Which Investments Worked 40 Years Ago When Inflation Was This High?

I just returned home from London, where I was attending and speaking at the AIM Summit, which stands for Alternative Investment Management. Over $10 trillion in assets under management (AUM) were represented among the hundreds of institutional investors, family offices, fund managers and more who were in attendance.

One of the most valuable benefits of taking part in this international summit is the unique insight you receive from global leaders.

I had the pleasure of speaking with Ali Jehangir Siddiqui, Pakistan’s former ambassador to the U.S. during the Trump administration. He shared with me his first experience meeting the president, who eschewed formalities and traditional protocol in favor of getting right down to business. The U.S. would withdraw millions in aid, Trump told Siddiqui, if Islamabad didn’t do more to combat terrorists and militants.

I also had the opportunity to catch up with my friend Robert Friedland, founder and co-chairman of Ivanhoe Mines, one of our favorite copper producers. Robert told me a power vacuum could soon open up in both Russia and China, as both leaders may be seriously ill. There’s speculation that Vladimir Putin could have cancer, while Xi Jinping may be suffering from a brain aneurysm that the Chinese leader is choosing to treat not with surgery but traditional Chinese medicine.

If true, it may not be long until we see a dramatic shift in the world order.

Of Bulls and Bears

After today’s close, the S&P 500 is off about 20% from its all-time high set in early January, putting stocks in bear market territory. This being the case, I wanted to revisit the historical bull and bear markets from the past 50 years to see how much they rose or fell by, respectively.

Between 1973 and today, there have been six bear markets, the average decline being 41%. The worst of the five bear markets took place from October 2007 to March 2009 when stocks decreased about 57%.

If this sounds bad, I hope the bull market chart helps brighten your mood. Over the same period, there were five bull markets. Stocks rose 227% on average. The strongest bull market occurred roughly from 1987 to 2000, gaining a phenomenal 582% before crashing due to the dotcom bubble.

S&P 500 Bull and Bear Markets Since 1970

What Worked in the 1970s

Inflation continues to hover above an annual rate of 8%, with prices for gasoline, natural gas, food and used vehicles rising the most. The last time inflation was this high, Ronald Reagan was only a year into his first term, and the headline interest rate was around 13%, compared to 1% today.

Forty years ago, the U.S. was experiencing some of the highest inflation in the country’s history after a decade of global oil supply shocks, easy monetary policy and expanding government borrowing. The convertibility of the dollar into gold had recently been suspended, and this had the immediate effect of devaluing the greenback.

There are key differences between then and now—unemployment was alarmingly high in the 1970s and early 80s, for instance—but there are also a few obvious parallels. Today we’re facing our own global supply chain disruptions, for everything from food to energy, largely as a result of the war in Eastern Europe and ongoing Covid lockdowns. A shortage of semiconductor chips has slowed the manufacture of new automobiles, appliances, data centers and more.

Even though the Federal Reserve has begun raising rates in a new tightening cycle, monetary policy remains extremely accommodative on a historical basis. Combined with trillions of dollars in pandemic-related stimulus, this has served as rocket fuel for corporate borrowing and household debt, both of which stand at all-time highs. For the first time ever, the federal government now owes over $30 trillion, or nearly 130% of the U.S. economy.

The truth is, officials are much more comfortable with large deficits today than they were in the 1970s, and that’s all thanks to modern monetary theory, or MMT. Advocates of MMT believe that deficit spending is perfectly fine since the government can just issue more of its own currency to pay for it all. And thus the cycle continues.

U.S. Feberal Deficit (or Surplus) as a Percebnt of Gross Domestic Product

Gold Was the Number One Asset of the 1970s

So what can investors do?

Again, history is a valuable guide. The best asset to own in the 1970s was gold, which went from $35 an ounce at the beginning of the decade to as high as $850 by 1980. Investors sought a hard asset that could go toe-to-toe with inflation and hold its value over time, and the yellow metal fit the bill. Unlike fiat currency, which policymakers can create more of out of thin air, gold requires incredible amounts of time, energy, and money to produce. This helps keep its supply in check.

But does the thesis still hold up?

