My real job is not to explain to the people who govern us, or aspire to do so, how they could manage our affairs better, but to try to understand what is the reality that savers must confront when looking to deploy their assets in the hope of becoming financially independent.
As Dostoyevsky once said: “Money is coined liberty.” The better you invest your savings, then, the freer you will ultimately be. I do not wish you anything less than that.
Alas, though, your money is also of interest to them, and there are as many of them as there are devils in the Gospels.
To name but a few, there’s the State, the swindlers who promise miraculous, risk-free returns, the banks that have financial products to sell, a member of your family who’s going to set up a company that will hit the jackpot, charities that want to save baby seals... In short, the moment you have a little money, you are subjected to a constant barrage of requests to help you manage your capital in the best interests of those making the requests.
The first thing you’re going to have to do, then, is learn to say ‘no’ when it’s wise to do so! That is far and away the hardest thing to do, because from time to time you’ll need to say ‘yes’, lest you miss out on some wonderful opportunities. (In this field, I still have some progress to make)
‘No’ must be the rule, ‘yes’ must be the exception.
Once you’ve taken this step, you’ll be able to start thinking about what you should do to guarantee that independence in the long term. That is what I am going to try to do before you, by describing the world that is before me.
This world, in which I am going to invest, is not a perfect world in which everyone is kind and beautiful. The world in which you are going to deploy your savings is tough, unfair, and ruthless, and no-one is going to give you any freebies. You are therefore going to take some hits, that’s for sure, and it’s then that you have to remember that making a mistake is no big deal. What is a big deal is making a mistake you already made once before, as that would mean that the experience has taught you nothing. If that happens, you’ll have to find a good professional - and there are plenty out there - who will take care of your savings in an appropriate manner.
Let us imagine, though, that the reader has taken the decision to manage their savings themselves - and I congratulate them on that - they will have to build a portfolio that will have two parts:
- An offensive part, comprised primarily of stocks. As I have written in the past, in the world we live in, I would only have stocks that are completely independent from governments and States. To give you an example, I have built an IDL index of these values listed in Paris, which works to my satisfaction.
- A defensive part. For quite a while, I have been recommending a defensive portfolio, with 2/3 comprised of Chinese bonds and 1/3 comprised of gold, which serves as a store of value for buying the offensive part when the stocks take a beating.
Every month, or every quarter, you will re-balance your portfolio, so that the proportions that you had at the beginning (50-50, 60-40, 70-30, etc.) stay the same.
What I am recommending today is that you increase the defensive part of the portfolio, to the detriment of the offensive part. Instead of there being 67% in Chinese bonds and 33% in gold in the defensive portfolio, I would like to increase the gold to 50% of the defensive portfolio, by reducing the portion taken up by the stocks.
So what I am saying to you is that you should increase the proportion of gold in your portfolios and buy some, if you didn’t already have any, but that you should also reduce the size of the stocks component, because the situation is getting bad.
Why? First of all, because inflation is accelerating in the United States, something that is never good news for the stock markets around the world.
Inflation has been accelerating in the United States for more than a year: I have stopped wondering, I am reducing the number of stocks I hold and buying gold.
Second question: Why sell your stocks to buy gold? Answer: because the stocks are overpriced compared to gold. Here is the relationship between the price of gold and U.S. stocks over the last 120 years.
Rarely has gold been as cheap as it is now compared to stocks, and this ratio always seems to return to the historic average (the dotted orange line). A simple return to the ratio’s average value would lead to a quadrupling of the price of gold compared to stocks in the next few years, a prospect that seems to me to be more than sufficient as a gain to be hoped for. To arrive at this result, gold would have to double in value and stocks would need to fall by 50% or more. Both things have already happened at least once since the start of the century.
The third reason is more ‘subjective’: gold ‘looks good’, in my opinion.
If I analyze the path gold has taken since the start of this century, it went from $300 to $1600 from 2000 to 2012, before losing almost half of this increase between 2013 and 2016, by breaking to the downside its 5-year moving average. It then climbed back up, breaking to the upside its moving average, and it has stayed above it ever since. At the time of writing, gold is close to its record highs of $1864.
I am not a technical analyst, far from it, I’m not a big believer in them, but if I were to use this analytical technique, I would say that the ‘target’ for the price of gold is approximately $2400.
And that brings me to the final part of this piece.
Having made the customary observations about the gold prices, I am stepping out of my study and taking a look at the real world outside, to find out whether it is looking increasingly quiet (bad for gold) or increasingly agitated (good for gold).
And it's a done deal!
The world in 2022 seems very troubling.
- In the United States, angry madmen who want to screw up the financial system are in power.
- We seem to be heading straight into an unprecedented energy crisis, at breakneck speed.
- A religious way of thinking is spreading all over the world, to the detriment of a more scientific one, and this is happening in the name of science, which is very curious.
- Food commodities are skyrocketing, and that is going to prompt serious problems in North Africa, as always happens when the price of food goes up. That is not good news for Europe in general and for France in particular.
- Covid is continuing to make our governments increasingly dictatorial, without the loss of our freedoms improving our life expectancy in any way.
- The revolt of the people against the technocrats, which I have often spoken about in these articles, is only getting worse, and it may in the future lead to the disbandment of Europe and the disappearance of the Euro, a development that would certainly not be painless.
- The list goes on...
All of that constitutes merely the ‘known unknowns’, whereas the real danger perhaps lies in the ‘unknown unknowns’, and will therefore come as a complete surprise. No-one thought there was going to be a pandemic, three years ago.
What I can say for sure, though, is that the stock markets are ‘fragile’ and that they therefore tend to fall when their uncertainty, and therefore their volatility, increase, whereas gold is ‘antifragile’, i.e. it tends to rise when everything’s going badly.
And since managing your own money means managing the risk I’m willing to take, what I am trying to tell you is fairly straightforward.
For the next few months and doubtless until April 2022, I want to batten down the hatches. It’s not so much that I’m certain that we’re going to have a crisis - I’m no soothsayer - but simply that fragile assets are very expensive compared to antifragile assets generally, and gold in particular. Rather than expecting my portfolio to re-balance itself on its own because I’m keeping the percentages the same, you know what, I prefer to act today and shore up the antifragile part against the fragile part.
This is by no means a forecast. At most, it is about being prudent.
In savings management, one has to be very disciplined, but from time to time, on rare occasions, one has to follow one’s instincts.
Today, I have a strong desire to be prudent, very prudent. I’m not completely sure why, and the time will come when we will see whether it’s because of the years I’ve racked up (a polite way of saying I’m an old stick-in-the-mud), or whether this is experience combining with instinct, and telling me that there are some pretty odd noises coming from the savanna, so to speak.
We will see what happens.
At any rate, my recommendation is to increase the antifragile portion, to the detriment of the fragile portion. That way, I’ll sleep better not only at night, but during my siestas too.