Focusing on Precious Metals and Farmland

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, (published Monday October 26th):

Baruch liked gold mines. There is always a market, he pointed out, for their product, and at a satisfactory price. Gold, he insisted, is one of the very few things in the world that approaches the status of a permanent investment. Baruch told the story of a Rothschild who set up a ‘permanent trust’ consisting of five different currencies. By the time Baruch heard about the trust, it had shrunk to one-fifth its original value. ‘But gold doesn’t yield any interest,’ a friend protested after listening to the story. ‘True’, replied Baruch, ‘but consider the fabulous wealth of some of the Indian princes and rajahs. I had dinner with the Maharajah of Kapurthala on one occasion in Vittel, France. Several of us talked afterward about his wealth, and someone said that among the treasures of these Indian moguls were gold coins brought to the East by Alexander the Great, hundreds of years before Christ.

Their gold and jewels had earned no interest during these more than 2,000 years, but they still had their capital. Suppose they had attempted to provide income from it. They might have been no more far-seeing than the Rothschild I mentioned. If they had tried speculation there have been many times in each century that they might have gone broke. No, save for gold, jewels, works of art, perhaps good agricultural land, and a very few other things, there ain’t no such animal as a permanent investment. Even in agricultural land, Baruch pointed out, there is some risk. Lands that made men rich in rice cultivation years ago in Baruch’s own state of South Carolina, are not nearly so valuable now that rice is produced more economically in other sections. City real estate is subject to all sorts of hazards, as he learned when he no longer needed his big Fifth Avenue mansion.

... Bernard Baruch, Park Bench Statesman by Carter Field, 1944

A “permanent investment,” what an intriguing concept. When I first entered this business one of my mentors, namely Lucien Hooper (securities analyst extraordinary), often spoke of permanent investments. In fact he once stated, “You should put one quarter of your investment portfolio in stocks, one quarter in bonds, one quarter in precious metals, and one quarter in farmland." His reasoning was that such a non-correlated asset allocation would grow, and preserve, capital through any multi-generational economic cycle. Today, we focus on precious metals and farmland.

We have been bullish on gold, as well as all “stuff,” and “stuff stocks” in general (energy, timber, agriculture, water, base-metals, etc.), since 4Q01. That strategy was driven by China’s joining of the World Trade Organization, which we thought would cause Chinese per capita incomes to rise. Universally, when per capita incomes increase, people consume more “stuff.” Ladies and gentlemen, once per capita incomes start rising, they tend not to stop; and this income-rise is occurring not just in China and India, but in Brazil, Indonesia, Vietnam, Malaysia, etc. Consequently, our mantra has been, and continues to be, that the “stuff stock” secular bull market that began in 2001 still has years left to run.

While it’s true we did recommend re-balancing (read: selling partial positions) ALL “stuff stock” positions in November/December 2007 because they had grown into too large a position in our portfolios, we never gave up on our secular bull market “call” for “stuff” and stuff-stocks. Accordingly, over the past few weeks gold has broken out to new all-time highs (as can been seen in the nearby chart) and we think it continues to travel higher. In addition to Closed-End Funds, and ETFs, there are numerous precious metals funds recommended by our Mutual Fund Department that play to this theme.

Like precious metals, we have been bullish on agriculture since 4Q01. To this point, in last week’s Barron’s Alan Abelson referenced a report by Société Générale’s Dylan Grice which stated – (farmland) is the only asset class left behind by the “rally in everything.” What piques Mr. Grice’s interest is China’s voracious need for grain to sate its burgeoning demand for protein. He points out that China has 22% of the world’s population, but only 8% of the world’s arable land and 7% of it water (water has been another theme of ours). Moreover, China is losing nearly 1,400 square miles to desert each year. Meanwhile, despite record harvests, global grain inventories remain at record lows.

Clearly, farmland is an intriguing investment since people have to eat and because investors can collect “rents” from tenant farmers while waiting for farmland values to rise. For example, while British housing prices collapsed last year, British farmland values rose by ~21%. While there are public companies playing to agricultural properties like Argentina’s Cresud SA (CRESY/$12.97), a better route might be considering companies that boost agricultural productivity. In past missives we have mentioned many of them, especially the names that have convertible preferreds. Also, for the more adventuresome types, are agricultural companies, and food processing companies, in the Ukraine. The Ukraine has roughly 32 million hectors of arable land; half of that land is termed “black earth,” which is considered the world’s best soil. For individual names, please contact the liaison desk.

The call for this week: I will be on the West Coast this week, so these will be our only strategy comments. Nevertheless, as stated in last Friday’s verbal comments, I have not really liked the tone of the equity markets for the past few weeks, but every time it looks like we are making a short-term top, a mysterious buyer shows up to rescue the day. That happened again last week when Tuesday’s, and Wednesday’s, downside “two step” was reversed on Thursday. Then came Friday’s fade, which stopped us out of our “long” index recommendations. As the prescient Lowry’s service wrote,

(While Thursday’s) rally looked impressive, our measurement of internal strength suggests that investors should exercise some skepticism. (Thursday’s) upswing occurred on a small contraction in volume, and was unable to break above its October 19th rally high. In addition, our Buying Power Index has lost 15 points over the previous 5 trading days, and regained a rather anemic two points today (that would be last Thursday). With some of our short term indexes currently well above oversold levels, near tem caution is warranted.

