Snakes and Ladders – Market Karma, Gold and Commodities

My latest posting on the sharpspixley.com website

Of the various regular publications which I receive in my inbox, one of the most thought provoking is always Grant Williams’ ‘Things that make you go hmm..’ (www.ttmygh.com) newsletter, published roughly fortnightly.  Grant always develops a theme for his exceedingly comprehensive commentaries – how he has the time and the imagination to do this to this degree of depth alongside his other work and interests I do not know – but his insights into aspects of the global economic picture are perhaps unsurpassed.  His newsletters are always inclusive of a large number of illustrative charts and are backed up with excerpts of articles from, and interviews with, some other key commentators.

Grant is also much in demand as a speaker at conferences and his presentations should not be missed – they are filled with remarkable insights into global finance and always presented with a degree of humour sadly lacking from many of the other financial speeches at these events.

Grant’s latest newsletter is over 60 pages long and he takes the ‘Snakes and Ladders’ board game as his inspiration.  According to the newsletter’s introduction, the game is one of the oldest board games known to man and has its origins in pre-Colonial India where it was called Moksha Patamu.

The game centres around the Hindu philosophy of Karma which is the spiritual principle of cause and effect whereby actions taken today will determine the nature of tomorrow’s consequential ramifications.  Grant applies this philosophy to the various supposedly ‘economy-supportive’ programmes implemented by the U.S. Federal Reserve, and other central banks, over the past four decades where successive Fed chairmen have taken interest rates on a continuous downward path and are only now trying to redress the balance, but in the meantime have built up staggering volumes of debt.  The problem with taking interest rates down to near zero is that that leaves the Fed with little interest rate lowering leeway should the economy teeter into the next almost inevitable financial crisis – hence the pressure to try and normalize rates before the next crisis strikes.

As Grant puts it though “For investors, the last 9 years has been one long, mostly pleasant climb up a nice, shallow ladder, however we’ve reached the point where the chances of stepping on a snake have reached a level which demands precautions be taken.”

Other commentators point to the fact that equity market investors represent only a small part of the population – the ‘already haves’ – but the years of investor prosperity have largely passed the general public by.  The rich and the Wall Street elite have been getting richer, while the average person in the street remains relatively unaffected financially and continues to struggle and may even be persuaded to spend money they don’t have by optimistic media reporting, bordering on the euphoric, that the economy is extremely strong!  It isn’t.

He also reckons that the new Fed Chairman, Jay Powell, has taken over and is ripe for what rugby players call a ‘hospital pass’.  While Powell in the past has expressed opinions on Fed policy which Grant strongly agrees with, he may well also have inherited a situation under which he may have little immediate control given the scenario which has already been set in motion.

So how does one protect oneself from this particular snake should markets peak and start to slide. Equity markets, as is bitcoin, are essentially speculative, and have had a very good run, but have to be considered vulnerable to a major reversal.  (Bitcoin has already seen such a move, halving in value, and, in our view, there could well be further pain ahead for bitcoin investors).

Thus, those with the wherewithal to do so might look at alternative perhaps more stable assets like gold, though to protect themselves should Karma strike and overbought markets lose ground substantially as many are predicting.  This is particularly so as we appear to be transitioning from Quantitative Easing (QE) to Fed-implemented Quantitative Tightening (QT).  That could be seen as a significant game-changer and trend reverser for the markets.

Grant goes one step further though in recommending gold stocks over physical gold and looking at commodities in general which he feels have been heavily oversold.

So his initial recommendations are go long gold mining stocks against physical metal (as represented by GLD) and against general equities which he sees as ripe for a major downwards correction (the next snake).  He notes that the HUI Index of gold miners is at the same level it was in October 2000, when gold was trading at $265 and that with a current gold price of over $1,300 an ounce, and with the drastic improvements miners have been forced to make to their operations in the last 7 years, he expects gold miners to outperform the metal significantly.  It’s not that he doesn’t rate physical gold investment positively, but that he feels that, for now, gold mining stocks have an even better growth potential.

He also feels that commodities in general have been underpriced.  He thus suggests a thematic investment in the commodities sector could be well worthwhile thus capturing the overall thrust of his thinking revolving around a weak dollar in the long term, rising inflation and a Fed which will be forced to either hike rates to choke off inflation or embark on another round of monetary profligacy in the face of a recession triggered by its own policies.

He does have a caveat, though, in that the dollar may try to move swiftly higher in the short-term, but that he doesn’t see this continuing for long and, utilising the words of ice hockey player Wayne Gretsky feels that this positions him for where the puck is going – not necessarily where it is today.

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