Well, consider this: So far this century, through the end of April 2022, gold has outperformed the S&P 500 by a factor of three. Not bad for a “barbarous relic” that generates no income.

Gold Has Beaten the Market So Far This Century

Granted, if we compare gold to the market over the past 10 years, the metal has significantly underperformed as stocks rallied in the longest bull market in history, fueled by low interest rates and low inflation.

That said, the S&P 500 has traded down in 2022 on inflation risk and concerns the Fed will raise borrowing costs much faster than initially anticipated. Gold has been the better asset, then, delivering a positive return in the first four months of the year.

Is Bitcoin Stealing Gold’s Thunder?

Some market watchers may wonder why gold hasn’t climbed even higher. Indeed, when inflation surpassed 8% in March 2022, the metal’s price was not quite able to surpass its record high of $2,073 an ounce, set in August 2020.

There’s speculation that the recent popularity of Bitcoin and other digital assets has siphoned off investors’ money that would otherwise have gone to gold. As a Bitcoin fan myself, I’m not so sure. With a total market cap of $11.5 trillion, gold remains one of the most liquid assets on earth, and unlike Bitcoin, it’s universally respected and traded. Dozens of central banks around the globe continue to hold billions of dollars’ worth of gold in their reserves.

I should also point out that Bitcoin has tumbled dramatically from its all-time high set in November 2021, putting it on a similar path as tech stocks and other risk-on assets. This has made some investors question its perceived role as a store of value, or “digital gold.”

Commodities Were Also a Profitable Bet

Even if physical gold is not hitting new highs, its resilience in the face of runaway inflation tells us that what the market seems to favor right now are hard assets that have intrinsic value. It’s little wonder, then, that prices for nearly every commodity—from metals to energy to agriculture—are going parabolic in many cases.

We saw the same thing happen in the 1970s. The S&P GSCI, which tracks a basket of commodities, surged sevenfold during the decade, while the S&P 500 remained mostly flat.

Inflation Kept Stocks Grounded in the 19702 While Commodities Took Off

With commodity prices doing so well right now, we believe energy producers and metal miners look attractive by extension. Many oil and gas companies posted head-turning results in the first quarter of 2022, which was reflected in higher share prices. London-based Shell, for instance, reported $9.1 billion in profits in Q1, almost three times what it made during the same quarter in 2021. In New York trading, Shell stock rose 23% year-to-date through the end of April.

Inflation may not be as “transitory” as the Fed maintained early on, but at some point, prices will stabilize. Until then, it’s important for investors not to make rash decisions and panic-sell at a loss. If nothing else, it may be prudent simply to hold your positions for a longer duration than you were planning. This isn’t the first spate of inflation we’ve seen, and it likely won’t be the last.

Missed the HIVE Blockchain Technologies webcast update on the stock consolidation, set to happen next week? Watch the replay on YouTube by clicking here!

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 2.90%. The S&P 500 Stock Index fell 3.05%, while the Nasdaq Composite fell 3.82%. The Russell 2000 small capitalization index lost 1.08% this week.
  • The Hang Seng Composite rose 3.99% this week; while Taiwan was down 11.38% and the KOSPI fell 11.36%.
  • The 10-year Treasury bond yield fell 13 basis points to 2.788%.

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Energy & Natural Resources

Strengths

  • The best performing commodity for the week was aluminum, up 6.31%. Control by OPEC+ over the oil market appears to be declining. Outside of the Middle East, supply growth continues to fall short of expectations: following April’s OPEC undershoot versus quotas reached of 1.8mb/d in April, with the group’s spare capacity “buffer” declining concurrently to just 7%. This means that, while OPEC+ production is growing in absolute terms, the group’s ability to influence price is diminishing. This creates upside risk to current prices, particularly in the context of expected higher summer demand.
Oil Prices Moving Back Toward Previous Highs
  • America’s shale oil companies are enjoying a cash bonanza, as soaring oil prices and months of capital restraint transform the fortunes and balance sheets of a sector once notorious for debt-fueled drilling sprees. Operators will rake in about $180 billion of free cash flow this year at current crude prices, according to research company Rystad Energy. That compares to huge losses amassed during a decade of fast supply growth that crashed to a halt just before the pandemic.
  • U.S. energy firms last week added oil and natural gas rigs for an eighth week in a row as high prices and prodding by the federal government prompted drillers to return to the wellpad. The oil and gas rig count rose in the week ended May 13 to its highest since March 2020, Baker Hughes said in a report. Baker Hughes said that puts the total rig count up 261, or 58%, over this time last year.

