"Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, Howie was a financial analyst."
When you’re building a portfolio, there are a variety of different factors and variables that you have to consider. Depending on the types of objectives, or the type of financial goals you have, will be important in creating your investment portfolio. The type of future outlook you have, the level of confidence you have, and the upside you believe certain assets to have will determine the amount of resources or capital you allocate to it, and the types of weight you give certain assets within your investment portfolio.
Within your portfolio, each investment or asset makes up a different number or percentage of your assets or your portfolio. Depending on the amount of investment or value an investment has, compared to the value of the total overall portfolio, is how you determine the amount of weight or allocation a certain asset or investment has. It’s also worth noting, that keeping cash on the sidelines, or not having a full allocation is also an option, if you feel the market is in a downward trajectory or going to decline. Deciding not to invest or use your capital is an investment the same way it is to use or invest your capital.
Additionally, the type of investor you are also plays a role in the way you invest your assets. Whether you’re a conservative investor by nature, an aggressive one, or somewhere in the middle. The portfolio you have, or the one you construct, is often created with a certain goal or objective in mind. This means, the capital you are choosing to invest or allocate to the portfolio, usually has an objective or a goal in mind. Whether if it’s saving for a new home, a certain investment, or a certain upcoming expense, the type of objective or agenda you have for yourself or your life is going to be a factor in the creation of your portfolio.
A lot of it also depends on where you are in life. Are you younger or older, do you have a family, are you trying to save for your kids, the life factors around you also play a role when you’re creating or shaping your portfolio. There are lots of things to consider when it comes to creating a portfolio, and there are many factors you have to consider when deciding which assets to invest in, and how much to invest into them.
The weight you give to a certain investment or asset, shows the level of confidence you have for it, the type of risk you’re willing to open yourself up to from it, and the effect it’s going to have on your overall portfolio. Why the weights are so important to consider, is because it has a strong effect on the way your portfolio moves, whether up or down. The more allocation or weight you give an asset, the more the portfolio is going to be affected or move as it moves.
A thing to keep in mind when it comes to allocations, is the direction you believe the market is going into, and whether a certain industry or company is going to perform well in the future. If you like a company or their business model and feel like they are only going to grow their revenue, their market share, and their income, then consider those when you’re making the different allocations within your portfolio. Depending on the asset classes you like the best, the type of companies you’re most bullish, and the way you build your portfolio, are important factors in determining the weights of each asset and investment.
Another important thing to consider is rebalancing your portfolio or readjusting the weights within your portfolio. When one asset performs really well, or a certain investment performs great, often times the allocation or the weight it has tends to outweigh what you originally thought or believed it would be. This is a great problem to have, as it means your investment has performed better than you expected it to. If this happens, then you have a decision to make. Whether to keep the money invested, and the investment the way it is, or readjust the allocation or the weight. Ultimately, it’s a decision that’s up to you, and for you to decide. To determine whether you’d like to keep the capital or allocation invested or look to reallocate the capital. Either way, it’s an awesome place to be in, and a great problem to have. As it means your investment or portfolio has done well, and you’re in a better position than where you once were.
Creating a portfolio comes with lots of things to consider. The one we tried to highlight in this article, are the allocations you make, and the weights you given to certain investments or assets. The allocations you make play an important role in the way your portfolio moves, the portfolios performance, and the risk your portfolio is exposed to. The performance and the allocations within your portfolio are closely tied, as they are two of the major contributing factors to the fluctuations and movements within your portfolio. The allocations and weights you assign to certain investments indicate the confidence level, or the belief you have in them.
Depending on the way the market is headed, or the future outlook of a company, it’s smart to keep in mind how much of your capital is invested into them, and what you feel comfortable with. As you build your portfolio, learn and understand the market, and are able to evaluate and analyze investments, you’re able to get a glimpse into how to become a financial analyst. By building a portfolio, and gaining that experience, you’re able to get some insight into what some financial analysts do, and the type of tasks they are used to.
We hope you were able to get a bit more insight and information on the importance of the various allocations and weights of your assets within your portfolio. Best of luck, and we wish you nothing but success.
Speakers:Ed Coyne, Senior Managing Director, Global Sales, Whitney George, Chief Investment Officer, and John Hathaway, Senior Portfolio Manager (Sprott Asset Management).
Topic: The COVID-19 pandemic has created a new financial landscape, where returns from traditional financial assets, in real terms, could be subpar for many years. By contrast, this crisis continues to highlight gold’s value as a safe haven investment.
Gold is one of the few assets that offers both downside protection and upside performance in the new financial landscape
Gold is under-owned and under-utilized; we are in the early stages of what could be a very dynamic bull market
M&A cycle among gold miners continues with more small- and mid-cap companies needing to scale to remain relevant
Next major test for gold is $1,800, putting $2,000 and new highs within reach
Please contact the Sprott Team at 888.622.1813 for more information on this webcast. You can also email us at firstname.lastname@example.org
Note from Dudley - These Guys Are Good:
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A Hyperinflationary Depression has always been the inevitable end to the biggest financial bubble in history. And this time it will be global. Hyperinflation will spread from country to country like Coronavirus. It could start anywhere but the most likely first countries are the US and the EU or ED (European Disunion) They will quickly be followed by many more like Japan and most developing countries. Like CV it will quickly jump from country to country with very few being spared.
