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Investing with a Crystal Ball

The legendary investor, Jim Rogers, used to say you only had to make a decision on one asset class every ten years to enjoy unbelievably high investment returns and that diversification and over-trading were the way to ruin. While Jim might well have incorporated many different asset classes into his ten-year choices, we have just looked at the last half century worth of returns by decade of US equities and gold.

So, with the benefit of hindsight, you would only need to make a decision every decade between US equities or gold to make truly eye-popping returns, obviously the RIGHT decision. It is quite incredible that the correct decade decision makes 315,132% returns over 50 years, but the incorrect decision loses 30.7%.

Undoubtedly, the volatility and drawdowns of this strategy would have been unbearable, but it does illustrate the point notably. The better informed you are, and the more knowledge you have of valuation and economic conditions, the more you can aspire to trade with the Gods. For mere mortals, some diversification is certainly wise.

I believe it is a far harder decision today, amidst the super-high valuations driven insanely by extraordinary money printing, to identify a major asset class that beckons a stellar ten-year return and could be considered cheap. But, if the decision is simplified and only includes a choice between stocks and gold to hold for the next ten years, then looking at the valuation of US equities at century high valuations on many metrics, gold is a clear winner.

We have shown Hussman’s margin-adjusted Cyclically adjusted price/earnings ratio (MAPE) before. Clearly, US equities are not cheap, or fair. They are in fact, more expensive on this metric than at any time in the last 100 years, blown up by the largest global monetary printing conditions ever.

Growth is slowing globally, especially in Europe, with real recession concerns in the foreseeable future, Brexit or no Brexit.  While wage inflation is gaining traction, adding to concerns.

And global liquidity, led by China is taking a distinct turn for the worse. The chart below shows monetary liquidity heading much lower, which historically correlates with large collapses in equity values.

Gold, on the other hand remains very quiet, still some 30% lower than its 2011 peak, treading water, biding its time? Is it cheap versus US equities? Of course.

But there is another part of the metal market that is truly cheap and solidly backs up the argument for precious metals as cheap.

Gold and silver mining stocks have become a forgotten market. Most of these stocks – junior and major caps – trade on the Canadian stock market with some other country listings. As an asset class, they are by far the cheapest. The metrics to measure them in 2011, at the highs of the metals last bull cycle, are no longer used. They have, in all effect, become penny stocks, beckoning insolvency. Companies, many with no debt and hundreds of ground claims with in-situ metal values in the hundreds of millions are going for single digit market caps.

 

The indices, GDX mining and GDXJ junior mining have fallen by up to 80% in the last eight years and these are indices. Imagine how many actual companies have fallen the full 100% and closed! Canada is the land of bandwagons – boom and bust, pump and dump – with stock market practices, which have long since been outlawed by developed countries. Last year, all the brokers were raising money for crypto mining hardware. Recently, they have raised money for cannabis companies that now have ridiculous valuations and will no doubt overpromise and under deliver. At a conference in Canada, one analyst presentation showed that 82% of ALL Canadian public listed companies (not just mining) had negative net income! (That’s a loss to you and me.) But you get the picture. There has been no financing at all, to speak of, into smaller mining companies and the larger companies are failing to provide any real profit potential at these metal prices.

 

While I can clearly see the ‘cheapness’ of this asset class at the moment, in relation to the metal prices, and I believe the metal prices will have to rise as production falls off the proverbial cliff, there is a concern that the whole model is potentially broken. As a result, I would not buy single stocks, only the indices. Often, when there is so much negativity and only extreme pessimism prevails, these are true cycle bottoms.

2019-2029, only time will tell what the future beckons for gold and US equities, but the facts seem to speak for themselves.