Lay Low Until November

On 18 September 2020, Goldman Sachs strategist, Zach Pandl, released a report in which he referred to this coming November as a “November to remember”. For those of you who don’t yet know why investors keep referring to this coming November, or more specifically, 3 November 2020, it refers to the day that USA will take to voting stations for the 59th time, and where they will either vote for a new president, or vote to keep Donald Trump as president, to serve another term.

I definitely don’t want to use my time this week to discuss who I think will win this election, but I would like to focus on a few troubling matters that Pandl pointed out in his report, should Trump’s competitor, Joe Biden, be elected as the new US president.

In short, the report mentioned that if Biden wins, this would most likely lead to an acceleration in the weakening of the US dollar. He pointed out three important reasons for this:

  1. Biden already indicated that a victory for the Democrats could lead to a rise in the corporate tax rate in the USA, which will most probably make US shares less attractive compared to their international peers. This in turn could cause the US dollar to weaken as US companies/shares underperform and are consequently sold. The report also states that any regulatory changes brought about under the Biden administration could have a similar outcome, especially if it is aimed at the technological sector.

  1. Goldman Sachs also believes that a large fiscal stimulus package would probably lead to the weakening of the US Dollar, mainly due to the fact that the FED already made it very clear that interest rates will remain low for longer. Under normal circumstances you usually experience a strengthening in currency following fiscal stimulus, simply because it leads to higher interest rates, which in turn attracts new investments. New investments in a country always contributes to the strengthening of its currency, but research has shown that the exact opposite tends to happen following fiscal expansion when unemployment figures are high and central banks keep interest rates on the low side.

  1. Biden’s approach to foreign affairs may also lower the risk premium of certain currencies. Biden’s administration will most probably be able to downsize the trade war with China, and not only will this be good for the Chinese yuan vs. the US dollar, but also for other emerging currencies with a high correlation to the Yuan, such as the South African Rand.

So, if Goldman Sachs’s predictions turn out to be correct, what can I do as an investor to protect my investments against these events?

Well, the first thing that investors could consider, could be to do nothing until the results of the American elections have been finalised. Why take any risks now? Warren Buffett said “The stock market is a device for transferring money from the impatient to the patient”. It may very well be in your best interest to be patient and to wait for opportunities.

Patience, however, does not offer a solution to the possibility that Biden might be elected president, and the possible risk that the US dollar’s weakening could get out of hand.

I recently read “Death of Money” by James Rickards, which addresses precisely this possibility, and although the book tends to anticipate the worst case scenario, Rickards did mention one possible solution to the problem in the form of physical gold – more specifically through allocating 20% of your investment portfolio to physical gold as a hedge against the weakening US dollar.

Many experts, including myself, have discussed why gold is such a good hedge against a weakening US dollar, so this week I decided to test Rickards’s strategy with the FTSE/JSE All Share Index (JSE). Despite the fact that South Africa is the world’s eighth largest gold producer, gold still makes out a relatively small portion of the JSE. In fact, currently there are only five pure gold mines listed on the JSE and collectively they make up only 6.5% of the Index.

But Rickards referred to physical gold (i.e. gold price in rand for South Africans), to which you can gain exposure in a variety of ways, such as purchasing gold coins or by investing in exchange traded funds (ETFs) that will offer you exposure to physical gold (not gold mines).

Graph1: FTSE/JSE All Share Index (JSE) vs a combination of 80% JSE and 20% physical gold (source: PSG Wealth Old Oak & Thomson Reuters & Iress)

Normally an investment in gold in its distinct form is considered a speculative investment (something that you buy and sell, rather than buy and hold), but I find it’s hedging abilities incredibly impressive.

If you compare an investment of 20% physical gold and 80% JSE exposure over the last 20 years to a pure JSE investment, you wouldn’t only be impressed by the fact that the investment with gold exposure delivered 0.5% better returns per year. You see, aside from the volatile nature of the gold price, it’s its low correlation with regular shares that makes it such a good hedging tool, especially in poor economic environments.

During the last 20 years, the 20% exposure to gold would have meant 15% less volatility (an annual standard deviation of 14.1% vs. the JSE’s 16.5%), and it would have meant that in each of the four  occurrences (since August 2020) where the JSE declined by more than 10%, you would have, on average, side-stepped 6% of each decline. If we isolate the market collapses of 2008 and 2020, the portfolio with 20% exposure to physical gold would have side-stepped more than 10% of each decline.

I want to conclude by emphasising the fact that 3 November 2020 is around the corner, and that it may very well be a November that we’ll never forget. Now might be the time to take a good look at your current investment structure from a new and fresh perspective.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

Leave a Reply