How to spot the next big bull market

I hope your head isn’t too sore from the last few days, writes Nick O’Connor. Below is something to get the neurons firing. Late last year, I sat down with Charlie Morris to talk specifically about gold. You saw Charlie’s political forecast yesterday.

Today, you’ll read about his proprietary methods for valuing gold, how to understand when the next big bull market is here, and the one signal to look out for before it arrives. This is a transcript of my conversation with Charlie.

He gave a presentation on this subject at the London Bullion Market Association (LBMA) in Vienna in 2015. Those presentations are usually reserved for members. But he sat down with me here in London and went through the same points. That’s what you’ll find below.

NO: Today, we’re going to focus almost exclusively on gold and the gold market, and what’s next for gold, and potentially how you can try and value it. The reason we’re doing this is because Charlie is an expert in gold, as well as other things. In fact, I think it was in November… was it in October or November you went to Vienna?

CM: October.

NO: So, it’s October you went to talk at the London Bullion Market Association. Was it like an AGM for them?

CM: Well, the LBMA is the body that is responsible for dictating the type of gold held in vaults around the world, and the reason that’s important is because if you’re in China, and pick up the phone and want to deal with London, or New York, or Dubai, or Switzerland, wherever it might be, then if it’s an LMBA good delivery bar, you know exactly what you’re buying.

NO: So, essentially they’re a pre-eminent trade organisation for…

CM: For the bullion market, correct.

NO: So, who was in the audience when you were there? What sort of people were you talking to?

CM: There’s a mixture of all sorts. Mainly it’s the industry as opposed to the speculators or investors, and the industry itself doesn’t know much about the financial side, ironically, of the gold market. Gold is many different things to many different people.

So, for example, you could be a recycler in Birmingham, you could be a jeweller in Mumbai, you could be a hedge fund in Connecticut, you could be a futures trader in Chicago. There are all sorts of different players that come together in this highly-fragmented global market, so I think the audience is predominantly refiners, vaulters, traders, trading system operators, jewellers, and of course, the number one source of demand each year is jewellery. Let’s not forget that. So, all of those people come together to get an understanding of how the market’s behaving.

NO: It wasn’t the first time you’d spoken there, is that right? You went to Hong Kong to speak to this same group of people, same organisation in 2012, is that right?

CM: At the end of 2012. I didn’t present the fair value models, but I presented the regime models at that time, and then I went back this year and presented the valuation models. So, here we are on Capital & Conflict getting both in one go.

NO: Yes, so when Charlie refers to his regime models and his fair price models, that’s your proprietary analysis that you’ve been putting together for three or four years now. Is that right?

CM: That’s right. Well, I came up with these ideas many years ago, and I was very bullish on the gold price from the early noughties all the way through. I was probably late to get out, but I did get out, and in the beginning of 2013 before the correction, my models had turned bearish, so that was it for me, and I’m still sitting here waiting for them to turn bullish again.

NO: So, basically what we have here for you is this is the analysis that Charlie’s been working on for a long time, he’s presented it to the trade organisation, and we’ve persuaded him to come in and share it with you, so we’re quite excited to hear what Charlie has to say.

I’m here to prompt Charlie and ask any questions that I think are pertinent, but mainly I’m just going to let Charlie talk you through his different ways of looking at the gold market. So, why don’t we start with what you call the

CM: OK. So, there are three simple ideas I brought together, and if you take anything, a restaurant, for example – are the loos clean? Is the chef good? Is the atmosphere good? Three ticks are better than one, and so I had the same sort of analysis for gold, and in the first instance, you’ve got to tell is the trend rising, and how do you measure the trend?

I think that most people like to think of gold in dollar terms, and that is how it is generally traded, but it doesn’t matter. The price of gold in euros or the price of gold in yen is exactly the same thing at any time. They just look different because the currencies are different.

And so I tend to measure gold in a basket of all of the currencies, and to try and get some sort of sense of whether it’s rising or falling across the world, and I think that’s more important than just being purely dollar-centric.

For example, the dollar fell a lot between 2002 and 2007, by nearly a third, so all that weakness in the dollar was reflected in a strong gold price, but the gold price, for example, didn’t actually start moving in euro terms or in sterling terms until around 2005. So it’s very important to strip out the excessive strength or weakness of the dollar and look at an average trend of gold across the world.

