FRA Co-founder Gordon T. Long is joined by Jordan Eliseo
in discussing the value of precious metals as an investment.
Jordan Eliseo is a much sought-after and respected
financial commentator and economic analyst with close to 20 years experience
in the financial sector. After working for some of the biggest names in the
global financial marketplace including Deutsche Bank, JP Morgan and AMP
Capital, Jordan has amassed a wealth of experience analyzing investment
markets.
Jordan not only 'talks the talk' but has walked the walk,
setting up his own precious metal and mining fund back in 2003, when most
people had never even heard of precious metal investment, and is also the
founding partner of a national financial advice business, helping Australians
take control of their finances and maximize their superannuation. And now he
is the Chief Economist of Australasia's largest independent bullion dealer - ABC Bullion.
Jordan holds a BA in Banking and International Finance
from Flinders University and a Graduate Diploma in Applied Finance and
Investment from FINSIA. He also holds the Diploma in Financial Planning
(Financial Services) with specialist SMSF accreditation.
Precious Metals: Gold
It's been a very impressive quarter for anyone who's gone
long in precious metals, with gold up 16% and silver up 11% for the quarter,
welcome respite after the cyclical correction in precious metals that started
in 2013. In a world where equity markets are increasingly volatile and
central banks are taking more extreme monetary policy positions and
decisions, the merits of holding gold as part of a portfolio are high.
In 2013-15 there were hundreds of tonnes of gold diverted
from gold ETFs, but that has increased in the last few months.
"People are, if not adopting it as a major
holding, openly looking at it and analyzing the merits of including it
alongside more traditional assets."
People long term in gold argue that if there's any interest in gold ETFs,
there might be a shortage of physical gold. But there is several thousand
tonnes of gold in London at this point and there's the better part of 3000
tonnes of organic or freshly mined production being brought to the market
every year.
"Central banks demand and emerging market demand are, to me, the
bit under the gold market that will support it for the next few years."
But for gold to move substantially higher, we will need to see western
investors adopt it in their portfolio. It doesn't have to be a major move,
just 2-5% of the average western investor's portfolio, we'd see prices move
much higher.
"In a world where we earn less than nothing on cash, when there's
20 trillion Dollars of sovereign debt... it probably makes sense to hold this
asset class."
Effects of Japan and NIRP
There's a lot more discussion on a cashless society ever since Japan
announced NIRP, which correlates with the increase in consideration of gold.
This has changed the perception around financial market risk and financial
markets as a whole, and gold is affected.
A retail investor concerned about QA and bank bailings would find the
argument for holding gold strengthened. An institutional investor with a
volatility mandate and return objective would be more interested in the
potential for gold to deliver alpha in a low rate environment, since gold is
uncorrelated to the financial markets.
Problem of Liquidity
If you look at liquidity, it's drying up in financial markets. In the last
twelve months there have been multiple warnings about the waning of liquidity
in markets. They're worried in the liquidity might not be there in the event
that investors move to cash and liquidize their bond portfolios. This is
extraordinary as bonds are supposedly low risk and highly liquid.
If you're an institutional investor, you need a large market to go into -
gold fits that bill and has the advantage of having 0 credit rising despite
its growing size.
Precious Metals: Silver
The gold-silver ratio is now roughly 80:1, which indicates that it's under
priced by many historical measures. In the last twenty years it's only been
even cheaper relative to gold once. We're at a level now where the last three
times we reached this kind of ratio, it really did market to bottom in the
gold to silver ratio and silver comfortably outperformed to the outside.
I think there's a couple reasons why it's so cheap. In 2015 there was a
bloodbath in industrial and energy commodities commodities. Gold has always
been considered a pure monetary asset and store of wealth, but silver still
has the quasi-monetary quasi-industrial status. So in environments with
concerning rates of economic growth, it's natural for silver to under
perform.
But the smaller market means it will take less Dollars to move the price
of silver. As a physical asset, silver is very attractive to hold. The future
looks very good for silver in particular, even though it's not getting the
recognition that it should have.
South-East Asia and Australia
In South-East Asia, there's 3 billion people getting wealthier who
understand the value of saving and investing. There's misallocation of
capital on a grand scale, especially in certain parts of China, but broadly
speaking I'm bullish on the whole area.
If we bring it back to Australia, we're facing some pretty strong
headwinds in the next few years. The worst in the fall in commodity pricing
is now behind us, but we will be in a softer real commodity environment for a
few years.
"The investment in the money sector breaks 8% of GDP in Australia
at one point. The long run average is closer to 2%."
What's kept the Australian economy going in the last few years was
construction. The housing industry thinks that 2015 was the peak for home
construction, and it's going to ease up over the next three years.
Wages are also growing at less than the rate of inflation. While Australia
has no sovereign debt issue, we have the high private sector indebtness in
the world.
The average person in Australia has very little money in actual savings to
spend, has never been more indebted, and is facing an uncertain employment
outlook where their real wages are unlikely to keep pace with inflation. The
majority of their financial assets are ring-fenced inside of superannuation.
"We will continue to see declines in real incomes, recession-like
conditions, and much lower interest rates from the RBA, at least 1.5% if not
lower, between now and the middle of next year."
Back to Bullion
This reasserts the importance of owning gold, even for Australian
investors, because all the interest rates they'll earn on cash will decline
and fall below zero. Our stock market has an almost unprecedented sector
concentration within our stock market where about 45% of the ASX 200 is
concentrated in financials, VS 20% MSCI world average. This worked well in
the last 25 years, but that cycle is starting to change now.
Positive Outlooks on The Future
"Even if we don't grow at a substantial rate, that doesn't also
mean we're going to have an absolute collapse in GDP."
During the global financial crisis, financial markets fell more than 50%
but GDP fell around 2%.The value we put on our output plummeted, but the
actual output fell by a small amount. There will not be any major greenshoots
on the horizon that are going to help the global economy grow in any
meaningful way.
China's slowing down, and there are huge problems in Brazil and Russia.
Europe and Japan are still disasters and even the US is slowing down. There
will not be an uptick in global growth, but there is no major reason to
panic.
"As an investor, it comes down to making sure the portfolio is
well constructed to protect yourself against the overvaluation in financial
assets and making sure you protect real wealth through this more challenging
period."
Abstract by: Annie Zhou
Video Editor: Sarah Tung
