Monday Morning Wrap Up – May 25, 2020
Posted on — 1 CommentHarold Hamm lost more than $3 billion in March.
The self-made billionaire is scrambling to survive the bust in oil prices, which saw New York crude oil trade below $0 a barrel last month. With no college degree, Hamm first hit it big by drilling in an overlooked North Dakota oil field over a decade ago. The coronavirus pandemic tanked global demand for crude oil, another market completely disrupted by the crisis.
While you probably didn’t lose $3 billion in the last few months (we hope), your portfolio is likely still suffering, which reminds us all about the importance of asset allocation and portfolio diversification.
The stock market has rebounded partially off its recent lows. Yet, the S&P 500 index remains down about 9% for the year, which could easily mean thousands of dollars in losses for you, depending on the size of your portfolio.
Speaking of billionaires, legendary hedge fund manager John Paulson, is still betting big on gold right now, CNBC reported last week. This is not surprising. Recent market action has reminded us all about the importance of portfolio diversification and investing in assets like gold and silver that go up when stocks go down.
Gold is one of the best performing asset classes in 2020, up about 13% for the year.
Now, silver is playing catch-up, as we’ve long expected, with a swift rally to almost an $18 an ounce level last week.
In the second quarter, silver climbed 27%, an impressive recovery from the sell-off earlier this year. Investors are piling into silver, amid expectations for a pick-up in industrial demand now that economies around the globe are beginning to reopen.
Looking Back at Last Week
Most of the 50 states have relaxed coronavirus lockdown restrictions. Economists expect a long road to recovery as many people remain cautious about resuming normal activities. Data like TSA airport screening levels and OpenTable restaurant bookings show demand for these services at well below normal levels.
Last week, another 2.4 million Americans filed for unemployment benefits, bringing the total to about 38 million Americans who have lost their jobs since mid-March, a staggering figure.
Existing home sales collapsed 17.8% in April, to a 4.33 million annual rate. No surprise really. Buying a home is a major purchase and it can be a little unsettling to make an offer on a property you have only see through a Zoom video app.
The stock market wasn’t fazed by the steady stream of Depression-like economic figures. The stock market mostly consolidated sideways last week in a wait and see mode. The unprecedented fiscal and monetary policy boosted the market off its lows. From here, however, additional stock market gains will be difficult to achieve as the economy remains mired in a massive slowdown.
There is a long economic recovery ahead. Consumer spending accounts for about two-thirds of the U.S. economy. With millions out of work and millions more hesitant to resume normal activities, the recovery will be slow.
‘Smart Money’ Players Are Buying Gold
Central banks intend to buy more gold this year, according to a new survey from the World Gold Council. Twenty percent say they will increase their gold reserves over the next 12 months, versus only 8% in 2019.
Why? Central banks purchase physical gold for the same reason individuals do – for diversification, liquidity and wealth preservation. Other reasons central banks want to buy more gold include concerns about negative interest rates, gold’s performance during a crisis, and gold’s lack of default risk, the World Gold Council said.
Here’s what Goldman Sachs said about gold two months ago…
“We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policy makers act to accommodate shocks such as the one being experienced now,” said analysts at Goldman Sachs led by Jeffrey Currie, as quoted in a MarketWatch article.
The Bottom Line
The coronavirus pandemic is creating a new normal for us in many ways. However, the rules of successful investing have not changed.
This crisis reminds us all about the importance of diversification – especially into tangible assets, like gold, that are not correlated to the stock market. Other rules of investing include, regular rebalancing, understanding your risk tolerance level, defining your investing goals and measuring your success on a quarterly basis.
Wishing you and your loved ones a safe Memorial Day!
David
Who Decides What is Normal?
Posted on — 1 CommentApproximately half of the states in the US are starting to relax social distancing measures. This fractious approach to returning to “normalcy” has become the defining characteristic of the country’s response to COVID-19. Some states are extending aggressive stay-at-home measures. Others never fully embraced them in the first place.
Despite this asymmetry, there appears to be a uniform hesitance among Americans to embrace business as usual. While the government and states can issue formal re-opening declarations, they cannot force people to spend. This divergence is the reason so many expect that the economic recovery will take so long.
Consider survey data published in The Kiplinger Letter, which indicates that half of US consumers will not feel comfortable returning to their normal routines until a vaccine is ready. Such a vaccine will likely require a minimum of one year to develop and distribute, if ever. The same research shows that nearly one-quarter of consumers think that the pandemic will last another six months. Another one-quarter expect current circumstances to last for another year.