So, that’s the first thing, and right now that model is telling you to be bearish, because on average gold is falling on a long-term basis in most currencies. Obviously not in Venezuela or in Argentina, where it’s going through the roof, but that’s just a reflection of their currencies being awful, and not telling you much about gold at all.

The second one is to look at it against a stockmarket, and it doesn’t really matter if you use global equities or if you use American equities. To keep it simple I use America, and the reasoning here is that if gold is outperforming stock markets, then there’s every reason for asset allocators, fund managers and so on, to buy gold, to sell some stocks and buy gold because they think they’re going to make a higher return that way.

And conversely, when gold is worse than the stock market consistently, as has been the case for the last four years, then there really is every incentive to get rid of it and own stocks instead, because you don’t want to lose your job by underperforming the stockmarket. So, there’s a lot of logic for that relationship.

And the third one really is the state of money, and it’s a case of are interest rates tight or are they easy? And my original idea here was that the real interest rate should be below 1.8%. Now, what does that mean? You know, in a tight money environment, you’ve got interest rates higher than inflation. In an easy money environment, you’ve got interest rates lower than inflation. Yes?

So, if they’re below 1.7%, which is below the historic average, that tends to be an environment where inflationary pressures build up and the gold price tends to respond. So, I put those three tests together, this idea of low real interest rates, of gold beating or failing to beat the S&P 500, and finally the trend of gold in global currency.

And I put that into a model going back many years, and essentially it told you to buy gold in 2001, it briefly told you to sell it in 2006, not such a good call that one, but it got you back in fairly soon thereafter in 2007, and it got you out in 2011. The bottom line is it’s not just that it gets you in or out at the right time, but it tells you when you don’t need to worry about the gold market because it’s not relevant, and so you’ve got better things to do with your money.

So, I don’t think it’s a case of do you need to sell gold because it’s going down. I don’t think that’s really the argument. It’s more the case of are there better things to do, and according to my analysis right now, there are better things to do.

NO: So, what we’re really talking about, it’s almost like if a doctor was giving you a check-up, it’s like blood pressure, heart rate, all those things. It’s like a more rounded picture of the health of the gold market, or the general direction.

CM: Absolutely.

NO: Do you look for all three indicators to change direction before you would say, OK, gold is going to change direction? So, if it got you out in 2006, by that do you mean all three indicators were showing that?

CM: Well, a perfect score of three is bull, two is neutral, and one or zero is bear.

NO: Ah, OK. I see. Right.

CM: So, it’s a very simple construct, and I think it’s more of an honesty test because this model did call sell right at the beginning of 2013 when the price was close to $1,700. It’s now $1,080, so it’s been a great call, and it did keep you in when it needed to.

So, I’m pleased with that, but what’s more important really is not catching the bottom. The lowest price doesn’t really matter. What really matters is when we next have a whopping great big gold bull market, this thing signals green and says, now’s the time. So, I’m not interested in the highest price, I’m not interested in the lowest price, but I am very interested in the regime.

NO: OK, I get you. So, you’ve plugged your figures into that and went back to 2001, and that’s allowed you to forecast the key turning points in the gold market?

CM: Absolutely, and the one we’re looking at that’s on the screen is…

NO: Yes, we’ll just put that up on the screen now.

CM: Yes, that one goes back to 1987, but this data can run back much further than that if you wanted to. I mean, the real problem is that gold wasn’t free-floated pre-1970 for lots of reasons, the gold standard and so on. So, these models don’t make much sense in that environment when you’ve got an artificially suppressed price.

That’s the first point I’d make, and I suppose the other thing, the 70s were so strong for the gold market that any analysis you do doesn’t make sense because it went up 27 times in ten years. It was…

NO: Yes, it’s easy to forget that.

CM: It was huge. That’s because the price started too low. So, $30 was the wrong price to start, because it had been suppressed for decades, and there genuinely was a massive surge of inflation. The dollar did a couple of things. It went up and it went down a lot, depending on which part of the decade you’re in, but I suppose the interest rate at the time you had high inflation and interest rates were below the rate of inflation, so again this model would have been very positive during that era.

NO: OK. So, that’s your regime that you use for measuring the health of the gold market. Let’s talk about the analysis you shared with us a little bit earlier in the year about… how would you describe it? How to find gold’s fair value, is that how you would look at it?

