The Preamble
For the background to this series of posts: here, here and here. And the summary:
- Small investors have some investing options.
- You can invest occasionally in lump sums (the once-off investors) or monthly through debit orders (the monthly investors).
- As for things to invest in, I’m a general fan of low-cost equity-index-tracker ETFs (as is Warren Buffett). But there are other possibilities as well.
- This series of posts is there to see which would work out well.
- Then there are some indicators at the end. Because why not.
A look at the week everyone had:
Once-Off Investors
In pictures:
In numbers:
The almost not much to say, really. Some small recoveries on the stock market and exchange rate fronts, while gold is having a torrid time of it (I’ll get to that just now).
Monthly Investors
In pictures:
In numbers:
Gold: really not having a great year.
The Indicators
The Exchange Rate continues to strengthen:
The JSE has remained fairly stable in Rand terms:
But it’s continuing to recover in real terms:
10 Year Government Bonds continue to strengthen (probably on the back of the exchange rate strengthening – or the improvements represent the same improvement in general investor sentiment):
Gold and Platinum are dipping slightly:
And it’s slightly worse in Rand terms:
I’ve spent a fair amount of time over the last few weeks thinking about platinum and gold. In particular, about the growing disconnect between the asset price and the market “fundamentals”.
If we were to narrowly define market “fundamentals”, we’d say that there is an commercial usage for gold and platinum (catalytic converters, jewellery, etc) – and the production/mining of those metals is directly linked to the need/demand for those metals. So in theory, the price should be determined by those demands, and the supply of the mining houses.
However, there is also a very strong investor-speculative demand for those metals. A demand that’s driven by (I’d guess) two things:
- The investor view of the future commercial usage of those metals; and
- The investor view of how other investors will buy/sell stocks of precious metals in response to their fears/lack-of-fears of global inflation.
It’s the second one that’s problematic.
In the world of Quantitative Easing, there were lots of fears of inflation. This drove up the prices of gold and platinum – as lots of important people made big calls about the coming inflation (of course, what they missed was that the first wave of big inflation would be in asset prices, not in consumer prices – and they were unwittingly [or not?] perpetuating it).
Today, just a few hours short of the end of QE, we have lots of fears of deflation.
The trouble is: inflation, whether it takes place in the consumer marketplace or the investor marketplace, is the great decimator of the middle class. It robs them of their relative purchasing power. And unfortunately, the middle class is the consumer.
All that (financial) asset price inflation has accomplished is to exacerbate the inequality gap. And you can’t have consumer-price inflation when the consumer lacks the means to consume in the first place.
So who really wants to hold inflation-hedges when there is no immediate inflation to hedge against – other than asset-price inflation, which is theoretically a good thing? And more specifically – who really wants to bet on a growing demand for inflation-hedges? If anything, you can bet on the short-term disinvestment from inflation-hedges…
So the investor-speculators are dropping their reserves, driving down the prices of gold and platinum – and in the process, thoroughly disrupting the supply-side of the equation by forcing the mining houses to be loss-making.
It’s not really sustainable. But if you’re looking for a big correction – I think we’ll find it most pronounced in those asset classes which have traditionally been perceived as inflation-havens.
The same sort of thing is happening with the oil price. Investors anticipated oil supply disruption. And as it turns out, they over-anticipated it. Hence:
We’re living in interesting times.
Until next week!
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
