2019 Top 10 List by Sprott's Trey Reik

Authored by Trey Reik, Senior Portfolio Manager, Sprott Asset Management USA, Inc.

During 2018, we started to sound a bit like a broken record. We felt the Fed’s dual policy agenda of simultaneous rate hikes and balance sheet reduction was too aggressive in the context of a global economy bloated with debt and addled far too long by salves of quantitative easing (QE) and zero interest rate policies (ZIRP). We even questioned whether the Keynesian academics at the Fed fully appreciated the direct and measurable impacts of QT on global money supply.

All the way through December’s unanimous decision by the Federal Open Market Committee (FOMC) to hike fed funds for the fourth time in 2018, our concerns gained very little traction in consensus circles. Because we have remained confident in our analysis, we found the second half of 2018 to be a frustrating investment environment.

Powell’s Pivot: The Fed’s Policy Reversal

How quickly things can change. In the four weeks following the December FOMC rate hike, the Fed executed one of its sharpest policy U-turns in memory. Indeed, the Fed’s tonal shift has been so profound, it is difficult to square recent comments from Fed Governors and Regional Bank Presidents with their stated positions just a few weeks prior. What could possibly account for such a dramatic about-face from such a characteristically deliberative body? Is the explanation as simple as the 19.6% decline in the S&P 500 Index (S&P 500)1 between Chairman Powell’s “long way from neutral” comment on 10/3/18 and Secretary Mnuchin’s convening of the President’s Working Group on Financial Markets on Christmas Eve?

In our experience, the contemporary Fed is always hyper vigilant about signs of financial stress with perceived potential to evolve into debt deflation. To us, S&P 500 air pockets are but a symptom of a far more troublesome underlying condition: insufficient credit creation to sustain inflated paper claims. Once equities complete their current Pavlovian bounce, consensus will need to confront the more sobering implications of the Fed’s policy reversal. The Fed is far too tight and has already tripped the switch on long overdue debt rationalization.

Of course, this is precisely the juncture for which we have long prepared.

Gold Coiling for Spirited Advance

Similar to early 2016, when global financial markets were destabilized by the Fed’s initial 12/16/15 rate hike, the gold price responded quickly to market fallout from Chairman Powell’s early October overreach, and has remained in steady uptrend ever since. Importantly, gold’s advance has not been derailed by the S&P 500’s 18.1% bounce from Christmas Eve through 2/15/19. To us, gold’s performance clearly signals Fed policy error, and we believe spot gold is coiling for spirited advance as global central banks pivot back toward easing. For gold investors, this is the mix of real-deal fundamentals on which spectacular gains are based.

Given the seminal nature of catalysts now in play for precious metals, we felt the timing appropriate for a comprehensive review of factors driving the gold price. In this report, we have compiled our Top 10 List of fundamentals supporting a portfolio allocation to gold in 2019. Because our gold investment thesis rests on epic global imbalances, our first few sections review underpinnings of our long-term gold thesis.

#1. Gold has been the Best Performing Global Asset for 18 Years

We often marvel at investor apathy towards gold’s investment merits. Especially in institutional circles, gold is generally viewed as an archaic asset offering negligible portfolio utility. To us, it is remarkable that gold could remain such an institutional outcast after posting the single best performance of any global asset for eighteen years running. Since 2000, not only has bullion outperformed traditional investment assets in cumulative total return, but gold’s ongoing bull market has also proved to be highly consistent in its annual progression. As shown in the rightmost column of Figure 1, the average of gold’s annual performance in nine prominent currencies has been positive in 16 of the past 18 years.

Figure 1: Annual Performance of Spot Gold in Prominent Global Currencies (2001-2018)

Performance of Spot Gold in Prominent Global Currencies
Source: Bloomberg.

Given gold’s fringe standing in much of the investment world, it is interesting to note that gold bullion’s cumulative performance since 2000 has trounced the S&P 500. As shown in Figure 2, gold’s cumulative gain from 12/31/00 through 2/15/19 totaled 385.42%, versus a 110.23% advance in the S&P 500 price level, and a 201.15% gain in S&P 500 total return. 

Figure 2: Spot Gold2 vs. S&P 5001 (Price and Total Return Indices) (12/29/00-2/15/19)

Gold vs. S&P 500
Source: Bloomberg.

Click here to continue reading...

Subscribe to the RSD email list and get the latest resource stock activity directly to your inbox, for free.

Part of the Stock Digest family of websites

Small Cap Stock Digest

MARKET SUMMARY

INDICES

Name Last Change
DOW 25914.10 0.25%
S&P 500 2832.94 0.37%
NASDAQ 7714.48 0.34%
TSX 16251.37 0.68%
TSX-V 632.59 0.00%

Resource Commodities

Name Last Change
Gold 1306.07 0.22%
Silver 15.38 0.39%
Copper 2.90 0.000
Platinum 835.50 1.40%
Oil 59.09 0.96%
Natural Gas 2.85 1.93%
Uranium 27.13 0.00%
Zinc 1.29 0.00%

@RSDigest ON TWITTER