These survey findings underscore an important fact about our economy; consumers decide when the recovery begins, not the government. This fact has major implications given that 67% of the US GDP is made up of personal consumption expenditures. In short: until consumers feel safe enough to get back to shopping the economy will have a low pulse.
Equity investors are feeling these effects. Many of the companies included in the S&P 500 require a healthy level of consumer spending. For this reason, they are seeing a decline in share values. At the same time these companies are suspending their dividend payments. A defensive pivot is unlikely for many of these businesses who, like giant oil tankers, are simply too large to change direction and navigate a new course that is less dependent on consumer spending. They, like so many others, will have to make aggressive cost cutting measures and wait out the storm.
Individual investors, however, do not need to wait. They can make moves now. They can choose gold, an asset that is not beholden to the all-important consumer spending that governs our twenty-first century economy. Now it the time for investors to release themselves from the shackles of consumer sentiment.
Even as a recovery does begin to take shape it is unlikely that consumers will return to the spending levels seen before the pandemic. Family budgets will have long since contracted. Lower consumption will be the new normal as Americans become more accustomed to simpler living that involves less shopping. Some have suggested that pent-up demand will unleash a tidal wave of spending. This, however, is unlikely as more people struggle to cover ordinary living expenses in the wake of 20 million job losses in the month of April alone. Today, the unemployment rate is 14.7%, representing the worst figure since 1939. Recoveries happen in inches, not yards.
Forward-thinking investors are taking this opportunity to shore up their investible assets and preserve and even grow their wealth with an investment in gold.
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Monday Morning Wrap Up: May 18, 2020
Posted on
The days are getting longer. The sun is shining brighter. Flowers are blooming. Garden centers are reopening in many part of the country so people can begin their spring planting: seeds, tomato plants, annuals and more. Spring is a time of new beginnings.
We as a country are still mired in a great deal of uncertainty, yet there is so much to be hopeful about. In the midst of the economic distress, tragic health issues and yes the deaths of many Americans, there are green shoots. Take heart. Every day there is something to be grateful for, if you take the time to focus on it.
Vast sums of money are being poured into finding a vaccine for the coronavirus. Many families are spending more quality time with each other than ever before. Those separated geographically are connecting by video visits. While millions of Americans have lost their jobs, millions more are able to telecommute and work from home. This pandemic reminds us how strong we are as a nation, and as individuals.
Week in Review
Retail sales collapsed a record 16.4% in April. Consumer spending fell off a cliff last month as the lockdown kept Americans away from malls, barber shops, furniture stores and restaurants. COVID-19 has stolen the lives of many Americans, and the U.S. economy is also a victim of this treacherous virus.
The economic collapse we’ve witnessed in the past two months is mind-blowing. It defies anything we have seen in the last 100 years and is the fastest and deepest recession in American history.
Hopes for a V-shaped recovery are dissipating fast.
Economists are warning that we could be facing an unheard of 40% decline in GDP this quarter.
Every economic cycle is different. But, this particular COVID-19 recession and recovery will be especially different, given the cause. Revenues nosedived dramatically across many industries over the past two months and it will take time for those revenue streams to come back. It’s true, stocks are off their March lows right now. But, companies can’t make money if the economy has fallen off a cliff and can’t get back up very fast.
Attitudes are different regionally, of course. But, in some parts of the country, Americans are still afraid to go to the grocery store, let alone get on an airplane, rent a car and stay in a hotel.
There are now reports that a portion of the recent “temporary” layoffs will become permanent for millions of Americans as businesses make the difficult decision to shut down for good. Many Americans will not be returning to their old jobs because the businesses are closing down.
Fed officials warned last week of widespread business failures ahead.
“You will get business failures on a grand scale and you will be taking risks that you would go into depression” if shutdowns persist, Federal Reserve Bank of St. Louis President James Bullard said last week.
Meanwhile, Fed Chair Powell warned about the potential for lasting economic damage unless policymakers pass another economic stimulus plan.
But, we already have so much debt…
Staggering Debt
The U.S. Treasury announced a record $737.9 billion budget deficit in April, as the federal budget deficit continues to grow. That compares to a $160.3 billion surplus in April last year. The budget, of course, was destroyed by virus spending and the shift of the tax date, which is why April is usually a surplus month with the inflow of tax revenue.
While the COVID-19 pandemic is today’s crisis, the colossal debt load of our nation will be a crisis for the future that can’t be ignored. In this fast-changing world, gold is taking an increasingly strategic role in portfolio diversification.
