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Adding PRECIOUS Gold to the portfolio as S&P500 In record High

01-March-2017
01-March-2017 13:08
in General
by Benny Menashe

March 1 Gold fell on Wednesday as the dollar gained after comments from U.S. Federal Reserve officials raised , Spot gold was trading at $1243.86. With the market pricing in a greater chance of a March rate hike from the Fed, gold is likely to remain under pressure in the short term

Despite the pressure on the gold on the short term , We find this precious metal to be the most stable investment in times of uncertainty that we are speedily heading  into, or even more accurately stated, we already in.

Our view on gold is that it's one of the best insurance policies for wealth preservation because of its lack of counterparty risk. I remember very clearly those investors who held paper instruments during the 2008 to 2009 recession that had virtually no-bid at the time.  

Gold  is typically considered a safe haven when markets are volatile. We all saw it after the Brexit vote when Britain chose to leave the EU. Gold rose more than 10%,  a 2 year record to $1374.71  and for residents of the UK the price of gold jumped more than 20% overnight in sterling terms due to the weakening in the GBP .     

Interestingly enough, it wasn't always the case that gold was such a safe haven in times of volatility. During the financial crisis of 2008, the bankruptcy of US investment bank Lehman Brothers triggered the biggest financial crisis in decades.  Stock prices fell, many bonds no longer traded. Banks did not trust each other and interbank lending stopped dead in its tracks. Queues formed in front of several banks and money was withdrawn in panic. One terrifying news item after another was released. The total collapse of the financial system was feared.  Both institutional investors and private savers transferred their investments into safe government bonds and gold. What happened to gold prices ? They fell.

In 2008, if you wanted to buy gold coins or a bar online, they were in short supply. This raises the question as to whether there is a "secret player " influencing the gold prices.  

Rumours that central banks are intervening in the gold market have been circulating for many years.   But why should central banks suppress the price of gold? They hold an abundance of gold and should be interested in a rising price, as that would produce profits for them.

Unlike interventions in the FX markets and bond markets that most of the time are fully disclosed, sometimes central banks engage in secret interventions that they expect to be more effective. These interventions do, however, leave traces in prices or on their balance sheets,  which came to the attention of market observers and researchers in the past.  

What's the reason then for intervention in the gold market ?

For hundreds of  years gold and silver were synonymous with the term "MONEY". Basically they are an alternative to money that we use today. The US dollar and other currencies are called fiat money.  Fiat currency is legal tender whose value is backed by the government that issued it. This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money. Even though the central banking system ensures that no one has to fear that his money will become worthless in the event that a specific bank draft is not honored, this dependence is still a given- it has merely been transferred to government. If the state no longer can or wants to fulfil its duties in this regard, money can become worthless at a stroke (which has happened time and again in the past) . The Fed interest is to support the US dollar as representative of the government and the FED strength and policy.  So if the price of gold , a measure of the dollar value goes up the FED has good reason to depress it.

Despite the last increase in the gold prices we still think that gold prices are undervalued and big gains could be ahead.  The reasons that could support the price of gold in the short and long term: 

  1. Central banks around the world continue to buy the precious metal despite gold prices being well below the highs made in 2011. Know this: they are not buying it for speculative purposes. They are buying to hedge their reserves and they      will need more. 
  2. The European Union may be facing an unsettling year. As the year goes on there will be several important elections happening across Europe. Britain is aiming to trigger Article 50 by the end of March.
  3. Uncertainty about Donald Trump’s economic platform and trade policies,  less-than-stellar economic data, and geopolitical issues, could easily cause gold to make a run for pre-election levels near $1,345.00 per ounce in 2017.
  4. Gold as a hedge, not just against inflation but "deflation" as well and the negative interest rates associated with it.  The above described hedge threatens to break the traditional banking system, fueling a flight away from financial assets to real assets like gold.
  5. The global  economy continues to struggle. Major economic hubs are struggling to show any growth. China, Japan, Russia, Australia, the Eurozone, the U.S., Canada, Brazil, and many other nations are reporting growth rates that are      just outright dismal. (Recall that gold is a hedge against all of this uncertainty.)
  6. The Chinese economy could collapse. Remember that China is the second-biggest economy in the world; if its economy falls, it could have dire effects on the global economy.
  7. Terror attacks in Europe and the uncertainty as a consequence of the refugees crisis
  8. The demand for gold bullion from India and China remains solid.
  9. Demand for the precious metal remains solid elsewhere in the world as well. In the first quarter, demand for gold in the U.S. increased by 21%.
  10. Exchange-traded products, which sold massive amounts of gold in 2013, are starting to buy once again.
  11. Gold producers  remain suppressed. Surely gold prices are up about 15% year-to-date, but they are still too low for many to produce profitably. Gold grades in the ground are low and costs to extract from the ground continue to increase.
  12. Gold discoveries have plummeted. According to Goldcorp Inc. (NYSE:GG), in the early 90s, well over 100 million ounces of gold were discovered. This figure has dropped to below 25 million in recent years

For 2017 we would suggest to have an allocation of at least 10% in a gold products as an as a hedging mechanism on the portfolio, we may see the gold make a run for pre-election levels near $1,345.00 per ounce this year. As for long term, Falcon will continue to stay bullish on gold mainly as Stocks are in  overbought territory and sentiment is way too bullish for the so-called Trump rally!

  

Falcon is a London-based multi-strategy investment manager, focused mainly in highly liquid global macro investment vehicles. January 2017 Falcon launched the first FX fund  . 

Falcon targets investments on an opportunistic basis and includes four core investment funds: Long/Short Equity , Fixed Income , FX spot and Future Indices Quantitative Strategies . Falcon's team consists of experienced managers and teams, deploying diverse set of strategy sets designed to extract value from market inefficiencies. From discretionary to systematic strategies , liquidity is a key driver in our funds. Falcon determines the concentration in, and allocation to our investment strategies. The Firm is positioned to selectively add to or reduce its allocation to particular investment strategies on short notice given the opportunity set prevailing from time to time. Our clients are UHNWI, Family offices and wealth management companies. We currently have committed capital close of $100mln across our different funds.

 

Disclaimer

The Material is for distribution to Professional clients and should not be relied by any other persons. The information contained herein does not constitute an offer to sell or the solicitation of any offer to purchase interests in Falcon Funds (the “Fund”). Any such offer or solicitation may only be made through the Fund’s offering and governing documents.