Francisco Martin specializes in global ETF strategies and foreign bond portfolios as vice president at UBS International, part of the financial-services giant's wealth management arm. Prior to that position, he was founder and managing director of Martin Asset Management.
Which single asset class are you most bullish (or bearish) about in the coming year? And what ETF position would you choose to best capture that?
I am bearish overall and not too many asset classes look good to me. As a bullish pick, then, I would say a gold ETF such as the SPDR Gold Trust (GLD).
How does GLD fit into your overall investment approach?
At the beginning of this year I was expecting inflation to be an issue, but have changed my view quite a bit since then. I believe we have entered a deflationary cycle, which is very negative for equities overall and especially commodities. To top it off, I believe China is close to an asset bubble correction.
Gold is usually a good asset class to hedge against a possible inflation and not necessarily viewed as an deflation hedge. I believe the safe-haven characteristics of the U.S. dollar and gold will actually produce positive returns for gold, even during a deflation. Investors are looking for a safe place to put their money; an asset class they can "touch" and possibly trade even when no organized marketplace exists. That of course is the worst-case scenario and I do not believe it will get that far; but the possibility is there and gold seems to achieve that peace of mind for investors at the moment.
You mention positive returns for gold even during a deflation, though the dollar and gold have tended to move inversely to each other. Are there changing market fundamentals you think would alter that relationship? Is it about relative performance vs. other currencies?
Gold prices have in the past had inverse correlation to the dollar; that is absolutely true. We are in uncharted territory with an economy that is not only in shambles but very much globalized. We would need to essentially rewrite our economics books to address the current economic situation.
I believe investors are currently deleveraging and de-risking their portfolios. The de-risking part is the driver for gold prices to move in tandem with the dollar. Investors are more interested in capital preservation than equity-like returns (as seen in the past). My thesis is that the dollar and gold prices are moving in tandem because they are perceived as safe havens during an unknown future.
Tell us a bit more about GLD: What makes it your top pick?
As I mentioned before, there aren't many asset classes one can invest in and expect OK returns without incurring risk. Uncertainty is just too great for any investor to risk their hard-earned money. Gold is a "real" asset that is portable and it holds an implied value. GLD actually holds the bullion in a vault based in London, making it a great alternative to actually buying coins and/or gold bullion, which need to be held in a safe deposit box at a bank or in your house.
There are a few gold ETFs. GLD seems to be the largest and most liquid one and therefore my preferred vehicle.
About asset classes you can touch: GLD has come in for some criticism from those who say it doesn't represent physical bars, and that despite its size it's susceptible to price manipulation vs. a physical fund like Sprott Physical Gold Trust (PHYS) (also see Seriously, The SPDR Gold Trust Isn't a Scam. But PHYS Might Be). Anything that you are wary of there?
First, GLD is not a derivative. It is a trust that holds the equivalent value in gold bars. Since it is a financial instrument that holds gold and follows its price movements it will without a doubt sometimes either trade at a discount and/or premium. But that is when savvy investors (mostly institutional) will arbitrage such price anomalies out of the ETF price.
Manipulation is not an issue in my view. I don't know how you could manipulate GLD any other way than you would a stock. Sure, you could disseminate rumors that gold is the new global currency; that surely would move the price, but other than that, I cannot imagine manipulation being an issue. The only negative would be that the ETF would make gold more accessible to the mass market and easier to buy, sell and hold and that could essentially create a greater demand and move prices higher. I believe prices on gold have moved higher because of instruments such as gold ETFs.
What do you think about the consensus on gold, and does your view differ?
I believe consensus is definitely pro-gold, if you will. My view is not differing much as to where gold is heading.
The only difference you might see from my view is the fact that I am actually expecting deflation, and not necessary inflation, and that gold can be as much a deflation hedge as it is an inflation hedge.
What catalysts, near-term or long-term, could move GLD significantly?
I think China is a catalyst to watch. If China implodes, gold could reach new highs very rapidly. The current developments in the eurozone are also very alarming and could ignite a gold rally, especially if Spain is not able to get their act together. Odds are against a quick resolution in Europe. Chinese banks are curbing lending, which could slow their growth and subsequently start a sell-off; and I'm bearish on iShares FTSE/Xinhua China 25 Index (FXI).
What about central banks entering the gold market? The IMF has embarked on a program where it's ready to sell its tons to banks, though some argue that news has been priced into gold already.
Yes, the news on the IMF selling gold is already priced in.
What could go wrong with your pick?
The only thing that could possibly go wrong is a dramatic global recovery and Europe getting back on their feet quickly. That could initiate a sell-off in gold. It is a possibility, but highly unlikely within the next 12 months.
Thanks, Francisco, for sharing your pick with us.
Disclosure: Long gold futures (no position in GLD)
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