Gold Shines Bright
Current gold investment demand remains at record high levels. As the stock market weakened last week, gold prices gained. Gold is trading at the highest level since late 2012. As the uncertainty over what lies ahead for the U.S. economy in the second half of the year, gold’s stellar performance shines a spotlight on its strategic role as a store of value, liquidity source and a wealth building vehicle.
Some money managers are comparing the current rising cycle in gold to the bull market of the 1970’s.
“Once the bull market started again in 1976, it went up for four years and it went up basically from $100 to $890, so nearly nine-fold. If you use the same ratio to today’s numbers, we would end up having gold, at some point in the future, $8,000, $9,000 gold, but we’re talking five to 10 years, I think,” Florian Grummes, managing director of Midas Touch Consulting said last week.
Silver Bull Run Is Beginning
The silver market climbed to a fresh 2-month high last week. Some analysts expect silver to outperform gold in the weeks ahead as industrial demand begins to pick up as countries begin to cautiously emerge from shelter-in-place and shutdown requirements.
Gold – A Replacement for Bonds
This pandemic is changing so many things. From the way we conduct our daily lives, to the interest rates offered at the bank, to debt levels our government is taking on…everything is different. It is also changing the attitude of investors toward bonds.
As we highlighted last week, but believe it is worth stating again, investors are turning to gold as a replacement for bonds in a world where central bank monetary policy is centered on ultra-low interest rates.
The Wells Fargo Investment Institute said in a recent report that gold is being utilized by investors as a substitute for holding long-term bonds as a perceived safe-haven investment. “With no particular ties to a government or other bond issuer, we believe gold looks attractive to long-term investors.”
Interest rates have been low since the 2008 crisis and never returned to normal levels. The COVID-19 recession and bear market ensures that near-zero interest rates could be a hallmark for the next decade too.
“In our view, more central banks will move towards explicit targets for government bond yields, a policy previously adopted in the US during the Second World War as debt surged,” Capital Economics said in a research note last week.
In this environment, it makes more sense than ever to consider increasing your allocation to tangible assets like physical gold.
Consider replacing a portion of your bond allocation with a hard asset like gold that 1) is increasing in value and, 2) is an asset that will preserve your purchasing power and, 3) is a financial asset that can’t be manipulated or weakened by central bank printing presses or governments besieged with enormous debt loads.
Best wishes,
David
This Coin Is Hard To Find
Posted on — 2 CommentsIf you collect rare coins, you are probably familiar with the Winged Liberty Head Dime, popularly known as the “Mercury” Dime.
The U.S. mint struck this beloved coin from 1916 until 1945. This is one of the most popular and iconic coins that numismatists acquire for sets. Easy availability of most of the years is one reason that even beginning collector will reach the satisfying goal of owning a Mercury Dime set.
Within the Mercury Dime series, there are only a few absolute rarities and there is only one that is hard to find.
The 1916-D is the scarcest major key date and rarity within the Mercury Dime series. Only 264,000 were struck and we have one. You can see it here. A numismatic collector paid a record $207,000 for the 1916-D back in 2010 for a MS67 specimen.
Why did the 1916-D Mercury Dimes have such a low mintage of only 264,000?
Production of this coin was halted after the U.S. Treasury department entered an urgent order late in the year for 4 million quarter dollars.
Collectors seek to add 1916-D Mercury dimes to their collections due, in part, to its low mintage and because of their unique status as first ‘year-of-issue’ type coins. Some type collectors only acquire first-year coins.
Renowned sculptor Adolph A. Weinman designed this highly sought after coin. Even during its years of production, collectors clamored to own these coins for their collections.
Some Americans confused the depiction on the reverse of the coin of a young Liberty with the Roman god Mercury, which is how it’s popular name caught on. The coin’s design received positive reviews within the artistic community. However, some modifications were required as the coin did not perform well in vending machines.
The Mercury dime is struck with 90 percent silver and 10 percent copper and the coin contains just over .072 troy ounces of silver.
Have you embarked on the journey of collecting sets? We’d love to hear about your experiences in a comment below! Many collectors find that their enjoyment of this hobby and investment increases exponentially when you set goals and acquire sets. From a financial perspective, one of the best way to invest in rare coins is to acquire sets. In fact, many collections have been sold as a whole for more than the total value of the individual coins. If you have any questions about the types of sets that could be a good fit for your interests and financial goals, give Blanchard a call today!