CM: Yes, I mean, the real issue for gold is it doesn’t have a cash flow, an income stream, and so most investors have no idea what to do in that case. They say that you can’t value gold because it’s got no cash flow. Now, property has a cash flow because you can rent it or lease it, and shares and bonds have a cash flow, so those are traditional assets in that sense, but Christie’s have no issue valuing a painting or a vintage car, so I don’t believe that things with no cash flow can’t be valued.

NO: Is it Warren Buffet who said, if a Martian was looking at us, they’d see that we spend a fortune trying to dig gold out of the ground, get it out of the ground, put it in a van, drive it somewhere else, dig a big hole, and put the gold back in the ground, and it never produces anything, right?

CM: And then guard it, yes.

NO: Yes, so it basically just costs us money, but…

CM: He also said in Africa or someplace like that.

NO: Yes. Well, we’ll ignore that side of the argument, but the way I always look at it, something’s intrinsic value or its relevance to the system just comes from the number of people who are willing to hold it, or buy it, or look at it, if you know what I mean. People’s freedom of choice to just be interested in gold is what gives it its relevance. That’s how I always looked at it anyway.

CM: Yes. I mean, as I said at the beginning, there’s a huge fragmented gold market, and what it means to a Chinese person or an Indian person is completely different, and people say it has no utility, but that’s slightly absurd since most people, well, particularly women but some men these days, wear the stuff as they go about their daily affairs. You know, people have gold watches, and gold cuff links, and all sorts of things. So, how someone can describe gold as having no utility I find extraordinary.

NO: There you go. Anyway, let’s get back to gold and the fact that it doesn’t have cash flow. That’s what we were talking about, right?

CM: Yes, but I think there are ways you can actually value this quite effectively, and the first one, I’m going to do my bond model, and the bond model really is to say that most people would describe gold as some kind of hedge against inflation. So, in the long term the value of money’s going to fall, and so therefore gold will protect you against that.

Totally rational, totally reasonable, and I think that’s the whole point of gold, and there’s several thousand years of human history to prove that that concept makes perfect sense, and we can do it slightly more scientifically than just saying that a bowl of potatoes in 400 AD was the same price then as it is now, or a suit, or a Roman soldier’s wage, or what have you.

I think a much more effective way of doing it is to treat it as if it’s a bond. So, think about what that statement is, and if you say it is a bond, and we already know gold’s got no cash flow, therefore it’s a zero coupon bond, because it doesn’t pay a coupon. Then it’s inflation-linked, we’ve already ascertained that.

We know it’s got no credit risk because it lasts forever, and it’s not issued by the Federal Reserve or the Bank of England, gold is issued by God, the Lord himself, so there’s a limited supply of this stuff, and we can put that concept into an equation and we can calibrate it over the last 18 years of data from the bond market. This is inflation expectation, something that the US launched treasury inflation to protect its securities back in the late 90s.

I think they launched it in 96 actually, but the data only exists in 98, and in Britain they launched it a bit earlier, I think it was the 80s if I’m correct, but again the data only starts to be recorded from 1996. If I look at the difference bond prices and inflationary bond prices, the market is telling you what it thinks inflation will be in the future, and using this very crucial number, very different than saying when the BBC News says, inflation dropped by 0.5% today, what they mean is the inflation over the past year.

What we’re talking about here is the expected inflation over the next 30 years. Now, we don’t know what it’s going to be, but the bond market assumes a number according to everything it knows.

NO: And I think an important point about that is when you say the bond market assumes. That’s essentially all the players in the bond market’s best guess aggregated. So, it’s the combined intelligence, I suppose?

CM: It’s the implication of the current price of bonds.

NO: Yes, so it’s the people who know the most about it analysing the markets and acting on that information, and when you aggregate all of their decisions, that’s what the market tells you.

CM: The market believes. Now, the market’s often wrong. I mean, it’s always wrong. It spends all day moving up and down trying to be right, but it’s aspiring to be right, so it’s good enough to use as a model because it’s what we think is going to happen today. Now, of course, this time next year, the numbers could be completely different, hence the model is dynamic and it’s always moving, but what does it tell us today? It tells us that the price of gold should be about $946, and the current price of the market is $1,080.

NO: Yes, by the way, it’s Monday morning in London, it’s 7th December, 2015, so just remember that. Keep that in mind when you listen to Charlie talking. If it’s a year’s time and gold’s at $3,000, then perhaps re-look at the analysis.

CM: Well, if gold’s at $3,000 in a year’s time, then hopefully, Nick, between now and then we’ve had another meeting and we’ve said…

NO: We’ve covered it again.

