Investing in times of economic crisis and beyond

“An investment in knowledge pays the best interest.” 

– Benjamin Franklin 

When it comes to investing, nothing pays off more than educating yourself. Do the necessary research, study and analysis before making any investment decisions.

The Covid-19 pandemic crisis and the resulting economic recession arose out of nowhere. Although it has often been described as a “Black Swan” event, Nassim Taleep, the developer of the concept, disagrees. Black Swans were thought not to exist. Pandemics have occurred before. In 2015, Bill Gates even recommended that we be ready for such a pandemic. We were not. Crises happen frequently, although the causes may differ. While many businesses are destroyed, new opportunities open up. Some share prices skyrocket, as do those of safe-haven assets. 

We live in unprecedented times for anyone younger than 102. The full economic consequences of the Covid-19 pandemic have yet to be felt. How long will the crisis last? We just don’t know, as with most crises and recessions.  

So, where to invest in times of crisis, viral or otherwise? The key to successful stock selection in these times is to carefully evaluate the hazards and risks, identify expected survivors and potential highflyers, such as new technology stocks, and include a significant proportion of safe-haven assets in one’s portfolio. 

Gold and Silver

For thousands of years in times of war, economic collapse, and pandemics, the rich have a sort of safe haven for their wealth. A store of value. Gold, and to a lesser extent, its cheaper cousin, silver, have been the traditional refuge. When crises arise, there is massive buying and hoarding of these metals. Witness the 41% increase in the gold price since March, to a new all-time high of $2,072/oz. on August 4th, 2020. Witness the 123% increase in the price of silver over the same period.
                                                                                   
When economies are stable or growing, the gold price goes nowhere. Then a crisis occurs, everything changes, gold becomes attractive (silver, even more so) and a price rally is triggered every time. 

The current COVID-19 pandemic crisis exemplifies the criteria driving up gold and silver prices at times of crisis:

  1. Economic Contraction. The US economy has suffered its worst contraction since the 1930s Great Depression.
  2. Government printing presses working overtime, printing money with a consequential threat of high inflation. Hyperinflation even. Think of Weimar Germany in the 1920s, Zimbabwe in the early 2000s, and Venezuela now.
  3. Geopolitical instability in the form of the ongoing standoff between China and the USA.
  4. Very low, even negative, interest rates. A quarter of government bonds worldwide have negative yields, a “mere” $15 trillion worth. In times of trouble, government bonds are typically a safe-haven competitor of non-interest paying gold, but not this time around.

Predictions are always difficult, especially about the future, but I believe we are only at the early stages of a sustained multi-year bull market for both gold and silver.

Historical gold price

(Recessions in Grey)

The gold price hit a new peak on August 7th, 2020.

HISTORICAL GOLD PRICE INFLATION ADJUSTED (LOG SCALE)

Despite reaching a new peak on August 7th, 2020, when inflation-adjusted, the January 1980 peak has still to be surpassed.

HISTORICAL SILVER PRICE

The silver price is still well below its peak reached in May 2011.  

HISTORICAL SILVER PRICE INFLATION ADJUSTED (LOG SCALE)

On an inflation-adjusted basis, the peak in the silver price was $120 in January 1980.

GOLD VS. SILVER PRICE

Over time, gold and silver prices followed a similar trend.

GOLD-SILVER PRICE RATIO

When the gold-silver price ratio has exceeded 80, historically, the silver price has significantly outperformed the gold price percentage-wise. Over the last forty years, it has averaged at about 60.

CRYPTOCURRENCIES: BITCOIN AND ALTCOINS

Digital Gold 

New safe-haven assets

We are living in an incredible new technological era. The Covid-19 crisis will typically be the catalyst triggering many changes that were going to happen anyway. Now sooner. Crypto currencies, for example, will become a medium of payment and exchange and new safe- haven assets.

Warren Buffet hates cryptocurrencies; he doesn’t trust them, but, frankly, I don’t think he fully understands them. “Assets that create nothing,” he so wrongly says. He says he will never buy them, as he said with gold, until very recently. 

1. Bitcoin was the first cryptocurrency created in early 2009 by the enigmatic, presumably pseudonymous, Satoshi Nakamoto.

2. Altcoins are cryptos other than Bitcoin, over 5,000 of them, each with their own characteristics and rules. They are early-stage investments in computer systems that make our lives easier and more efficient.