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Monday Morning Wrap Up: May 11, 2020
Posted onAmerica is Resilient
As we move into the second month of the COVID-19 pandemic, it’s worth pausing to remember how our country overcame past crises. Remember the historical events that shook our country like the Spanish flu, the Great Depression, Pearl Harbor, 1970’s oil embargo, 9/11, the 2008 financial crisis and more.
America is resilient. We as a nation worked through previous crises and this too shall pass. While the details and cause of the crises are different, focusing on the ideals our country is founded upon reminds us that America’s spirit is strong. We are a nation founded on courage, determination, optimism, rugged individualism and compassion. Take heart. We will get through this.
Scars and Battle Wounds
Day after day there are still news stories about lives lost to coronavirus and jobs lost to businesses that are shut down. These are the facts. Our nation will emerge from this crisis, but there will be scars and battle wounds.
The labor market swung from full employment at the start of the year to one of the highest levels of unemployment ever seen in American history.
Last Friday’s April jobs report revealed a shocking 14.7% unemployment rate. The pandemic crisis forced Depression sized job losses on the U.S. economy in a matter of weeks. Jobs were lost in restaurants, bars, the arts, entertainment, recreation industries and hotels.
Last week another 3.2 million Americans filed for unemployment benefits, bringing the total number to 33.5 million since the crisis started. This is unprecedented for its speed and its scope. While these are data points they also represent people and families who have lost their jobs and a way to pay their rent or mortgage and put food on the table. The challenge that lies ahead is determining how quickly these 33.5 million people get back to work. It will take time. Some economists now estimate it could take up to a decade before the unemployment picture fully heals.
Wall Street versus Main Street
The economic news has been terrible. However, stock market investors are looking past that and seeing sunny skies. This is a classic divergence between Wall Street and Main Street.
Stocks staged a rally last week, fueled by the Fed’s punch bowl, easy money-printing policies. Is it a case of stocks going too far, too fast?
Many experts say yes.
Simply put, the Fed’s bond buying is driving stocks higher. The Fed purchased $625 billion of Treasuries and corporate bonds in recent weeks, an amount larger than the central bank’s normal purchases over an eight month period. As mutual fund companies rebalance their stock/bond holdings, the inflows into bonds cascaded and artificially inflate the stock market.
Many mainstream economists are publicly wondering if the recent gains in the stock market and on Wall Street are getting ahead of the reality that those on Main Street still face.
China Tensions Climb
It’s not just the trade war that the U.S. and China are bickering about these days.
Last week the U.S. Administration accused China of creating the coronavirus in a lab in Wuhan. The Chinese government flat out denied this accusation calling it a smear campaign. While the origin of the global pandemic doesn’t change the result, the increased level of sniping between the world’s two largest economies creates new challenges in a world that needs cooperation across economic, health, environmental partnership.
Gold Remains Favored Asset
In this environment, gold remains a favored asset among global investors. The World Gold Council reported last week that global gold-backed ETF funds had inflows for the sixth straight month in a row.
This data underscores the deep trust that investors have in gold. However, investors who gain exposure to gold through an ETF are not ever taking physical ownership of the metal and thereby are depriving themselves of the actual true portfolio diversification value of tangible assets. If you have questions about the differences between physical gold ownership and paper gold ownership, please reach out to a Blanchard portfolio manager today.
“We like Gold as Part of a Well Diversified Portfolio”
That’s what the Wells Fargo Investment Institute said about gold in a May 4th research report. Here’s more analysis.
“Some may brush off gold’s 14% year-to-date return as gold being a defensive asset in a ‘risk-off’ world that is concerned with the coronavirus. We don’t see it that way. Gold has been performing well for a few years now. In 2019, gold was up by 20% and we upgraded our gold targets twice. We raised our year-end gold targets again in March 2020 and we did it again last week. Our new year-end target of $1,800-$1,900 calls for gold to test its 2011 all-time high of $1,900.”
The Wells Fargo Investment Institute added that “we believe that gold has a host of economic and market factors working in its favor. Of course, the increased volatility of 2020 is one. Gold’s prime macro driver, though, continues to be the direction and level of global interest rates and their persistent flirtation with negative.”
Gold: A Bond Substitute
The Wells Fargo Investment Institute also noted that gold is being utilized by investors as a substitute for holding long-term bonds as a perceived safe-haven investment. “With no particular ties to a government or other bond issuer, we believe gold looks attractive to long-term investors.”
Moving Forward
America is resilient, yet this pandemic will change us forever. It is changing people’s financial and health pictures and shifting the core principals of Federal Reserve monetary policy.
