Why I'm frustrated with Gold + our plan from here...

James Gerrish

Market Matters

The ASX200 commenced the last week of July pretty much in the same fashion as most other days, some choppy action around the psychological 6000 area with far more action unfolding beneath the hood on both the stock and sector level. This month has seen the index meander along in a very tight 268-point range, the lowest since November 2019, the world might still be struggling with COVID-19 but financial markets have clearly evolved beyond the volatility it delivered. On the sector level July has delivered a stellar performance by the Resources Sector while Real Estate has struggled – Our CIO at Shaw Martin Crabb recently described the later as a “slow moving train wreck” , a theme we unfortunately largely agree with hence our minor exposure across the MM Portfolios.

The market managed to close up 20-points yesterday, another good performance in the face of the ongoing COVID-19 headwind, Victoria recorded a very scary 532 fresh cases on Monday. More and more people I talk to in Sydney are becoming increasingly worried and are watching the NSW daily infection rate very closely as fears increase that it’s just a matter of time before our southern neighbors export the deadly virus, fingers crossed this is a case of the masses being too pessimistic and we won’t face another lock down. News overnight that Alphabet (GOOGL) has told its 200k staff globally that they’ll be working from home until July 2021 shows the scale of what is transpiring – it also highlights why technology companies have held up extremely well given their ability to operate remotely.

It’s important for subscribers to understand and acknowledge the huge disconnect between the global economy today and equities – stocks / risk assets are in a huge “buy the dip” trend where the technicals must be respected, in all likelihood in todays “free money” and negative real interest world a change in backdrop will be required before we stop climbing the wall of worry = don’t fight the trend! To put a quantifiable number on things the world is set to receive $US6trillion in QE over the next 12-months.

The enormous mountain of liquidity (money) being pumped into the financial system by governments & central banks is pushing almost every asset class higher from equities to bonds and now increasingly precious metals. However with bonds and stocks having enjoyed multi-year bull markets albeit with a few bumps in the road it appears that the increasing uncertainty / fear is causing some rotation into gold et al, no surprise to MM although our exposure is way below what we intended hence the topic of today’s report.

MM remains bullish the ASX200 medium-term.

ASX200 Index Chart

We keep highlighting the correlation between the ASX200 and $A but while it holds true quite simply why change? The $A is enjoying a weak $US and improvement in commodity strength and has now rallied to test April 2019 levels, an impressive performance for a “risk on / growth currency” considering we are in a global recession. While the $A continues to rally we are bullish local stocks and can see a period of performance catch up during the remainder of 2020.

MM remains bullish equities & the $A.

The Australian Dollar ($A) v ASX200 Index Chart

Reporting season is now underway, for a list of company results, CLICK HERE for the Market Matters Reporting Calendar **Please note, data sourced from Bloomberg, not all ASX companies are on this list**.

This morning we’ve seen full year results out from Credit Corp (CCP) & GUD Holdings (GUD) – my take here, and I’ll endeavor to provide a daily update in the AM Report during reporting season.

Insurance Australia Group (IAG) was the worst performing stock yesterday falling -5.3% on an “up day” taking its decline to over 20% in just a few weeks. The issue is simple, and it’s a timely reminder as we enter reporting season – last week IAG cut its dividend after it announced it was set to miss its FY guidance, the business is getting hit on a few fronts from falling bond yields hurting its ROI on cash held to cover premiums to the significant negative impact from COVID-19 on many levels from customers, suppliers and staff. The scenario which is unfolding should be remembered by investors in the coming weeks i.e. when a stock misses badly it usually falls for more than a few days and vice-versa with the star performers hence any action being considered after an out-of-line result is usually best executed sooner rather than later.

MM is neutral IAG.

Insurance Australia Group (IAG) Chart

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Overseas Indices.

US stocks enjoyed a good start to the week led by the tech stocks with the NASDAQ advancing almost 2% e.g. Apple (AAPL US) +2.4% and Amazon (AMZN US) +1.5%. There is no change to our short-term view discussed in the Weekend Report - US stocks again look on track to scale fresh all-time highs in the coming weeks~5% higher where we might consider reducing our exposure slightly.

MM remains bullish US stocks medium-term.

US S&P500 Index Chart

The psychology of investing.

Human psychology is arguably the largest hindrance for both investors and traders alike, people are wired to buy things cheaply and sell them after a bounce which sounds ideal in theory, but it has a huge flaw. For successful investing its critical to run profits and cut losses but most investors usually try and buy stocks that are falling (cheap) while often being reticent to buy stocks that have rallied, interestingly not the case with most Australians main asset i.e. property. Just a quick reflection over the last few Monday Reports illustrates this point with questions often along the lines of – xyz has fallen 15% is it time to buy &/or xyz has rallied 15% should we take profit?

However, some of the most successful global equity funds adopt a very different philosophy with 2 of their criteria aimed at trend following:

1 – They only buy stocks where the business has delivered an increase on earnings quarter on quarter.

