April 2023: The Sound Money Bull Market
Gold, silver and bitcoin
“If you look at a long-term chart of the silver price, what you see is it rewards you infrequently and it rewards you from bases where it has been despised, but when it rewards you it rewards you extravagantly. And at age 70, I look forward to one more rip-roaring bull market in silver.” – Rick Rule
With negative real yields, likely recession and more stimulus to get out of it, we should be in for a bull market in sound money assets. Of the sound money assets (hard assets with a limited supply, like commodities), very few are monetary assets (meaning those that function as money). There is gold, silver and new contender bitcoin. That’s about it. And traditional investment portfolios have almost no exposure to them.
Portfolio performance
YTD: -8%
2022: +1%
2021: +10%
2020: +49%
2019: +51%
Macro overview
In response to the banking crisis, we’ve just seen the Fed adding liquidity into the system with its new Bank Term Funding Program (BTFP). This lets banks borrow from the Fed against their Treasuries and mortgage-backed securities at par value – meaning the banks will not have to sell their bonds at a loss, risking a bank failure. This has the effect of pumping liquidity into the system, the opposite of the objective of the quantitative tightening regime.
Can they continue to raise interest rates into this? Maybe, for now, until something else breaks. The market doesn’t think so. The yield curve strongly indicates an imminent recession and interest rate cuts in response. An inversion of the 10-year and 2-year Treasury yield (meaning the 2-year yielding more than the 10-year) has historically predicted a recession with 100% accuracy. Recently, we’ve had the most pronounced yield curve inversion in modern history (currently the 10-year Treasury yield is at 3.6%, the 2-year at 3.9% and the 3-month the highest at 5.1%). Equities could be in for a tough time.
How bad will it get? Well, very likely, the Fed chooses the lesser of two evils: to avert economic catastrophe, even if inflation isn’t under control, by doing the same as they did in 2008 and in 2020 – lowering rates and starting quantitative easing. The government will also want to provide fiscal stimulus and will have to borrow more to do it.
More currency units will be added into the system at a time of potentially still high inflation. This could cause another inflation spike on the other side; in any case, there will be an increasing money supply versus a fixed quantity of commodities.
In this scenario, sound monetary assets should do well. Bond prices likely get bid up in a recession and yields fall at the expense of equities. However, if bonds are still offering negative real yields – or even more negative real yields – more money will also be looking elsewhere for a safe haven and to protect purchasing power.
Sound monetary assets
Gold is the established safe haven in times of financial instability and has been soaring, looking to set new all-time highs. Silver could follow in the case of continued financial crisis / inflation / negative real yields. Bitcoin, the new kid on the block, is set to outperform massively in the money printing part of the cycle – but could also be vulnerable in the near term in a liquidity crisis or equity selloff.
Gold
The total market cap of the sound money assets is small in comparison to both the equity and bond markets and to sound money’s historical ratio versus equities and bonds. Incredibly, in 1980, the market cap of gold was equal to all the world’s equities ($2.5tn); today the equity market is nine times larger than gold.
Yes, 1980 was a peak for gold, but is relevant to where we are today. 1980 was peak inflation after the inflationary decade of the 1970s. From 1972 to 1980, gold went up 14 times. If we’re in for further dollar debasement, gold has plenty of room to run.
Today, gold is nearing all-time highs and looks set to break out. The all-time high was $2,074.88/oz in August 2020. Over the last couple of weeks, we broke through the $2,000 barrier and the $2,050 barrier, seeing some profit taking and retracement at both of these levels. Technical traders I follow, and goldbugs such as Lawrence Lepard, believe a convincing new all-time high of $2,100 will be the start of a new bull run, with a lot of capital waiting in the wings of Wall Street until this kind of breakout to jump on board.
We’re already seeing foreign central banks selling dollars to buy gold. The Fed reducing interest rates under persistent inflation and negative real yields is likely to weaken the dollar and accelerate the foreign selling of Treasuries for gold.
Silver
Silver saw even more extreme upside in the 70s – it has a smaller market cap and is more volatile. It went from $1.30 in 1971 to $49 in 1980. The market cap of silver today is tiny, estimated at $1.4tn, about half the size of Apple’s equity. It has the potential to move dramatically if traditional or generalist investors start allocating to silver.
