Outlier economic and bespoke investing outlook #31
First published on 23.7.19 we have updated the posting. Since the U.S. Fed signaled a rates cut and if the US and China do not reach a détente in their escalating trade war and other risks continue to grow Pundits C (conforming economic watchers) say that foreign fund inflows to Northeast Asia equity markets (China, Hong Kong and South Korea) will be inevitable due to cheaper valuations.
Malaysian equities will under-perform against its peers due to expensive valuation and lower corporate earnings growth. The price-earnings (PE) ratio for FBM KLCI is trading about 16 to 17 times, whereas Asia peers are trading between 10 and 11 times. Malaysia’s corporate earnings growth would be below 10% for 2019 compared with 12% for its peers.
The Fed currently pegs the overnight funds rate in a range between 2.25% and 2.5% – well below normal levels that prevailed during past economic expansions. Gold has also been in demand from central banks especially China and Russia. They have been diversifying away from the US dollar. With gold priced in US dollars, any weakness in the currency gives a boost to the price of the precious metal. Bonds making fixed income are now unattractive for investors.
Pundits Y (mainstream orthodox economic watchers) note that the bubble in complacency and “excessively brittle” consensus views are about to give way to market recognition of new realities. The best time to buy is when the market is quiet – a strategy that requires both discipline and conviction.
Gold price breakout from a massive base formed over a six-year consolidation has left most investors on the sidelines. The rally from below $1,300 to over $1,400 and a 6 year high caught most either wrong-footed (short) or flat footed (no exposure at all). They believe substantial further upside lies ahead and gold’s allure should grow as the price advances in the months and years ahead.
The true hallmark of a bull market in gold is its ability to rise relative to other major currencies. With regards to Malaysia (based on our records) and EP (MYR per gram) values:
The E.P. values provide a simple comparative depiction of different values of gold over time.
Pundits M (maverick economic watchers) see slowing international macroeconomic conditions and weaker global trade growth trends pushing gold to $1,500 by year-end and as high as $1,600 in the next 12 months.
When gold goes from $1,200 to $1,400 (a 16.6% move), profit margin per ounce goes up from $100 to $300 for gold mines with all-in mining costs averaging $1,100 per ounce.
Asian stocks were negative on 22.7.19 but Wall Street stocks closed near to their year’s highs. At this juncture, no one knows where all of this is headed, although one might gather from it that gold would be a good place to hide for citizens of all nation states dragged into the fray by their respective central banks and governments.
We wrote on 22 Mar 2019 that Pundits Y noted that the Federal Reserve would remain the top holder of U.S. Treasuries for the foreseeable future after the central bank said it would stop shrinking its $4 trillion balance sheet by the end of September. Its balance sheet was less than a quarter of its current size and consisted almost entirely of Treasury securities before the financial crisis of late 2007. The Fed’s quantitative easing (QE) bought a mix of Treasuries and mortgage-backed securities (MBS) from the end of 2008 to late 2014 (six years) resulting in its balance sheet mushrooming nearly five-fold due to fostering an economic recovery.
We also had written about China’s petro-yuan thrust. It began in June of 2017 when Beijing started to buy oil from Russia in yuan – thus establishing the “petroyuan”. Since the yuan was still too unestablished China backed petroyuan with gold.
Pundits C noted that all measuring of pick-ups and decelerations in economic growth were then a;ready in negative territory. The present outlier economic outlook: China in the immediate term is not ready to devalue the Dollar with no grand trade deal in sight.
With an ounce of gold, a man could buy a fine suit of clothes in the time of Shakespeare and in the depression of the 1930s. In 2019 with respect to the Quality Man’s Attire-Gold Ratio off-the-rack suit ranges between $2625 and $3122 in the United States. Gold at $1400 per ounce is undervalued.
Despite the loud howlers of enthralled pundits that end games point to price next legs up we liquidated our gold holdings when world gold price was around USD1425 per ounce on 18.7.19 because it was opportunistic to place money in another asset class for ROI while local gold prices remain in a tight range. Que sera sera.
Local gold prices did not remain in a tight range for long since 18.7.19 when we liquidated our gold holdings. Putting money in Bitcoin for instance could make a paper gain of USD59 (MYR250 or ROI of 25%) in 15 minutes – with an investment of USD235 (MYR1,000).
On 5.8.19, and subsequent 2 days we added back 3 grams of gold. On 6.8.19 Pundits C (conforming economic watchers) pointed that world gold price moved sharply to the upside in overseas markets on China’s retaliation to last week’s announcement of new tariffs and the looming threat of the trade war progressing to an all-out currency war. Bond yields and stocks globally have dropped in alarming fashion.
Gold is up $23 at $1464 on 6.8.19. Encouragingly the recent buying action on short shallow dips tells us that underlying sentiment remains strong as buyers join in on any price correction suggesting the market may be set for further strong gains. The precious metal is poised to do something it has only done twice since World War II, that is to enter a major bull market.
As at 9.8.19 our gold holdings of 4 grams represent less than 40% of our MYR2000 hold money. In our records world gold price of USD1504.05 per ounce is 23.4% above base 22.11.2016, EP of 204.70 is 15.8% higher than base. Local gold price is 16..3% higher than base, forex is 5.9% stronger but is weaker than 19.7.19. Cash out value of 4 gm is MYR794 (16.7% higher than base and higher than 19.7.19). Total gain of gold investing this year is only 3.6%.
Pundits Y (mainstream orthodox economic watchers) reminds us that precious gold cannot be de-based by the printing presses or extra-ordinary monetary policy measures and it cannot be talked down in a currency war of words. In Europe the ECB announcement that the Central Bank Agreement will not be renewed signals strong central banks buying is still to come.