And, we continue to trade, and invest, accordingly.

Click here to enlarge

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Comments

[Graham and ...:]

Gold doesn't yield any interest because it is the risk-free "currency." Everything else can be priced off it.

Oct 27 03:28 PM

[Mad Hedge F...:]

nnc The gold rush is back on in California. On my way back from Lake Tahoe last weekend I saw that every bend of the American river was dotted with hopeful miners, looking to make a windfall fortune. Weekend hobbyists were there panning away from the banks, while the hardcore pros stood in hip waders balancing portable pumps on truck inner tubes, pouring sand into sluice boxes. A sharp eyed veteran can take in $2,000 worth of gold dust a day. The new 2009’ers were driven by a record price of gold at $1,066 and the attendant headlines, but also by unemployment, and recent heavy rains that flushes new quantities of the yellow metal out of the Sierras. They were also no doubt inspired by the chance discovery of an 8.7 ounce nugget in May near Bakersfield, worth an impressive $9,200. Local folklore says that only 20% of the Sierra’s gold has been found, and the remaining 80% is still up there awaiting discovery. Out of work construction workers are taking their heavy equipment up to the mountains and using it to reopen mines that have been abandoned since the 19th century. The US Bureau of Land Management says that mining permits in the Golden State this year have shot up from 15,606 to 23,974. Unfortunately the big money here is being made by the sellers of supplies and services to the new miners, much as Levi Strauss and Wells Fargo did in the original 1849 gold rush.

Oct 27 05:20 PM

[Steve in Gr...:]

Thanks, Mr. Saut, for the thoughtful note.

I like the idea of investing in farmland, but buying land in Argentina (with Kirchner, the neo-Peronist, running the place) or in Ukraine (with Putin planning to take the place back) both sound like a little more "adventuresome" than I'd like. Any other thoughts?

Oct 27 09:32 PM

[doubleguns:]

Consider Gold as a growth stock not a dividend stock. It will pay no interest but it will grow in value over the long haul.

Oct 27 10:52 PM

[bfarms:]

Steve. have you shopped around in the USA? Farmland is still reasonably priced in my area (the Northwest), and it's a great feeling owning and preserving some land fpr open space or farming.
Good luck to you!

Oct 27 11:21 PM

[T. Marc Sch...:]

I really liked the article. It seems "stuff" will do pretty well if/when inflation rises. I agree with the author’s suggested investments as well; water, renewable energy sources, agriculture, and precious metals.

Gold is an interesting investment and it is proving it right now, but I like farmland too. It acts as a great inflation hedge, like gold, but it pays you to own it. Of course farmland holds some risks then. Commodity prices can affect it as well as weather and interest rates.

Commodities soared in 2008 and then decreased dramatically, while farmland decreased just over 1% nationally according to the USDA. Farmland is not as volatile as some may think.

Farmland has returned over 12.5% per year over the past 20 years on average in the US, by USDA statistics. A little over half of that 12.5% is from appreciation, while the other portion is from leasing out the land through cash rent, share cropping, or some other program.

Our blog, farmlandforecast.colvi.../, talks about agriculture and farmland. We write from an investor’s point of view at times as well.

Oct 28 09:48 AM

[sorgmot:]

The end of the socialist government system on planet earth.

2010 AD by the USA calender.

The problems facing socialist states of which the USA is one.

They have lost the ability to produce goods and services at competitive prices relative to non socialist states. They export IOU

Oct 28 10:30 AM

[jerrydd:]

Sorry but you are wrong. Take the period of the chart of say 82 till now gold has gone from $400 to $1k. But real inflation has gone up far more, about 400% thanks to republicans. Go back and take the price of anything and compare it today and you'll see.

Far better is gold mining stocks which capture both the value of gold and profit producing it in dividends.

. Now oil will far out pace gold and everything else for the next 5-6 yrs when it will be replaced by alt energy, dropping it's price.

Oct 28 12:57 PM

[jerrydd:]

You mean the state brought on by Republicans? They are the ones who ran up the debt, inflation, made wars and kept us on oil, No?
The only time we did good was during Clinton, no? Look at the record and it's very clear. Of course I'd bet you don't want to be bothered by facts.

On Oct 28 10:30 AM sorgmot wrote:

> The end of the socialist government system on planet earth.
>
> 2010 AD by the USA calender.
>
> The problems facing socialist states of which the USA is one.
>
> They have lost the ability to produce goods and services at competitive
> prices relative to non socialist states. They export IOU

Oct 28 01:01 PM