April Fool or a 'Hamlet' Moment?
The Blind Squirrel's Monday Morning Notes, 1st April 2024.
We need to talk about the breakout in the ‘yella fella’ and what it means for the bigger picture.
An inflationary world is a ‘rising tide’ for non-cash assets. This is not an April Fool. This is a ‘Hamlet’ moment. We need to accept the reality and get on board.
In Section Two (for paid subscribers), we lay out our preferred precious metals play. There is also plenty to discuss with our tail hedges; Formula One, Coherent Optics, Tires, Brazil and Ag commodities.
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The audio companion to this week’s note will be uploaded to Substack on Tuesday to allow me to incorporate comments and feedback from this note. It will also be available as a podcast on Apple, Spotify and the other usual podcast apps.
April Fool or a ‘Hamlet’ Moment?
The 🐿️ always takes a deep breath and pauses before smashing the keyboard putting pen to paper on the topic of the barbaric rock. However, the most recent moves in the gold market now cannot be ignored any longer.
If one ever has any latent concerns about ‘living in a simulation’ I just looked back in the archive to check the last time I wrote about gold. The fact that it was exactly a year ago is enough to make this rodent wonder whether or not the programmers of ‘the Matrix’ are getting a little bit sloppy these days! Worth a read if you missed it last year… or did you 😉??
Back in the days when it was legal to advertise ‘vice’ products on television, some of the best output from the Soho Square and Maddison Avenue creative departments was produced on behalf of the tobacco companies. For me, some of the most memorable of these were the ingenious Hamlet moments, where the final acceptance of a grim reality came with a puff of cigar smoke to the tune of Bach’s ‘Air on a G String’.
Have we now reached a point that we will look back at in the future and view as the moment when collective consciousness called time on the latest iteration of monetary order? As ever, ‘Arun S. Chopra CFA CMT’ has his finger on the pulse of the zeitgeist when forecasting incoming fiat currency debasement lectures.
Anyway, do not panic. You shall not be getting a fiat debasement lecture from this rodent either. I am operating a safe zone, free from charts of central bank balance sheets and inflation in the 1970s.
As we have commented on before, judging by the continued reduction in shares outstanding in the main US-listed physical gold ETF $GLD, retail investors are showing limited desire to join the party. Competition in the monetary-debasement-hedge department from new kid on the block (spot bitcoin ETFs) may explain part of the outflow since January, but this has been going on for quite a while.
Positive real interest rates, the traditional kryptonite for gold, have been in evidence since the beginning of last year. This appears to have deterred some of the traditional retail and institutional asset allocation flows into precious metals. In the West.
Certainly not the case elsewhere in the world. While the youth of the West binges on financial nihilism and meme coins, China’s Gen Z is buying gold beans (1-gram measures of the ‘yella fella’).
Chinese kids and gold beans may make for catchy headlines, the real action is with the central bank purchases. January alone saw China add 10 tons, Turkey 12 tons and India 9 tons.
One thing that Asian central bankers and Chinese retail also have in common is that they (i) do not currently (it was certainly not always the case!) favor silver as a store of wealth in the same way as gold; and (ii) do not buy precious metals mining stocks either.
The divergent performance of gold and silver versus their miners has had the gold bugs scratching their head. We have seen some degree of ‘catch up’ in the past few weeks, but I think we need to be careful. I have only anecdotal evidence to support this, but I do not get the sense that the more recent positive moves in silver and in the miners are being driven by the arrival of fresh new cohorts of PM mining investors:
Somehow, I feel that the old truism of “if gold spot is going up ‘x’, the miners are going up ‘4x’” is unlikely to play out this time. Sure, the rodent has some exposure to the junior PM miners (via GDXJ). Old habits die hard! But it’s a trade, people! The hard truth (for gold bugs) is that I suspect that this PM mining cycle could be different.
I have been a subscriber to Fred Hickey’s ‘High Tech Strategist’ for years. Fred’s detailed analysis of the reserves, operations and earnings of his favorite gold and silver miners is superb. With gold above $2,200/oz, I have no doubt that many of his picks are going to be exceptionally profitable enterprises. But are they going to outperform as stocks?
