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I didn’t see this coming, and neither did you

Are we approaching a financial doomsday? Should investor look to gold shares?

Let me be upfront about this: I didn’t see it coming.

Having been burnt so many times in the past by the capricious and unpredictable nature of gold and gold shares I’ve been hot-wired to interpret any sudden upward movement in the price of this ‘barbaric relic’ as the sceptics call it, as temporary, just waiting for my decision to enter the market before it begins yet another downward swoon.

And so it was again for many years, particularly with regard to South African gold shares, and over this time I often commented that I wouldn’t touch gold shares with a barge pole.

But as faraway friend and former stockbroker Neville Stevens-Burt (now living in Malaysia), keeps reminding: “We are now approaching the end-game. It’s time to protect yourself against the financial calamity that is rapidly unfolding. Buy gold and gold shares.”

But as I said in the introduction, if you’ve been in the financial world as long as I have, you’ve heard and read such warnings too often to react to them all the time. And for good reason: most of these ‘end-game’ predictions have been wrong. Yes, markets have swooned and crashed, sometimes spectacularly – the last time during the 2007/8 Great Financial Crisis, when markets plummeted by more than 50% in about four months. But by and large markets have recovered and the financial edifices of the financial world are still standing.

I have a number of books predicting financial doomsday in my library, including one written by Robert Kiyosaki (Prophecy, 2002), and all of them bear testimony to the folly of making such definitive, bold forecasts. But they all prey on fear inbred in the human race and many of them sell well and become a talking point for a short period of time.

How can interest rates be negative?

But I must admit that the rumblings of financial discontent, which are getting louder and closer all the time – akin to a rolling thunderstorm on the Highveld – have me worried. I’ve spent considerable time in recent weeks trying to understand this extraordinary period we are in right now: global negative interest rates.

We now have, according to recent reports, about $10 trillion dollars’ worth of government debt across the globe trading at negative interest rates. The latest country to join this mad scramble was Germany last week, where the rate on the ten-year Bund dropped below 0%, the lowest yields in over 500 years!

Nowhere have I came across any credible explanation from any recognised economic commentators. I’ve even been spending some time on off-centre financial websites to try to find answers. And there were plenty, none of which I liked. In short – if you believe in the majority of contributors to these sites – it’s all over for financial markets and the Big Crash is coming our way. Sort of like the movie Independence Day.

Why the sudden gloom?

Interest rates in countries such as Norway, Switzerland and others have been negative for a while and now Germany has joined them. This is not a small, peripheral country – it’s the fourth largest economy in the world and the sharp drop in rates to -0.02% this week sent shockwaves throughout the banking system in Germany. It is costing German banks billions of dollars in fees and reducing the savings pool for future generations. Imagine being a German life assurance company that has to buy certain assets today to provide for a future, unknown liability ten or 20 years away for its future pensioners.

That’s right: savers are so petrified at the moment that they are prepared to forfeit as much as 2% per year of their capital to the issuer of the instrument. This collective action by savers/pension funds/retirement funds indicates that right now return of capital has become more important than the return on capital.

In the US, rates are still positive but on Thursday the yields on ten-year Treasury Bills dropped – which means the price went up – to 1.58%, the lowest in almost four years.

The US market has also been spooked by comments made by Republican nominee for the presidential race Donald Trump, saying that the US can never go broke…all it needs to do is print more money. 

Still fighting the inflation beast

Let’s just stop to think about it for a minute as it’s not an issue widely debated in local financial circles. Our financial issues are totally different: here we fear higher interest rates, a declining currency and an inflation rate that’s just itching to head higher as a result of drought, the currency decline and administered prices. Local investors are more focused on getting a return on their investments that will match or beat the inflation rate which, over the last two years, has become significantly more difficult to do than in the recent past.

Gold, and to a lesser extent silver, have been the major beneficiaries of the era of global negative interest rates. If bonds are earning less than zero and a generalised period of deflation ensues, then by definition an asset class that returns zero percent offers an attractive option. This is what seems to have been driving the renewed demand for physical gold over the past eight months or so. And because gold shares were so depressed for a number of years, the whipsaw reaction since then has been spectacular.

