Category Archives: Team Commentary

Gold bullion has rallied 15% since beginning of the year and gold mining stocks have also rallied significantly over the same period after a brutal bear market over the last five years.

Given gold’s proven ability to hold its value in the face of rising inflation and extremely accommodative monetary policy, we believe it plays an important role in any diversified portfolio.

Technical trading patterns suggest gold may finally be breaking out into a bull market.

Year-to-date, gold prices have leaped by more than 15% and the USD gold index has surged by more than 50% as the trade weighted US dollar softened and Rand strengthen against the dollar.

Despite the recent rally, gold remains bullish

Despite the surge we’ve seen in gold and gold mining stock prices in recent months, attitudes don’t change overnight. Trading volume and upside volatility are coming back, but investor’s hesitance to buy gold may signal an even bigger shift in global sentiment. Buying gold today may be comparable to buying stocks in April 2009.

The gold miners’ stocks are rocketing higher again, multiplying wealth for smart contrarian traders who bought them low in recent months.  But after such a blistering surge, traders are naturally wondering how much farther gold stocks can run.  Soon it might be time to realize gains, or buy aggressively for greater gains to come?

If you’re really intent on investing in  gold as a way to diversify beyond a well-balanced portfolio of stocks and bonds, we suggest exposure of 5% to 10% of your total portfolio to some form of gold (bullion, coins or, more likely, an ETF that invests in physical gold) and then rebalancing periodically and/or buying or selling gold so that the value of your gold stake maintains roughly the same percentage of your assets regardless of whether gold prices have been rising or falling.

The rationale behind this strategy is that over the long-term gold can provide a decent hedge against inflation and Rand/ Namibia Dollar weakness and offer some protection for your portfolio in turbulent economic and political times.

Since gold prices don’t always move in sync with stock prices, the price of gold rose 26% from the late 2007 pre-financial crisis stock market high to its trough in early 2009 while stock prices slumped more than 55% – owning some gold may be able to mitigate the ups and downs of a traditional stock and bond portfolio.

The result is that many investors end up adding gold to their portfolio when all the drama, anxiety and hype has driven gold to higher levels from which it can drop precipitously and weakening for years.

The last time the uproar for gold reached a fever pitch was back in August 2011 when the debt problems of Greece, Italy and Spain and concerns about Eurozone debt overall dominated the headlines. And, indeed, gold appeared full of promise back then, zooming from just under $1,400 an ounce at the beginning of 2011 to nearly $1,900 by early September for a gain of more than 36% in less than nine months.

But as the worries of a Euro debt meltdown faded, so did the price of gold, eventually retreating to less than $1,100 an ounce by the end of last year. This time round it seems that fears around a possible Brexit are underpinning the demand for gold.

We believe the Fed’s decision to hike interest rates into an economic slowdown will limit its ability to normalize interest rates in the coming year. Additional rate hikes are possible if global markets are relatively calm when the backward-looking, model-obsessed FOMC. However, further tightening would only increase the odds of a policy reversal as the year drags on. If we are correct, short-term interest rates may rise ever-so-slightly for a brief period, but will inevitably fall back toward zero (and even below zero with the likely introduction of negative interest rates), as we’ve seen with every other central bank that has tried and failed to raise rates in recent years.

Gold has been deeply out of favour for years thanks to the Fed’s surreal stock-market levitation sucking capital away from alternative investments.  And that gold antipathy climaxed in mid-December the day after the Fed’s first rate hike in 9.5 years when gold plunged to $1051.

This year’s stock turmoil and worries about global growth have pushed up the price of gold again, by roughly 15% so far this year. Still, at this point at least, investors who moved into gold nearly four and a half years ago for perceived safety, a shot at potential gains or whatever reason, are sitting on losses of about 30%.

If the current market turbulence continues and global growth prospects remain uncertain, we suppose gold could expand the gains it’s made so far this year and possibly even get back to or exceed its near-$1,900-an-ounce peak of 2011. On the other hand, if stocks revive and fears of an economic slowdown subside, investors’ enchantment with gold could fade and its price could stagnate or decline.

If you’re considering investing in gold, you should know that it is extremely volatile and, after periodic spikes in price, can fall to and remain at depressed prices for a long time. You can make the volatility work to your advantage somewhat by taking the approach I described above — that is, putting a certain percentage of your portfolio in gold and maintaining that percentage whatever the price of gold may be doing.

This strategy requires discipline and being a bit of a contrarian, as you may be buying less gold (or even selling) when everyone is crazy over gold and its price has soared and you may be buying more when the metal is unpopular and its price has slumped.

Sticking to such a regiment is difficult for many people. Most investors prefer to go with the crowd. The more popular approach is what we’re starting to see now is people jumping into gold when fear is running high and people crave safety. It’s essentially an emotional reaction and potentially dangerous one, as you run the risk of buying in only after anxious investors have already significantly boosted the price.

The Namibian budget was tabled on the 25^th of February, but now, four days later, the estimates of revenue and expenditure, which are in effect the budget, are still not available to the public, and it appears, still not available to parliamentarians either.

As such, the budget was tabled with little more than high-levels numbers, captured in the speech, and a few more detailed numbers in the Medium Term Expenditure Framework (also not yet digitally available and hard to come by in hard copy). However, noteworthy in its absence was the estimates document, which raises the question as to whether the budget has yet been genuinely tabled at all?

That this is a great blow for transparency, little doubt can exist. Access to the estimates documents is vital for accountability, as it is the only way that the public can assess how public funds, for whom the Government is entrusted as custodian, are being spent. This forms part of a vital social contract between the public and the Government, and this contract is currently being flaunted.

Moreover, with debt levels increasing, investors, domestic and external, are likely to be keeping a close eye on the fiscus, and this lack of transparency is unlikely to be viewed in a positive light. In this regard, the budget speech made emphasis of the importance of international funding and the role it has played over the past financial year. However, not a lot of gratitude appears to be shown towards these investors, with a late dissemination and a lack of electronic availability of these critical documents. We are further concerned that this is the second time in as many years that the estimates documents have not been made available to the public for many days after the tabling of the budget, and we remain cognisant of the fact that if this remains unchallenged, it may not be the last time either.

While a conspiracy theorist may suggest that this act of withholding the detail of revenue and expenditure is due to a willful effort to hide something from the analysts and public, we feel this is unlikely. However, the alternative, options; that either the numbers are not yet complete, or that there is simply a lack of interest and urgency in sharing these; are hardly any better. Moreover, the Ministry has been eerily quiet on the issue, and has yet to say anything publicly as to why these numbers are not yet available.

There is generally a lot of hype around the budget release, but this hype fast becomes old news. By the time the Ministry finally releases their numbers, it may well be the case that much of the public has lost interest. This is highly concerning given that the Government is spending in excess of N$66 billion of the public’s money in the next calendar year alone. Moreover, there has been a historical disconnect between the budget speech’s stated priorities, and actual expenditure priorities, which is likely to go unchecked should the detailed numbers remain unreleased.

What should be done?

All of the budget documents should be completed and uploaded to the website of the Ministry of Finance as the Minister starts his speech in parliament. This will allow for the Namibian public, investors in Namibian debt and various analysts, to inspect the fiscal actions of Government, who it must be repeated, is but a custodian of public funds. As these funds remain the money of the people, the people have a right to know how Government plans to raise and spend them.