Weaknesses

  • The worst performing commodity for the week was lumber, down 27.10%. Bakken natural gas production does not appear to have yet fully recovered from severe weather disruptions in late April, according to S&P Global | Platts. Bakken throughput on TRP/OKE’s Northern Border Pipeline have averaged just below 1.5 Bcf/d in recent days, 200-300 MMcf/d less than pre-storm averages.
  • For the past two months, the International Energy Agency (IEA) has become more bearish on demand, lowering its 2022 demand forecast to 99.4MMb/d versus 100.6MMb/d, citing slowdown in global economic growth.
  • China’s electricity output plummeted last month as COVID restrictions in Shanghai and other parts of the country pummeled economic activity, reports Bloomberg, from factory floors to steel mills and shopping malls. Electricity generation fell in April from the prior month to 608.6 billion kilowatt-hours, a decline of 4.3% on the same period last year. Thermal power output plunged to an even greater degree, the article continues, down 12% for the biggest drop since 2008, as the share of renewables increased at the expense of coal and gas and China installed more solar capacity than expected in the first quarter.

Opportunities

  • Chinese crude steel production picked up in April, reports Reuters, increasing 5.1% month-over-month with easing COVID and environmental restrictions. Despite the pickup, production was still down 5.2% year-over-year and China plans to keep crude steel production output below 2021 levels. The targeted steel production levels are being used to help control GHG emissions as the country aims to have peak emissions in 2030.
  • The global lithium industry needs as much as $42 billion of investment by the end of the decade in order to meet demand for the crucial battery-making material, writes Bloomberg, with attempts to build supply chains outside of China subject to much higher costs, according to a data and market-intelligence provider. The sector will require $7 billion of investment each year from now until 2028, Benchmark Mineral Intelligence said in a report. That would help it meet forecast demand of 2.4 million tons a year by 2030, which is four times higher than the 600,000 tons that’s estimated to be produced in 2022.
  • China’s coal production climbed by almost 12% in the first four months of the year compared with the same period in 2021, as the government ordered miners to maximize output to reduce the risk of electricity shortages and cut dependence on imports from Australia.

Threats

  • Oil retreated for the first time in four sessions as COVID lockdowns strained the economy in China, the world’s biggest crude importer. WTI slid to trade near $109 per barrel, Bloomberg explains, reversing earlier gains. China’s industrial output and consumer spending slumped in April to the worst levels since the pandemic began, while apparent oil demand and crude processing plunged. Strict lockdowns to halt the virus have curbed fuel use.
  • The European Union is meeting today to discuss details of a sixth round of sanctions on Russia. The proposed package continues to include a ban on Russian oil imports, which continues to be stalled by Hungary as it seeks guarantees over its own energy supplies. Reuters reports that EU officials must publicly pressure Hungary on its position, while targeting a May 30-31 summit as the moment for agreement on a phase ban on Russian oil. 
  • Supply is reportedly improving across all PE grades, except for LLDPE C6 due to a shortage of hexene and other additives. There are some suggestions that domestic demand may be weakening, and inventories have reportedly increased, though this is not deterring domestic producers from nominating price increases. Rather, producers have deferred their 6-7cpp April/May price increases to May/June.