The coronavirus pandemic will also leave in its wake a sharp increase in public sector debt in the United States. We shifted from a thoughtful, effective and responsible Federal Reserve era in recent decades into a new wild west of money printing, QE Infinity and pledges to ‘do whatever it takes.’ While these policies may provide short-term liquidity to the economy right now, you will be faced with a government with unsustainable debt loads and devalued paper currency as a result.
As you decide how to protect yourself and your loved ones in this changing world, gold can provide a level of security and trust that is unmatched by any paper money churned out from a heavily indebted government printing press.
Take that to the vault.
Stay safe,
David
The Role of Rare Coins in Your Portfolio
Posted onMany numismatists acquire rare coins for their rich history, exquisite beauty and absolute uniqueness. Owning early U.S. American gold and silver coins opens a window to a bygone era in history and invites exploration of the exciting years as our nation developed. Once you begin learning about rare coins, the interest, love and appreciation for this unique asset class grows stronger.
Beyond the pure aesthetics of rare coin ownership, there is proven historical research that reveals just how powerful an allocation to numismatics can be for your long-term portfolio growth.
In the midst of the COVID-19 pandemic, which is upending traditional monetary and fiscal policy, the case for acquiring rare coins right now is at its strongest in a decade. Let’s look first at three elements that investors desire in any asset class: liquidity, safety and yield, and consider how rare coins stack up (no pun intended).
Rare coins are liquid. The definition of a liquid investment is how quickly and easily you can access your cash if you need to sell. Rare coins, especially those highly prized by numismatics like $20 gold Saint-Gaudens are one of the most liquid assets you can find. Not only do these rare coins offer intrinsic value (the gold content of the coin), they offer increased value over bullion due to their rarity. This is one of the most easily recognizable rare coins and offers the ultimate security of liquidity if you ever need to sell fast.
Rare coins are safe. Investments in rare coins are safe when you consider the return of your money. Over the past 20 years U.S. rare coin values have more than quadrupled and the asset class remains in a rising uptrend. Given the intrinsic and rarity value of numismatics, this investment offers you a safe-haven asset that will protect your future purchasing power and assure the return of your money.
Rare coins offer yield. Best of all, rare coins offer the opportunity for dramatic price appreciation. In fact, rare coins of all types returned an average annual 10% yield from 1979-2019. That is an incredible double-digit return over four decades.
Gold Is Money
Why rare coins right now? Gold bullion has outperformed every G-10 currency so far in 2020 and also did so last year. The same trend is unfolding in emerging market currencies, where gold is outpacing all major emerging market fiat currencies in 2019 and 2020.
The coronavirus will leave a significant hangover for the U.S. economy long after the lock-down orders have been lifted. The U.S. government will be saddled with a legacy of higher debt and an overinflated fiat currency. Looking ahead, interest rates in the United States and major G-10 economies will be at zero or negative for a long period ahead. The International Monetary Fund says the global economy is facing the worst recession in 90 years. In this environment of money printing and fiat currency degradation, gold is returning to the forefront as the only true store of value for one’s assets.
Rare coin values tend to outpace gains of the underlying metal (gold, silver) during periods of economic weakness, inflation and bear markets in stocks. Bank of America now forecasts gold to rise to $3,000 an ounce over the next 18-months. Saxo Bank targets gains in gold to $4,000 an ounce. Bank of America also upped its silver forecast projecting gains to $20 an ounce over the next year.
If you’d like to leverage the bull market in metals to the maximum, investments in rare coins offer you an opportunity of a generation right now. Digging deeper, Saint-Gaudens are the rare coins that most often mimic the movements of gold bullion. The $20 Saint-Gaudens series are rare gold coins minted from 1907 to 1933 and were minted with .96750 ounce pure gold.
While Saints do mimic gold price movements, once gold starts a significant run – like it is doing right now, Saints can significantly outperform gold prices. That means with gold in a major bull market, Saint-Gaudens have the potential to increase even more in the years ahead.
Monday Morning Wrap Up: May 3, 2020
Posted onA message from David Beahm
President and CEO
Opening Up
Over half of America is beginning a week with looser coronavirus restrictions. While some states remain under shelter-in-place orders, other states are reopening for business. Gyms, malls and hair salons are beginning to reopen in a scattering of states amid warnings from public health officials that the moves could cost lives.
Will there be a cost to opening up? What about a second wave of COVID-19 in the fall? Much uncertainty lies ahead.
Stocks head lower. Again.
Market action last week saw stocks turn down, while the gold market consolidated within its recent range. The $64,000 question is will the stock market retest the lows seen in late March, which saw the S&P 500 down about 30+% from its high.
