Why We Need Gold
BY PETER GROSSKOPF | WEDNESDAY, MAY 15, 2019
It has been nearly a decade since I made a career change from investment dealer to asset management. Throughout that time, the asset management industry has continued to change dramatically, bringing many benefits to investors. These include overall fee compression, the ability to own almost every conceivable segment of the market through ETFs, some increased participation in "alternative" investment strategies, much-improved access to information and risk disclosure, and the proliferation of fee-based accounts providing tailored investment advice. The markets have delivered strong overall returns globally, and those who have not been fully invested have been punished as asset classes of all descriptions rose in tandem, fueled by reasonably strong economies and low-interest rates.
That backdrop underpins the advice of almost all conventional asset managers today — to allocate capital mostly to broad, liquid equity and bond indices, with perhaps some participation in real estate and other dividend-paying asset classes. The global giants in our industry are no longer active investment managers; rather they resemble operators of licensed technology platforms that offer computer-generated models, packaging this robotic advice to their clients in easy-to-swallow bites.
The Cinderella Story will End
But there are ominous signs that dangers lie ahead for this Cinderella story, which has worked for investors lately but will not last forever. For one thing, all of the strategies described above have become increasingly correlated, and have benefited from once-in-a-lifetime interest rate reductions. For another, global debt levels are at record levels and can no longer be serviced by the productive engines of the economy and normal tax levels. Many pensions and entitlement programs are past the point of broken, and government deficits are out of control. A spate of recent IPOs based on ludicrous price-to-sales valuation multiples are eerily reminiscent of the dot-com bubble of 2000.
From a top-down perspective, there is no question that the combination of the increasing polarization of classes and politics will drive governments globally to adapt populist-leaning policies, rather than those that require moderation. It is clear to me that these dovish policies will now require financing through the hand-in-hand partners of massive deficits and direct currency printing, as justified by some version of Modern Monetary Theory (i.e., "helicopter money"). While inflation, as calculated by the misleading CPI measure, is currently seen as low, there is simply no precedent by which to predict what might occur as this macroeconomic thriller plays out. An apt summary is that all of the above can be described as a tightly coiled spring which is becoming more loaded every year.
We understand that it is hard to resist the siren song of the solid track record that has been created by the investment industry in the past ten years, and the three decades which preceded it as the boomer generation propelled the markets and the economy. There is also ample logic to suggest that when helicopter money drops one must have some allocation to solid growth and value stocks, as well as dividend-paying real assets. These positions should broadly benefit from the growth and inflation that is initially generated as governments print more money.
Time to Add Portfolio Protection?
A reasonable question to ask is what happens if investors cool to Treasuries, or lose confidence in the purchasing power of their cash, or start to price in the multiple risks that appear to be lurking on the edges of "consensus" expectations? The crowded trade is to do nothing, but that is yet another harbinger that the right thing to do is to begin to add some portfolio protection. As we see them, the existing liquid alternatives for insurance would, with U.S. Treasuries losing much of their appeal, be limited to (a) moving to cash; (b) purchasing portfolio protection options or moving to market-neutral funds; or, (c) buying gold or gold equities.
On the personal side, I accepted the position as CEO of Sprott because I felt, after more than 30 years of experience financing the mining industry, there was an opportunity to establish an industry-leading investment firm specializing in precious metals. I believe that investors will require our expertise as protection against a highly probable pullback in the markets. Lately, my patience has been tested by the markets’ resilient faith in government monetary policies and their proxies — the paper currencies.
Gold is Unmatched as a Diversification Tool
Most investors do not realize that gold is one of the world’s most liquid currencies and assets, trading with volumes equivalent to those of the euro or U.S. Treasury bond benchmarks. Although similar in philosophy, gold blows Bitcoin away on any measure by which the two can be compared. Gold bullion is easy to purchase and the principal risks are timing, fees and expenses. There are significant new developments in vaulting, ETFs and the digitization of gold, which are helping to improve access for all investors.