This summer's scenario analysis focusing on Swedish equities, hedging and gold

Mikael Syding
13.07.2020 | 4 Læsetid

Just as for stocks, momentum in the gold interest usually builds up gradually, initially based on sound principles, but eventually the movement and interest gain their own lives and end with speculative “FOMO” (fear of missing out) -driven frenz

I make forecasts all the time. It's not because I think they'll be released, because they rarely do. Or, if I am going to be really honest, I probably believe my own forecasts a little. The point of still making them explicit is that it means I have something concrete to compare with when I'm wrong.

Without forecasts, it is far too easy to deceive yourself that you were probably right after all. How unreliable human memory is can be read in the book "The 7 sins of memory" by Daniel Schacter. Not least, it is useful to write down why you think it should be a certain outcome, so that during the evaluation can then distinguish between pure luck and some kind of skills.

My forecasts are usually based on the fact that there is nothing new under the sun, that human psychology and group dynamics continue much like they always did. My “Status Quo” -analysis can be something as simple as the Level of a variable to stay reasonably constant, ie within the same interval as before. Or, my "All Pass" -analysis is based on the rate of change being constant, or the Acceleration (ie the second derivative of the variable).

Another way to expect the current paradigm to exist is to assume that past patterns will repeat in some form; or, for example, the degree of volatility. For stock indices or commodity prices, price graphs can be the starting point, while for individual companies it is more often the analysis of accounting data such as sales or margins, as well as the market's tendency to value these variables at stable multiple intervals. Which variable or pattern I dare assume will be maintained in the future depends on the patterns and intervals that have been stable in the past.

Now after the Covid crash and the market's V-shaped recovery (but not the economy), I wonder what the future might look like. As the underlying economy continues to be weak, the virus has regained strength and companies' profits in most cases do not seem to recover, but the government's stimulus measures on the other hand continue to accelerate, so I think the recent pattern will repeat again. What I mean will be an echo of what has already happened, for example with respect to stock markets and the gold price. By repetition, I mean in this case that the Swedish stock exchange's sideways movement during fluctuations of about +/- 20% continues, but without any major trend succeeding in establishing itself. If we zoom into the graph, periods of fluctuations of +/- 5% will give an illusion of stability, only to be accompanied by slightly larger movements of 10-20% upwards and downwards. These, in turn, appear to indicate that longer bull or bear trends are in progress, but are soon interrupted by news of a weaker economy or larger incentives.

The end station for OMX, I think, will thus be about the same level in one year as today, or as three years ago for that part. It may very well happen with some lower bottoms along the way, which are however followed by intensive growth phases, so there will be no easy market for a trader without fundamental security in their business. This is a market where different forms of hedging strategies will prove valuable.

Meanwhile, the underlying economy is gradually becoming less efficient due to the money illusion and distortion effects of various types of targeted stimulus measures, not to mention the growing neat effects that deglobalization is having.

On the other hand, one thing that is almost certain is that the monetary value will be eroded, and that it is mainly gold, and perhaps Bitcoin, which generally gets a strong headwind. The influx of gold ETFs has set new records this year and more and more are starting to catch the eye for gold's role in a portfolio. Gold acts partly as an option hedge by virtue of often being countercyclical relative to shares, and partly as a speculative asset in its own right if, for example, believe that the price of gold in USD over time should reflect the amount of dollars available.

One of many powerful strategies typically is to rebalance its portfolio to eg. 75% shares and 25% gold once a year. This methodology has yielded slightly higher returns over time and significantly lower portfolio fluctuations (which in practice means that with mortgages, it was possible to obtain approximately 25% higher annual return than the stock exchange at the same risk in its gold-hedged portfolio). A more aggressive strategy is to dare to take a longer break from the stock exchange altogether in favor of gold, when the situation looks like now. The "situation" is simply expressed that the authorities have completely lost respect for money printing, stimulus and asset price bubbles. While at the same time the gold price began to gain momentum (but at the same time long before gold was priced up to its historically motivated share of the money supply M2 (which includes "near money", such as savings deposit, money market securities and other instruments), or became a significant share of most portfolios.

Just as for stocks, momentum in the gold interest usually builds up gradually, initially based on sound principles, but eventually the movement and interest gain their own lives and end with speculative “FOMO” (fear of missing out) -driven frenzy. Right now it is software stocks and corona teams like pharmaceuticals or work-from-home shares that are rising vertically, but not long after that it can be the turn of the gold at the same time as the bubbly shares are pulled closer to their motivated values.

So I do not think that we have seen the last of high volatility in the markets, and I expect many new buying positions on the stock exchange in the coming years, due to the recurring financial weakness that too large debts always give rise to sooner or later. Between these "situations" is the gold I keep coming back to, and is there any time one should have more gold than usual in their portfolio, rather than just rebalancing normally, so it is now. Two alternatives to gold are also to begin with, not surprisingly, gold mining stocks (check out the very largest, including Newmont) for a reasonable risk level and gold price correlation), and, in the alternative, commercial real estate stocks that have been hit extremely hard during the Covid crisis, for example Svenska Hufvudstaden.

@Mikael Syding

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