3. Cryptocurrencies are not currencies in the typical sense, but sophisticated software programs, the ultimate wealth creators in today’s world. Blockchains are their core technology (akin to giant Excel spreadsheets).

4. Security

     4.1 Bitcoins are safe from interference and manipulation by governments and central banks.  

     4.2. They cannot be stolen or lost if purchased through a reputable, licensed and regulated broker, such as eToro. Effectively, they can be stored on a smartphone, that is password-, fingerprint- and face recognition-protected.

5. Crypto will be the currency of the future. Bitcoin is already an international form of currency without exchange costs and fees. After profound skepticism, governments and institutions are now taking them seriously. More and more major companies accept them for payment. On July 22nd, 2020, the US Office of the Comptroller of Currency (OCC) (that regulates the US banking system), permitted US banks to custody crypto assets for customers and to provide banking services for crypto business. Major banks employ large teams dedicated to confirming and checking transactions at a cost of billions of dollars. One crypto, such as Ethereum, can change all that. Buying cryptos will fund new systems to compete with entrenched models, often used to exploit customers.

 Based on the foregoing, it is to be expected that there will be an unstoppable widespread adoption of crypto, changing financial systems around the world forever. 

But it will take time. “Old habits die hard; new habits grow exponentially.”

6. Bitcoin versus Gold 

     6.1 Gold needs to be stored in a safe. Bitcoin can be safely stored on an iPad. 

     6.2 The value of all Bitcoins in circulation is only a fraction of the $8 trillion gold market. As a safe-haven investment, Bitcoin is taking market share from gold. It will be a long time before it makes a serious impact, but it will. 

    6.3 Both are scarce commodities. Bitcoin is scarcer. Annual world gold production is 3,300 tonnes, equivalent to about 3.5% of world gold being added to supply. The Bitcoin  protocol stipulates that there can never be more than 21 million. Eighteen million have already been mined (94%) and are in circulation. Sixty-four percent of Bitcoin ever bought are still being held by the original purchasers.       

    6.4 There are means of earning interest on Bitcoin, unlike gold.

7. What is the outlook for the price of Bitcoin and altcoins?

    7.1 Halvings. Every four years, the Bitcoin payments received by miners (people with powerful computers who monitor the Bitcoin network, adding new blocks of transactions to the blockchain) are halved, thereby constraining supply. The last halving event was on May 11th, 2020. After the two previous halvings, the Bitcoin Price skyrocketed. Not immediately, but within 612 months. Following the 2012 halving, it went up 7200%. In 2016, it went up 100%. 

BITCOIN GEARING FOR A RALLY AFTER MAY 2020 HALVING 

Source: Macrotrends

Source: Macrotrends

After the first two halvings of Bitcoin, there was a tremendous increase in the Bitcoin price. 

   7.2 Price prediction for Bitcoin and altcoin. The May 2020 halving could be the trigger of a massive bull run. How about $40,000 by mid-2021, $250, 000 by 2025 and $1 million within 10 years? Who knows?  But this is the view of several quite sane analysts. They also expect the better altcoins to far outperform Bitcoin price wise, as they are currently doing.

8. Negative aspects 

        8.1 Difficult to buy. Here, eToro comes to the fore. Fifteen leading cryptos available for trading 24/7. Easy to buy via safe and secure transactions.

        8.2 Scams. There have been many online scammers climbing in to exploit vulnerable individuals who got greedy reading about new crypto multi-millionaires. 

       8.3 Price volatility. Can be extremely volatile. Look at the Bitcoin price graph for 20172019. 

HISTORICAL BITCOIN PRICE 

Source: Macrotrends

When plotted on a log scale, the recent volatility in Bitcoin is seen to be far less pronounced.

In conclusion, in answer to the question: where to invest in times of crises and beyond? I recommend a portfolio structured as follows:

  1. A core holding of high technology international stocks, primarily American, but also Chinese, and to a lesser extent, European and Japanese stocks.
  2. This core holding should include biotechnology, solar energy, electric cars, online shopping companies, and companies that should benefit from the 5G rollout.  
  3. Up to 30% in gold, silver, and cryptocurrency instruments, which actively managed to take cognizance of individual market parameters and events as they unfold.

This blog was written by Ian Benfield, one of eToro’s Popular Investors, who currently lives in the Philippines. Ian worked in the African mining industry for 40 years and operated as the CEO of several companies.

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