The continued delay by the US Federal Reserve to further increase interest rates (the increase was postponed yet again on Wednesday evening by Fed governor Janet Yellen) is also playing into the hands of the gold bulls. Higher US interest rates are anathema to higher gold prices and vice versa. There is a feeling that the US Fed has missed the boat in terms of raising interest rates and rates are unlikely to be raised anytime soon, especially considering the deflationary blanket that has descended over global financial markets.

The accompanying graph of the performance of the Old Mutual (local) and Investec (global) gold funds – two vehicles that give South African investors direct access to gold shares – shows just how unpredictable it’s been to determine if the turnaround in the fortune in gold shares has been the real thing.

(Click image to enlarge)

image001 (1)

The bear market in gold shares lasted more than four years and intermittent upticks in prices proved to be a false alarm. That is, until the market bottomed some time around December last year – since then the market has almost doubled.

It’s not a retail market favourite and it’s not the kind of investment you could have recommended to your clients unless you were prepared to face the wrath of the Fais Ombud if your call turned out to be wrong, once again. That’s why there has been no flood of money into the Old Mutual Gold or the Stanlib Gold and Precious Metal funds since the upturn started.

John Biccard, who runs the Investec Value fund, has had a large exposure to gold shares for quite some time and he has since the end of November shot the lights out as far as returns are concerned. However, many investors bailed from this fund and were not able to stomach the gut-wrenching under-performance for such a protracted period of time.

Biccard has to be commended for sticking to his guns in the face of widespread criticism, from me too. It’s still not a fund I would or could recommend to widows and orphans. 

Too late to join the bull run?

The big question now is what should investors do? Is it too late to board this rapidly-accelerating train or is the derailment just around the first corner, as yet unseen?

This is why an investment in gold shares is such an exhilarating, stomach-churning ride. Get it right, like my friend Stevens-Burt, and you are floating on a cloud of profits.

Get it wrong and you slink away to sulk, all alone with no one wanting to hear yet another tale of woe.

And furthermore, where do you buy your gold shares: here in sunny SA or do you send some dosh abroad to invest in a more globally-diversified gold mining portfolio – a strategy that seems to have worked better than staying local. Or do you buy NewGold or Krugerrands?

From a technical perspective the increase in both the gold price and gold shares has been very positive, signaling higher levels in the weeks and months ahead. But, once again, it’s not for the fainthearted or for people who shop on Tuesdays to get discount on milk and bread.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at  magnus@heystek.co.za for ideas and suggestions.

COMMENTS   39

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Hindsight is of course the best vision to have. As in this case.

the maestro has spoken – let all listen!! 1000% agree – even down to the fact that never have I bought gold before except some kruger rands – a long time ago. however my shares are both listed in London – randgold (RRS.L) and freslino (FRES.L) – gold and silver respectively. my retirement fund will be effectively 100% invested off shore (ie out of oz) by the end of the year – no issues with any 25% limit as prescribed to retirement funds in sa. remember people saying oz was a “nanny state” – yet I am allowed to invest when and where I like. something not right!

Robert, Robert, Robert
First you (allegedly) find fault with SA and move to AUS -pledging allegiance to that country and its people. Aus take you in and give you a safe haven.
Yet, you don’t trust your new fatherland and now taking your Zillions ‘off-shore’.
And throughout this time you have a burning desire to educate poor SA’ns staying behind in your former fatherland – soon to be your former-former fatherland?
I am glad you are not my friend or my partner or my family member – you seem to chop and change where you go – just to protect your ZAR1500 of funds.
I now understand you a bit better – strongly suggest you seek professional help when your NEXT chosen fatherland don’t want to accept you and when your present fatherland kick you out being a dishonest and disloyal citizen

It’s his gloating and “look at me, how clever I am!” that irritates me. He says he has a family. I would hate to be a member of his family – surely they must find his gratuitous comments equally annoying.

