In a previous column I wrote about living in interesting times, well things continue to stay interesting, or are getting even more exciting!
Background reading I did for an interview on my view of gold has generally not left me in a very optimistic mood (taking into account my generally half-glass empty view of things), although there are a few bright points out there (and more of this later).
However, to start with, it is amazing to me the different views and opinions that can be gleaned from the same information that are there for investors to lap up and act upon. For example, with gold, some are saying the entire fiat currency system is about to collapse, and gold will go through the roof; others are seeing we could see 20-30% falls this year, with opinions on all points in between.
So who is right? We honestly don’t know, and only time will tell. (If I really knew I would have acted upon it and not be sitting here now!) Also, how many of the commentators’ opinions are based on vested interests, e.g. do many of the larger gold bears carry significant short positions and therefore it is in their interest to spook the markets to drop the price? This though brings up the whole conspiracy theory of market manipulation, which given the size of the gold market would require a coordinated effort by numerous parties to achieve “desired results”. There have been many column inches written on this subject.
So a brief look at the markets and world economy overall.
World equity markets have generally performed poorly in recent times – the Dow is off 10% since its May 2015 high, and in my view looks to be heading into bear territory. The whole US situation has not been helped by generally negative comments by the Fed, with a number of commentators now fearing that the US will go into recession, although the US economy is showing some mixed signals. This was after cautious optimism late last year when rates were raised 25 basis points (is 25 points really a rise??), with an expectation of three or four rises in 2016. This looks to now have gone out the door.
We also have a possibility of more damage coming from the fall in oil prices, especially in the US. US oil and gas companies are set for reserve restatements over coming months. Given the falls in prices these restatements will generally be negative, and will affect the amount of debt that companies can carry. This may well send more highly geared companies under.
We also now have China, the world’s largest economy slowing down, and also with severe stock market ructions. This has led in a large part to the severe and continuing downturn in commodities since 2011. And as I have previous written other global markets are not in good health either.
With the two largest economies (and others) encountering headwinds, what hope is there for the next year or so, and where is there life?
The headline grabber over the last month has been gold, with the price increasing some 15%, which has put a sparkle in many a broker’s eye! My view is that this sustainable, and I foresee prices remaining at least at current levels over the coming year, given the uncertainty in the global economy and other assets overall. Gold is still a safe haven commodity.
Australia (and other gold producing countries with currencies depreciating against the US Dollar) are enjoying strong performances from gold stocks – gold prices are at historical highs in Canadian Dollars and Brazilian Reals, and near historical highs in Australian Dollars. Performances have also been helped by lower costs – anecdotally contractors’ costs have come back >20% since the end of the boom, and the recent decreases in energy costs have also helped considerably. Higher prices + lower costs = much higher margins….
On the ASX we have also seen graphite and lithium stocks performing well, however some of this will be due to speculation with these commodities being the current hot things (or they were until gold came back). This is not to say there are no quality stocks in both of these commodities – there most definitely are some excellent opportunities in the battery space.
It is generally all doom and gloom on the base metal front; however there still are companies that are advancing quality projects. Some of these may not be viable at current prices, but when prices and capital markets improve they will be in a position to go quickly into production. This requires patience from investors; however there are some excellent buying opportunities out there.
As I have written ad-nauseam before, with the right due diligence there is still value our there even in these troubled times.
Oh, and another area performing at high levels is the volatility index. We however would prefer this not to perform as such.
Until next time…