The new year is a time for both reflection and anticipation. It seems to me it is one of the most important of years to do both thoroughly.
2023 is described by many of my friends and business associates as one of the hardest of their lives. Even supposedly after COVID (although of course we are not really “after COVID,” at the time of writing, one in 24 of us is likely to have the wretched virus, and sadly it will claim many UK lives again in 2024) 2023 has been an “annus horribilis” for many of us, so it was good to have made a positive investment return overall in the year. We will all hope for better things in 2024 though.
Hope springs eternal, but the prospects for an improved investment environment in 2024 are worryingly faint.
The last 25 years have been characterized as the period of great moderation, de-globalization and collaboration. Companies have exported their manufacturing costs around the world and kept an effective lid on inflation; this being one thing that investment markets universally hate for the destructive power it unleashes on lifestyles and company profits. Exporting manufacturing overseas has improved standards of living in both the giver and recipients’ regions; a virtuous geo-political and macro-economic circle if ever there was one. Sadly, all good things come to an end.
It is not a revelation to say that the world is a rather different place today. Markedly so actually. As I write, Europe faces a threat from Russia the like of which has not been seen in 70 years, the US relationship with China is not much better than it was with Russia in the Cold War years, the Taiwanese population has just shown the finger to China’s ambitions to claim what they would argue is rightfully theirs, and tensions in the Middle East which have simmered the whole of my lifetime have now so boiled over that it is difficult to see a satisfactory resolution in the near term.
The rise of the Houthis in Yemen, on the edge of and most certainly influenced by their middle eastern neighbours, and who now disrupt world trade and supply chains is most unwelcome as all that exported manufacturing cannot now easily and cheaply be returned. Companies now seek to “onshore” what they rushed to “offshore” so recently. All eggs in one basket is rarely a good strategy.
One wonders if the world’s self-appointed police officer has the mandate and long-term appetite to keep the terrorists at bay. Speaking of the US, one cannot also help but wonder if it won’t soon be at war with itself given the strength of feeling and intransigence of both sides of an increasingly polarized political divide. Everything around us seems to be fracturing.
In the light of all this it was no surprise to me to see that Gold was amongst the best performing asset classes of 2023. I have been a gold bug for years, but even some of my better educated friends have been surprised to hear that the precious metal has out-performed the S&P 500 since the turn of the century, and by an even greater margin, bonds. That is also worth some reflection.
The last twenty or so years have offered investors some very strong years and some serious bumps, but even I might not have anticipated that gold would have come out on top of markets as a whole, (you would of course have been far better off investing in Microsoft or Apple, if only one had had that foresight!). Adjusting for volatility, a beloved metric of professional managers, gold apparently managed a sharp ratio of 0.48 compared to 0.45 for equities. Such figures will have many active property, equity and bond managers reflecting upon their own existence.
It is a fair bet of course that gold appeals in times of uncertainty, so I might not be telling you much there. But you might not know that Central banks, who in theory should know a thing or two about risk and inflation, made their highest level of net purchases of gold in 2022, more in fact than they have done in a single year since 1950 when records began. We might want to reflect that Russia and China led this buying, two of the major names featuring earlier in this article.
If these two global gorillas see it necessary to hedge their financial positions with substantial gold purchases even as they cause increasing disruption to the global world order, I hope that you have an appropriate amount of the same insurance in your own portfolio’s dear reader.
