Challenging a popular narrative

The results are in!

I asked people if they were interested in investing in Japan, and this is what you said:

  • YES – 70.5%
  • NO – 29.5%

That was quite a bit higher than I expected, I’ll admit!

No wonder Japan has outperformed all developed markets except the US since 2012…

Source: Koyfin. S&P in red, France, Germany, the UK and Hong Kong in the appropriately vomit-coloured consortium down the bottom.

What’s curious is that everyone seems to say, rather casually, that no investors are looking in Japan, and that Japan has been an underperformer for too long.

Well, it seems neither are true. It’s outperformed for the last eight years, and it’s done so because 70% of you are buying into the story!

I also found it interesting in your email responses that people who wrote in saying they had invested all said it was going brilliantly, while those that were explaining why they hadn’t invested, used the reasoning of underperformance to explain why.

Thanks to everyone who wrote in, as always.

It seems that Japan’s performance (145% in eight years) is viewed more subjectively than most.

It reminds me of Dominic Frisby, a guest on our wonderful Crypto Summit, who gives a lovely definition of what a bubble is: “A bull market in which you do not have a position.”

Well anyway, I was delighted and surprised by how many of you were interested in Japanese stocks, as it means I can continue to write more about them in the future.

The golden goose – done laying?

A concerning theme for many of us in the last fortnight has been the fall in gold’s price.

It’s not just the fall though, but the fact that it has correlated with falls in the US equity markets, which have been driven by the tech-heavy Nasdaq index.

This is the opposite of what we would expect, as gold is supposed to be a safe haven.

But we have been here before, and recently too.

In the last week of February, stocks fell sharply for the first time – 12% in a week, for most global indices. Gold fell too, for the first few weeks of the crash.

The reaction to a selloff in stocks was a rise in the dollar, which is also seen as a safe haven.

Source: Koyfin

The falling price of gold was in large part the result of the strengthening dollar. You can see a perfect inverse correlation between the red line (gold) and the orange line (dollar index, DXY) in the above chart.

Meanwhile, the S&P 500 (blue line) started falling over two weeks ago, but gold only joined that pullback once the dollar started strengthening at the back end of last week.

That’s what happened in March – gold prices began correlating with equity markets for a period, before the dollar trade (people selling assets to buy dollars) had run its course. Then, gold began its amazing run.

It’s only part of the story of course.

The truest correlation has been between real yields (bond yields, adjusted for inflation) and the gold price:

Source: John Authers, on Bloomberg

Which makes sense.

Gold’s value increases when cash or bonds are decreasing in value, because inflation is eroding their purchasing power.

Does the insane strength of this correlation between real yields and gold prices mean that the safe-haven trade no longer exists for gold? Will people still just buy it as an instinctive reaction to market turmoil?

What will it take for people to buy gold for non-technical reasons? Or was that always a myth, and in fact gold has only ever been driven by fundamentals?

Here’s a longer term chart of real yields.

Source: Quandl

In the period from 2000 to 2011, gold prices in USD rose sevenfold, from $250 to over $1,750.

Annoyingly, this real yield data only goes back to the start of 2003, but it’ll do. Here is the gold price in US dollars from the same starting point. It rose from $350 to $1,900 in 2011, before falling back to around $1,100.

Source: Koyfin

What’s the point I’m trying to make here?

That everyone is becoming obsessed with the idea that real yields on US Treasuries are the only thing driving the gold price.

But that’s not true, or at least, it’s only been true for a short period of time (short in this context meaning roughly one decade).

For example, you can see from the charts above that gold tripled in price in a seven-year period in which real yields went roughly nowhere, from 2003 to 2008. Then, real yields fell from +1% to -1% between 2011 and 2013, and the gold price fell back by 30%.

While the recent dynamic certainly is true, and holding on tight, it has not always been so, and it will not last forever.

Other things may come into play.

So gold investors, we must watch real yields closely, while also thinking deeply about what other drivers of the gold price might come along next.

Recognising them early will be key to protecting our lovely gains from the last two years, or increasing them.

I’ll certainly be doing my utmost to help us all do exactly that.

Best wishes for now,

Kit Winder
Editor, UK Uncensored

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