COVID-19 trading UPDATE

Investing during a crisis: Should you invest in gold?

IPM Group’s founding partner David Mitchell makes a case for gold and other precious metals as possible investment vehicles.

 

With stock markets still in turmoil and oil prices continuing to plummet downwards, it has become harder to find diamonds in the investment rough. However, David Mitchell, founding partner of Auctus Metal Portfolios and IPM Group, believes that there are bright spots. Together with his sales director Robbie Hoyes-Cock, the duo wants you to consider investing in gold and other precious metals during this period. The Peak grills Mitchell about his stance.

Could you share with me a bit more about yourself and how you got started in the financial markets?

I started off as a computer programmer with Rothschild’s, but was offered the opportunity to join their trading desk in London in the mid 80’s and was captivated. I was ultimately employed over a 20-year period with a number of investment banks across the globe, achieving success as a senior director, chief dealer and then finally as the head of the proprietary risk trading desk. I started my own company investing, trading and managing my own family funds as well as those of several clients.I moved back to Singapore with my family in early 2014, starting up the new investment company (Indigo Precious Metals: IPM Group), focusing on investment precious metals, as my in-depth analysis provided me with a very strong view of the direction the global economy was taking and the inevitable demand for and importance of precious metals within the system going forward. My clients followed me and I continue to help and advise their investment portfolios.

Why should one purchase physical gold as opposed to buying gold-linked ETFs?

When I first started actively investing in precious metals I was an early-bird investor into the gold SPDR ETF at the beginning of 2005. I then focused on conducting more detailed due diligence and research into the ETF’s construct and their prospectus, after which I decided to withdraw my investment. I believe it unfair to comment here on the strengths and weaknesses of these products without a full analysis breakdown, which I have done. However, what I will say is that these structures are designed as short term trading vehicles. ETFs are definitely not a cyclical wealth preservation asset with zero third party liabilities. What also disturbed me was that ETFs fall into the category of a taxable item whereas in many cases hard physical precious metals are tax-free.

What makes IPM Group different from the other gold platforms and more importantly, banks that offer physical gold as investments?

So, we are ‘not’ predominantly a gold dealer; we also supply bespoke and strategic advice based on a client’s particular circumstances. We analyse and sell across the full spectrum of investment precious metals including ‘strategic metals’ or what are more commonly referred to as ‘rare earth metals’.Our background is from the investment and trading financial markets, and our key role is in providing comprehensive investment advice to our clients on physical precious metal portfolio diversification and product selection. We are seriously focused on advising our clients and providing in-depth education, making absolutely sure that they understand the full economic cycle, including when to invest or water down exposures and precisely which of the precious metals make the best investment sense. Our service is therefore highly tailored to individual customers, family trusts and funds rather than blanket selling across a large banking platform.Finally, our competitive advantage on pricing offers a considerable benefit to our clients when compared to the banks.

How did IPM Group’s relationship develop with Baird & Co.? And why did you choose to work with this entity?

Baird & Co. is the largest UK refinery, with a major presence across Asia. They approached me in late 2017 (as we had a very close, existing supplier relationship) and suggested that I take over their Asia operations and build their operations here, while IPM Group continued to grow independently. I took this as an opportunity to not only grow their business but to also expand my global network and meet other established bullion operations as a supplier rather than a competitor. Baird & Co. as a mint produces one of the largest ranges of PGM (Platinum Group Metals) products. Working with the Baird & Co. team gave me a unique opportunity to understand the supply, demand and refining sides of the PGM and gold market in great detail.

David Mitchell, founding partner of Auctus Metal Portfolios and IPM Group.

David Mitchell, founding partner of Auctus Metal Portfolios and IPM Group.

 

The rough mantra of investing in gold is to buy when the stock market is at an all-time high, so as to hedge yourself when the economy tanks. In your opinion, would you say that this is the correct rule of thumb? If so, would now be a bad time to buy gold?

Precious metal investors often use this as a rule of thumb. However there are many exceptions going back through market history, even in the last 20 years. For example, that theory doesn’t hold when you consider that gold has rallied right alongside the stock markets since late 2015. We categorically advised our clients well in advance, that there would be a cycle low in gold in December 2015. The lows traded in gold were roughly US$1,045 and as of today 24th April, 2020 gold is up +65% in US$ terms, +87% in A$ and +66% in S$.

During this same time frame the S&P 500 rallied to highs of +65% in early February 2020, and is currently only up +37% from the December 2015 levels following the recent hard crash.

An exposure to precious metals should always be part of one’s overall portfolio and in my research on historical portfolio allocations (looking at every period within the economic cycles since 1970) a percentage investment into precious metals representing the ‘non-correlated’ aspect of one’s overall holdings, will clearly outperform portfolios with a zero allocation to metals. Uncorrelated exposure and returns are essential within a portfolio and precious metals are an uncorrelated asset (lacking a mutual relationship or connection) when compared with global asset classes such as stocks, fixed income, debt instruments and the property sector, to name a few.

The art is in recognising what percentage of precious metals your overall portfolio should represent. Most analysts will suggest 5% to 10% is adequate, and in a normal well-balanced macro environment I would agree this is adequate. But in these unprecedented times featuring a growing and unsustainable global debt crisis, the onslaught of which was widely identified over 5 years ago, precious metal holdings have to be a much higher percentage of all client’s portfolios. This is precisely why understanding the macroeconomic environment is so critically important.