History shows new stock lows likely
Research from independent market intelligence firm Bespoke shows the odds are in favor of further stock market declines. The past 25 bear markets since 1928 saw a lower price low put in by the S&P 500 60% of the time.
“In the first bear market of the Great Depression, the S&P fell 44.57% over 58 days and then rallied 20%+ to enter a new bull market,” a Bespoke research report stated on Friday. “Unfortunately, the S&P went on to make a lower low 338 days later, and then kept going lower and lower for years,” the report added.
Economic Update
30 million jobless claims: Fresh economic data continues to trickle out, confirming the severe damage from the social distancing requirements. Over 3.3 million Americans filed for unemployment insurance last week, raising the total number of people thrown out of work in the past six weeks at over 30 million.
4.8 GDP decline: First quarter GDP (gross domestic product) data released last week showed a 4.8% decline, which is surprising given that the pandemic restrictions didn’t begin until the second week of March. Forecasts for second quarter GDP vary widely from negative 10% to as high as a 30% or 40% decline, which is unprecedented in modern history.
Fed rates at zero: The Federal Reserve met last week and kept interest rates on hold at zero, while pledging to do what it takes to support the economy in the midst of this historic event. Unlimited QE (money printing) is now the official policy of the Fed, who has become both the lender of last resort and the buyer of last resort in this topsy-turvy new world of monetary policy. The actions undertaken by the central bank continue to devalue the paper money sitting in your bank account right now.
Huge Gold Coin Demand
The World Gold Council released its Q1 Demand Trends report last week. No surprise. It found that gold coin demand surged higher, up 36% to 76.9 tonnes in the first quarter, driven by safe-haven buying by individual investors.
You don’t have to wait
So many parts of our lives are on hold in this pandemic. Your financial security does not need to be on hold. If you haven’t fully diversified your portfolio, you can act today. Blanchard is fully operational and available for a complimentary, personalized portfolio review and recommendations for you right now. As greater stock market declines may loom ahead, now is the time to act to lock in your tangible assets while gold is still a relative bargain trading below its all-time high around $1,900 an ounce.
What Lies Ahead?
When will we return to spring and summer days filled with days at the beach, watching your favorite baseball team, shopping at the mall or simply meeting friends for dinner at a new restaurant? There will be a new normal this summer and fall as the country braces for a potential second wave of COVID-19.
Yet, according to a recent survey, the 30 million Americans won’t all be able to return to work next month as 7.5 million small businesses are at risk of closing permanently due to the coronavirus shutdowns. At the government level, our country is now saddled with greater debt levels that will handcuff policymakers and tax payers in the years ahead. The massive money printing continues to eat away at the value of a U.S. dollar on a daily basis.
With so much out of your control, it is helpful to focus on what you can control. If you haven’t rebalanced your portfolio in recent months, now is the time for that simple and quick exercise. If you’d like us to walk you through that process, please call a Blanchard portfolio manager today.
In these volatile markets, we want to make sure everyone has access to the best information possible to help you navigate the financial storm. So many parts of our lives are on hold in this pandemic. Your financial security should not be on hold.
Stay safe,
David
Why “Tail Risk” Should Be in Your Investment Vocabulary
Posted on — 1 CommentA tail risk is the probability of a rare event occurring. The tail is the left and right portion of a normal distribution curve which resembles a bell and therefore carries the name “bell curve.”
Author and investor Nassim Taleb explored the concept of tail risk in his 2007 best-seller The Black Swan: The Impact of the Highly Improbable. In the book Taleb tries to draw the reader’s attention to the idea that too often we are blind to randomness. As a result, we are exposed to the cataclysmic fallout from events that are possible, though improbable.
Investors across the world have experienced a rude awakening to this idea. As the COVID-19 pandemic continues to ravage economies, investors are discovering that they can in fact find themselves sliding down the bell curve into tail risk territory.
The “tail” however, is a strange place. When examined from the perspective of a diversified portfolio the tail represents both threats and opportunities. Consider that “gold tends to outperform in left-tail events,” according to research recently published by the World Gold Council. This outperformance does not always look like surging returns. Sometimes outperformance simply means being able to weather the storm and hold on to assets when others are watching their investments (equities and fixed-income) sink.
Others before Taleb have attempted to warn people of the unseen dangers lurking within the Byzantine systems we build. In his book Normal Accidents, author Charles Perrow argues that “we create systems—organizations, and the organization of organizations—that increase the risks for the operators, passengers, innocent bystanders, and for future generations.”
