Hold on Tightly to Gold In 2018 as Turbulence Insurance

Hold on Tightly to Gold In 2018 as Turbulence Insurance

Hold on Tightly to Gold In 2018 as Turbulence Insurance

February got off to a stormy start. Global equity markets saw extreme volatility which reverberated across all asset classes. March has its own proverb that may be more applicable to the first trading sessions of this month coming “in like a lion, out like a lamb.”  At least, so far.

Rick Rule, President and CEO of Sprott U.S. Holdings Inc. addressed the market gyrations that saw the Dow Jones Industrial Average tumble a whopping 1175.21 points or 4.6% on Monday, Feb. 5, 2018. The equity index was not alone in its rout but saw a partial recovery in the following session rebounding 567 points or 2.3%. Not surprisingly the VIX index spiked the most on record on Monday amid the unexpected reversal in calm. On Thursday, Feb. 8, 2018 the Dow lost 1,033 points or 4% while the SP 500 slipped 101 points or 3.8%. Both indexes officially entered correction territory.

Rick has a theory about the recent swings in the stock market and sees it “merely as a return to normality after the benign calm” in the past two to three years. He says the lack of volatility came from the Federal Reserve’s massive liquidity injection. Rick emphasizes the need for speculators to be prepared for periods of extreme volatility and even to expect a few failed products. Indeed, a handful of exchange traded securities tied to (shorting) volatility were on track for liquidation due to an ‘acceleration event.’

COMING OFF THE HIGH

When it comes to the fundamental perspective Rick elaborates and has nuggets of wisdom to spare. He says the “benign period” slowly began to cease as the U.S. Treasury 10-year yield began to climb.  Inflation expectations pushed Treasury yields higher this year and this could prove debilitating for the stock market.

Keep in mind the difference between inflation and deflation concerns. Historically deflation-related selloffs saw flights to safety that drove government bonds higher and yields lower. Current conditions reflect elevated equity market valuations combined with interest rates and inflation that are still comparatively low.

Rick says market conditions are in the process of returning to normal. While people may be unnerved by recent price action, he remarks that this is simply a return to historic norms and that the next several years could prove “difficult” without realistic expectations. He considers volatility levels for the VIX at 15% and even 20% not out-of-the-ordinary. The period of seeing the volatility index below 10% represents “absolute historic anomalies.”

Many investors have become accustomed to market conditions that can be described as “almost perfect,” but retrenchments are quite common. They just enjoyed a luxurious slumber in the post-2009 environment.

Another example may put things in perspective. Take a look at the performance of Berkshire Hathaway’s Class A shares (NYSE: BRK-A). Rick says the stock has seen declines of 20%, 30% and even 40%. But it is about the 40-year long view and not about immediate returns. Although dips can be unnerving during a correction, Rick says the dips are irrelevant and are helpful in “character building.”

GOLD – TIME TO SHINE?

The big question is whether 2018 will be a breakout year for gold. It should come as no surprise that technical levels are currently being eyed for the precious metal. Yet Rick is not one to forecast prices or even offer up precise levels. Instead he looks at the big picture and what it means for commodities.  He says it is about gold stocks outshining spot prices.

‘Mining Journal’ named Rick as one of the most influential people in mining. He was among the top five people out of the storied twenty recognized for their ability to influence the mining world. Xi Jinping, Donald Trump and Mark Bristow snagged the top three ranking with Rick following close behind in fourth place.

Some investors may not find commodities very exciting. Rick is an unabashed gold bug and has lived through several market cycles. He says his experience between 1971 to 1980 saw gold prices go from $35 an ounce to $850 an ounce. It wasn’t until March 2008 that spot gold topped $1,000 for the first time in the U.S. The geopolitical, political and financial uncertainty that marked the major swings should offer some perspective.

In times of turbulence Rick says “gold will be wonderful insurance but it will be the gold stocks that stand to gain.” He expects the senior producers and large intermediates to outperform in 2018. In addition, the companies that are producing over 100K ounces of gold are the ones that stand to draw the interest of the big institutions and could see an eventual buyout.

He also has another nugget for commodity equity investors: While the junior resource stocks may be punished over and over again it is the commodity stocks that will find a floor and manage a quick recovery. It is the “compelling value arguments … that recover the fastest.”

So hold on to your hats as the broader market continues to normalize. Or better yet—hold on to your proverbial mining hats for an expedition of a year. – Remy Blaire

 

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