Shining in the gloom

There are now over one thousand cryptocurrencies and barely a day goes by without another headline.

Bitcoin. BitcoinDark. Ethereum. Bunnycoin. NoLimitCoin. And so on. There are now over one thousand cryptocurrencies and barely a day goes by without another headline. Another record high. Another Initial Coin Offer. Even the socialite Paris Hilton is getting involved, announcing her backing of LydianCoin. Bulls talk about the democratisation of the monetary system and push cryptocurrencies as a ‘disaster hedge’, a store of value that can’t be hacked or tampered with, beyond the sweaty clutches and zealous oversight for indebted and discredited governments. They are the future. They will revolutionise our lives. The benefits of the technology behind them – blockchain – are astronomical. And institutional investors are hungry too. According to Forbes magazine, fifteen crypto hedge funds are poised to launch, further fuelling the feeding frenzy. There is now even a Bitcoin exchange traded fund.

What’s good enough for Paris Hilton, is also good enough for Kim Jong-un, he of the belligerent missile launch and bete noir of the United Nations. The famed leader has let his cyber hackers loose on several South Korean exchanges in the hope of stealing funds, according to a recent report by the security firm FireEye. In April, $5m of bitcoin was reported stolen from Bithumb, a South Korean exchange. The finger pointed North.

And there lies the immediate problem. Cryptocurrencies are supposedly kept safe using encryption keys. The ledger is immune from attack, administered as it is by its many participants. And yet, as several multinational companies have recently discovered and the National Security Agency knows, with time, anything can be hacked. And then the data or the bitcoins, perhaps, just disappear.

With cyberwarfare high on the list of geopolitical risks, the idea of the electrical grid being taken out is no longer confined to the realms of Hollywood. And with the grid down, Bitcoin won’t be much use. It is also not much use in many shops. Despite being touted as currency, almost no one uses it to buy anything. A report by Morgan Stanley highlighted the ‘striking dependency’ between virtually no merchant acceptance and Bitcoin’s recent gains. The gains, then, are speculators’ gains. Jamie Dimon, JP Morgan Chase’s CEO at an investor conference this month, labelled bitcoin ‘a fraud’. He went on to say that ‘it’s worse than the tulip bubble’, and ‘it won’t end well’. But then he is an establishment figure, running the very institution, the ideologues of bitcoin aim to subvert. Cryptocurrencies may have a future, or they may be a bubble, but from what we read, it appears more likely to be the latter.

$1300, and rising

At times of heightened political and economic uncertainty, another more traditional ‘safe-haven’ asset, has also started to catch a bid, and one that holds significantly more interest to us. Gold.

Ingrained across cultures for thousands of years as a store of value, the yellow metal has quietly advanced year to date, breaking several key technical levels. With Central Banks still expanding the monetary base at a rapid clip, and seemingly unsure how or when to start to reverse the flows of liquidity, the attractions of having some exposure to gold increasingly hold appeal.

All the gold in the world amounts to $7 trillion. This is set against a global debt of $217 trillion, and rising. There’s a lot of debt, but there’s not much gold about. The amount of gold grows by about 1% a year. It’s hard to find. Indeed, all the gold ever mined could fit in about three Olympic sized swimming pools. As financial assets have soared in recent years, hard assets have struggled to keep pace, yet the Central Bank of the Russian Federation, for example, has been quietly buying 200 tons of gold every year for the past few years. So too others. Ten percent of the world’s gold is owned not by speculator’s but by Indian households.

Since the Financial Crisis, the world’s Central Banks have never printed so much money. They have also never had to reverse such expansive policies. The risk of error, of miscommunication, of actions that lead to unintended and unexpected outcomes has risen materially in a richly valued market distorted by Central Bank intervention. We are in uncharted territory and no one knows how disruptive the withdrawal of stimulus will be. Hence our caution. Hence gold.

We were encouraged to see a strong operating performance at Barrick Gold in Q2, after a slip up in the previous quarter. Positive momentum returning to the business continues to help the company’s goal to reduce debt and improve productivity. We also have several smaller positions in other Gold Miners: some on extremely attractive valuations due to lopsided political discounts, others which offer significant production upside as new assets come on stream. One similar theme across our holdings, and one found across many in the Mining industry, is one of strategic reform and capital discipline, where new management teams are attempting to deliver for shareholders operational improvements and higher returns. With debt being rapidly reduced, mechanisation boosting output, and safety records in sharp focus, the outlook for shareholders has drastically improved.

We have moved the bulk of our Mining exposure into precious metals, and are encouraged to see strong operational performance across our companies at a time when $9 trillion of bonds trade with a negative yield, when there are signs of softness across housing, autos, retail, and bank lending, and when there are whisperings of mania in untested financial assets. As stewards of our clients’ capital, we continue to tread carefully as the economic cycle approaches it’s hundredth month of what is a tepid, and liquidity fuelled, expansion.

Majedie are one of the fund managers available through Irongate Wealth Management and the St. James’s Place IMA.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected. You may get back less than the amount invested.