Academic Stephen H. Kellert touched on this idea when he coined the term, “predictive hopelessness” in his book In the Wake of Choas: Unpredictable Order in Dynamical Systems. Others, like Gerald Schueler who wrote The Unpredictability of Complex Systems, explains that “complex systems all have feedback mechanisms,” and that “tiny errors will creep into the feedback system.”
Today we are seeing that the accumulation of these errors can lead to an economic system that is unprepared for a pandemic. For those who hold gold as part of a diversified portfolio, however, these risks, while unavoidable, can be mitigated. Consider additional research from the World Gold Council report which finds that the correlation between gold and the stock market becomes more negative as equity market moves intensify. That is, as the S&P 500 experiences larger swings gold increasingly moves in an opposite direction. This fact has become especially evident in the last 8 weeks of market turmoil where the correlation between gold and the S&P 500 has reached much further into negative territory than the same correlation measured over the last 59 weeks.
When sweeping upheaval hits the equities market gold often seeks the high ground, helping investors to weather the storm. As authors like Taleb, Kellert, and Schueler issue warnings, many of us go about our lives without even a moment’s reflection on what awaits around the next corner. Gold, as an investment, reminds us that we can make at least some protective measures today.
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Monday Morning Wrap Up – April 27, 2020
Posted onA message from David Beahm
President and CEO
Gold $3,000
It was another wild week in the economy and the markets. As we wait for the coronavirus to peak, the economic toll from the shut-down continues to mount. Never say never. We saw oil prices go negative last week. The price of West Texas Intermediate (WTI) crude oil closed below zero on April 20. That’s right, oil sellers couldn’t give barrels of oil away for free.
In this topsy turvy world of the coronavirus pandemic, we’ve seen the government print new money and give it away (helicopter money) in the form of $1,200 stimulus checks to most Americans. The Fed has gone into full-on Rambo mode in its efforts to save the economy, aggressively printing new money, even buying assets like junk bonds. The Fed has stepped, or overstepped as some might say, into the role as both the lender and buyer of last resort.
Gold climbed last week, while stocks weakened. As the COVID-19 shutdown rocks the economy, gold shines brightly as the ultimate store of value. Major investment banks are now projecting gold will climb as high as $3,000 an ounce over the next several years.
Is the Fed Overreaching?
As we wait this week for the Federal Reserve’s policy making meeting on April 28-29, its worth taking a close look at its recent actions. Like the boy who cried wolf, we’ve used the word unprecedented so often lately it’s beginning to lose its meaning.
The Fed has attempted to ride in like a knight on a white horse to save the economy from another Great Depression. The Fed ballooned its balance sheet by about $2 trillion in the past month to $6.6 trillion as of April 22. Economists are projecting it could climb as high as $9 trillion by this summer. Yes, that’s all new money printing.
In its dramatic rescue efforts, the Federal Reserve began buying junk bonds this month. Outside of actual stocks, the Fed is buying asset classes of all kinds. Is the Fed’s move into buying assets that are below investment grade dangerous? Probably.
Meanwhile, public government debt is surging, while the Fed is effectively monetizing the debt. Here’s how this works:
The Fed prints the money. The Treasury sells new government bonds to finance the helicopter money and other emergency stimulus measures and to make interest payments on its current debt. Then, the Fed buys those bonds. Read that one more time. If that has you thinking of a Ponzi scheme, you aren’t that far off.
In the midst of this, foreign holders of U.S. Treasuries are selling. Foreigners dumped over $100 billion of Treasuries during three weeks to March, according to Fed custody data. Is that worrisome? Yes, indeed. Where will we be when no one except the Fed is willing to buy Treasuries to continue to finance our interest payments on the $24.7 trillion in U.S. debt? We will be in a world where gold is the only true money.
Will the Fed Go Negative?
While Europe has seen negative interest rates (when you have to pay the bank to hold your money), we haven’t seen that here in the U.S. Yet.
Last week, a former Fed official called for just that.
“Unprecedented situations require unprecedented actions. That’s why the U.S. Federal Reserve should fight a rapidly deepening recession by taking interest rates below zero for the first time ever,” said Narayana Kocherlakota, an economist and past president of the Federal Reserve Bank of Minneapolis.
Will interest rates go negative for the first time in history? We’ll update you on Wednesday afternoon after the Fed meeting concludes. If they do, expect an EXPLOSIVE move in gold higher.
Gold: The Ultimate Store of Value
It’s no wonder that last week in a BofA Global Research report entitled: “The Fed Can’t Print Gold”, the bank upped its 18-month gold target from $3,000 and even $4,000 an ounce over the next several years. Why? Largely because central banks are underwrite fiscal stimulus and financial markets through money printing, the bank said.