 

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Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Nekocoin, rising 1,913.68%.
  • Gary Gensler, the head of the Securities and Exchange Commission (SEC), made a pitch for a higher budget on Wednesday, telling lawmakers in the U.S House of Representative that he wants to do more as a cop on the cryptocurrency beat, according to Bloomberg. He cited the recent firestorm that consumed TerraUSD as an example of the industry’s investor-protection need, telling lawmakers “There was one crypto complex that went from $50 billion in value to zero just in the last three weeks.” 
  • A Bitcoin whale just sent $73,803,577 worth of Bitcoin off Coinbase, according to Bloomberg. Bitcoin whales, investors who own $10 million or more in BTC, typically send cryptocurrency from exchanges when planning to hold their investments for an extended period of time.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Flexible Leverage Index, down 100%.
  • A selloff in cryptocurrencies accelerated Monday, with Bitcoin dropping back below $30,000 after weak Chinese economic data dented appetite for riskier assets. Monday’s price action saw Bitcoin give back some of a Sunday rally. The total market value of cryptocurrencies has dropped by about $326 billion in the past seven days to roughly $1.33 trillion, according to data from CoinGecko. Bitcoin is some 57% off its November all-time high. 
Double Trouble - Bitcoin and Ether are Emblematic of a Tough Year for Crypto
  • Cryptocurrency hedge funds lost 12% in April, the most among all investment styles, according to Bloomberg Hedge Fund Indices. The Bloomberg All Hedge Index fell 1.6% in the month and lost 3.2% year-to-date.

Opportunities

  • Amid the ups and down of cryptocurrencies, a new venture by Rodrigo Batista – who helped found the Bitcoin Market – shows that risk appetite is more than alive. Digitra.com, the cryptocurrency trading platform created by the entrepreneur, is capitalized and ready to debut in retail in June. 
  • Texas has ambitions to become the most important crypto hub in the U.S. A number of following facts support the claim of Texas and its largest metropolis, Dallas-Fort Worth, as the main cryptohub of the United States. The world’s largest cryptocurrency operator Coinsource is based in Dallas, Texas. The crypto start-up Zabo acquired in 2021 by Coinbase originated in Dallas, and in April 2022, Fort Worth became the first city government to mine Bitcoin and Texas itself was already referred to as the “mining capital,” writes Bloomberg. 
  • Popular nun-fungible token (NFT) marketplace OpenSea just launched a new marketplace protocol to buy and sell NFTs. The new venture, which was first made apparent by an address linked to OpenSean on Etherscan earlier Friday, was confirmed in a blog post by the company, according to an article written by the Block. 

Threats

  • Cryptocurrency litigation is soaring, prompted by a surge of investors in the space, and U.S. proposals promise more rules to fight over in the coming months and years, writes Bloomberg. Crypto has generated more than 200 class action lawsuits and other private litigation as of this month, up more than 50% since the start of 2020, according to Morrison Cohen, which tracks the activity. 
  • The recent collapse of a popular stablecoin shows that the tokens aren’t ready to be used by consumers to make payments, according to a key U.S. watchdog. “People wonder: Is it going to be one day used for consumer payments?” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a Bloomberg TV interview on Monday. “Many are thinking it’s not ready yet,” writes Bloomberg. 
  • Mike Novogratz, the founder of Galaxy Digital Holdings who this week issued a mea culpa over Terraform Labs’ imploded stablecoin, noted that some smaller tokens are down 80% from their highs. Should their losses accelerate to the same degree they did in 2018, those coins could lose an additional 70%, according to Bloomberg.

Gold Market

This week gold futures closed the week at $1,846.17, up $22.56 per ounce, or 1.88%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 4.17%. The S&P/TSX Venture Index came in up 0.49%. The U.S. Trade-Weighted Dollar fell 1.29%.

Date Event Survey Actual Prior
May-15 China Retail Sales YoY -6.6% -11.1% -3.5%
May-18 Eurozone CPI Core YoY 3.5% 3.5% 3.5%
May-18 Housing Starts 1,756k 1,724k 1,793k
May-19 Initial Jobless Claims 200k 218k 203k
May-24 New Homes Sales 750k 763k
May-25 Durable Goods Orders 0.6% 1.1%
May-26 Hong Kong Exports YoY -3.5%   -8.9%
May-26 GDP Annualized QoQ -1.3% -1.4%
May-26 Initial Jobless Claims 210k 218k