The problem with miners is all that they want to do when they make some money is to dig more holes in the ground! They have not learned the value of cannibalism (i.e., stock buybacks). I did a simple word search of Fred’s last (February) report for the word ‘buyback’. Only 3 hits for a sector starting to generate meaningful cash flow.
2 of them related to Newmont Corporation $NEM (which has a trailing buyback yield of a paltry 0.06%!) and 1 mention related to Barrick $GOLD, who “announced a new stock repurchase program (up to $1.0 billion over the next 12 months), but they had the same buyback plan in place last year and didn’t acquire any shares with it”. Enough said.
I dumped the entire universe of GDX (VanEck miners) and GDXJ (VanEck junior miners) ETF constituents into a Koyfin watch list to take a deeper dive. Similarly underwhelming. Only 10 stocks out of a total universe of 150 gold mining stocks have a positive buyback yield over the past 12 months. The sooner that management teams in this sector learn that they need to compete (with the same old boomers😉) for their own stock, the sooner the sector might outperform.
Based on this and other realizations, we will have some more thoughts on how to position in the sector in ‘Section Two’ (for paid subscribers). Before then, I wanted to take a moment to reflect on what the gold price also may be telling us.
Regular readers will note that we have not had an outright short equity position on the books since Q4 of last year. Let me be clear, I would love to have a #TeamSaddlebags position (i.e., a short position in private equity/ credit / commercial real estate) on the pad. Nothing would give the 🐿️ more pleasure than to finally take on Omar. However, we need to keep our inner ‘Financial Justice Warrior’ tendencies in check.
We live in a world in which the value of assets can diminish slower than the value of fiat currency in which they are measured. The ‘expected value’ of short asset trades shrinks with each day. To be honest, listening to my friends
and chatting about inflation last weekend was a bit of a ‘wake up and smell the coffee’ moment.What if the core strategy for the next few years is simply to ensure that you are short (i.e., borrowing) the asset that is leading the race to the bottom: fiat currency. Now, not many of us are able to walk into Jamie Dimon’s office and ask for multi-year, non-recourse leverage terms, at ‘institutional’ pricing, with which you might acquire an attractive, cashflow generating asset.
However, you can own options. I have often referred to options at ‘The Poor Man’s Prime Broker’. So much focus these days is given to the gambling excesses in the option market (from gamma squeezes on meme stocks to the fast-growing institutional use of very short dated ‘0DTE’ index options).
I think that option-based investment strategies are suffering from some bad public relations (perhaps they need some help from Maddison Avenue!). Over longer-dated time horizons, options can operate as a leveraged bet on rising asset prices (or should I rather say a levered bet on the falling value of cash).
It also seems pretty clear to this rodent, that central bankers worldwide are currently full time employed in the risk asset volatility compression game. The ‘frog boiling’ exercise (an urban myth by the way) of inflating our way out of a debt problem only works if markets are not repeatedly shocked by volatility surprises sparking awareness.
While a ‘higher for longer’ (risk-free - you are not paying a credit spread) interest rate environment is already baked into option premiums, so are these historically low levels of implied volatility! This makes long-term option strategies extremely attractive. Expect a lot more of these types of idea from this publication.
Constantly trying to position for corrections in risk asset markets is a high stress undertaking. The 🐿️’s own bar for shorting anything or for buying puts rises every day that we are in this environment. An inflationary world is a ‘rising tide’ for non-cash assets. This is not an April Fool. This is a ‘Hamlet’ moment. We need to accept the reality and get on board.
To ease you into that state of cigar puffing acceptance, I give you the brilliant Khatia Buniatishvili’s haunting piano arrangement of the JS Bach ‘Hamlet’ classic:
That’s it for the front section this week. In Section Two (for paid subscribers), we lay out our preferred precious metals play. There is also plenty to discuss with our tail hedges; Formula One, Coherent Optics, Tires, Brazil and Ag commodities.