Portfolios
Going for Gold?
Rules of Thumb
The idea of rules of thumb, or even ‘old wives tales’ is something treated quite seriously by some psychologists. The suggestion is that they have come about on the basis of human experience, so insofar as they reflect maybe millions of observations over maybe thousands of years, they may have considerable merit.
One such rule of thumb for investment markets is that when people are nervous about the value of paper assets, they sell them and buy physical assets. In other words, they sell shares and buy gold, other precious metals, classic cars, Bordeaux wine “en primeur” and so on. Gold is widely recognised as an asset not closely correlated with shares in developed countries.
This is observably true, so I always checked any potentially short term market sell off against the direction of the gold price. If the latter was not moving, it was a fair bet that the sell off was ‘technical’ and just short term reaction to news flow or repositioning by major market participants.
Recently, the price of gold bullion has risen sharply, suggesting a genuine fear is abroad and people are looking to hedge out risk. Readers of my blog post a couple of weeks back will know that I believe is the true situation – market players are now accounting for multiple risks.
So buy gold then?
Well, if only that was easy. Buying funds with the word ‘gold’ in the title may well just get you an exposure to mining companies, but that is just another form of equity share grouping. Buying a gold ETF might work, but check it is one backed by actual physical gold assets. Buying actual bullion in a bonded secure vault is possible using a limited number of third party agents, but of course you have to pay fees. Or you can buy small amounts of gold in the form of sovereigns and so on – but again you will have potentially high trading costs.
Personally, because I know gold is a commodity and it has no income yield, plus potential storage and insurance costs as well as being highly volatile in value at times, I don’t ever use it as an asset class diversifier. Some very well resourced managed portfolio suppliers (7IM, for example) will use gold ETFs for diversification and that is to their credit.
Like that other commodity Bitcoin, I would see gold as an asset for those who can afford to speculate and lose a lot if things go wrong. For the average investor, it is a little too ‘quirky’ an asset to be of much use in portfolio diversification.
New “How to” article added
I have just completed an article expanding earlier comments on how to decide on selling investments to raise cash or “skim’ profits.
Doing this effectively is quite challenging, requiring objective analysis and a fight with your own psychological biases.
At this moment in time, reviewing past profits and changes in your portfolio mix are absolute housekeeping essentials. Don’t delay!
I hope the article is helpful.
Conflicting expert opinion
Yes, this is one of those times when I get as close as I ever do to those folk who issue Tweets they either wish they had thought more about, or which everyone else wishes they had thought more about. I don’t use Twitter, because I am by nature an exponent of the long way round with words, except when it comes to music lyrics.
I am going to rant a bit, but in a hopefully educational way.
Today Morningstar sent me an investor bulletin. In it they point out the useful and interesting fact that dividends grew very healthily last year in all the major global markets. Any investment professional knows that the cardinal driver of share prices is dividend growth, so that suggests share prices at what otherwise seem to be rather high levels based on macro economic and historic data might well be justified.
On the same page, they say US shares are overvalued and that it is a good idea to sell overvalued shares. In that article they go on to say that they are NOT recommending selling US shares. They also say (correctly) that you should never sell shares on the basis of news headlines. In their view tariffs won’t impact the US market as the US has a high domestic focus and is not too much impacted by international trade, so ignore that news. Might one ask why the US President is imposing tariffs in the first place if that is true?
A rational line of advice might be this: current shares prices are high because we have seen (past tense) excellent dividend growth. In a world where tariffs will have some impact on local costs (absolutely without doubt) and there is full employment and pressure on wages in many producer countries and also rising interest rates, profits will grow less, dividends will grow less or even get cut and share prices will indeed look expensive.
I am relatively pessimistic, which as I am naturally an optimist, means that for me I am very concerned about current share price valuations in many places. But there will be buying opportunities, something Morningstar does point out to give them credit. As I have been saying for some months now, holding cash patiently is a good tactic.
Cold Turkey?
In today’s news about the financial pressure being exerted on Turkey by the Trump administration, two blog posts I have made recently are brought together.
Currency fluctuation is a risk that can impact all portfolios
This is as I explained: because many emerging economies have large amounts of US dollar denominated debt, the cost of servicing that debt goes up if the dollar appreciates relative to the currency of the debtor nation. That is one of those ‘rule of thumb’ justifications for selling emerging market and broadly Asian stocks (although not logical for Japan and China, at least).
Tariffs have unpredictable consequences
In this case, tariffs aimed at Turkey (because they are not being nice to Donald, it seems), may lead to default on debts owned mainly by international banks, thus awakening sleeping concerns about the liquidity of the financial system when central bank money printing ends.
Thoughts
Turkey is not a small country and of course was once a significant regional power, so is unlikely to allow itself to be pushed around. It talks about new alliances with Russia, although allowing for not such ancient history, one would not see the two countries as likely best mates. But ‘need is must’ sometimes as the saying goes and I am sure President Putin would like more influence South West of the Black Sea.
A worry is that US foreign policy is now so ignorant that Trump sees Turkey as just another Middle Eastern country (because it is Islamic) and therefore a natural enemy of the US. As I write that is seems bizarre, but I do believe it is possible!
It would be odd if this particular non-sensical action by Trump caused the market sell off that is rather overdue, but it will be a nervous few days. Investors should keep an eye on events and be prepared to take any buying opportunities.
As a final thought, the Euro has been quoted as depreciating in today’s news as a contagion effect from the Turkish currency crisis. But it has hardly moved against Sterling – an indication of how uncertain an option the UK appears to international traders as the Brexit dithering continues. The Pound looks likely to continue to fall against the US dollar so portfolio exposure to global trading businesses will benefit.
Facebook (and others) – risks now apparent, but should you exit tech?
Depending on which news media you read, you are pretty much bound to have heard about record falls in the price of Facebook shares, apparently due to a slowdown in the rate of advertising revenue.
Of course, Facebook and for that matter Google, are in trouble with politicians for behaving “without moral leadership” to quote. This factor seems not to have much impact on the share prices. If you have any detailed knowledge of the history of the oil industry (the book to read is “The Prize” by Daniel Yergin), it will all look pretty familiar. I am surprised President Trump has not started tweeting about anti-trust legislation, something that was prompted by the utterly disreputable behaviour of Standard Oil (the largest remnant of which is now Exxon Mobil). Later this legislation was used to attack IBM, which in my college days was seen to be so large as to be able to outdo many nation states. I realise many young folk won’t even have heard of IBM!
As I mentioned in a another recent post about share price swings, these are most dramatic where the share price is justified on the basis of expected future profits growth, with the psychological overlay of the “fear of missing out” (FOMO). So if profits growth is at risk and investors are sitting on large paper profits, they will dump shares in an instant. There is a very old cliché in the investment world that a profits warning is always the first of many. That default idea also exacerbates sell offs.
So, should investors now pull out of tech funds? I personally will not. Some fund mangers will see a fall in prices as a buying opportunity because the cultural change (like the adoption of oil as a fuel for motor vehicles as opposed to use in smelly heaters and lights) is genuine, set in and will not be reversed. There will be winners and losers, new legislation and even systemic shocks to all the share values in the market, but I have no doubt that IT and media linked together are driving forces in business and profit generation for many years to come.