Got to love Robert – No loyalty at all to any country – Probably no friends as well – Always looking out for number 1 – I have a friend like that in London – Going to grow old alone – Wealthy, but alone and very bitter…

Robert – You can only be an ex financial adviser – Made all your money from other people and then jumped ship to good old Aus… If you were really so content with your wonderful life you would not be spending it on this site – Maybe you have run out of people to irritate in Aus?

Go away Robert…nobody cares about you or your opinion. You don’t stay here any more. You are a sad person.

ABSA NewGold ETF. Been buying this every month for a few years now. Probably the best performer in our portfolio right now. Unfortunately it doesn’t pay divvies, but it avoids the drama of SA miners who go on strike, have mine accidents, subject to load shedding and BEE throttling requirements.

Negative interest rates bear testimony to the extent at which companies and individuals across the globe are deleveraging and moving away from debt. The current global depression will prove to be much worse than the 1930’s depression.

The devaluation of currencies cloud the true picture and hides the severity of the crash. When we look at the true picture (Dow/Gold ratio), it becomes clear that the market in real terms is now half-way in the crash that started in the year 2000.
It is prudent to own gold but I am not falling over my feet to by goldmines.
http://www.macrotrends.net/1378/dow-to-gold-ratio-100-year-historical-chart

“…lowest yields in over 500 years…” – ignore this at your own peril!

Magnus and readers let me tell you a tale of wow, as a novice investor I bought both Anglogold (R88) and Harmony (R9) in Dec 2015 by myself, during that time kept fluctuating, i got cold feet and no knowing if I had done the right thing, i checked that what I had done was correct, my Private broker ridiculed me, telling how he had TOLD ME TO AVOID COMMODITIES, and what a fool I was, TRUSTING THE IMBECILE, I took a small loss on both, Anglo R84 and Harmony R8.70 as did not know what I was doing, look at gold now, reputable fractional stockbroking firm, you geniuses. How I’m itching to give the readers your company name, you lucky i’m not Anonymous, you’d be down and out

Magnus There are always exceptions to the rule, or so they say. In February this year at a presentation to the Technical Analysts Association, using monthly charts I showed that gold and silver had started long term bull markets and that the Dow Jones was completing a top formation – also long term. No surprise, as I have been studying the gold market since 1996 and it has been clear for some time what was developing, confirmed by the charts.
Also, the 2007/8 bear market on Wall Street did not recover normally, but only after the Fed mortgaged the inheritance of two or three generations of Americans by laying out about $17 Trillion to rescue the financial system. And they are still paying even more each year to keep a failing economy afloat.

more like to rescue the banks who finance America’s elections and run the world through their proxies at the White House…

And gold drops over $15 an ounce this morning. Lets see what that does to the gold shares then?

Magnus, I expected more insight from you:

1. You do not make a difference between “real” gold and gold shares. Really. There are 800 times more promises (paper gold “ounces”) issued by the financial industry than there is real gold in this world. What do you think the consequences are when panic breaks out and people are going to look for the real stuff?
2. So you want to protect yourself against a meltdown of the global financial industry with paper gold promises made out by that same financial industry? Good luck with that! At the end you will hold a worthless piece of paper.
3. The gold price is the price our financial overlords want it to be. As there are 800 times more paper gold promises than physical gold the price has nothing to do with supply and demand of physical. The price is managed as sudden increases in the gold price will be regarded as a threat to national security as this would mean that people do not trust the Dollar anymore.

Interesting that there is such a strong desire to trust the criminals running this fake system.

ps: Krugerrands in 2008 were R7500. They now retail for R20 000.

The amount of derivative contracts based on the underlying instrument says nothing about the supply-and-demand factors of the underlying commodity. The fact that the open interest is 800 times larger than the physical market certainly does not imply that the price of the underlying is being manipulated, or that the price will be forced in a certain direction upon expiry of these contracts, because for every long there is a short.
The open interest for maize and wheat is many times the amount of physical product. This does not mean the price of these commodities are being manipulated, it simply means that producers, buyers and speculators are busy offsetting their risk between one-another.