Natural resources investor Rick Rule, who has had huge success investing in gold and silver in his career, including some 100 baggers, expects an incoming major bull market for silver:
“If you look at a long-term chart of the silver price, what you see is it rewards you infrequently and it rewards you from bases where it has been despised, but when it rewards you it rewards you extravagantly. And at age 70, I look forward to one more rip-roaring bull market in silver.” – Rick Rule on the Wealthion Podcast
He believes negative real interest rates will cause a bull market for gold and that silver will follow suit and outperform gold towards the middle to end of the gold bull market as it has done in the past. He goes on to say that the way to play the market for the most upside is the silver equities, giving an example of a stock that went from $0.10 to $65.
“The response that you get from an intelligently run but relatively unknown silver company in a silver bull market is absolutely astonishing… I happen to believe that, because of the entry point right now, that the risks are, at least in a historical context, minimised, and the time that one has to wait to be rewarded is probably short too, but nobody should be listening to this is they are afraid of volatility.” – Rick Rule
Despite the strong performance of silver in March, we are still starting from a low base with the gold to silver ratio historically high at around 80, when it has traded below half that in the past and as low as 15 in 1980.
Bitcoin
Bitcoin is even smaller than silver and, I would argue, the best in terms of both its properties as sound money (e.g. its fixed supply of 21 million units) and its technology (e.g. the ability to send it peer-to-peer across the world almost instantly and with a low fee). I have written briefly about bitcoin recently here.
Plenty of room for all three
The total market cap of the major sound monetary contenders is so small, relatively speaking, that there is plenty of room for all three to do well – the central banks, the pension funds and the boomers at least will likely be buying gold and silver!
Due to this and the fact that the three assets are far from being perfectly correlated, it’s sensible to have exposure to them all – gold, silver and bitcoin – in the sound money bucket of a portfolio.
The mainstream has no exposure
Not having any exposure to sound money is a risk. If we do have another inflationary decade like the 70s, not only is sound money likely to massively outperform, but traditional equity and bond portfolios could continue to lose purchasing power.
The fact that the mainstream has no exposure is also very bullish. Once standard asset managers start communicating about allocating a portion of portfolios to gold/silver/bitcoin, it will already have been ‘game-on’ for some time – several quarters of outperformance. The market is not prepared for this and there is not enough liquidity – especially in silver and bitcoin, and in the gold and silver stocks – to take mainstream adoption without sending the prices to the moon.
How to get exposure
My preferred option is to own gold and silver equities, companies that can produce income while growing and giving leverage to the commodity price. However, the gold and silver mining sector is notorious for being poorly managed, destroying capital and underperforming the commodities themselves.
In order to be successful investing in the gold and silver miners, one has to put in a lot of work and become an expert in the sector. I may or may not try to do this as time goes on.
At the moment, I am in a couple of gold and silver royalty/streaming companies, which I believe is a good option for the generalist investor. Royalty/streaming companies have historically outperformed the commodity prices and they are less risky and less levered. They don’t offer so much upside as a small cap, currently unprofitable miner, but they let you participate in the gold and silver thesis without blowing up on stock selection.
I have Sandstorm Gold (SSL.TO) in the portfolio, which I recently wrote on. I’ve also added Wheaton Precious Metals (WPM.TO), in April, for silver exposure.
Regarding bitcoin, it’s really best to own the underlying ‘physical’ bitcoin in self custody. It is volatile, which is why it’s a good idea to dollar cost average into it – it’s possible to set up an account on an exchange like Coinbase and set it to automatically buy a little bitcoin every day. People who started doing this at the all-time high are now up despite the price of bitcoin falling by more than half since then. However, I also have quite a bit of my exposure through Microstrategy (MSTR) – I bought more at the low in March when bitcoin dipped to $20,000 and MSTR to under $200.
Portfolio
I have made the decision to add my bitcoin position to the portfolio from the end of March, in the interests of transparency. The performance year-to-date would have been significantly better had I included it from the beginning of the year – however, it also would have been a little worse last year!
Trades in March:
I added to MSTR
I sold WCP.TO and withdrew cash
I have also added Wheaton Precious Metals (WPM.TO) to the portfolio during April and sold ARCH.
Final thoughts
I’m a little late this month. I’ve had a lot going on and have been enjoying spending time with the children! As always, thank you for your support and I wish you all the best for what’s left of the month and the quarter!
With best wishes,
Timothy Lamb.
Written by Timothy Lamb
Blog: www.retailbull.co.uk
Twitter: @theretailbull
Disclosure:
The writer owns shares in the securities listed in the stock portfolio and WPM.TO at the time of writing.
Disclaimer:
This article is for informational purposes only, does not offer investment advice and does not recommend the purchase or sale of any security or investment product. Please see the full disclaimer on the About page.