Current Market Conditions And Gold

Hey, The Investor’s Podcast Network Community!

What a market it has been the last few weeks! With the trade war raging on, the mixed signals from the FED, and the price of gold soaring, watching the financial markets almost felt like watching a sports event.

In times like these, it’s important to keep your head straight. With a net worth just shy of $4B, a highly successful track record with 4.2% outperformance, and being heavily invested currently in the financial markets, Ken Fisher seemed to be the right person to ask.

As anyone following Ken Fisher would know, he always provides great insights on the current market conditions. However, it wasn’t his view on the market that surprised us, but something entirely different. Ken Fisher told us that he didn’t think he was managing a lot of money. He also didn’t feel that it constrained him to achieve great returns. For a guy managing more than $100B (yes, it’s billion), it was surprising to say the least. He felt that compared to the size and opportunities in financial markets, the funds he had under management were a drop in the ocean. Here’s a link to our conversation if you’re interested in hearing Ken Fisher’s view on the optimal macro top-down investment strategy.

So let’s compare the size of Ken Fisher’s portfolio against the financial markets. In very rough numbers, the value of the global bonds market is $100T. The value of all listed stocks is closer to $80T, where the US accounts for around 50%. Keep in mind that private businesses (like behemoth companies Cargill and Koch Industries) are not part of the stock market as it only includes public listed companies. While $100B still seems like a lot of money to me, Ken Fisher’s assessment can be viewed in that context.

Perhaps the hottest investment these days is gold, with a total market cap of $8T. Trading at around $1,500 an ounce, many investors ask themselves if now is the time to own gold. The decision to buy gold is like the decision of any other investment you can make. First, you should ask yourself why you want to make the investment. Then, you should estimate the current price and compare it to the value.

So let’s start with the why. Generally, there are three reasons for owning gold. The first is that you don’t trust your government and the federal reserve, so you would like to bet or hedge against them. Just consider the financial crisis. The real estate bubble was arguably created by the FED; when the bubble bursted, the government pumped hundreds of billions back into the system. This is best exemplified by the $787B plan pushed out to create jobs in 2009. In the meantime, what happened to the price of gold when the trust was at its lowest? The price soared and didn’t look back for years.

The second reason is related to the distrust in authorities, but focuses more on preserving wealth for the investor. Billionaire Ray Dalio is a big proponent for gold as a long term hedge against unexpected inflation. In a fiat-based currency system, authorities are incentivized to make good short-term decisions with negative long-term impacts. The narrow focus on the short-term can spike inflation, which we’ve seen multiple times throughout history. One might ask, “What is the use of $1M in equities if $1M is not worth anything?”

The third and final reason is that gold can be looked at as an asset you currently find undervalued. This takes me back to the valuation piece I mentioned before.

So what is gold worth? I follow Warren Buffet more than any other investor and I’ve seen quotes similar to this multiple times: “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

As a value investor, I know where this is coming from. How do we value an ounce of gold when it does not spin off any cash? You’ll surely have to do this very differently than a stock or a bond. There are a few different methods to do this, and a very popular one is the Dow to Gold Ratio. With the ratio currently at around 17, which is historically very expensive, we do have an indication that the price of gold will appreciate compared to stocks.

So where am I in all of this? As long term readers of my newsletters would know, I’ve always been very upfront with my investments and failures both in my newsletters and on the podcast. This newsletter is, of course, no different.

I’m not invested in gold, but I could as well have been. Please allow me to elaborate on that statement. As much as I usually agree with Warren Buffett, I also understand where Ray Dalio is coming from when he talks about diversification and preserving wealth. If I were close to retirement, I would strongly consider a small gold position of no more than 5% of my portfolio. However, I’m in a phase of my life where I aim to compound my wealth, and I wouldn’t like to pay the opportunity cost of owning gold long term.

If you ask me where I think the price of gold would go over the next 12 months, my best guess would be that it would go higher for the reasons mentioned. However, gold is neither within my circe of competence nor part of my strategy.

If gold is not within your circle of competence, I would suggest that you don’t start today, unless you’re interested in learning about gold investing from A to Z and aim to use it to preserve wealth. Of course, you can consider investing in gold short-term, but that would be quite speculative, unless you really know what you’re doing and have a clear exit strategy.

I hope my newsletter was able to help clarify a few things about investing in gold. Please make sure to check out the stock pick that Preston and I found trading at an attractive valuation since my last newsletter in July. I’ve attached our intrinsic value assessment of that stock in this email. Also, here is the link to all of our stock analyses.

Your Friend,

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Preston and I always love to meet our audience. This past weekend, I met up with the TIP community in Aarhus, Denmark. It was fantastic to see so many people, also from abroad, joining our free two-day event. You can always check out our next events, as well as photos from previous events, on this page.

I’ll be in Manila, Philippines on August 30th for the next event. During these events, you can meet other listeners of The Investor’s Podcast Network. It’s completely free — you just have to pay for your own food and drinks. We already expect to be at least 20 people, so please don’t be shy to sign up. The more, the merrier. If you’re interested, please reply to this email and I’ll send you more information.