May was one of the more difficult months for natural resource investing in recent memory ! Crude oil (WTI) finished the month down 18% to a seven-month low – one has to go back to October 2008 to see a drop of similar magnitude. The main drivers of this commodity sell-off were slowing growth in both China and the U.S. and, even more critically, an accelerating deterioration in Europe.
In an environment where we would have expected the world to increasingly gravitate towards gold as a safe haven, investors have instead continued to rush into U.S. Treasuries and Japanese Government Bonds, where 10-year maturities are now offering record low yields of 1.559% and 0.819% respectively, despite considerable new issuance.
What to do?
My fund remains heavily weighted towards cash and dividend-paying companies. I believe that North American interest rates are likely to remain low for a surprisingly long time. As such, good quality high-yielding equities should remain an attractive investment – providing investors with regular income.
Central banks are facing rising political pressure to step up money printing efforts in Europe, China, Japan, and the U.S. The accelerating European bank run in particular is increasing the odds of a massive ECB response at any moment. Given the scope of the threat, we would not rule out an announcement of a globally coordinated initiative.
The obvious direct beneficiary from increased money printing is gold, which effectively acts as a fixed supply “currency” (store of value) relative to depreciating paper currencies.
At a time when massive money printing by the world’s central banks is not only inevitable, but potentially imminent, we believe that gold should be viewed in its traditional role as a store of value rather than just one more “risk-on” trade.
In order to mitigate downside risk and generate income (above 10% currently), I have exposure to a covered call option strategy on 33% of the securities of my Gold Portfolio. The level of covered call option writing and income vary based on market volatility and other factors.
