Equity market performance over the past year is illuminative and should flag some serious warnings for investors – particularly in the U.S. Over the past year, the gold price is up 26% and silver near 30% yet all the major U.S. stock indices are showing only a little better than zero growth over the same period. Precious metals investment had been out of favor, but those who persevered are now seeing the benefits and can hold their heads up high against stock market investors who had previously been the main beneficiaries of the recent bull equities markets.
U.S. equities in particular had been hugely buoyed by enormously elevated valuations given to tech market leaders, led by Microsoft and the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google). These high flying tech stocks together account for a vast percentage of the combined market capitalization of U.S. equities.
Recently these elevated market valuations have been added to by the rise of the ‘unicorn’ stock IPOs all supported by huge debt positions resulting from unprecedentedly low interest rates and relaxed borrowing conditions from major banking organizations. ‘Unicorn’ (or perhaps ‘jam tomorrow’) stocks are those presented as having fantastic future growth potential by charismatic CEOs who have had the capability of dragging in investment from institutions and individual investors alike to support their dreams of being the next Microsoft or Apple – and probably becoming hugely rich in the process. But actual investors beware. Most of these companies are so mired in debt and their future growth predictions so fanciful, that any semblance of profitability is probably so far ahead, and indeed may never be achievable anyway, as to make any decent returns for investors likely to be illusory to say the least.
As an example of the ‘unicorn’ company , I am indebted to Grant Williams and his latest ‘Things that make you go hmmm…’ newsletter (www.ttmygh.com) which carries a detailed analysis of the We Company (WeWork), one of the latest stock market darlings with a hugely inflated market capitalization despite it having an enormous debt burden and making vast annual losses of over $1billion in the name of supposed growth. TTMYGH compares the We Company with IWG (Regus) which is larger in terms of locations and assets, and has a somewhat similar key business concept in outsourcing workspaces for individuals and companies which wish to avoid the upfront costs of owning and maintaining their own work premises. Yet IWG, despite being larger and at least marginally profitable, has a stock market capitalization at around one-eighth of that of the heavily indebted We Company, which is currently making billion dollar plus losses. There’s something very awry with market judgment here, but the We Company classifies itself – or is classified by the markets as - a tech company (which in reality it is not) and carries a huge market premium because of this, helped on by the marketing hype of its CEO and the adulation of some of the media and short-sighted analysts.
But the fact that the We Company, and other tech companies with recent IPOs like Uber, Snapchat, Airbnb etc., all seem to carry elevated stock market capitalizations should ring warning bells. Remember the dotcom bubble of almost 20 years ago. Are we headed for a repeat? And if we are could it bring down with it the other probably overpriced, albeit profitable, tech stocks (Microsoft and the FAANG companies) which have been so dominantly responsible for the seemingly ever-climbing U.S. equity market indexes. (Of the FAANG stocks Netflix looks to be particularly vulnerable). To the ‘unicorns’ mentioned above one has to include Tesla which may be longer established than some of the recent ones, but carries all the attributes of the others in terms of a charismatic leader who can do no wrong in the eyes of his admirers, an elevated stock price, a very dubious earnings path and a huge debt burden. One of the ‘unicorns’ will surely crash and burn which will likely then undermine the whole tech bubble charade. Because of the tech stock dominance of the equities markets it won’t take much of a change in sentiment to them to bring the indexes to their knees – and other stocks – even those with decent earnings patterns and growth prospects – would likely follow them downwards in a general market collapse.
All the more reason then to invest in safe haven assets like gold and silver. But there should even be a word of caution here as well. As in the 2008 crash investors who held precious metals, but also general equities, particularly if bought on margin, could see their precious metals holdings slip back in value too as investors need to sell good assets along with bad to stay afloat. But such falls so generated could be relatively small and the recovery would likely be far quicker than that of equities. This happened in 2008 with gold recovering any losses within a couple of months – and then going on to new record highs over the next two to three years with silver peaking even a little earlier at close to $50.
I sometimes get access, through a friend, to Michael Lewitt’s excellent Credit Strategist newsletter and although I find some of his views a little over the top for my British sensibilities, it often reads like a breath of fresh air among all the bs and hype I’m normally exposed to. Lewitt’s ever-continuing mantra is ‘Buy gold and save yourselves’. He has certainly been on point over the past couple of years and remains even more so, in my opinion, today. So do take his advice .
His latest newsletter also looks in detail at the We company and comes to all the same conclusions as Grant Williams’ TTMYGH newsletter. How a company quite so mired in debt and making absolutely enormous losses can command the kind of stock market valuation of WE defeats this writer. It has to be some kind of collective market aberration!
Silver generally rides on gold’s coattails, but tends to outperform in a rising gold market, so that could be an even better, but perhaps riskier, bet. In recent weeks the Gold:Silver Ratio (GSR) - effectively the number of ounces of silver equivalent in price to one ounce of gold - has come down from 93 to around 81, meaning silver has risen faster than gold in percentage terms over the same period, and the consensus is the ratio should fall further if the gold price continues to climb. (The lower the GSR the better for the silver investor). Over the past 10 years or so the GSR has averaged between 50 and 60 so, if it reverts to form, the ratio could yet fall much further to the huge benefit of the silver investor.
Maybe gold and silver won’t soar to dizzying heights as some are predicting, but they are a far better bet for wealth preservation than the tech-heavy equities markets where we feel the excess of ‘unicorn’ stocks makes a market meltdown virtually inevitable once the mainstream begins to realize how vulnerable they actually are. And this will probably happen by the end of the current calendar year. There, that’s really sticking my neck out! October sees the 90th Anniversary of the 1929 market crash beginning and there are some huge parallels in today’s equities markets to ramp the worries up. Equity investor beware.
Looking ahead, an equities crash, if and when it occurs, should support safe haven investing in gold and silver, although predicting the path of precious metals prices is notoriously prone to be proven wrong! However the overall future for precious metals remains positive and the price movements early in the past week could be a foretaste of what lies ahead.
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About the Author: Lawrence (Lawrie) Williams
Lawrence (Lawrie) Williams has been involved in the mining sector and precious metals for over 60 years. He worked as a mining engineer and analyst in Africa and North America and wrote for the Mining Journal, and subsequently managed the publishing company, for over 38 years - including 13 years as CEO. Williams shares his unique knowledge of the precious metals industry at the United States Gold Bureau and other outlets.