Consolidate Capital
05th March 2022
Dear Fellow Investors,
Hope everyone is keeping healthy and cheerful.
“Bull market gives opportunity to sell mistakes. Bear market gives opportunity to buy regrets.”
The volatility and sharp swings in global equity markets, witnessed over the last few months, continued in February as well. This has been a result of the Russia-Ukraine standoff, hawkish Fed commentary, rising crude and commodity prices, inflation fears, rising yields and mixed corporate earnings. Indian markets were no different.
Although the year 2022 began strongly, equities saw bouts of upswings as well as pullbacks throughout the month with Nifty 50 seeing minor corrections, with broader markets seeing higher drawdowns.
Currently, the worst seems to be discounted and though we might not have a sharp V-shaped movement, markets should start to move into a positive trajectory. Be Positive on Indian equities from a 2–3 year perspective.
These periods of high volatility in an equity portfolio creates a zone of excitement and fear. This adversely affects the quality of decision-making.
“We are all far less rational in our decision-making than standard economic theory assumes.” — Dan Ariely in his 2008 book Predictably Irrational — The Hidden Forces That Shape Our Decisions.
It is important to remember that swings are just something that happens from time to time in the stock market. The only way to get high yields over the long run is seldom to experience losses in the short run. This is a feature, not a bug.
More volatility means more opportunities to buy or rebalance at lower prices, like buying stocks on sale. Bear markets and crashes are rare. If history is any guide, there is a higher probability this is simply a regular correction as opposed to the end of the world.
As far as how long this correction lasts, the truth is we don’t but surely tides shift faster than we can imagine.
Currently, we don’t see the geo-political tensions lasting long. Big muscle groups of the world won’t prolong and would be looking forward to easing the citizen life once the trouble settles.
Although, such events affect human life but connecting each step of war with the fluctuations in the market is irrational. Such situations like the US-Afghanistan, USA-China, India-Pakistan, India-China are all short term events and not permanently changing the course of Equity Markets.
Further, these events, if they do occur, provide growth by opening war-chests into the economy, leading to not only an increase of money in circulation but also giving rise to quid pro quo of policies, federal banks actions and taxes.
In the months’ edition, we would like to discuss precious metal Gold with our fellow investors.
(Our Previous writing on Gold — Link)
There has been no shortage of questions on why gold has significantly underperformed during such an ideal macro setting. Few in the fear of losing shine have even diluted their gold positions.
Gossips had started building up that crypto can be held instead of Gold and those rumours couldn’t have gotten it more wrong. In recent times, Cryptos has nearly halved from their peaks and still, no respite is being seen. We think Warren Buffet’s wise words — “You never know who is swimming naked until the tides go out” have gotten true with wealth destruction happening in cryptos.
(Our views on Cryptos Link — 1 and Link — 2)
Coming back on Gold, it is quite normal for gold to struggle after making new highs. We have seen this price behaviour happen twice before recently.
In March 1978, gold briefly reached a record level and then corrected by 15% soon after. Also, in January 2008, the metal hit new highs and continued to appreciate for another month until declining by 28% during the GFC — Global Financial Crisis.
We are probably seeing a similar issue today again. The price is now 14% lower, and the entire financial media already claims that gold is dead. Note, however, how the shiny metal tends to come screaming back after these pullbacks.
Some technical reasons to long precious metals:
- Silver remains historically undervalued relative to the money supply and is now technically forming a double bottom.
2. Gold is the reserve currency of the world. It is observed that the government has continued to pile on debt. The setup today looks just like it did in the early 2000s ahead 10-year precious metals bull market.
3. As inflation continues to develop in the economy, Gold is likely to appreciate too quick and too fast to become an obvious trade. Extreme sentiment probably explains the reason for its recent weakness after signalling way earlier than any other asset the possibility that an inflationary environment could be ahead of us.
See below the incredible link between gold and CPI since the GFC.
Keep in mind that we are using government reported numbers to gauge inflation in this analysis. We should all know by now that the true cost of goods and services is growing at a drastically faster pace than CPI.
4. Precious metals are now at their cheapest levels relative to other commodities since 2009. The other 2 times this ratio reached such depressed levels also marked incredible buying opportunities.
Commodities look ready for another big move to the upside after consolidating.
5. There has been a decade of exploration underinvestment with no major new gold discoveries in the last four years.
Gold and silver cycles are long-term trends that tend to last many years. Our view is that if there was ever a time to go up on the risk curve in exchange for upside return potential, that time is now.
All in all, we believe that the current correction should be used as an opportunity to invest rather than be fearful. We continue to maintain our stand that the past two years’ market returns were extraordinary and will not be repeated but decent mid-teen returns over the next 3 to 4 years are still possible.
Happy Investing!!
Leaving everyone with a thought –
“Spend each day trying to be a little wiser than you were when you woke up.” — Charlie Munger
With Respect,
Chandranshu & Priyaanshu
+91–9953726305 & +91–8800967088
cachandranshu@outlook.com priyaanshu@live.com