CURRENT INTEREST RATES ARE A FALSE INDICATOR
Ever since the last interest cycle peaked in 1981, there has been a 39 year downtrend in US and global rates from almost 20% to 0%. Since in a free market interest rates are a function of the demand for credit, this long downtrend points to a severe recession in the US and the rest of the world. The simple rules of supply and demand tell us that when the price of money is zero, nobody wants it. But instead debt has grown exponentially without putting any upside pressure on rates. The reason is simple. Central and commercial banks have created limitless amounts of credit out of thin air. In a fractional banking system banks can lend the same money 10 to 50 times. And central banks can just print infinite amounts.
Global debt in 1981 was $14 trillion. One would have assumed that with interest rates crashing there would not have been a major demand for debt. High demand would have led to high interest rates. But if we look at global debt in 2020 it is a staggering $265 trillion. So debt has gone up 19X in the last 39 years and cost of debt has gone from 20% to 0% – Hmmm!
CORONAVIRUS IS THE CATALYST BUT NOT THE CAUSE
The crisis that the world is now encountering has not been caused by the Coronavirus. As I have stressed in many articles recently, CV is just the catalyst, albeit the most vicious one which could have hit the world. The real cause of the Greatest Financial Crisis in history is the Central Banks. They have been pouring fuel on the fire for 50 years by continuously reducing the cost of money until it became free in 2008 when rates were reduced to ZERO. Since then we have also seen negative rates around the world.
Negative rates are not just a total paradox but also absolute lunacy. Bankrupt sovereign nations around the world have been issuing debt at no cost or have even been paid for it. The whole purpose of interest is to be paid for the risk of lending money. As governments around the world have issued virtually unlimited debt which will never be repaid, the risk of lending to them has increased exponentially. But instead of much higher rates, to reflect the massive increase in debt plus severely elevated risk, central banks have got away with defying the laws of nature buy falsely manipulating rates..
FALSE MARKETS WITH NO REAL PRICES
Money is a commodity and the price should be a direct function of risk plus supply and demand. But since we currently have a false financial system with fake money and false markets, there are no real prices. So through constant manipulation and intervention central banks together with a few accomplices can totally rig most markets and prices.
Therefore, the cost of money today neither reflects the risk nor the demand. All it represents is malicious manipulation to serve governments and their masters the central bankers. But like all fake markets, also this one will end, not just badly but catastrophically.
THE SITUATION IS DESPERATE FOR BUSINESSES AND INDIVIDUALS
As I discussed in last week’s article, we now have the perfect storm. Virtually every government in the world is now committing billions and trillions of dollars, euros etc in fruitless attempts to save a collapsing world economy. In many countries, 50% or more of industry is shut. Most service industries are in a total lockdown and so is aviation, transport and most small businesses. Unemployment is approaching rates not seen since the 1930s depression. All businesses need assistance, from major corporations to small firms. The majority of individuals haven’t got savings for more than a couple of weeks living and for the ones who are now becoming unemployed, the situation is desperate.
Many major US corporations need assistance from the government. Very few of these have put aside profits to reserves for a rainy day. Instead management has been too generously rewarded as well as the shareholders. Since 2009, S&P 500 companies have spent $5.4 trillion in share buybacks. Instead of asking government for assistance, management should pay back their bonuses and shareholders who have received major payouts should recapitalise the companies. But this will obviously not happen. Just like in 2006-9, profits are privatised and losses are socialised.
Businesses are haemorrhaging cash and so are individuals. All that becomes a vicious circle with bills not being paid including rents, mortgages and taxes. Estimates predict a 40-50% fall in Q2 2020 GDP in the US. The problem is that this is not a temporary crisis. This means that GDP will see permanent erosion of a major magnitude in most countries.
SECULAR DOWNTURN LEADING TO HYPERINFLATIONARY DEPRESSION
So what we are experiencing is the start of a secular downturn which soon will become a hyperinflationary depression. This was always the inevitable end to this cycle as I have discussed in many articles for over 20 years.
A crisis of this magnitude is always a debt crisis. Very soon we will see debt around the world come under enormous pressure as borrowers start defaulting. This will lead to bonds crashing and rates surging. Central banks will then lose control of interest rates as long rates first go up and soon also pulling the shorter rates up. Rates can easily go to 15-20%. Many bonds will go to zero and rates to infinity. I have previously talked about paying 21% on my first mortgage in the UK in 1974. So I have personal experience of high inflation but never hyperinflation.
Since the majority of the $1.5 quadrillion derivatives market is interest related, this market will also blow up. All this will lead to unlimited money printing and currencies crashing fast to their intrinsic value of ZERO. At that point the entire financial system will be unrecognisable and parts of it nonexistent. All of this could happen very quickly, possibly within the next 6 -18 months.
2006-9 WAS A REHEARSAL
Could my Cassandra forecast be wrong. Yes, of course it could. But let’s be clear that the rehearsal of what I am predicting took place in 2006-9. Nothing was resolved at that point, just temporarily deferred. This is now the real thing and whatever money central banks print this time will have no effect. So I doubt very much that our banker “friends” can pull another trick out of the hat again. Because the only trick they know, to print more money, can never solve a debt problem.
