How to invest in these highly uncertain times

Wednesday, 28 August 2019
Adelaide, Australia
By Bernd Struben

Was there or wasn’t there a phone call?

In a telling sign of just how frayed investor nerves have become, this single uncertainty saw US markets sink overnight…and gold shoot higher.

The phone call in question is the one Trump said he received from Chinese trade officials on Monday. According to Trump, they called to say they want to ‘get back to the table’.

China’s lead trade negotiator, Vice-Premier Liu He, appeared to corroborate this. Liu told the Chinese news outlet Caixin, ‘We think an escalation of the trade war is against the interest of China, the US and the entire world.

This news offered some much needed cheer to the trade war weary markets. As I wrote here yesterday:

So investors have a glimmer of hope in the US trade war with China as well as the nuclear accord dispute with Iran.

And so the markets go up…while gold and gold stocks slide.

But as we’ve seen before, these glimmers of hope can be snuffed by a single tweet from a disgruntled Trump.

Which, in my opinion, makes today’s sell-off of gold stocks short-sighted, at best…

With investors on edge, it won’t take more than a “boo” from any of our geopolitical powder kegs to see investors piling back into gold and gold stocks.

That ‘boo’, it turns out, came straight from Beijing. And it took less than a day to arrive.

From Bloomberg:

China declined to confirm phone calls with the U.S. that President Donald Trump claimed happened over the weekend, during which Trump said China indicated it wanted to work toward a trade deal.

“I’m not aware of that,” Chinese Foreign Ministry spokesman Geng Shuang said at a regular briefing in Beijing on Tuesday.’

Trump, as you’d expect, is standing by his claim. He’s backed by Treasury Secretary Steven Mnuchin who said there had been renewed contact. Though he declined to say who precisely made the alleged phone call.

So was there or wasn’t there a phone call?

Who knows.

The Chinese certainly have nothing to lose by making Trump appear desperate. Or a liar. And Trump has nothing to lose by doubling down…whether he’s telling the truth or telling tall tales.

The important takeaway here isn’t whether the Chinese called US officials hoping to restart talks or not. It’s how dramatically investors reacted on little more than rumours.

Gold, for example, is up a bit over $27 per ounce on the renewed uncertainty.

And gold stocks — which tanked in a selloff I called ‘highly myopic’ yesterday — came roaring back.

Now gold stocks, as I like to bang on about here, have the potential to offer you many times the gains of the price of bullion. But, as is inevitably the case when hunting for outsized gains, investing in gold stocks carries a lot more risk than investing in bullion.

Most of our editors, myself included, advocate a healthy allocation to both physical gold and the companies that dig it up. Say 10% of your investable wealth in bullion. And somewhat less in gold stocks.

Your particular allocation obviously depends on your personal circumstances. If you have high interest debts, like credit cards for example, I’d suggest paying those off before investing in…well…anything.

Now, most gold bugs I know buy and hold gold for the long term. Some never plan to sell at all.

That strategy, as you can see in the gold chart below (in US dollars), has done quite well over the past 12 months.



chart image
Source: Bloomberg
Click to enlarge

Gold (in US dollars) is up 28.5% since 28 August 2018. You won’t hear anyone complaining about those kinds of returns.

Of course, it doesn’t always work out this way.

Just think back to the latter half of 2016. On 8 July 2016, gold was trading for US$1,366 per ounce. By 23 December, it had sunk to US$1,133. That’s a loss of 17.1% in just over half a year.

Now if you’d held tight to your bullion, you’d still be nicely in the black today.

But what if there was a way, a system, that could help you get out of your gold holdings during the downturns and back in during the upswings? What if you could even short gold during those downturns and gain as the yellow metal falls?

That, folks, is precisely the system our good friends at Agora Financial Australia (AFAU) have put together.

We’ll get back to that, right after a look at the markets.

Or, if you’re feeling impatient, you can click here to get all the details now.

Markets

Overnight, the Dow Jones Industrial Average closed down 120.93 points, or 0.47%.

The S&P 500 closed down 9.22 points, or 0.32%.

In Europe the Euro Stoxx 50 index finished up 21.63 points, or 0.65%. Meanwhile, the FTSE 100 lost 0.08% and Germany’s DAX closed up 71.98 points, or 0.62%.

In Asian markets Japan’s Nikkei 225 is up 29.36 points, or 0.14%. China’s CSI 300 is down 0.44%.

In Australia, the S&P/ASX 200 is up 21.89 points, or 0.34%.

West Texas Intermediate crude oil is US$55.64 per barrel. Brent crude is US$59.95 per barrel.

Turning to gold, the yellow metal is trading for US$1,543.16 (AU$2,284.13) per troy ounce. Silver is US$18.27 (AU$27.04) per troy ounce.

One bitcoin is worth US$10,142.60.

The Aussie dollar is worth 67.56 US cents.

Gaining from gold’s price swings

Now back to gold. And how you can potentially gain from gold’s moves higher and lower.

With a picture worth a thousand words, I’ll save us all some time by showing you this chart:



chart image
Source: Thomas Meyer
(NOTE: Figures above exclude trading fees, taxes and dividends)

Click to enlarge


Diligent readers may recognise this chart. I showed it to you last month. Which is why the gold price (in US dollars) is a fair way below today’s price.

Anyhow, let me explain what you’re looking at.

The black line is the gold price. The yellow line is what’s known as the transition zone. And the green line is the theoretical gain you could have made.

How?

By using a proprietary algorithmic trading system developed by Morgan Stanley veteran Tom Meyer.

I won’t delve into Tom’s background today. Suffice to say that would need another 1,000 words…or more.

It’s his system we’re interested int today. A system backed by 28 years of comprehensive back-testing.

Now you can see when the gold price began to fall in early 2013, Tom’s algorithm went the other way. It signalled the time had come to short gold. Something you can do with a straight forward inverse exchange traded fund (ETF). You can buy and sell these just like you do shares in a stock.

If you’d followed Tom’s signals and gone both long and short over this 10-year period, you could have potentially gained 185%. By contrast, buy and hold gold bugs would have seen gains of only 49%. Meaning Tom’s system delivered a theoretical outperformance of 136%. (Remember, the data is derived from back testing.)

And Tom’s finetuned his system not just for gold. But for the ASX 200 index as well, which you can also buy or sell with ETFs. Topping it off are four other large-cap ASX stocks.

According to Tom, these may be the only six ‘stocks’ you ever need to buy and sell again. And, with rare exceptions, you only need to check your trading signals once each week. That’s on Mondays.

Interested?

If you want to see next Monday’s ‘Big Six’ trading signals, you just need to register your email address in AFAU’s priority list. But don’t wait too long. Registration closes this Friday at 3pm AEST.

Just click here to register now.

Market data

We’ve received numerous emails from readers about our end of day market data. You may have noticed that we pulled these tables last month. That came after we cancelled our contract with our former data provider.

We are looking into alternatives to return this service to you here. Thanks for your patience.

Cheers,
Bernd