The article below is an excerpt from our Q2 2023 commentary.
Picture it, if you will: December of 2029. In a dimly lit private dining room, the sound of cutlery clinking blends with spirited conversation. Gathered at this stately round table is a diverse group of investors. Some wear the hard-fought wrinkles of significant gains, while others wear the furrowed brows of regrettable losses.
What stratagems, one wonders, divided the winners from the less fortunate?
To call the 2020s volatile might be akin to calling the sun slightly warm. Consider 2020, with the globe in the clutches of COVID-19. Then there was the inflationary flare of 2022, a fire stoked by Russia’s move on Ukraine. Central banks, as reactive as ever, escalated rates in a dramatic fashion, prompting many to toast to the Federal Reserve’s apparent mid-2023 success. Alas, as the hypothetical scene suggests, the party might have been premature.
The prevailing wisdom of 2023 still held that oil demand had seen its heyday in late 2019. How baffling, then, that by the end of the decade, demand kept reaching new unexpected highs, largely propelled by emerging markets like India. A trust in the boundless potential of the US oil shales was dashed, as production waned midway through our tumultuous decade. The American solution, releasing a sizable portion of its strategic reserves, was a mere temporary salve, and oil’s price ascended to dizzying heights. In a few short years, oil had gone from universally accepted as “uninvestable” to the “must-own” asset class.
A brief upturn in food prices post the Russian-Ukraine conflict turned out to be just the opening act. The main event? A succession of agricultural calamities, the most severe being a midwest US drought, eerily reminiscent of the 1930s Dust Bowl.
Renewable energy, hailed as the savior of both wallet and environment, took a rather ironic turn. With heavy government backing, these “clean” energies seemed to generate only escalated electricity costs and persistent power shortages, plaguing the very Western economies that championed them.
The mighty dollar began the decade without peer. Yet, halfway through the 2020s, the musical chairs of global monetary order began, with nations gravitating towards their own currencies and the golden touch of precious metals to square off their imbalances.
With the dollar’s retreat, the inflationary inferno pushed commodity demand significantly higher. Bonds were not spared, resulting in the central banks’ predictable rescue operation as governments had trouble rolling over their short-term obligations.
Equity markets too grappled with inflation’s weight and the diminishing lure of bonds. A stark illustration: The Dow Jones Industrial Average’s relationship with gold. From a once formidable 20:1 ratio at the decade’s onset, a historical crossroads loomed: ten years later, they looked set to cross – a rare event that had occurred only three times in 140 years (1896, 1932-4 and 1980).
Retrospect at our 2029 table illuminated the follies and triumphs of a decade. Those that had bought the “must own” assets of the early 2020s (i.e., fixed income and growth stocks) were rewarded with the worst inflation-adjusted returns. Conversely, the assets most universally hated at the start of the 2020s (i.e., hard assets) produced the best returns by far. Leading that hard asset class would be the quintessential “hard” asset: gold.
Those far-sighted souls who, a decade earlier, had the wisdom to acquire gold found themselves comfortably ensconced in the cozy realm of foresight. While much of the market grappled, rather inelegantly, with the unforeseen maladies of the decade — resulting in discernible, tangible losses in what were once deemed “safe” portfolios — these astute speculators sat on the very asset that the generalist hordes suddenly found irresistible. Come the twilight of the 2020s, they stood not just as benefactors of their own prudence but as the envy of many, having firmly secured the reins of their financial future.
Peering into fog of the future, one is invariably met with a degree of uncertainty, a kind of myopia if you will. Yet, it might amuse our diligent readership that the unforeseen turns and tempests in today’s financial landscape were none other than the subjects dissected at our Fall 2022 Investor Day.
Marko Papic candidly expounded on our trajectory: veering away from the quiet sanctity of a unipolar world to the cacophonous theaters of multipolarity. The aspiring occupant of the Oval Office, Vivek Ramaswamy, elucidated on the curious ways ESG pressures have begun to distort corporate investment, particularly when one treads the rugged terrains of natural resources. Leigh Goehring sounded the clarion call on a looming metamorphosis – our gas fields, both global and our own continental, teetering on the brink of a structural deficit. As for agriculture? Shaun Hackett painted a frosty panorama, hinting at the dawning of a global cooling epoch, replete with its tantrums of volatile weather and crop yields that greatly disappointed. Adam Rozencwajg warned of the faux allure of renewables, focusing on the paradoxical energy crisis it might birth, thanks to the nettlesome issue of their efficiency. Edward Chancellor, always the astute historian, regaled us with tales of investment cycles, drawing our gaze to the grand pendulum swings in energy and metals – a narrative of liquidation, but promising prosperity in its aftermath.
Now, it’s true that at Goehring & Rozencwajg, our crystal ball isn’t infallible. Yet, it’s in our DNA to speculate, prognosticate, and occasionally, pontificate. An interesting tapestry woven by our speakers was a shared spirit of contrarianism, a thirst to not just see the future but to envision it with a tint different from the many.
The golden thread for our attendees? A bullish outlook for several commodities. But ah! One precious element was not discussed: gold.
The gilded metal, we assert, stands on the precipice of a roaring bull run, perhaps echoing its luminous days of the ‘70s and the 2000s. Despite its sluggish dance since the commodity rally began in May 2020, with gold’s mere 15% advance looking rather pale against the Rogers International Commodity Index’s 160% and the Goldman Sachs Spot Commodity Index’s 125% leap, we sense an imminent turn of the tides. Investors, it seems, might be getting one last golden ticket.
Those with long memories might remember how gold became the “must-own” asset of the 1970s. We believe the same thing is happening today. Gold demand will come from speculators seeking a short-term profit and generalist investors seeking protection from financial turmoil and mounting inflationary pressures. Gold and silver were radically undervalued in 1971. Over the next decade, they were the best-performing asset class. Between 1970 and the peak in January 1980, gold and silver surged 2,000% and 2,800%, respectively. After peaking in 1980, gold spent the next 20 years drifting lower. By 1999, it had become as cheap as ever on many metrics. Between 1999 and today, gold advanced more than eight-fold, significantly outperforming stocks and bonds. Despite its strong appreciation, we believe gold remains exceptionally cheap based on our framework. In our 2023 Q2 commentary (available below), we describe our valuation techniques and show that gold still has a considerable upside, irrespective of what occurs in global financial markets.
The question remains: Come 2029, on which side of the table do you envision yourself?
Intrigued? We invite you to download or revisit our entire Q2 2023 research letter, available below.
Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Historical performance is not indicative of any specific investment or future results. Investment process, strategies, philosophies, portfolio composition and allocations, security selection criteria and other parameters are current as of the date indicated and are subject to change without prior notice. This communication is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes. This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. All expressions of opinion are subject to change. You are cautioned not to place undue reliance on these forward-looking statements. Any dated information is published as of its date only. Dated and forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any dated or forward-looking statements. Any references to outside data, opinions or content are listed for informational purposes only and have not been independently verified for accuracy by the Adviser. Third-party views, opinions or forecasts do not necessarily reflect those of the Adviser or its employees. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.