Incidentally, a couple of market analysts have shared in their reports that Covid-19 will hurt the demand and consequently, price for gold. What are your thoughts on this?

Gold has been correctly re-classified as a ‘Tier-1 asset’ class last year by The Bank of International Settlement (BIS), which now recognises central banks’ holdings of physical gold as a reserve Tier-1 asset equal to cash, which also affects the classification of gold within the entire global banking system as a whole.

What is gold then? It is the money of last resort as stated by the US Federal Reserve, BIS and World Bank (amongst many others). Gold is predominantly a monetary metal recognised as, and equivalent to real money. It is estimated that all of the gold ever mined above ground is 190,000 metric tonnes, and as of today’s price that is approximately US$10.46 trillion.

So back to your question on whether Covid-19 is hurting gold demand, governments around the world have dramatically expanded the monetary base (we’ve seen approximately US$8 trillion in quantitative easing and fiscal expansion globally in the last 8 weeks alone) and this eye-popping monetary debasement will likely fall woefully short of what the actual overall currency debasement will be within the next 12 months.

It is easy to prove that gold is cheaper today than it was in 1971 (when it was just US$35/oz), if you sum up the total currency monetary base and divide it by physical gold we are looking at the best buying opportunity in 50 years, versus currencies.

Covid-19 has triggered the implementation of MMT (Modern Monetary Theory), which is a process of enormous global currency and monetary debasement. Because of both this and the enormous drop in the stock markets recently, we have seen a phenomenal increase in the demand for investment grade bullion.

I believe that gold is on the verge of a powerful multi-year cyclical revaluation as it will predominantly be used as hard physical capital during the re-balancing of the monetary system and debt cycles. We therefore have not seen any reduction in demand for gold whatsoever, in fact we are seeing quite the opposite with huge demand for physical gold bullion.

Le Freeport Singapore, where Auctus Metals stores gold and other precious metals.

 

In your opinion, how will the extraordinary quantitative easing measures taken by the US Federal Reserve this year impact the price and demand for gold in the next 5 to 10 years?

Well everyone seems rather focused on the USA, however the epicentre of our global debt crisis is squarely in Europe and not the USA, using the politest analogy possible; the USA and US$ is presently ‘the most attractive horse in the glue factory’. Please remember that monetary and fiscal expansion is a global phenomenon as this is a global debt crisis; and the world has an even more negative exposure than the USA.

It does not matter a great deal which side of the fence you are standing or what your belief structure is, it is clearly evident that after this global event the world will have changed forever. It is my strong opinion that the world is facing the dreaded economic spectre of ‘stagflation’. The only global policy levers left are massive currency and monetary value destruction under the guise of MMT. If this is indeed the case (and it appears to be playing out that way and being supported officially) it is only logical to assume that precious metals, among certain other asset classes (not property I am afraid as that is a debt-linked asset class) are heading to much higher valuations in currency terms.

How big of an exposure should one have in their portfolio for gold?

The allocation into precious metals (not just gold) as part of your overall portfolio needs to be weighed against the immediate macroeconomic ‘tail risks’, or ‘black swans’ on the horizon. Knowing how to diversify is the most important aspect of investment trading for an investor to be successful in wealth management and achieve sustained portfolio growth. Everyone should have his or her own individual objectives and comfort zone (particularly for risk), but a 5% to 10% holding of precious metals during this period of economic crisis is wholly inadequate.

Auctus Metal Portfolios uses proprietary algorithms to correctly re-balance our clients ‘physically held’ precious metals portfolio with a high growth and diversified investment strategy. We’ve delivered a +54% net return to clients in 2019 and our clients are just shy of +700% since 1 January 2016.

Using over 55 variables with live data feeds that identify re-weighting opportunities of our clients’ physical metal holdings, the portfolio management accounts offered by Auctus have historically ensured an ‘alpha return’ that has far outperformed the benchmark for gold. Our performances are based on zero exposure to collateralization, paper trading or any leverage whatsoever, as our clients keep hard, physical metals in their own fully segregated and tax free vaults at Le Freeport.

Besides gold, could you tell me more about the other precious metals that are worth investing in? And what makes them potentially more valuable than gold from a layman’s perspective?

We are not only examining the ‘crisis hedge’ qualities of precious metals, but more importantly we are weighing up and studying supply-demand curves, pricing ratios, industrial usage curves, cost of production, ore grade degradation, mining infrastructure, above ground stock piles, cycle analysis, macroeconomic fundamentals and the list goes on.

We are constantly looking for the next great investment trade within precious metals and our early clients have achieved returns of 1,200% in rhodium, over 700% in palladium and other very high returns across their metal portfolios, including in rare earths.

Our objective is to recognise and advise our clients on when to get in and when to re-balance out of any particular metal into the next great trade – on an ongoing basis. Platinum especially has a truly wonderful investment thesis building, alongside silver and some of the rare earth metals. We believe that platinum and silver will outperform gold from this point onwards in terms of percentage performances over the next cycle into year 2024.

 

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