2 – They only buy stocks which are trading at 3-month highs.

Obviously there are huge variances and tweaks on the above 2 rules and I’ve used these more to make a point as opposed to suggesting them as a ‘must have’ but they’re not bad guides! Just consider they would have filtered out investment disasters like Myer (MYR) and Whitehaven Coal (WHC) while ensuring both a2 Milk (A2M) and Xero (XRO) sat front and centre in any portfolio. At MM we adopt a number of additional filters in our modelling of portfolios but there are times when a “keep it simple stupid” (KISS) approach would keep investors out of trouble.

Subscribers should not be afraid to buy a stock that’s already rallied 10% in one day and vice versa – if there was one aspect of investing, we all struggle with at times it’s this very point. I certainly know at MM we’re not perfect as I consider our precious metal exposure which is sadly not yet as aggressive as our rhetoric – we’ve been too fussy so far! History tells us its far more profitable to buy a great stock at a high price as opposed to a bad stock at a cheap price.

MM remains bullish stocks i.e. with the decade old trend.

MSCI Global Index Chart

Overnight we saw Bitcoin surge over 12% making the rally in precious metals look tame, if anybody believes that the liquidity bubble is about to deflate I would argue that if there’s enough money slushing around for a high risk questionable asset like Bitcoin to surge why not stocks and precious metals. MM is bullish Bitcoin while it holds above $US10,000! Technically while Bitcoin holds above Mondays low it looks great with the potential to explode towards the 14,000 area, excellent risk / reward but more importantly by implication other risk assets like equities could rally significantly higher, a move not being forecast by many but there’s clearly “money in them there hills!”.

MM is bullish risk assets.

Bitcoin ($US) Chart

The US NASDAQ has provided an excellent illustration of what happens when investors are all trying to buy “on the cheap” – they don’t get set! I believe most people recognised in late March / early April that stocks had probably formed a very meaningful / important low but I question how many boarded the train as pullbacks have remained unusually very shallow for a market that’s rallied 63% in just 4-months. We regularly talk about risk / reward and technical analysis tells us a strong market should remain above its previous swing high, just as the NASDAQ has done below, there’s been plenty of “low risk” opportunities to buy the likes of Microsoft (MSFT US) even if they had already rallied strongly but not if you’ve been too pedantic.

MM likes to follow a trend unless we anticipate a significant macro change in trend e.g. the $US to fall.


The “Fear of missing out” - FOMO.

The phrase FOMO has evolved over time as investors lose patience with not owning a stock / position and jump on board without due care and attention to valuations / fundamentals, or basically simple risk / reward – CSL has been a classic local example in our opinion this year, a great stock but at what price? The FANG’s might be walking a similar path however in our opinion they have further to travel before its time to lighten exposure but that time will undoubtedly come as free money pushes growth assets ever higher.

MM is neutral CSL at current levels.

CSL Ltd (CSL) Chart

Today’s report evolved because of how I felt yesterday as gold roared towards $US2000/oz, its highest level since 2011. The proverbial ducks have clearly all aligned for gold with COVID-19 increasing investors’ fears, negative real interest rates likely to stay around for years plus the potential for inflation in the years ahead as $US6 trillion washes through the global economy in the next 12 months, what’s not to like – but we are not long enough!

The question I can imagine people would now be asking is along the lines of “where should we take profit on gold” but in line with previous discussion we prefer “where should we buy gold”. Our current outlook for gold as we approach the next Fed meeting, which will undoubtedly have a major impact on gold, is as follows:

1 – Buy gold, we can actually envisage $US2,500 in the next 12-18 months so forget about taking profit – I know this is way more bullish than many but sometimes I don’t mind being the 3rd standard deviation.

2 – If / when we get a $US100/oz pullback in gold, which may occur this week, after the FOMC meeting, add to positions

3 – A break under $US1,800 is now required to question this bullish outlook, less than 10% stop.

Hence while MM is undoubtedly experiencing some classic FOMO with gold, we are bullish over the next year thus a simple plan is required to improve the risk / reward at current levels.

MM is bullish gold and precious metals.

Gold ($US/oz) Chart

Our Gold Plan.

Hence while MM is undoubtedly experiencing some classic FOMO with gold, we are bullish over the next year thus a simple plan is required to improve the risk / reward at current levels. Our preferred vehicle remains Newcrest (NCM) it’s a quality gold company that we believe is undervalued compared to its higher beta (more volatile) peers. After golds advanced ~30% in 2020 I remain happy to buy the gold sector but not the high cost producers, sure they may rally harder as gold challenges $US2,000/oz but if we are wrong they will be hit hardest, making the risk / reward far less attractive.

A clearly defined plan is vital during periods of volatility and our is simple plan with gold / NCM – buy now and add lower / later, a scaled in approach albeit from higher levels than I would have preferred.

MM is bullish NCM – buy now & add later / lower.

Newcrest Mining (NCM) Chart


MM is a buyer of Newcrest Mining (NCM).

Any advice provided is of a general nature only.

James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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