Lexicon Financial Group Weekly Update — July 17, 2024
“If you took all the gold in the world, it would roughly make a cube 67 feet on a side… Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States. For $7 trillion… you could have all the farmland in the United States, you could have about seven Exxon Mobils and you could have a trillion dollars of walking-around money. And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally… Call me crazy, but I’ll take the farmland and the Exxon Mobils.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
The 1964 movie “Goldfinger” (based on the seventh novel of Ian Fleming’s James Bond series) featured criminal mastermind, Auric Goldfinger. He is a man who, in the words of the great singer, Shirley Bassey, “is the man with the Midas touch.” The first two letters of his first name are “Au” (the symbol for gold on the periodic table of elements). Not exactly the most original of names, but we digress.
But Goldfinger isn’t alone. Over the centuries gold has been cherished and revered. From ancient Egypt to Spanish galleons and the Klondike gold rush, the love and lust for gold has been relentless.
These days, you’ll hear people talk about gold as a store of value, an investment asset and a hedge against inflation and market volatility. But is it?
From a pure performance standpoint for long-term investors, the answer is “not really.” As you can see from the graph below, gold has underperformed stocks or a diversified portfolio consisting of 60 per cent stocks and 40 per cent in bonds over the long term. (Gold is the light blue line in the chart.) Translation: over long periods of times stocks, particularly smaller company stocks, have outperformed all other asset classes. Also true, they are much more volatile and experience a wider range of possible annual returns.
Source: Morningstar Direct. Date as of January 31, 2024
Between 1980 and 2005 gold investors were not rewarded at all. Performance for Auric’s favourite metal was basically flat. So maybe the story about gold is not how long you hold onto it, but *when* you hold it. Because between 2000 and 2010 there was a significant increase in its price. It looks like being a long-term investor does pay off – eventually. This is why some consider gold an excellent “insurance policy” to protect portfolio values against steep market declines. (1)
It is worth noting here that Warren Buffet chooses not to invest in gold because it does not produce anything – income, revenue, profit, goods and services, etc. For him, the only way investors in gold make money is by hoping that someone will pay a higher price for gold later. Stocks, on the other hand, can grow earnings and profits and pay dividends, while farmland produces fruits and vegetables that can be used and sold. (2)
This might be the difference between an investor and a speculator. It’s also why investors who value growth of capital over preservation of capital look elsewhere for investment ideas. So, are there other assets or commodities that we should be looking at besides gold?
Yes. For example, demand for copper, zinc, nickel, lithium, aluminium, graphite, and cobalt is expected to surge as the world transitions to a greener future. According to a World Bank report – "Minerals for Climate Change: The mineral intensity of the Clean Energy Transition", May 2020 – more than three billion tons of minerals and metals will be required by 2050 to successfully deploy sufficient wind, solar and geothermal power (and energy storage) to have a chance of limiting global warming to 2 degrees Celsius by 2100.
The real long-term winners here could be copper (which is already used in the electrical wires in our homes, offices, etc.), zinc and aluminium as they are widely used in most clean-air energy technologies. (3)
Investing in commodities can be very volatile, which is why these form only a small part of the diversified portfolios we create for clients. Because part of our role for each investor – as communicated in our written Statement of Investment Policy – is to manage and control overall portfolio risk.
One way to think about portfolio risk is to consider volatility, which essentially is the rapid change in price of a stock. Things happen quickly in the markets. But if you look at the price of gold in the 1980s, it didn’t change very much at all. It wasn’t very volatile. When you woke up in the morning, the price was very similar to the price when you went to bed. That just isn’t the case anymore.
We’re not Goldfinger or King Midas, but we’re still paying attention.
Looking Back
We need to talk about inflation again. This week Statistics Canada reported that Canada's annual inflation rate fell to 2.7 per cent in June (from 2.9 per cent in May) mainly due to slower year-over-year growth in gasoline prices. According to CIBC senior economist Katherine Judge, the June inflation data has given the Bank of Canada (BoC) a reason to cut interest rates at next week's meeting. She said that this shows that the prior month's upside surprise in inflation was just a blip in a broader trend of disinflation as demand in the economy remains under pressure.
Grocery prices rose 2.1 per cent year-over-year in June, up from May’s increase of 1.5 per cent. Although this is closer to the norm for food price growth in Canada, food prices play a large role in how we all view inflation because we buy food regularly. The BoC’s next interest rate decision is set for July 24. With inflation now trending toward two per cent, it is widely expected that it will cut rates. (4)
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Video and Article: Momentum grows for interest rate cuts in 2024. Experts explain why.