CM: We’ve covered it again. We’ve said that something’s changed, and you heard it here first.

NO: Anyway, continue.

CM: So, right now, gold is about 15% over its bond market fair value. Now, that model’s not perfect. It was telling you some time ago… for example, in 2011 it was telling you that gold was 17% above its fair value, so most of that’s already happened, yes? Fifteen’s not a big number. These are only approximate, but we’re very much in the region close to something we could call a fair value by looking at gold as a bond.

NO: So, what you’re saying there really is if there was a bond with all of those qualities that gold has, so doesn’t pay a coupon, no counterparty risk, all those sorts of things, inflation-linked, if there was a bond that had those qualities, you would expect it to be $940-odd dollars, so there’s a 15% premium in the gold price just for the fact that it’s gold, when you look at it that way?

CM: Sure. I mean, there’s a slight apples and oranges there, but in principle, yes, but of course the bonds would be priced differently to gold, so we’d have to calibrate it somehow.

NO: But roughly speaking.

CM: Roughly speaking, the concept of what you’re saying’s absolutely right. So, that’s the first technique. The second technique is to say, OK, well maybe gold’s not a bond, maybe it’s a commodity. That sounds pretty obvious to me, and over a long period of time, the relationship between gold and corn, and gold and oil, gold and copper, gold and silver, the list keeps going, there’s a kind of average of where you’d expect them to be.

The relationship between most commodities is mean-reverting. Now, the exception to the rule would be some commodities temporarily become very scarce, and they go through the roof, and they can really go far too far, or they go from being irrelevant to relevant, something like silicon, perhaps, and on the other side of it you might have whale oil as the example I would like to use as something that was very relevant to society once upon a time but is no longer relevant.

So, taking those aside and sticking with the main relationships that we have, the commodity market has been extremely weak since 2010, as we know. The price of oil’s come down to $40, and we’ve seen soft commodities and grains, the price of gas, all of them come back to the 2008 low, so it’s absolutely being crushed, and that was the depth of a serious financial depression/recession, and commodity markets are back there in most cases.

Now, the interesting thing is in most cases the metals aren’t, the metals have held up, in particular gold, and gold if it was a normal commodity right now, it would be about $675 rather than the current $1,080.

NO: So, by that, do you mean if it had fallen by the same percentage as the rest of the commodities that you were talking about, it would have fallen to $600-odd?

CM: Absolutely, and I’m using 20-year relationships. This is not just saying gold hasn’t done very badly this year, but everything else has. It’s saying that over a period of 20 years, you would reasonably expect gold to be in line with all these guys, and what change was 2008, the financial crisis, where gold literally went from a 20% discount to commodities to a 40% premium very quickly, and it’s more or less stayed there?

Now, I’ve highlighted this one. It’s currently 62%. That premium is particularly large right here right now, but that’s just stayed in place. So, for pretty obvious reasons since we’ve had funny money, central banks doing strange things, printing, bailouts, bail-ins, all of these kinds of things have made people think twice about how to keep their wealth safe, and so the result of that is there’s almost certainly a premium in the gold price relative to other commodities.

Now, it doesn’t really come out in the bond model particularly effectively because we’re only 15% overvalued, which is no big deal, but 60% overvalued compared to the rest of the commodities is a big deal. What I think is likely to happen is that there will be a recovery in the commodities market at some point, and when it does, it could well be that gold is the underperformer. So, we might see a lot of strength in oil, and gas, and food, but then gold just hangs around and doesn’t go up very much.

NO: So what sort of premium between the wider commodity market and the gold price would you be comfortable with? So, 60% is probably too much, you’ll say?

CM: Well, if you’re buying something as an investment to try and make money, then ideally you want a discount not a premium at all. So, gold on that same basis in 2001, which we all know was a pretty good time to buy gold, was at a 40% discount to commodities.

NO: Right. So, really if you were looking for a strong buy, say you want the average price of commodities to get back up above the price of gold?

CM: Yes, so when we turn that on its head and say, what’s at a discount? Yes, and that’s probably a good way of doing it, and the answer, I’ve just said it, it’s oil, it’s gas, and it’s food. So…

NO: I suppose you can just flip the equation on its head.