Stock markets, in their first leg down of the new secular bear market, reached a 40% loss in most countries and that in less than 4 weeks. We are now seeing a typical correction that can go a bit higher. But when that is finished which could take 1-3 weeks, the next devastating downleg will start. Anyone trying to catch this falling knife will be slaughtered.
Bond markets might hold up for a bit longer with massive central bank manipulation and money printing. Junk bonds will first start crashing and constant downgrades will turn a lot of debt to junk. Much of corporate debt will go the same way and within 6-12 months also sovereign debt will come under attack.
Property markets are a major bubble and are already starting to disintegrate. Industrial, commercial, retail and residential, no sector will be spared. There will be no buyers, no financing and many forced sellers. A perfect recipe for a collapse.
Before the secular bear market has bottomed in these three markets, prices will be down 90-100% in real terms. And real terms means in constant purchasing power like gold.
We must remember that markets will bottom long before the economy. The likely development is first a hyperinflationary depression that could come and go very quickly within the next couple of years. Thereafter we will most probably see a deflationary implosion of all assets and a collapse of most of the financial system.
But we mustn’t believe that this is the end. It is just another phase in the world economy to correct excesses of the 100 or 300 years or even 2000 years. Once debt has imploded and all asset prices have come down from current fantasy valuations, a new system will emerge built on sound values and principles. And then the cycle starts all over again.
There are currently severe pressures in both the paper gold market and the physical market. The Comex and LBMA are making noises that everything is under control. LBMA is giving the illusion that they have plenty of gold in their vaults. But virtually all of that gold is already committed. Comex, the gold futures exchange is under tremendous pressure since they can’t deliver more than a small fraction in physical when paper holders of gold demand delivery. And that day is not far away.
The 3 biggest refiners in the world based in Ticino, Switzerland have been closed for 2 1/2 weeks, representing at least 50% of world production. The refiners have just opened this week but at a very reduced capacity of 25-33%.
If we just take the Gold ETFs as an example, they increased their holdings by 93 tonnes in the last 4 weeks. That represents a total value of $5 billion
It is today virtually impossible to get hold of physical gold so you wonder where the ETFs have bought their gold.
The answer is of course simple. It was lent to them by LBMA banks which are custodians for the biggest gold ETF GLD. These banks also hold central bank gold and all they need to do is to lend the same gold yet one more time to the ETFs. So if you hold a gold ETF, which you mustn’t, you know that it is unlikely to be backed by gold for more than a small portion of the fund total.
In a world where prices of most assets are about to implode, gold is life insurance and virtually the only asset that will maintain its value in real terms. Silver is also likely to do very well and will most probably outperform gold. But gold is safer and much less volatile.
As the 20 year gold chart shows above, gold is in an extremely strong uptrend. In all currencies but US dollars, gold has surpassed the 2011 highs. The gold price in dollars has just broken out and is now likely to go to $1,700 on its way to the old high of $1,920 and thereafter much, much higher.
As I have expressed before, I have been standing on a soap box for 20 years in my attempt to inform investors of the critical importance of gold for wealth preservation purposes. Fortunately many investors have listened but they still represent less than 0.5% of world financial assets. Since we started 18 years ago, gold is up 6-7X depending on the currency. That rise is insignificant compared to what is coming next.
But remember you are not holding gold to measure the gains in debased paper money. Instead you are holding physical gold as insurance against a broken financial system that is unlikely to be repaired for a very long time.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Phone: +41 44 213 62 45
Matterhorn Asset Management’s global client base strategically stores an important part of their wealth in Switzerland in physical gold and silver outside the banking system. Matterhorn Asset Management is pleased to deliver a unique and exceptional service to our highly esteemed wealth preservation clientele in over 70 countries. GoldSwitzerland.com Contact Us
Precious metals expert and financial writer David Morgan says silver is still 65% off its all-time high and is a much better value than gold. Morgan points out, “Relative to all asset classes, I can’t think of one that is more undervalued than silver. If you look at every asset in the metals world, meaning base metals . . . anything to do with the periodic chart, every one of them has obtained a higher price level than it was in 1980 except silver.”
If we look at the Gold/Silver Ratio right now all signs point to a massive rally. And if you recall sometime in 2008, silver was trading at about $9.70/ounce as we were entering the recession of 2008. The price of silver after breaking down in the gold/silver ratio below the 80 level, exploded to a high of $49.82/ounce. That was approximately a 500% gain in the price of silver. And during this period of time, many fortunes were made and lost. The gold/silver ratio reached the high of about 88 to 1 in 2008, before it collapsed in the same time frame that silver exploded to almost $50, with the ratio reaching a low of 30 to 1 by mid 2011.
Let's be clear... Gold and Silver will explode in the coming months/years. Nobody can predict when. But history has proven it time and time again. Which side will you be on when it happens?
The coronavirus epidemic in China has triggered restrictions in the country’s public transport and air travel, both at a domestic and an international level, reducing demand for oil, which has lost about a fifth of its value since the start of the year.
What does that mean for the world’s 2020 oil demand?
Assessing the impact of the virus, Rystad Energy is heavily revising its annual global oil demand growth forecast down by 25% to 820,000 barrels per day (bpd) in 2020.
Our previous growth forecast, published in December, before the coronavirus outbreak, stood at 1.1 million bpd. The coronavirus’ impact on demand growth could be even wider, however, slashing growth to as low as 650,000 bpd year on year (y/y) in our worst case scenario.
“Our current assessment implies that the impact of coronavirus will persist throughout all of February and March and will then gradually subside towards June 2020. We hence expect travel restrictions and extended holidays in China to significantly impair demand in 1Q20 and partially in 2Q20. Demand is forecast to start recovering in April and May,” said Bjornar Tonhaugen, Rystad Energy’s Senior Vice President, Head of Oil Markets.
What does that mean quarterly?
We now believe that the projected global oil demand growth in the first quarter will be almost entirely wiped out. Rystad Energy’s estimates show that demand will grow by only 0.1 million bpd, a steep decline from a previously projected y/y growth of 1.2 million bpd for 1Q20.
Of the above, 0.9 million bpd of the growth’s decline is attributed to lower demand in China and 0.2 million bpd to the rest of the world. Overall, we expect Chinese demand to drop in 1Q20 by 0.3 million bpd y/y, instead of growing by a previously projected 0.6 million bpd. This will be the first quarterly y/y drop in seven years.
Similarly, the rest of the world’s demand, excluding China, which had been projected to grow by 0.6 million bpd in 1Q, is now expected to grow by only 0.4 million bpd.
We see an additional downside risk to short-term oil demand growth also from a macro-economic perspective as we continue to see weak economic indicators from India – one of the main engines of demand growth – along with weak European manufacturing PMIs. Consensus GDP forecasts have recently put Indian GDP growth at just 5% this year, 0.5 percentage points lower than in the previous forecast. European manufacturing PMIs remain at 46, well below the inflection point of 50.
China to take the biggest hit
Chinese oil demand accounted for 13% of the global total in 2019, standing at 13.6 million bpd. Before the coronavirus outbreak, we expected Chinese demand to grow by 400,000 bpd this year, including a 100,000 bpd y/y growth in jet fuel demand.
We have now reduced our forecast for Chinese demand growth to 230,000 bpd this year, and we expect the largest negative impact to be seen in demand for jet fuel. Rystad Energy’s data show that Chinese jet fuel demand fell by 30% in January and could potentially decline by 60% in February and March.
China’s travel restrictions have come at a time that would normally mark a seasonal increase in air and long-distance bus journeys, as hundreds of millions of people typically travel during Chinese Lunar New Year. This means that a fraction of oil demand this year will be lost indefinitely.
Viruses – like hurricanes, economic crises and armed conflicts – are ad hoc events that can significantly impair oil demand. The SARS virus, which originated in China around the same time of the year back in 2003, is believed to have eliminated all of the growth of global jet fuel demand for that year, which had been forecast at about 200,000 bpd.
China’s oil demand has now more than doubled since 2003. The country accounts for 14% of global air passengers carried and around 13% of global trade in goods, which is why the impact of a similar virus outbreak as SARS will likely be even greater now. Moreover, the death toll from the coronavirus reported this weekend has already surpassed that of SARS in 2003, and we see a risk that the coronavirus impact may be understated.
At their peak in February and March, both Chinese and international air restrictions could reduce global jet fuel demand by 900,000 bpd in relation to our pre-coronavirus expected growth levels.
About Rystad Energy Rystad Energy is an independent energy research and business intelligence company providing data, tools, analytics and consultancy services to the global energy industry. Our products and services cover energy fundamentals and the global and regional upstream, oilfield services and renewable energy industries, tailored to analysts, managers and executives alike. Rystad Energy’s headquarters are located in Oslo, Norway with offices in London, New York, Houston, Aberdeen, Stavanger, Moscow, Rio de Janeiro, Singapore, Bangalore, Tokyo, Sydney and Dubai.
Since socialist-leaning Andres Manuel Lopez Obrador (AMLO) was elected Mexican president in 2018, it’s been challenging for privately-owned companies like Vancouver-based Renaissance Oil Corp. to operate in the country.
AMLO has reserved policies under former market-friendly President Enrique Pena Nieto, who had sold off Pemex assets to companies from juniors like ROC to super majors like Exxon Mobil Corporation, and had encouraged private sector partnerships with Pemex.
Last week AMLO reiterated his pro-Pemex stance, announcing that his government is not planning to reopen oil and gas auctions this year, ending hopes his government might spur private sector investment in the energy sector.
But despite the heavy debt load Pemex carries, AMLO’s government continues to be determined to renew its past glories, when it produced about three million bbls daily, mostly from shallow offshore finds.
This has made it difficult for companies like ROC, which entered the country in 2014, subsequently gaining ownership of three former Pemex properties in the southern state of Chiapas and forming a partnership with Lukoil to win rights to develop the 243-square kilometre Amatitlan block in central Mexico.
The company planned a 10-well program, initially targeting Chicontepec sands with the potential to produce thousands of bbls/d of oil, mostly using unconventional production methods.
But the real prize on the property is the Upper Jurassic shales under the entire block where the company sees the potential for several “elephants.”
However, the only way to develop those assets is through fracking, which AMLO is opposed to amidst a growing anti-fracking movement in Mexico.
Kevin Smith, ROC spokesperson, said the company believes it still has a promising future in Mexico, despite the policy reversal of the AMLO government.
“The home run opportunity is still in the Amatitlan block, but we think we can still be a substantial producers from our Chiapas blocks,” he said.
The company is continuing its negotiations with Pemex involving ownership stake and production approaches.
The political difficulties in Mexico aside, ROC, which is not yet profitable, has been able to raise millions from wealthy investors. Last March, for example, it announced it had raised $5 million from selling shares at 25 cents each to a wealthy Mexican family.
However, despite the lack of enthusiasm for the company’s shares from retail investors, it has been able to attract interest from well-heeled investors. Recently it had issued 6.57 million common shares, at 20 cents each, to an unidentified investor, raising $1 million, who was revealed to be Pierre Lassonde, chairman of Canadian-based mining and oil and gas giant Franco Nevada Corp.
Meanwhile ROC is concentrating on its Chiapas properties.
“We still think there’s a large role for us in Mexico,” he said.
The company is producing about 1,260 boe/d from the three Chiapas blocks — Mundo Nuevo, Topen and Malva — and has plans for an aggressive drilling program this year.
“We have plans to drill four wells and do three workovers on the blocks this year,” he said. “We think we can increase production by five times.”
In the long history of governments and central banks deceiving the people, August 15 1971 was just another date in the calendar. Throughout history, the ruling elite has always cheated the people. But the leaders’ irresponsible actions are always revealed as in the end they always fail.
Still, in modern times August 15th 1971 was a monumental day. That day was not the end of the financial system, and not even the beginning of the end. But it was perhaps the end of the beginning. Historians will recognise this paraphrasing of Churchill after the Allies’ El Alamein victory in 1942.
1913 WAS THE BEGINNING & 1971 THE END OF THE BEGINNING
The beginning was the creation of the Fed in 1913 in order for private bankers to take control of the financial system and money creation. With August 1971 being the end of the beginning, we have thereafter seen the final phase lasting soon half a century and creating the most ginormous super bubble that the world has ever seen.
WE ARE NOW APPROACHING THE END
So we are now coming to the end, after over 100 years of a fake financial system, created and controlled by the bankers for their benefit. The build up has been long but the end will be fast and extremely painful. The speed at which the collapse will happen will take the world by surprise. The final phase happens at an exponential rate as I explained in my article from 2017 about filling a stadium with water:
“EXPONENTIAL MOVES ARE TERMINAL
There is a more scientific illustration how these exponential moves occur and also how they end.
Imagine a football stadium which is filled with water. Every minute one drop is added. The number of drops doubles every minute. Thus it goes from 1 to 2, 4, 8 16 etc. So how long would it take to fill the entire stadium? One day, one month or a year? No it would be a lot quicker and only take 50 minutes! That in itself is hard to understand but even more interestingly, how full is the stadium after 45 minutes? Most people would guess 75-90%. Totally wrong. After 45 minutes the stadium is only 7% full! In the final 5 minutes the stadium goes from 7% full to 100% full.”
GLOBAL DEBT HAS TREBLED IN THE 2000S
It has taken 107 years to create global debts and liabilities of over $2 quadrillion with most of it generated in the last 25 years.
Just look at global debt which has trebled in this century from $80 trillion to $258 trillion. This is another example of the final phase being exponential.
Although debt has gone up 3X in the last 20 years, what we will see in the final 5 years will be even more spectacular. As Central Banks attempt to save the system, they are now embarking on the biggest money creation in history. Saving the financial system will require more than $2 quadrillion including derivatives and the shadow banking system. Hyperinflation will multiply these figures many times.
THE END OF THE FINAL PHASE WILL BE QUICK
I would be surprised if the final phase lasts more than 5 years. It doesn’t take longer than that for asset and debt bubbles to implode. So by 2025 the total financial system will not only be unrecognisable but also a mere shadow of what it is today.
What the world will experience is the inevitable effect of 107 years of false money, fake assets, unlimited debt and false moral and ethical values.
The fact that it will all implode over a short period like 5 years, doesn’t mean that the problems are over by then. It just means that debt and asset values have all disappeared into a black hole. The debts will be gone and all the false paper assets like $1.5 quadrillion of derivatives will be gone too. Virtually all bonds will be worthless also. Many good companies will survive but profits will crash and so will P/E ratios. The result will be that stock prices will come down by 95% on average in real terms.
A world economy which was based on fake money and false values will take a very long time to recover to where we are today. It will likely be decades or even longer. Remember that the Dark Ages lasted for 500 years after the fall of the Roman Empire.
We have learnt during this final phase that it is just not possible to soundly grow an economy based on debt and printed money. Every government that has attempted this has always been caught red-handed. And this is guaranteed to happen to the current fraudulent system too.
TAXATION IS A CONFISCATORY LEVY
Throughout history, the rulers have used numerous methods to swindle their citizens. Taxation has been the most obvious of all tricks. Taxation is a confiscatory fee on the people, often levied to finance the rulers’ extravagances and wars. The first known taxation was in Egypt already 3,000 years ago. Since then, there have been a multitude of taxes on goods or trade.
In England and Wales, in 1696, a window tax was introduced. The purpose was a tax based on the prosperity of the taxpayer. Initially it was a flat tax of 2 shillings per house (£13 or $16 in today’s money). There was also a variable part above 10 windows starting at 4 shillings. People objected to an income tax since the disclosure of personal income was considered a government intrusion into private matters.
How refreshing to hear the extremely sensible values of confidentiality and privacy which prevailed at that time. What a difference to today’s world when governments are prying into our personal affairs and control the people’s every move with nothing being confidential or private. Orwell was so right when in 1949 he wrote 1984, as we now have BIG BROTHER watching every step we take. But that will end too. As the system collapses so will governments’ ability to police the people. The state will run out of money and systems necessary to control the people.
INCOME TAX IS A RECENT PHENOMENON
Coming back to income tax, it was first introduced in the UK in 1798 but was quickly repealed. It was reintroduced a few times and became permanent in the late 1800s. In the US, taxation was a major reason for the American Revolution which led to the Declaration of Independence. Income tax was first introduced in the US in 1913 at 1% on income above $3,000 which very few people earned at the time.
So for 1000s of years most nations functioned with no or very low rates of taxation. There is no reason why that couldn’t work again. But obviously not based on the incredible waste and bureaucracy in the system today. A complete revision of the tax system with a sales tax of say 10% and corporate rate of also 10% would most probably work extremely well if all the waste in the system was eliminated. People would then pay for services they used like roads.
DEBASEMENT OF CURRENCIES IS A FORM OF TAX ON THE PEOPLE
Except for confiscatory taxation, the debasement of fiat or paper money is the most common method that governments use to defraud their people. By destroying the value of money, ordinary people are robbed of their savings and their pensions. Only the wealthy can take advantage of this. They invest in asset markets, often with leverage, like stocks or property which are benefiting from the credit expansion caused by the currency debasement.
Even though the wealthy will see a colossal destruction of their wealth, they will still be left with sizeable assets as long as they don’t have major debt. Buildings and land held by the rich will still exist although worth a lot less. But when Marxist/Socialist governments take over, they will either expropriate the properties of the wealthy or tax them so highly that owners can’t afford to keep them. The UK Labour leader Corbyn has already suggested that luxury properties in Central London should be occupied by ordinary people and not the current wealthy residents.
Most ordinary people have no assets but only debt. For the ones who have houses or apartments with a mortgage, the value of their property is likely to be lower than the debt. The question is if governments will legislate to let defaulting property owners stay in their houses? But what about people who rent accommodation, will they be allowed to stay too in the coming Marxist environment?
The effects of letting everyone stay in their property even if they can’t service the debt or pay the rent will obviously lead to bank defaults. So central banks will need to print more money for this purpose to prop up failing banks.
EXTREME WEALTH INEQUALITY LEADS TO REVOLUTION
Revolutions or social unrest are often the result of economic misery for ordinary people combined with disgruntlement with the leading elite and the wealthy. In most Western countries, but also in for example China and Russia, the gap between the rich and the poor has reached extreme proportions. The graph below shows the gap in the USA between the wealthiest 0.1% and the bottom 90%. In the mid 1980s the bottom 90% owned 37% and the top 0.1%, 10% of the assets. As the graph shows, this gap has now narrowed to the extent that the top 0.1% own as many assets as the bottom 90%.
The income gains in the US show the same gap widening between the top 1% and the rest. As the graph below shows the top 1% has seen a 350% growth in income since 1980 whilst the middle 60% has only achieved a 47% increase in the same period.
This massive concentration of wealth and income is bad for the economy but more importantly very dangerous. When the economic downturn starts in the next few years, the economic misery of the poor and the hungry is likely to lead to major social unrest and even civil war. The high number of recent immigrants in many countries today could also lead to neo-nazi or other right wing groups emerging.
So in all, we are rapidly approaching a very unstable and also dangerous period both economically and socially. We have already seen major protests and violence today around the world plus a significant increase in crime. Many governments can’t cope with the present level of crime and protests. In Sweden for example the prisons are full already. When these problems escalate, the world is likely to become a less safe place as governments lose control of law and order.
NASDAQ FALL WILL BE GREATER THAN IN 2000-02
Stock markets are at the end of a secular bull market. The quarterly chart of the Nasdaq shows the picture clearly. This index has gone up 112X since 1973. Once this market turns, the fall can be very rapid. In 2000-2002, the Nasdaq fell 80%. It would be surprising if the coming fall is smaller than the last one. Thus a 95% fall would not be surprising, at least not to me. I was personally involved with an e-commerce company in the late 1990s. I saw the bubble then and we therefore sold the company in early 2000 to a corporation quoted on the Nasdaq. We were paid in stock, but I set as a condition that we could sell our stock immediately. And we did of course. The company that bought our business and many others went bankrupt a few years later.
I am absolutely convinced that the situation today is worse than in 2000 and the bubbles are of course much bigger. Anyone holding onto Nasdaq stocks or any other stocks will see a total destruction of values and wealth in the next few years. So a CAVEAT EMPTOR! (buyer beware) warning here is totally motivated.
GOLD HAS MERELY STARTED THE MOVE
When stock markets fall, precious metals will continue their secular bull market which initially started in 1971 with the last leg starting in 2000. Anyone doubting that we are in a bull market needs to look at the annual charts of gold in US dollars and Euros. The picture could not be clearer. The 20 year bull market that started in 2000 has only seen one year with a major correction which was in 2013. (The green bars are up years and red ones down years).
This is a remarkably strong picture and anyone that has doubts about the future direction of gold should take heed. We have hardly started the move at this point. When the events I discuss in this article come into play, gold will move at a pace that will surprise everyone. We will see multiples of the current price before the current bull market ends.
But remember that physical gold should not primarily be owned for capital appreciation purposes. Above all, we hold gold as the best protection against a rotten financial system and insurance against unprecedented financial, economic and political/geo-political risk.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Phone: +41 44 213 62 45
Matterhorn Asset Management’s global client base strategically stores an important part of their wealth in Switzerland in physical gold and silver outside the banking system. Matterhorn Asset Management is pleased to deliver a unique and exceptional service to our highly esteemed wealth preservation clientele in over 60 countries. GoldSwitzerland.com Contact Us
This week I want to explore how the junior sector operates and how it fits into the overall commodity puzzle. In order to do so, I will draw a direct analogy to the tech space. These two sectors independently represent the two most volatile markets in the world and surprisingly have a lot in common.
Let’s start with tech. In tech, there are a handful of companies that produce a majority of the sector’s profits and represent the lion’s share of the sector’s market capitalization. Think of Google ($GOOG), Apple ($APPL), Amazon ($AMZN), Microsoft ($MSFT), and Facebook ($FB) – the Giants.
Next down the totem pole are companies that operate on solid cash flow, but lack conglomerate status. They are less known and ultimately serve as unsuspecting lunch should one of the top dogs get hungry to acquire.
Further down still are the start-ups – companies built to solve a specific problem. Some of them are known, but generally they are obscure and most fail to produce anything that gains market traction or longevity.
Start-ups serve an indispensable function in the technology space. They feed innovative concepts and ideas that change the world. Almost every technological revolution stems from a start-up. They begin as an idea in the mind of an inventor, but ultimately become capital intensive and rarely generate profit until maturation. The potential monetary prize of these inventions, platforms, or apps is exponential and thus warrants serious attention from the Giants.
The technology ecosystem was not designed like this, but has naturally evolved this way due to market forces. Tech Goliaths like Facebook and Google are constantly investing in R&D, but they simply cannot justify allocating the resources to create 2,000 startups in hopes of finding one gem. And even if they did, start-ups are organic concepts – a result of an inventor solving a problem they often times personally encountered.
For these reasons, tech giants are forced to sit back and watch with a checkbook in hand. When a start-up emerges that they deem to be critically important, they are willing to pay massive premiums to acquire that technology. Think of Google buying YouTube or Facebook’s purchase of Instagram. In both cases, these acquisitions cost $1B and were thought ludicrous at the time due to a lack of profit. They now contribute as massive profit centers for both companies. Investors trying to value technology start-ups on cash flow, or lack thereof, possess a fundamental misunderstanding of the sector.
There is of course the rare case where a start-up makes it through the maturation phase on its own. Facebook was famously offered $1B by Yahoo, but declined the offer. Uber ($UBER) has not had a credible takeout offer and is now public, but a sustainable cash flowing model has yet to be demonstrated.
Moving to mining, there similarly exist a handful of companies that make up the majority of production and lion’s share of the sector’s market capitalization – Barrick ($GOLD), Newmont ($NEM), Zijin, Kirkland Lake ($KL.TO) are some of the names that come to mind. These are the Majors, analogous to the Giants of technology.
A Major’s core competency rests in mining gold from the ground. They do occasionally perform grass roots exploration, but for the most part, are focused on development and extraction. A Major’s share price acts as a direct lever to the underlying commodity. Higher gold prices equate to better operating margins, and translate into a higher share price.
A bit further down the ladder are the mid-tier producers. They effectively perform the same duty as the Majors, but on a smaller scale and as witnessed time and time again, they are lunch for a hungry Major. Last week’s acquisition of Detour Gold ($DGC.TO) by Kirkland Lake is a prime example.
At the bottom of the hierarchical pyramid are the juniors, loosely defined as companies with less than a $250M market cap (often times below $10M). Juniors are focused on exploring for the mines of tomorrow.
These companies are the lifeblood of the mining business – without them there would be no ounces to replace the depleting reserves at operating gold mines. Just like technology start-ups, most of them fail. As the saying goes, 1-in-3,000 targets becomes a viable deposit. Ultimately those are pretty bad odds and why the majority of juniors fail. It is also why most Majors cannot justify grass roots exploration – it would bankrupt their operations.
For argument’s sake, a 1-in-3,000 success rate might be applicable to not just the juniors, but also tech startups. Success in achieving that pinnacle of discovery (or market relevance in the case of tech) will translate into serious profit for investors.
But, aside from market/discovery success, there is a force at play that is equally as important and that is the cycle itself. In technology today, the start-up ecosystem is robust. Across the board, companies have access to capital on terms that are not terribly dilutive. This has led to the ‘unicorn’ nomenclature, reminiscent of the dot-com bubble in 1999.
During the dot-com bubble, money rushed into the sector without prudence or precision. The value of tech companies rose in tandem regardless of quality, and investors made a fortune. This created an epic market bubble. The sector overcapitalized, capital was misallocated, and the market ultimately burst. It took a few years to come back, but money did ultimately return. The next cycle peak occurred in 2008. Today, tech appears once again in the euphoric portion of the cycle.
Mining is even more predictably cyclical. Following the Bre-X scandal in 1996, mining began a precipitous decline. The tides turned in 2000 and began an eleven-year bull market (minus the 2008 crash). Then in 2011 the mining market shifted into bear market territory, steered by the underlying commodity prices. In 2016, as a reaction to extremely depressed prices, the mining stocks rallied. Today, they remain depressed. But, positive indicators have emerged such as a rally in commodity prices, matched by moves in the Majors.
I cannot stress enough how important this cyclicality is to the ecosystems for both technology and mining. In a speculative market where valuations of companies are not based on profit, but instead derived from anticipation of future results, extreme cycles will always exist. When a lack of solutions are being invented to aid in technological issues, money will eventually pour in to fix this. When a lack of ounces exists in reserve in the gold market, money will ultimately rush in.
Conversely, when technology start-ups reach ‘unicorn’ valuations across the board, it only takes one WeWork moment to scare investors away – a not so subtle reminder that the risk they are taking on no longer can be met with the asymmetrical gains their capital deserves.
In mining, when an abundance of ounces are put into reserves due to discoveries and higher commodity prices, investors will achieve smaller returns for taking on greater risks. Major mining companies begin to overpay for ounces. The value of all juniors reaches extreme heights. And at some point, investors shy away.
Differences between technology and mining do, of course, exist. And they are valuable to examine in the context of this discussion as well.
I once asked a well-known industry titan why someone with such a sharp mind would subject himself to the junior sector? Why not venture into oil & gas for example? He responded that competition is a lot lighter when you are scraping along the bottom of the junior mining barrel. Harsh words – but not far removed from the truth.
People often times lament the junior mining sector with its inefficiencies and lack of intellectual capital. But there is good reason for this phenomenon and it is not going to change anytime soon – 1) the size of monetary reward and 2) the lack of predictability.
In technology, the prize for a successful start-up can directly translate into a $10B or $20B cash take out. This can happen in a very short period of time – a couple years. Facebook bought WhatsApp for $19B in stock and cash with only 55 employees on staff and five years into operation. Ownership of technology companies tend to remain quite concentrated in the hands of the founders, meaning the prize is really, really big.
In mining, it is rare for a discovery to yield over $1B on a takeout. $10B is unheard of. These acquisitions happen a couple times per cycle, not a couple times per month like in tech. Furthermore, the mining business is far more capital intensive in context of the value created in the market and therefore the founders receive a much smaller slice. Money owns the mining exploration space, not the geologists.
All this translates into smaller monetary rewards. Since money attracts talent, it is no wonder intellectual capital concentrates in technology rather than mining. Geologists can spend a lifetime in search of a discovery to call their own; when they find it, they rarely own enough to build serious wealth.
The second point is regarding a lack of predictability. In the start-up world, guessing what is going to be successful and what will not is no easy task. But there are venture capitalists out there that demonstrate an ability to pick the right horse time and time again – Peter Thiel, Andreessen Horowitz, etc. In mining, this is almost non- existent. Robert Friedland has had two multibillion-dollar discoveries to his name. He is the only person alive with such good luck. For those who will debate me on this point, I will further clarify that he is the only person to ever do it and remain the majority shareholder.
The reason for this is that mining is a game of odds. You have to buy enough lottery tickets to get a winning hand. If you ever wonder why billionaire Eric Sprott invests in hundreds of companies, it is not for lack of discipline. He understands the game innately. First, he takes educated guesses, planting seeds with the right teams and right projects. Then when the sniff of a discovery comes along, he is first in line to deploy as much as he can. Wallbridge Mining ($WM.TO) is a textbook example.
This is the only systematic way to play the discovery game and why Eric is bound to go from billionaire to multi-billionaire status when the next cycle hits.
Conversely, technology requires concentrated bets. Typical venture capitalists in Silicon Valley make very educated bets and will deploy into just a dozen companies over a few years period. This ability to predict the next tech success with some level of accuracy attracts intellectual capital away from an unpredictable sector like exploration and towards the world of tech. This fundamental difference in concentration of bets and associated risks is why technology start-ups exist in the private space, while mining is almost exclusively in the public sphere.
The bottom line is technology and mining are capital intensive and they require a constant flow of new ideas and new reserves. Without the start-ups and without the juniors, the ecosystem is broken.
The relevance of a technological innovation depletes over time in the face of new ideas, different needs, and faster processing capabilities. A mining project’s lifespan depletes very literally as every ounce mined is one less left in the ground.
These two sectors – tech start-ups and junior miners – lack traditional methods of valuation that are based on cash flow. And for that reason, cycles will always exist to reflect human nature – too much capital, too little capital, but always in search of a balance. Ironically, both sectors are currently out of whack. Mining is experiencing a lack of capital while technology is facing the opposite problem – too much money can result in an imprudent idea like WeWork being given a $40B valuation. The below graphic nicely depicts the discrepancy in relative valuations between the two sectors.
This is why I said last week that in some way, shape, or form, an impending junior mining mania is coming and it is going to be exactly the same this time!
NOTE: This material is for discussion purposes only. This is not an offer to buy or sell or subscribe or invest in securities. The information contained herein has been prepared for informational purposes using sources considered reliable and accurate, however, it is subject to change and we cannot guarantee the accurateness of the information. The material does not necessarily reflect the official policy or position of Palisades Goldcorp Ltd.