Buying gold shares when Banks like Investec ( as discussed in a plethora of Noseweek articles), sells gold structures ( like the ”naked option” that they sold to JCI’s Brett Kebble), when he gambled that the Gold Price would fall and that the USD/ZR would weaken, should scare any potential Gold Share buyer. The most scary and unacceptable part of this hedge of South Deep production ‘’12 years forward’’, was the fact that no gold were available for any future physical delivery when the deal was done. They thereby in my view entered into a ‘’illegal transaction’’, in line with accounting standards as no real ‘’market to market’’ could be done during any financial year. These type of transactions effects and influences the spot ‘’gold market’’ with gold sales that wasn’t even mined yet! It also remains a mystery to me how such a transaction, with infinite loss potential due to the ‘’naked hedge’’ risk, could have been sanctioned by the shareholders, as the loss eventually rose to almost ZAR 4 billion

what is even more mysterious is we destroy the environment to take gold out of the ground only to store it underground at some or other bank’s vaults…

Higher Gold Price > Yuan now Gold Backed and all other currencies will also be gold backed very soon.
World Debt> Jubilee around the corner, no crash possible for next 1,000 years.
Fiat Dollar> Now new US Gold backed currency is known as USN.
Fed> US Treasury now handles the USN Currency. Fed was owned by a British corporation.

No thanks, Il take what the tech savvy Chinese millennials are having, stellar returns in physical gold and Bitcoin. Keep your BEE infested SA gold shares and Randela fiat currency at own risk.

What happened to time in the market and not trying to time the market?? Gold should be a part of any balanced portfolio, but now all of a sudden and after gold shares have run hard, you are punting gold? Chopping and changing just incurs CGT costs. Get a balanced portfolio and stick it out with a gradual move to cash as you get to retirement age. Low cost ETF’s will save plenty in fees too. The market crashes from time to time, it always recovers over time. Unless Magnus is saying “this time is different”. In which case I bow to his superior foresight.

It’s madness and one step beyond. Magnus wants an explanation- here it is:

Conventional wisdom would dictate that negative interest rates (not to be confused with discount rates) are not possible as one could withdraw one’s money and stick it in a safety deposit box where is would not lose value.

Interest rates and bond values move in opposite directions. As interest rates fall, bond values rise and vice versa. If interest rates fall to zero then bond values would rise to infinity – which is an obvious contradiction.

The upper limit of interest rates is set by the marginal productivity of capital whereas the lower limit is set by the marginal bondholder. As interest rates fall bond values rise which is itself an enticement to hold bonds in a falling interest rate regime. Zero interest rates is not a merely line to be crossed, but an asymptote (for those more mathematically astute). Think of interest rates halving and halving again.

Clearly then a negative interest rates cannot be a market phenomenon. Let that sink in. It is imposed from above.

The question is why?

Forcing interest rates below zero is the same thing as capital destruction. Let that sink in. These countries are literally burning their capital. How is this? simple your capital investment is worth less when interest rates fall as it was financed at a higher interest rate level. The retirement value of debt increases as interest rates fall. Think of companies that issued debt.

The reason for the negative interest rates is a currency war or trade war to debase one’s currency. A debased currency is no road to riches. One cannot get rich be destroying the value of the peoples saving, companies and individual assets. The temporary boost to export earnings comes at a price: impoverishing the populace.

The only answer out of this mess is to re- monetise gold. Gold is the only asset that is nobody’s liability and is thus the ultimate extinguisher of debt. Gold has a very low declining marginal utility which is why people desire to hoard it. Without gold, debt can only compound until it destroys’ the world’s financial system. Remember the magic of compounding interest? Well the same thing goes for debt. Not so magical, though.

interesting – was wondering the same thing mathematically about what it means for valuations of companies when you can fund with negative yield debt.

So Gold as in physical krugerrands, or gold as in ETFs? or is everyone stuffed anyway when the financial system is destroyed.