CM: Yes. So, if you’re bullish on commodities because you think that there are lots of people in the world, that sort of thing, and you think that the oil excesses will work their way through, then that’s the play. Now, you shouldn’t buy all today because you can see that there’s still far too much of the stuff around, but as the conditions in commodities starts to turn more bullish over the next couple of years, then I would certainly start with the area where there is the value.

NO: Yes, I agree.

CM: And then the final technique really is to go back to our good old ancient Romans, Greeks, and so on, and just try and take price comparison points through history and follow them. So, for example, I look at house prices, a little bit of energy, but really commodities which are off-market. So, what I mean by that are things like tallow, and wool, and wax, all this stuff that’s not traded in the pits of Chicago, and so you get a sense of broad prices.

I also look at wages and the United Nations Food Index, things like that, and I just sort of say, well, this is a very simple way for the world to measure how prices have changed over long periods of time. We could just use CPI published inflation, but most people wouldn’t think that’s credible, and particularly over very long periods of time, it makes more sense just to have some clear anchors.

And right now, that’s not too bad. You know, we have had a big premium in the gold price from 2011, but that has come right back down, and the fair value is around $940, so very similar to the bond model. What I like about this, you’ve got three completely different techniques, two of them are the same, one’s a little lower, but they’re all telling us that the right price of gold is just under $1,000, and when it’s just over $1,000, you can say from a valuation point of view that that market’s pretty much played out.

NO: Ah, so that’s the outcome really.

CM: But going back to the beginning, conditions are not bullish, so there’s no reason to be piling into gold at this moment because all the indicators… all of those indicators we talked about at the beginning in the regime are still bearish, so we’re still in a bear market, but the ability to destroy value in gold now is vastly diminished. You could have paid $1,900 and gone down $1,000. Ouch. But if you’re paying $1,080 and you’re going down to $900, so what?

NO: So, your assessment would be we’re approaching the end of the bear market, but you’re watching your regime indicators for a green light, really, to indicate that something is going to change direction.

CM: Absolutely, and gold could go to a discount, so it’s quite possible that it goes to much lower than these numbers. I mean, anything’s possible. It doesn’t seem very likely. What it really means is if gold’s only worth $900, $950, let’s say, yes, and you pay more, that means if inflation over the next 30 years is 100% for argument’s sake, it probably won’t be that high, it might be higher, who knows, but you will return a little bit less.

So, if inflation’s 100% and you overpay, then deduct your future return by how much you overpay. If you underpay for gold, then add that to the inflation that you’ll get over the next 30 years.

NO: I get you.

CM: That’s the point. Again, this is not exact because we can’t tell you that it’s going to be the correct price in 30 years, it might be too high or too low, but generally speaking if you underpay for things, then that’s a good thing.

NO: So, what’s your personal view? Are you waiting for gold to come down, or are you waiting for your indicators to turn up?

CM: Well, the indicators on the regime model, which I’ve told you about at the beginning, are pretty slow. I mean, I’m using 35-month trends, so they’re definitely going to miss the bottom, but they will correctly identify a good regime. There are other things we can do to try and take advantage in the short term.

It gets a bit more complicated, but essentially rather than looking at supply and demand trends from the Mayans, and from China, and from India and so on, you’re actually just now looking at the men in red braces in the pits in Chicago, and the hedge fund managers, and the speculators. All you want to know is what they are up to in the short term, and when they hit extreme positions, then you may well get a turning point.

So, a lot of people are now very bearish on gold. You know, five years ago, hardly anyone was. Now, lots of people are, so a lot of people are betting against gold, they’ve got short positions on the market, and the chart that we’re about to pop up on the screen really just shows you…

NO: So, hang on, let’s just quickly explain what this chart is. So, this is the… Are we looking at the euro-dollar split that we were looking at earlier on?

CM: Let’s just call them lease rates. A lease rate is, if I were to go and hire a car, what’s the lease rate? How much would I have to pay to hire a car? So, how much do I have to pay to borrow gold? Why would I want to borrow gold? Because I want to sell it and then give it back to you later. So…

NO: So, you’re shorting.

CM: So, you’re shorting. So, how much does it cost to borrow?

NO: So, this at the extreme right end, the most recent movement in the lease rates, you can see a little spike. Well, that’s quite a big spike, actually.

CM: It’s quite a big spike, yes.

NO: So, what that means is that more people are… That’s essentially the number of people shorting it increasing.

CM: Yes, big boys shorting it, big boys.

NO: So, like, institutional buyers are borrowing more gold to sell into the market to buy back again at a lower price.