Saxo Bank, a Danish bank, went even farther, targeting gains to $4,000 gold within a few years.
Economic News
The fresh economic data is bleak. Breaking news last week saw a massive 15.4% decline in new home sales in March. The West Coast and the Northeast were hit particularly hard by the social-distancing requirements, with regional home sales down 38.5% and 41.5%, respectively.
No surprise, really. Home buyers are locked down in many regions of the country, making new home inspections virtually impossible. Sure, you can look at pictures online, but there’s no chance to look in the basement and turn on the faucets. Don’t forget. Home buyers generate a lot of consumer spending on furniture and new appliances. This shuts off the trickle-through impact on economic growth in more ways than one.
Jobless claims soared again last week, as another 4.4 million Americans lost their jobs.
Since mid-March, a staggering 26 million Americans have applied for unemployment benefits. These are real people, facing dramatic economic hardship with the loss of a paycheck. Economists’ project the unemployment forecast is closing in on levels not seen since the Great Depression.
Gold Is Real Money
It’s amazing, but not surprising, to see how the investment community has rallied around gold, with the new target of $3,000.
As the Fed continues to print new dollars with abandon, investors are taking solace in the intrinsic value of gold. Gold is real money and is the best for this money printing bubble the Fed and other central banks are creating. Soon, physical gold will only be available at much higher prices.
Would you rather buy gold today at around $1,717 an ounce, or will you wait until it is above $2,000 an ounce? The choice is yours.
We would like to hear about any questions or concerns you or those of your family or friends might be having on the investment and personal finance level. Please share those with us in a comment below, on social media or our website, or by phone at 1-800-880-4653 and we can offer guidance and recommendations.
While we all try to cope and move through this pandemic, count on Blanchard as a steady source of market analysis, guidance and support for you. We know you have questions. We are here for you and we have answers.
Stay safe,
David
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The Nuanced Appeal of the 1873-S $20 Open 3
Posted on — 2 CommentsThe California Gold Rush changed the firmament of American life. Nearly 300,000 people came to the state seeking to stake their claim and pull new found wealth from the ground. However, this adventurous spirit precipitated some serious problems. Many indigenous populations were forced off their lands by opportunistic “forty-niners,” a reference to those flocking to California during the peak of the gold rush in 1849.
In fact, the gold rush was so momentous that its effects extended all the way to Congress where people like James Iver McKay began to notice that the gold supply in the country was increasing markedly. Eventually, he drafted legislation calling for the issuance of the Liberty Head double eagle coin. The piece was originally intended to facilitate the transfer of large sums between parties.
After considerable collaboration the final design settled on an obverse depicting the head of Liberty. She has thirteen stars surrounding her as a representation of the original US states. The reverse side featured a heraldic eagle with a double ribbon reading “E Pluribus Unum.” As the case with nearly any new coin issuance, the piece was initially met with some dissatisfaction. The Journal of Commerce, for example suggested that the coin should include an image of George Washington and that the eagle should be designed “standing out as if it were not ashamed of itself.” Few hold these opinions today as the double eagle design remains popular with collectors.
The 1873 version of the coin was part of the “Type II” issuance which were minted between 1866 and 1876. During this period of upheaval in the stemming from the Civil War Secretary of the Treasury Salmon P. Chase responded for calls to imbue the coin with a reference to faith. Therefore, he and others decided to inscribe the coin, and nearly all other coins, with “In God We Trust.” To accomplish this change the designer enlarged the circle of stars on the reverse placing the new text within the stars.
By the end of 1872 another change, this one more practical, was requested. Chief Coiner A. Loudon Snowden indicated that the “3” appearing in the date of the coin could be easily mistaken for an “8.” This change is what led to the two versions we have today, an “Open 3,” and a “Closed 3” design.
On the Closed 3 design the knobs of the “3” are identical in size and shape. In contrast, the Open 3 design features a slightly smaller upper knob. The Open 3 version is estimated to be approximately three times more rare than the Closed 3 variety.
This detail is what gives the 1873-S $20 Open 3 its charm. It is a minor, but noticeable change that has come to represent the nuanced appeal that compels coin enthusiasts to seek out the unusual and obscure. In fact, almost none of the pieces struck at the Carson City Mint in Nevada and the San Francisco Mint include the Open 3 design.
Today, the coin enjoys a unique reputation among collectors who hold the piece in esteem for both its rarity and enduring record of US history.
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