Magnus
I enjoyed your comment about the market tanking as soon as you enter it – it has been my experience too many times.
Some time ago I bought gold bars and stashed them away in vault- about a month later I happened to check price of gold and my ‘investment’ was down by so much I did not have the heart to do a calculation.
Having left this as it is – I am now seeing some increase in value – but hopefully it will be worth a lot one day when my children and grandchildren open the vault.

I worked in the Gold and Foreign Exchange Dept of the SA Reserve Bank in 1970 when the AU price was about US $ 38 per fine ounce. The Dollar/Rand exchange rate was about US $ 1 = ZAR 0.7165
The monetary price of gold was R 23.80 p.f.o. and ”rocketed” to R 53 p.f.o. when President Nixon ended the convertibility of gold to US $ in August 1971!
My boss at the time started buying a ”Krugerrand” coin every month and advised us to do the same…..
I don’t believe in buying sunny SA gold shares as my view is that you buying very bad management and trade union trouble and concealed links between various parties….
…and LouisK, before you buy them, read Barry Sergeants article in Noseweek
183 for a detailed report of how ”The Mines are for the taking” !

My view is that Quantitative easing ( the introduction of new money supply by the central banks) , which was introduced during the great depression by most rich countries when they started printing money (and the Bank of Japan which is still doing it), is the real reason why we are seeing ”real negative” interest rates globally. Methinks the Fed should just start raising interest rates, despite the fact that world markets wobbled and interest rates jumped last year when the Fed first raised the possibility of tapering interest rates.

The jury is still out on QE but certain studies suggest that it did raise economic activity a bit over the world. Other studies suggested that the flood of cash has encouraged reckless financial behaviour and directed a fire-hose of money to emerging markets market and economies , that ”cannot manage the cash” !

Buying physical gold to me is the only viable option (in any form legally allowed), as you might also be on the receiving end (like the Minority Randgold shareholders) where Investec almost completely concealed their links with Western Areas .” Invested perfected the capture game long before the Guptas landed (Noseweek 199) – ”Kebblegate set a precedent for intuitional take-overs”, and I don’t think anybody should touch any Gold share with a ”pair of pliers”, in sunny SA anymore!

Recently there was an article on The Telegraph website about this pensioner in the UK who sold all his assets and bought gold. He buried this treasure in 18 different spots in his garden and left clues in his will where his children and grandchildren can find the gold he bequeathed to them.
Hmm.. Wouldn’t do it in South Africa though. You are bound to make someone from Malawi very rich…

It might at least tempt your gardener to pick up a spade and do some digging instead of sitting on his a…

My two cents. Always have a little gold or silver in a portfolio. I too am not sure if it should be quality gold shares or actual gold coins. Coins are great for taking along everywhere but they also tend to get stolen or lost. Shares are good but you need quality shares and if i can add here that many gold shares look like quality when the price is high only to become worthless when the price falls 20% say.

So get a few gold coins or shares but for Pete’s shake do not over do it. That has always been the SA investor way – overweight gold and gold shares by lots and lots and then someone is manipulating the market again against you. Decide now keep 5% or 10% or 2% or even 15% but do not do 100%! when the prices rushes up do not rush in too hard either 5% is better than 20% when the price has already risen 90% from it low month in SA Rands.

Ok that was three cents worth….

Coins can be stolen but you an insure them.

Official theft by our leaders (called inflation and NIRP) cannot be insured.