CM: And who might be borrowing gold? It could be… The people who like to short gold are gold miners, interestingly, because they might have a bank loan and they’ve got to protect themselves, so if they can produce gold at $1,100, let’s say, and the price falls down to $500, then that’s bad news for them, so they might want to forward sell and guarantee that price for the next five years.

NO: OK, I see. So, that’s a hedging strategy.

CM: That’s a hedging strategy, same reason that airlines like to lock into future oil prices. They’re buying oil, and in the case of the miners they’re selling gold, and then you could just have straight speculators who just say, I want to be short because I think I’ll make a profit.

NO: But a big jump like that you’d say that there’s some fairly…

CM: Yes, so that’s pretty interesting. I mean, that’s not saying this is the bottom of the gold market. I mean, I’ve got a longer version of that chart which we’ll also put up now, and you can see that… Well, one of the issues with this time series is that it used to be called GOFO, and after the financial crisis for various reasons GOFO was discontinued. Lots of things in the gold market changed, for example, the fixing.

So, GOFO went away, so we now have to go on this lease rate, which hasn’t got the same history, but I can try… but I can add them together so we’ll get this chart, and you can see that when there are spikes in lease rates, it often has coincided with major bottoms in the gold market. So, that’s a sort of indicator. There are many more that we can discuss, but…

NO: But what do you feel more comfortable with just on a personal level, your, sort of, longer-term things which may not exactly pinpoint the bottom on the day or the week it occurs, but will give you a much stronger, broad sense of the direction, or this, sort of, short-term stuff, on a personal level?

CM: I like both, but I think that what’s more important is to know where we should be looking. You know, I could probably come up with a model to value shares in Rio Tinto or shares in Glaxo. Is it worth anything if it’s the wrong place to be looking in the first place? Maybe we should be looking towards Silicon Valley and trying to figure out how much we dare overpay for that stuff, because that’s where the momentum is, that’s where the world’s getting better?

You could argue that parts of Japan, parts of things in the Japanese economy are improving as well, so I’m not saying the whole country but elements within, and so surely we should be focusing our time on what’s working rather than just underpay for something that’s not working and not likely to work anytime soon. So, that’s this whole, sort of, value trap concept where you get a very good price, great, then what? And I’m sure you can buy a really cheap house in Britain in the wrong place.

NO: Yes, I can think of a few places.

CM: Right. Now, what’s going to happen? Will you make money on that? Eventually, possibly.

NO: But not in the short term, no. So, essentially what you’re saying – I’m sure there’s probably another glib Warren Buffett phrase – but it’s better to pay a reasonable price for a great business than a really low…

CM: Exactly. It comes back to the whole concept of quality, because a good asset, you can always sell it. Right? If you’ve got a good house, I’m not just talking about Mayfair here, I’m talking about anywhere. So, in that same village, you’ve got a good house and bad house, yes? And the good house is near the bus stop and it’s been done up recently, it’s got a nice garden, and it’s away from the noisy road. That one will always sell.

But the one 500 yards down the road, which could be very similar, by the noisy road, next to the sewage plant with the pylons going across, I mean, you’re not going to sell it, and price won’t fix that. It could be half the price of the other one despite being the same square footage and architect and all that, but it just… you can’t budge it, and that’s what we mean by quality.

And quality’s a moving feast. There are long-term concepts of what’s a good quality asset, but really I think if you’re following what’s relevant to the time, then you’ll get much better bang for your buck. I’m not saying sit here day trading all day every day trying to keep up to date, but just try and make sure that you’re on top of relevant cycles.

NO: I suppose the caveat some people would have is on the rare occasions where you do get… where you do buy the rubbish house and then something extraordinary happens to turn it around, that’s probably where you make large sums of money, but you’ve taken on a lot more risk and it’s a lot less likely to happen.

CM: You’re absolutely right, and there are times when turning around and doing the opposite is exactly correct, and that would be two examples in the not-so-distant past. We had 2003 and 2009, bottom of those two major bear markets, buying the worst stuff at the bottom worked for the next six months in a spectacular way. I mean, Barclays shares were up six times in the space of three months.

NO: But I would argue that that’s not investing in the same way. That seems… Just on a gut level for me, that feels more like speculating rather than investing, because in my mind investing is… I think of it as if it was a private deal and you were buying equity in a company, would I give those people my money to grow their business? The dash to trash sort of stuff feels…

CM: Right.

