As the coronavirus cases rise again in most countries, it has a stronger impact on our everyday life again. However, in comparison to the first wave, there is more hope that in the next months the virus will be under control. The news of promising intermediate results of a vaccine published last Monday was a huge relief. In addition, the chances for more positive news regarding vaccination tests are high. However, despite all the optimism there are challenges ahead of us that relativize the euphoria. Despite being closer to a vaccine, it is obvious that it will not be available yet in this winter season. No public health authority has permitted the vaccine yet. It has not been produced yet and is consequently not being distributed yet either. Moreover, it is questionable how many people are willing to be vaccinated with a vaccine that was developed, permitted, produced, and distributed in less than a year, when this process normally takes at least 10 years. Furthermore, the US presidential elections on November 3 caused quite some uncertainty and keep investors cautious. The candidates could not be more different and the election result will have a significant impact on how the United States will position itself within the next four years. Once the confirmed president will start his term, we assume people will start to focus on other things again and that we see a reduction in volatility in the stock markets.
John talks about New Zealand as a financial jurisdiction, his vault solutions and bullion services as well as his outlook on the precious metals market. You can learn more about New Zealand Vault on their website: www.nzvault.co.nz or by sending an email to John: mail@nzvault.co.nz.
In October, indices continued the downtrend that started at the end of last quarter. It seemed that investors were taking money off the table based on the volatility caused by the US elections. However, in the last two weeks, the encouraging vaccination news and the prospect of moderate economics regulation by a possible split between the Democrats and Republicans gave the US stock market a boost up to 11%. This certainly had an impact on other country’s stock markets as well. Consequently, we have seen a sell-off of the so-called “corona winners”. In contrast, stocks in the travel and leisure industry made impressive jumps. However, the friendly turn will not endure for long since investors cannot deny the consistently rising cases of new infections and the challenges that will accompany us during the next couple of months. We therefore assume short-term traders drove the market’s reaction in particular and led to an overstatement that will entail a correction. The reason is, that we see no relieve for the travel and leisure industry during the winter months. An industry that we see more positively is insurance. Due to the newest developments, the future became more predictable which will help insurers to calculate their costs and manage their business effectively. Nevertheless, there will be further claims from the insured. Therefore, as conservative investors, we had a closer look at the balance sheets and solvency ratios of some of the larger players in the industry. Here in Switzerland we have a Swiss-Solvency-Test. This number represents the ability of an insurer to carry the costs of the risks assumed. In Switzerland, these numbers lie around 200%, which means that the insurers possess the ability to cover the costs of their assumed risks twice. Since the Swiss insurance companies are so well capitalized, we do not see their dividend endangered for 2021. Another industry that in our perspective is still posing further upwards potential is the mining industry. Unfortunately, gold and silver miners have not moved too much since August. Considering the results of the third quarter there is no obvious reason why the prices are as low as they are. Looking forward it seems that the mining industry will be able to keep up their profitability and that there will be a huge potential considering that some of the larger Canadian miners have already started paying dividends. Considering the all-in sustaining cost per gold ounce is equivalent of around USD 1,000, it becomes clear that the profitability margin currently lies somewhere between 80% and 90%.
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When it comes to government bonds in developed countries, it is almost impossible to find any profitable long-term investments anymore. The 10-year treasury note of the United States for example was the only investment that was still profitable until the beginning of this year. However, with the introduced measurements in reaction to the corona crisis this opportunity has been taken away too. Currently, we are observing the 10-year treasury rate at around 0.9%. Putting this in perspective with the inflation target of 2%, you will still lose money when buying and holding this investment until maturity. Looking at the continuing growth of the balance sheets of the Fed, ECB and Bank of Japan, we can observe a jump from about USD 15 trillion up to about USD 21 trillion since the start of the pandemic in March. From our perspective, it will be almost impossible to significantly lower this amount within the next years in a sustainable way. Moreover, we do not expect that there is a lot of motivation to do so anyway. Having said that, according to the economic rules, should the growth of the economy not be able to keep its pace with this development, we will face a higher inflation rate in the years to come.
If you hope for better opportunities with corporate bonds, we want to advise you to do your homework properly. Making the link to the travel and leisure industry mentioned above, the hotel industry in New York itself puts pressure on the USD 4 billion mortgage bond sector. Due to the huge stimulus packages that have already been released combined with the packages that are still to come, we believe that the consequences will become visible after all, but with a considerable delay. Therefore, investing into the bond market must be well thought through.
Gold and silver currently are trading at their lower support of USD 1,860 per ounce of gold and USD 24 per ounce of silver, respectively. However, due to the current situation with huge stimulus packages and government debt reaching incredible new highs, we believe that the investment case for precious metals is still in place. Due to the low interest rates, the opportunity cost of holding precious metals is stunningly low and we continue to face a huge amount of uncertainty about the future development of the economic recovery after the pandemic. If you are following the prices of precious metals, you surely took notice that even last Monday when the news about the effectiveness of the vaccine was published the entailed hint in precious metals prices was used by investors to buy. In the following days, you could observe the insecurity about the ongoing development of the gold and silver prices but eventually determined that the support levels hold well. In the coming days and weeks further positive news are quite likely. It will be interesting to see whether this news have the power to break the current support levels.
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A metal we usually do not talk much about, but which in our eyes might become more interesting again and therefore is worth mentioning, is platinum. Quite frankly, the price of platinum was frustrating to observe over the last decade. However, going forward there are user cases that make us believe the metal can shine again in the future. Platinum is important for the global green transition. The metal is primarily known for its use in auto catalysts. Besides, it plays an important role in emerging and renewable energy technologies as fuel cells, electrotypers and hydrogen. The change into new energy sources can lead to a considerable shift in the demand of platinum. However, in respect to the promising future of the metal it should be considered that platinum can be recycled quite easily. Nevertheless, we will further follow the development of platinum since we see reasonable occasions for a demand that exceeds the current production. Additionally, should the price of platinum be able to break through the level of USD 1,042 per ounce there will be a lot of new interest generated from investors.
Regarding commodities, the oil price seems not to be able to move above the level of USD 40 per barrel. Due to the ongoing restrictions, we see little reason for the oil price to move above this level within the rest of the year. Other commodities are still on their way up. Copper in particular showed an impressive recovery since its drop in March. Especially China needs cooper to expedite its economy. While China and Australia have their issues, it is unlikely that China will sanction the import of copper from Australia. Within the next years, we expect other economies to expedite infrastructure project within their countries as well and therefore believe that the demand for commodities used in construction will raise.
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