The beginning of the year is a good time to review expected returns of the various asset classes. Research Affiliates (RA) publishes their 10-year expected returns READ MORE
Early Innings for Gold and Silver?
Since January 1, the price of gold through October 1 has risen by 47.6% and the price of silver has risen by 63.7%. Are we in the early stages of a bull market for precious metals?
The primary reasons for continued price appreciation are 1) ongoing purchases of gold by central banks; 2) individual investors are now taking an interest in precious metals; and 3) physical supply deficits. Major investment firms are now getting on board the gold train.
On June 10, JP Morgan Research published a bullish opinion on gold. They wrote, “After three consecutive years of more than 1,000 (metric) tonnes of CB (central bank) gold purchases, the structural trend of higher CB buying has further to run in 2025 and 2026.” They cited policy uncertainty, stagflation or recession, lower interest rates, geopolitical risks, and diversification away from US dollar reserve holdings by central banks as reasons to include gold in investment portfolios as “one of the most optimal hedges.”
On September 16, the Chief Investment Officer of Morgan Stanley, Mike Wilson, recommended that investors shift from a traditional 60/40 allocation of equities/fixed income to a 60/20/20 allocation of equities/fixed income/gold. As US Treasury securities are losing some of their safe-haven status, Wilson wrote: “Gold is now the anti-fragile asset to own, rather than Treasuries.”
On September 17, Jeff Gundlach, Founder and CEO of DoubleLine Capital, recommended in a webcast that investors allocate 25% to gold. Gundlach has made positive comments about gold in the past, so this was not a surprise. DoubleLine Capital manages fixed income and has no precious metals investment products at this time, so Gundlach’s recommendation is unusual because it cannot benefit his firm. Gundlach commented: “So I’m still hanging in there owning gold until such time as we get a totally different regime as regards the deficit situation and the kind of international flow situation, which is now kind of not benefiting the United States. And I think that’s going to be a trend for the next few years.”
On a global basis, the current valuations of equities (common and preferred stocks), fixed income (sovereign, corporate, municipal, and asset-backed securities), real estate, and precious metals are approximately as follows:
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- Equities $124 trillion
- Fixed Income $140 trillion
- Real Estate-Commercial $ 58 trillion
- Real Estate-Residential $287 trillion
- Gold $ 27 trillion
- Silver $ 0.2 trillion
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While neither Wilson nor Gundlach included real estate in their allocation, they represent significant portions of net worth for many families. To get close to the target allocation levels that they talk about for gold, the price of gold would have to rise substantially, or the price of other financial assets would have to decline substantially, or it could be a combination of both. Despite the logic supporting precious metals, few investment advisors are including them in their model portfolio allocations. Thus, I expect gold and silver to continue their upward trends as more individual investors start to participate in the rally.
If you have any questions or comments, please contact me.
Robert G. Kahl
CFA, CPA, MBA
Prepare for All Eventualities
In “The Gentleman” series on Netflix, a young British army officer named Eddie Horniman finds out that his father has died in England. When he returns home for the funeral, READ MORE
GMO is Cautious but Selectively Optimistic
Jeremy Grantham, co-founder and chief investment strategist of GMO LLC, has an excellent reputation among investment managers due to many of his prescient statements of the past. He and his asset allocation team garner attention when they publish their commentary and 7-year forecasts on asset class returns. GMO is currently cautious about the US stock market but selectively optimistic about pockets of opportunity. Their comments reflect a defensive stance at the present time.
In his March 11 commentary, Jeremy Grantham writes that “the U.S. is really enjoying itself if you go by stock prices. A Shiller P/E of 34 (as of March 1st) is in the top 1% of history. Total profits (as a percent of almost anything) are at near-record levels as well. Remember, if margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy.” However, while U.S. stocks are generally overpriced, he believes that there are some relatively attractive investments. He highlights quality, resource, and deep value stocks.
Quality stocks are defined at GMO as stocks with a high stable return on equity and a strong balance sheet. Grantham argues that they have “a long history of slightly underperforming in bull markets and substantially outperforming in bear markets.”
Grantham likes resource stocks that provide raw materials which are finite and getting scarcer. He also likes the diversification benefits because “at longer horizons (10 years) resources are the only sector of the stock market to be negatively correlated with the broad stock market.”
There has been a divergence in valuations among U.S. stocks. Deep value stocks (the cheapest 20% of the US market) “are in the best 7% of their range” while the most expensive 20% of U.S. stocks “are in the worst 10% of their 40-year range (compared to the top 1000 stocks).”
As of February 29, 2024, GMO is forecasting an annualized real return (for 7 years, after inflation) of -4.1% for US large cap stocks and -2.6% for US small cap stocks. They have higher expectations for international stocks, with a range that varies from a low of 1.1% for international large cap stocks to the highest ranked category of emerging market value stocks at 5.8% (after inflation, in local currency terms). In terms of US dollars, GMO expects an additional 2 to 4% per year from currency gains for international stocks.
GMO has modest expectations for fixed income. At the end of February, their 7-year forecast for fixed income has real returns (after inflation) for U.S. bonds and U.S. inflation-linked bonds of 1.7%. The highest ranked category is emerging debt at a 3.5% real return.
GMO does not provide any forecasts for precious metals, but they are starting to receive more attention. Central banks and investors continue to buy gold, primarily due to the rapid growth of US government debt and interest expense. Also, the geopolitical landscape is changing and the world is less willing to follow America’s lead.
Silver demand is picking up as well. India imported a record 2,200 metric tons of silver in February 2024, a portion of which will be used for lithium-ion battery production at a new factory.
If you would like to read more research directly from GMO, it is available to the public here: https://www.gmo.com/americas/
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA
Are We There Yet?
Egon Von Greyerz is the Founder and Managing Partner of Matterhorn Asset Management and Gold Switzerland. Matthew Piepenburg joined their firm last year. Both provide thoughtful commentary and interviews. Piepenburg acknowledges that they are “Swiss-based gold bugs.“
In his September 24 commentary, Piepenburg asks, “Why is Gold Not Rising?” Good question given that:
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- Other commodities are reaching new highs.
- Inflation rates are rising.
- Interest rates are low and several percentage points below inflation rates.
- Central banks around the world continue to expand their balance sheet assets at a rapid rate.
- Governments show little or no fiscal discipline.
Piepenburg’s written commentary about Federal Reserve policy and gold’s purpose in an investment portfolio is located here: https://goldswitzerland.com/why-is-gold-not-rising/
If you prefer a video, Matthew Piepenburg was interviewed by Tom Bodrovics and discussed the international monetary system and related topics. The video link is here (51 min): https://www.youtube.com/watch?v=CZ9bNTl5kTE&t=599s An index of the topics covered with time marks is located in the right margin of the video.
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA