Over the last several weeks we have seen a total disconnect between “Main Street” and “Wall Street”. With the huge surge of bankruptcies, we will see in the coming months a massive GDP nosedive and it made no sense why stocks continued to move up with some “bonehead” analysts even calling for the stock market to hit new highs.
The last few days we are starting to see a sell off and other than specific stocks that would prosper during the covid crisis it remains most prudent to retain a huge position in cash and 5% to 10% of your portfolio in gold.
As members are very aware, I have advocated increasing your position in gold especially since this crisis has begun. In fact, gold has been the best performing asset class and even on a day like today where the Dow is down over 500 points, gold is up. In fact, all sectors are down and the only “green” on the screen is gold and some gold stocks. For those of you who increased your position in gold, congratulations – you have done well and for those members who have not, it is still a prudent investment as a hedge to protect your portfolio.
I remain more convinced than ever in gold as an investment due to the fact the government and Fed will provide more stimulus to support an economy battered by the virus. The Fed, in fact, announced it is buying bond exchange traded funds for the first time ever and so – with more stimulus members should own more gold. Today the US central bank started purchasing shares of ETFs that invest in bonds. The Fed is doing this to improve market functioning due to the pandemic.
Again, as a reminder – gold benefits from all these stimuli because it is considered a hedge against inflation and currency debasement. As we talk more about a 2ndwave of global infections this will show strong support for gold. Gold is up from approx. $1500 an ounce to over $1700 an ounce since the beginning of the year. If we see a market catastrophe, I see the price moving much higher which is exactly why all members must own it.
There is a large selection of ETFs with a focus on gold and large gold companies to select from. Stay away from exploration companies as there are many gold producing companies that, in my opinion, are undervalued and exploration companies are not a risk you have to take.
Here are the key indicators that I am watching closely to see what happens in the coming months:
- A vaccine for Covid 19: Lots of players are spending billions chasing the cure. Likely not to see success until late 2021. Even when a vaccine is found it will take a few years to vaccinate a global community.
- Fed stimulus: This is always the most difficult market condition as it is artificially created and prevents me from knowing what will happen. If the Fed throws unlimited stimulus at the stock market and the economy then “yes’ we will likely see stocks continue to sustain value but please realize this is artificial demand and why, again, I believe gold is the safe haven. However, when stocks move up investors tend to show less interest in gold, and this is always a major problem that gold has – with skyrocketing upwards. I believe the Central Bankers hate to see gold prices rise quickly as it means less confidence in the overall economy.
- Oil Prices: I believe oil remains a good bet because the major companies cannot make money at these prices – even after the large percentage move up in oil prices over the last few weeks. If we see success in reopening the economy then oil prices will move much higher; however, you know my new favorite word is “boneheads” and I hear these idiots saying, with confidence, that in the next year oil to be back above $100 a barrel. The odds of this happening are remote, and the possibility of a 2ndresurgence of the virus will continue to keep downward pressure on oil. (Billionaire Naguib Sawiris from Egypt, is calling for oil to hit $100 in 18 months or less)
- US China Tensions: Phase 1 trade negotiations between China and America have had to adjust due to the virus. This has caused concern that US-China bilateral relations would deteriorate. Another trade war will see huge downward pressure on stock prices. Trump in his typically unpredictable manner (and possibly after a bad night of sleep) could decide to wage trade war with more tariffs on China – which would see stock markets fall quickly.
- Many retailers will go bankrupt. A further wave of bankruptcies in airlines, oil, hotels, travel and tourism will result in significant job losses and debt defaults. This will impact consumer spending – which is the largest part of the US economy.
- A (likely) 2ndWave of Covid: As we listen to Covid experts every day almost all are saying there is a (almost) certainty – of a 2ndwave in the Fall after the hot summer months. I believe if this occurs that, this time, we will have to keep the economy open – but people will continue to change their personal behavior and buying habits which will gravely impact the economy with the major impact being on lower income people in retail, hospitality etc.
Given all these “headwind” forces at play, I stick by my guidance over the last few months:
- Own Gold. Up to 10% of your total portfolio.
- Maintain a very large position in cash. Over 50% of your portfolio and consider higher.
- A small position in oil that will likely continue to rise to higher levels. This is a trading position in which to take profits on gains.
- At the club we will be looking at Real Estate opportunities in the coming months; however, the big caveat will be – if the Fed stimulus is able to prevent deflation and an asset blow up. If so then the Real Estate opportunity may not be what we hope for – but current owners of properties will be happy. I see commercial real estate property values collapsing and this might be an area we look at.
Finally, I just don’t understand where some so-called experts get their information from. I have never been a fan of Goldman Sachs for many reasons, but they are expecting US gross domestic product growth of 4% in 2021 – and are very bullish on a market recovery. Whenever, Goldman says this to the masses I am suspect behind the scenes they doing the opposite. Remember – they were telling people, in the last financial crisis, to buy subprime debt while they were selling it out the back door. Goldman Sachs is probably the best politically connected company in the United States with countless Washington insiders. I would love to be a fly on the wall during some of their high level executive meetings.
P.S. There is one good thing about COVID-19 and that is the fact that “ambulance chasers’ (personal injury lawyers) have cut down on their advertising due to the fact the majority of Americans are driving much less. However, I don’t see Ed Burnstein, Adam Kutner or Glenn Lerner in a food bank lineup…….yet.
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