This is a complicated issue. We all think we have a handle on it but there are so many factors involved that it is beyond our comprehension to have anywhere near an accurate assessment let alone a strategy. But allow me to throw my few 10 cents into the ring. The big illusion is that we think/assume/hope that our leaders and their coterie know what they are doing. Wrong. The world is run primarily on short term self interest which has no bearing on what’s good for the country or the world. All previous economic crashes were not seen coming – by the people who we assume are monitoring the situation. Just like a monkey tampering with the controls of an aircraft in flight. We trust the monkey.
Bonus 10 cents. There is a war going on between “policy makers” and deflation. Deflation decreases taxation while increasing the cost of debt. The “solution” according to the monkey is to print more money and give it to the banks to lend to commerce to grow the economy, but the banks earn more risk free by parking it or speculating with it, so it is not going anywhere useful. Pull the other lever; lower interest rates, but when that does not work force the savers to spend their money by charging them interest (negative rates) to keep it in the bank. This causes hoarding and companies to buy back their own shares. Pull the next lever; Increase taxes to cover the shortfall and the increasing debt burden. That throttles the world economy, reduces tax revenues and increases corruption. Try the next lever; Introduce FATCA, OECD/CRS and force the world to apply anti-money laundering and tax compliance regulations. That increases evasion and corruption further while stifling investment, reduces the velocity of money, increases deflation and reduces tax revenues. No problem, pull lever marked “increase taxes” again. So what’s really happening while the monkey plays with all these levers? (and many more). Money is being drained from the productive economy into the unproductive economy. The next crisis is coming. But, as usual, no one can see it coming! How about some possibilities which are clear to an ignorant layman? Pension funds are about to crash worldwide (insufficient yields for 8 years!); student loans are massive but is the only debt not dischargeable through bankruptcy in the USA (thanks to the Clintons). Social security worldwide is either non-existent, underfunded or nearly bankrupt. Municipal and city budgets are in dire straits around the world. Sovereign debt is out of control worldwide. Savers and pensioners are desperate. Unemployment is rising exponentially. Socialism is collapsing (France!). Civil unrest is rising rapidly worldwide. Now what if 1 big domino sets off all the others and the monkeys have tried all the levers? What if there is an exceptionally clever monkey that speaks up and tries to prevent these possibilities from occurring? The other monkeys will expel him as a nutcase who is interfering with their pet agendas.
Last 10 cents. Investment strategy; Why does gold go up? There is only one proven correlation, and it is not inflation or interest rates. Gold flies when the public is confused and worried. Gold generally also performs well when currencies are collapsing (as do all tangible assets). In SA we have five excellent reasons to buy KRs; 1) The collapsing rand (300% since 1994) with no end in sight that guarantees a 13.5% annual return. 2) All of the above crisis waiting in the wings. 3) No counter party risk and out of the system. (Bury them in your garden, even bank safety deposit boxes are not safe). 4) No Monkey fees. 5) No temptation to whip them in and out of the garden when our emotions run amok.

And while all the levers are being yanked and nothing seems to work, the poor of the world have little to nothing to do so they amuse themselves by recreating, without any prospect of being able to look after this offspring, at a rate way in excess of inflation. Things are not looking very good for he optimists among us?

Bravo Foshan. At last somebody’s come out with the truth!

If it were true to hold gold as a store of value in a negative interest rate environment then wouldn’t it be more true to invest in other commodities which are completely under valued and actually have industrial purpose?
Platinum mining stocks are exposed to similar problems as the gold counterparts and yet they remain largely un-loved by the market.
Forget Gold – buy Platinum!

There are only 3 SA gold mining groups left within the 10 major gold producers. They ‘re valued at less than half their international peers respectively. AngloGold looks to have fallen into the South African malaise of reporting to the government instead of their shareholders. Sibanye was spun off from Gold Fields and is a deep miner with the associated labour problems. Gold Fields has developed a strong international portfolio and is mechanizing their remaining South Deep mine so could have an upside.
You need to trade internationally to be in this sector. Look at Barrick and Newmont within the majors but swings of 10% a day are normal.
Your safest Rand hedge today is your Kruger Rand.
The world’s central banks are monetizing government bonds, corporate bonds and the stock markets. Japan has led the way with 40% of their government spending financed by their central bank. QE in Europe and the USA is taking these economies down the same road. For the long game gold is the place to be but expect a lot of bumps on the way.

I apologise as I haven’t done the arithmetic but I have a suspicion that looking at your SA wealth in US$ will result in negative interest rates.

Please Mr Bank,
Can I have a LARGE loan at negative interest rates to buy lots of Kruger Rands?

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