to think so. These days they invest in gold and silver whose prices, as well as those of precious metal mining stocks, have shot up in value.
With excessive low interest rates, bond prices are also in the stratosphere. If both stock prices and fixed income instruments are in bubble territory then both will likely come down at the same time. So much for the famous diversification strategy of having 60% in stocks and 40% in bonds!  Today such a strategy is truly asking for trouble!  It shows you also that yesterday’s investment strategies are not always appropriate for today. If one believes in the new ‘Gold Bull Market’ and that gold is insurance against world instability and everything else that’s bad, how can you protect your portfolio and yourself?
In many severe bear markets, gold often performed well. Think of 2008 to 2011 for example. Now, with low, or better negative, interest rates, while coming out of a horrendous commodities bear market…. Now seems truly to be the time to dive into precious metals. Gold may boom, but silver typically outperforms gold and so does platinum during precious metal bull markets. Some prognosticators think gold is about to go up to $10,000 per ounce once the Fed decides to return the U.S. dollar to the gold standard as a remedy for today’s currency wars. Others talk about $5,000 per ounce. But even if we went through another major bear market with say stocks down 40%, real estate down 25% and bonds, the worst performer, down 50% then how much precious metals does a portfolio need to maintain your net worth or for you to even profit while the rest of the world goes to hell?  As for all major questions in life, answers can be found in a simple Excel spreadsheet.  Oh, thank you Great Bill! 
We are using our standard asset allocation for a $250,000 portfolio:
49% in real estate
28% in stocks
9.5% in bonds,
10% in cash
3.5% in gold and silver; in gold and silver mines or gold streaming businesses (e.g. Franco Nevada).

So let’s assume gold goes up to $2,500, $5,000 and $10,000 or so. Typically, in bull markets, silver outperforms gold at least 2 to 1. Mining and streaming share prices outperform the metals 10 to 1. So with those assumptions what happens to the above portfolio?   Aaaahh…. Numbers and numbers!  Well if you can’t stand the numbers what about my explanation below the numbers?
So the results are… 
Click on picture to magnify.
In case of a major economic collapse and assuming the precious metals thesis works out. If Gold doubles to $2500 (2011 high was $1900 or so) then you would basically break even.  Not bad when your neighbors lose nearly half their net worth! If things got out of hand and moderate gold bugs are right with gold going to $5000 your net worth would actually go up by 23%. Oh do I see jalousie on your neighbors’ faces?  
If the gold nuts are right and the gold price goes to $10,000 you better go live in the U.S. away from your neighbors and buy a gun because your net worth shoots through the roof!  And that by allocating a mere 3.5% of your net worth to precious metals!  You see why they call this stuff ‘chaos hedge’ or ‘portfolio insurance’?
This strategy may not only be true for precious metal investments. The same idea - investing a small portion of your portfolio in high risk but potentially high return assets - may proof a very powerful form of diversification. What about becoming a member of the Shark Tank? Investing in small cap startups?  Or invest 3 to 5% in a down trodden sector like today’s energy sector where potential surviving companies may double or go even higher in future years now that we are coming out of a severe oil and gas bear market?

What have I done lately and plan to keep on doing for the next year or so?  Similar as described above.  I am gradually selling off financials like Canadian Banks while reducing my U.S. ETFs.  I have been increasing my cash and invest small proportions in precious metals and miners of said metals (gold and silver). I also have dipped in the energy industry, including reviving my oil and gas consulting company. 
 Oil and Gas production will likely keep on leveling off or decline even further.  Demand is growing, despite a short term over supply of gasoline.With so many geologists and engineers out of work, it is only a matter of 'when not if' we’ll have great shortage of oil and gas as well as a shortage of expertise. So that is my strategy in today's environment. But that is not the point of this post. The point is: What are you going to do to protect yourself from the uncertainties of today’s economic environment?

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