In just nine months, the Investec Value strategy, managed by John Biccard, recovered approximately 90% of its underperformance versus the All Share Index over the four years from September 2011 to September 2015. This recovery is due to the thorough work done on the world’s debt position and the consequences thereof and the courage of John’s convictions throughout this period.
Failed policies of central banks
Our longstanding bearish view on the global economy and bullish outlook on precious metals have finally started to play out over the past nine months, with the market beginning to see what we have warned about for the past four years. The catalysts for this are numerous — the slowdown in US non-farm payrolls numbers, the collapse of global trade volumes, the inability of the US Federal Reserve to hike rates (despite hawkish stances between meetings), the phenomenon of negative bond rates on close to 40% of the world’s outstanding sovereign bonds and, most recently, the surprise leave result in the UK referendum vote on European Union membership.
We believe it is important to see that the vote for ‘Brexit’ as well as Donald Trump’s surprisingly strong showing are not isolated political events, but are political reflections of the core economic problem, i.e., an over-indebted world leading to well below par economic growth and the consequent actions of central bankers to continue to manipulate interest rates ever lower. This manipulation of the discount rate has brought no acceleration in growth, nor more jobs, but has rather made the rich even richer via the propping up of asset values, while the retired and the poor have lost interest income and employment opportunities. Trump and ‘Brexit’ are thus both a reaction to the failed policies of the central bankers of the last 15 years in our view, and we can expect further ‘populist’ revolts starting with other European countries having their own ‘Brexit’ moments.
Destruction of the value of paper money to continue to benefit gold
Thus, we see little reason to materially alter our strategy. The continuation of low real growth together with unprecedented levels of debt mean that central bankers have painted themselves into a corner of zero interest rates and continued quantitative easing. Under this scenario, the outlook for gold remains positive as ongoing negative real rates and the erosion of the pile of debt through the destruction of the value of paper money should continue to drive investors to the ultimate real asset (gold) as central bankers confiscate private savings in order to shore up bankrupt sovereign states. In time, we expect gold to surpass its 2011 high of $1,900 and, with AngloGold still 60% below its five-year high in US dollars, we are not in a hurry to sell.
Platinum offers exceptional value
Our investment case for platinum is based somewhat on that for gold, but, more importantly, we see a significant deficit looming in platinum group metals as slow growth in demand is met with a collapse in supply from South Africa as a result of years of underinvestment and ever-aging current mines. Our largest platinum position, Impala Platinum Holdings, is still trading 85% below its all-time high despite having doubled this year, and we are thus even less inclined to sell it. We believe the stock continues to offer exceptional value as it trades at one-third of its replacement cost.
A good nine months after four difficult years
We have regained a significant portion of the underperformance of the four years from September 2011 to September 2015 in just nine months.
One by one, the major equity classes have fallen in response to the reality of the debt-laden, low-growth world – first resources, then emerging markets, Chinese equities, global banks and now UK property – all a reaction to overvaluation encountering reality. The final shoe to fall is the biggest and the one about which the market is most confident (and therefore the most vulnerable) — the US equity market and especially the ‘FANG’ (Facebook, Amazon, Netflix and Google) stocks.
As we have done over the last quarter, relative strength in our large precious metals positions is most likely to be used to rebalance the portfolio as other stocks become relatively more attractive. As we believe the recovery in precious metals prices is only at the beginning, this rotation will be gradual, and will largely depend on the valuation of the recipients of these sales.