Strengths

  • The best performing precious metal for the week was silver, up 3.25%. Steppe Gold Limited reported a significant boost to its year-over-year first quarter revenue this week, reports Proactive Investors, as the company ramps up production at its ATO mine in Mongolia. Revenue for quarter ended March 31, 2022, came in at $5.5 million. The company said it mined 69, 613 tonnes of ore and 192,680 tonnes of ore were stacked on the leach pad, with an average gold grade of o1.83 grams per tonne.
  • K92 mining reported first quarter results this week, with strong quarterly gold equivalent production of 28,188 ounces (or 24,152 ounces of gold, 1.52 million pounds of copper and 28,142 ounces of silver). This is a 49% increase from the first quarter of 2021. The company also highlighted cash costs of $536 per ounce of gold and all-in sustaining costs of $788 per ounce of gold.
  • Investors once again looked to gold as a haven asset to help protect their hard-earned cash in the first quarter of 2022 as record inflation pummeled other investment vehicles. Physical demand for gold jumped 34% year-over-year to 1,234 tons in the first three months of 2022, according to the World Gold Council, marking the highest quarterly demand increase the gold market has seen since 2018.

Weaknesses

  • The worst performing precious metal for the week was steel, down 4.42%. The coming days could be pivotal for prices since significant technical levels have been broken. This could act as a brake on price declines in the near-term by offsetting some of the investor outflows which have weighed on the market recently, particularly if activity in China begins to rebound in the coming weeks after prolonged lockdowns have hampered demand.
  • Equinox Gold Corp. has suspended operations at the RDM Mine in Brazil, according to a statement. It is withdrawing its 2022 production guidance for the RDM Mine until operations resume. The operation halt is due to delayed permits for the scheduled tailings storage facility raise. The company expects operations could restart as soon as two months from receiving regulatory approval, which is anticipated in the second quarter of this year.
  • Exchange-traded funds cut 229,133 troy ounces of gold from their holdings in the last trading session, bringing this year’s net purchases to 7.32 million ounces, according to data compiled by Bloomberg. This was the seventh straight day of declines. The sales were equivalent to $415.1 million at the previous spot price.  

Opportunities

  • The fact that the last two mean reversion periods in crude oil coincide with enduring bottoms in the price of gold may play out in 2022, writes Bloomberg. The crude peak in 2000 launched gold above $300 an ounce, the article explains, and when oil reverted from its all-time high at around $145 per barrel in 2008, the yellow metal formed a base around $800. Could a reversal be in store?
Oil Price Peaks Have Coincided with Gold Price Bottoms. Is a Reversal in Order?
  • Orezone Gold Corporation continues the development of the Bombore Gold Project, the largest undeveloped gold project in Burkina Faso, with a total resource of 6.2 million ounces at 0.68 grams per ton silver. As of March 31, 2022, overall construction progress was at 68.4% with the project remaining on schedule for its first gold pour in the third quarter 2022.
  • Late last week, Orla Mining released its first quarter financials, and more importantly, its first quarterly release as a gold producer. Numbers came in as a solid beat (clean earnings per share of $0.08 per share ahead of consensus of $0.03 per share). This comes on better production (23,000 ounces of gold in the quarter, better than consensus of 21,600 ounces of gold).

Threats

  • Small-scale miners near Endeavour Mining’s operation in Burkina Faso launched a protest on Tuesday after mine officials moved in to clear them from the surrounding area, according to Agence d’Information du Burkina. Artisanal miners stormed Endeavour’s Houndé project and set fire to its facilities, the state-run news agency said on its website. Neither Endeavour nor officials at the mining site could be immediately reached for a comment.
  • Continued weakness in the junior gold space could begin to weigh on the GDXJ ETF, as companies at the lower end of the market cap scale begin to reach threshold for deletion. Over the past month, valuations have declined by 25% in parallel with the broader market sell-off, and analyst estimates show some junior gold miners now trade at $41 per ounce on an EV per ounce basis, in-line with levels last seen in mid-2019 at a gold price below $1,300 per ounce.
  • The World Platinum Investment Council (WPIC) lowered its supply forecast for 2022 to 7.78 million ounces, as it expects lower output from South Africa and Russia.  Additionally, the organization estimated supply at 8.18 million ounces earlier this year and major South African producers are all lowering guidance. The WPIC sees sanctions impacting Russian output and has reduced its platinum surplus outlook to 627,000 ounces from 652,000 ounces. 
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Author: Frank Holmes
Date Posted: May 20, 2022

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