NO: You’re smiling. Charlie’s smiling at me, and I believe it’s because he probably thinks I’m being naïve, which possibly I am.

CM: No, not at all. I think you’re being quite astute, actually.

NO: It depends the way you think about it.

CM: You know, 2007, would you have rather… would you rather go into the credit crisis owning Apple, Amazon, biotechnology and so on? You probably didn’t have a nice 08, you probably lost half your money, but then it probably went up ten times afterwards. Or, you went in with banks, lost 90% of your money. Yes, they rallied a lot from very low prices, but you still lost half your money even in the best situation, or two thirds.

I mean, if you own banks, after the dilution of rights issues, the lack of dividends for the last six years, and so on, the rally wasn’t worth it, and you’re better off sticking with the good stuff. Yes, if we could identify March 9th, 2009 as the date to buy stuff that’s half-dead, hang on for three months, clean up and then jump back into Apple, Google, and Facebook, great. Easier said than done.

NO: And probably would… I don’t know if you could include people’s blood pressure in your models, but if you could, that’s probably not a nice way to… You wouldn’t enjoy yourself. You wouldn’t sleep well at night if that was the way you were investing, especially with your long-term serious money. Well, I don’t think I would, and I’m sure lots of people out there wouldn’t.

CM: I mean, not everything has to be all-in.

NO: Yes, you’d have to just dabble, wouldn’t you?

CM: You’d do it in the margin. So, I think, that I would much rather have half the portfolio… very sensibly managed and try to be focused on the right areas, try and have a little bit of a value bias, not an extreme one, because if you look for too much value, then you miss out on growth, because the good stuff that’s growing’s never cheap. So, if you just take value, you’re just going to end up with this rubbish that’s not growing, so you want to be somewhere between the two.

And then at the periphery, every now and then there’s an opportunity. I mean, the biggest trade in the next two or three years most probably will be at the turn, going back to the beginning of this whole conversation, the turnaround in commodities and the turnaround in emerging markets. So, that is going to be much more important than anything else, but in the meantime, it’s carry-on. It’s stick with America, it’s stick with Japan.

NO: Yes, it’s finding those long-term turning points, I suppose, which is kind of what we’ve been talking about the whole show, it’s just finding different ways of ascertaining the long-term trend and whether you’re up or down on that.

One thing I think we will do is maybe we could get you to come back and update the argument on gold in six months, or nine months, or if one of your indicators changed, because I’m sure people would be interested to hear about that.

CM: You’ll be the first to know, Nick.

NO: There you go. Well, it’s December now, so hopefully you’re listening to this around Christmas or in the New Year. So, that’s the situation in the gold market as we speak now, but as Charlie’s been saying, there are various things that could change that would be highly relevant and worth knowing about. So, we will update you.

CM: Yes, just on that note, the most important thing is the change in inflation expectations. So, if, in America particularly, because that’s where the inflation in the developed world is the highest, if we start to see wage growth in America, that could potentially lead to more bullish conditions for gold.

NO: If there was one takeaway, it would be checking out wage growth, or is it expected wage growth?

CM: Well, very difficult to do from a newspaper, but the technical term is 30-year breakeven rates, which are referred to as 30-year inflation expectations.

NO: I’ve got a piece of advice for you. If that didn’t make any sense to you, then just keep reading Capital & Conflict and we’ll make Charlie explain it in layman’s terms.

CM: Or just follow the newspapers and say, did the US wages go up, and, I think… hourly wages. If they start to tick up, and there’s been a little bit of upward pressure, if that follows through, then that’s food for the next gold bull market. I think we don’t have to worry about it today, but you can see…

NO: But that’s why we should be looking.

CM: For some forward foresight.

NO: Well, I think we’ll leave it there. Thank you very much for coming in, Charlie. I hope everyone at home has enjoyed your analysis. I certainly did. Very interesting stuff all the way through. You’ll hear more from Charlie in Capital & Conflict going forward and in various other exciting projects that Charlie’s working on with us, so this won’t be the last you’ll hear from him.

If you have any questions on this podcast or anything else we’ve published, you can reach me at, and I can pass on anything you have to say to Charlie directly, and maybe he’ll write back to you. Aside from that, thank you very much for downloading the show, and we will see you again.

Charlie Morris is a 17-year City veteran and writes the gold market newsletter Atlas Pulse.

Category: Market updates

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