This is a third in a series of articles which scans the investment landscape for opportunities in both hard assets which may provide some protection against future market volatility and a painful near-term correction; as well as ‘long term’ investment opportunities in hypergrowth tech driven sectors.
GOLD & SILVER
The gold price has been drifting lower ever since it broke through the $2,000 an ounce barrier in August of last year. You would be excused for thinking the rally is over. We don’t think it is.
The case for supporting a higher gold price remains intact due to:
i.) The amount of liquidity being injected into the US monetary system to prevent the economy from collapsing. The budget deficit has sky-rocketed to its highest level since World War II. We expect the deficit to widen further and reach record highs. Loose monetary conditions provide a catalyst for gold buying.
ii.) Injecting massive liquidity into the financial system weighs heavily on the greenback. The chart below shows the US Dollar Index, which measures the value of the USD relative to a basket of foreign currencies, continues to head lower. We expect further US currency deterioration in the years ahead due to twin deficits. Please see graph that follows.
iii.) History tells us that a weakening US Dollar can be very positive news for Gold. For instance, the gold price increased 20X in the 1970’s during a period in which the Dollar Index lost 30% of its value. More recently, gold prices increased 6X in the 2000’s when Dollar Index tumbled by 40%.
iv.) Trillions of dollars’ worth of fixed income assets produce a rate of return which is below the current rate of inflation. Analysts at JPMorgan claim that the amount of sovereign debt producing a negative real yield exceeds $31 trillion which represents a 100% increase over two years. There is a strong possibility, that at some point, investors shift some of their investments from negative yielding bonds to zero yielding gold which also provides a hedge against inflation.
Silver range trades between $30oz & $90oz for 1oz of Gold but currently trades at $71oz. If it reverts to the mean which is $60oz; this would imply 20% further upside from today’s levels. If the gold price ever tests $3,000, a reversion to the mean, would see Silver at $50 per oz. This would imply 90% upside potential from current prices. We maintain our positive outlook on both precious metals.
We are also of the view that gold miners offer an excellent investment opportunity. The case for investing in gold miners relative even to gold has never been better. The gold producers are delivering record earnings, growing cash flows and margins whilst reducing costs and debts and increasing dividends. The ratio of gold miners relative to physical gold is close to an all-time low, a regression to the historical mean, would imply upside potential of 150%. In an expensive market, gold miners look, fundamentally cheap. Please see chart that follows:
SOLAR & CLEAN ENERGY
The world has been relying on ‘dirty fuel’ to produce electricity for over a century. Whilst this form of power generation is relatively cheap it’s a heavy pollutant with top scientists blaming higher temperatures, rising sea levels, melting ice caps and an increasing incidence of weather-related natural disasters on human-induced climate change.
People now consider renewable energy particularly solar and to a lesser extent wind, as a more environmentally friendly, viable alternative. The biggest challenge facing renewable energy sources was cost relative to fossil fuels and developing the technology to collect, store and harness the sun’s energy.
But that’s all about to change with the development of batteries for energy storage that allow for the large-scale production of cheap and clean energy. According to JP Morgan the global demand for battery energy storage solutions will increase 100X between now and 2030.
Solar powered energy production currently accounts for just 7% of total power generation but the ‘International Energy Agency’ expects this to increase 5X to 38% by 2025 and 13X or 66% of global power production by 2040.
According to the ‘US Energy Information Administration’ of all the renewable energy sources, solar is expected to grow the fastest from now through to 2050. The following graph shows massive US solar-generation growth over the next 30 years.
The case for investing in solar power is further supported by a number of factors including:
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Bloomberg NEF has suggested that the cost of power generation from solar will likely be lower than oil by 2025.
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The European Green Deal which aims to have net-zero emissions by 2050 – with increased reliance on solar power. This requires a doubling of power generation from renewable sources by 2030 to meet emission reduction targets.
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US President Joe Biden will prioritize the passing of a clean energy bill (increasing solar subsidies) worth $2 trillion.
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The growing interest in sustainable investing by large investment fund houses that are expected to allocate more capital flows into ESG investment themes of which solar power is a key trend.