ECB Rates Decision: What to Expect on July 18
China’s economy growing slower than expected as leaders meet for third plenum
Inflation in the United States (U.S.) cooled significantly in June, driven by a slowdown in housing costs. The result: increased investor confidence that the global economy is headed for a so-called soft landing, where inflation falls toward the Federal Reserve's target without high interest rates sending the economy into a tailspin. The U.S. has been an outlier in keeping their rates higher for longer. The recent Bank of America's July Global Fund Manager Survey revealed that 68 per cent of respondents said a soft landing is the most likely outcome for the global economy in the next 12 months. This is the highest percentage of respondents siding with such an outcome since January 2024. The respondents were surveyed between July 5 and July 11, which means that many may have submitted answers to questions before the June inflation number sent markets higher. For the first time in six months, inflation wasn't the No. 1 risk listed by respondents; it was geopolitical conflict.
On Tuesday this week, markets began pricing in a 100 per cent chance the Fed will cut interest rates by the end of its September meeting. This sentiment has contributed to a broad stock market rally, with investors rotating out of the high-flying technology stocks of the past year and into more interest-rate-sensitive sectors of the market. (5)
Our standard warning. Just because analysts and the market believe with conviction that something will happen does not actually mean that it will. A lot of things can (and will) happen between now and the next Fed meeting that could change their decision dramatically.
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 0.9% | 17.7% |
| Nasdaq Composite | 0.2% | 22.6% |
| Dow Jones Industrial Average | 1.6% | 6.1% |
| S&P/TSX Composite Index | 2.8% | 8.2% |
Source: Associated Press and Morningstar Direct 07/12/2024
The S&P/TSX Composite Index ended higher last week. In fact, it was the TSX’s best weekly performance since October 2023. Canadian inflation data is due to be released next week and will have investors adjusting their rate-cut bets ahead of the Bank of Canada’s next monetary policy meeting on July 24. (6)
Source: Statistics Canada and the Bank of Canada.
Last week U.S. stocks moved higher in the first notably broad advance since mid-April, which benefitted small-cap stocks. This move was supported in no small part by the decline in headline prices in June – the first decline since soon after the start of pandemic lockdowns in May 2020.
In local currency terms, the pan-European STOXX Europe 600 Index ended last week 1.45 per cent higher as investors welcomed lower-than-expected U.S. inflation data. Major stock indexes rose, too, as France’s CAC 40 Index added 0.63 per cent, Italy’s FTSE MIB put on 1.74 per cent, and Germany’s DAX gained 1.48 per cent. The UK’s FTSE 100 Index advanced 0.60 per cent. French and German sovereign bond yields were lower across the curve, falling in sympathy with U.S. Treasury yields after U.S. inflation slowed more than expected.
Japanese stocks retreated at the end of last week from the record highs they reached on Thursday amid increased speculation that authorities had intervened in the foreign exchange markets to support the Japanese yen. This speculation was triggered by a surge in the value of the yen against the U.S. dollar and was reinforced by a Nikkei report that the Bank of Japan (BoJ) conducted rate checks with banks on the euro-yen currency cross on Friday after the yen rose. A stronger yen reduces the profit outlook for Japan’s export-focused industries and makes Japanese assets more expensive for foreign investors.
Chinese stocks gained as strong export data offset continued concerns about deflationary pressures. The Shanghai Composite Index rose 0.72 per cent, while the blue chip CSI 300 added 1.2 per cent. In Hong Kong, the benchmark Hang Seng Index was up 2.77 per cent. (7)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
How to Use Gold in Your Portfolio, Amy C. Arnott, CFA, Morningstar, February 27, 2024, July 2, 2024
Does Warren Buffett Invest In Gold? John Csiszar, Yahoo!finance, April 19, 2024
Column: Which metals will gain most from a green energy revolution?, Andy Home, Reuters, May 14, 2020
Inflation falls to 2.7 per cent in June, driven by slower growth in gas prices: StatCan, Sammy Hudes, CTV News, July 16, 2024
Investors are growing increasingly confident about a 'soft landing'. Josh Schafer, Yahoo!finance, July 17, 2024
The close: TSX closes at fresh record as stocks rise on bets for Fed rate cut, The Globe and Mail, July 12, 2024
Global Markets Weekly Update, T. Rowe Price, July 12, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
Gold: The Most Precious of Metals
Video: Warren Buffett Tells the Reason He Doesn't Invest in Gold
Visualized: How Much Metal is Used in Clean Energy Technology?