Lately I’ve been spending time right before going to bed reading a brilliant novel, Life and Fate, by Vasily Grossman, a prominent Soviet writer and journalist. The book is set in Russia during the Second World War, with the action taking place during the Battle of Stalingrad, which as many of you will know was essentially Hitler’s Waterloo.
Though considered Grossman’s crowning literary achievement and described by Le Monde as “The greatest Russian novel of the twentieth century,” the manuscript was suppressed immediately after being submitted for publication in the Fall of 1960. The KGB raided Grossman’s apartment and confiscated notebooks, carbon copies, even typewriter ribbons, as the head of the Politburo asserted that the novel could inflict even greater damage on the Soviet Union than Pasternak’s Dr. Zhivago.
Grossman died in 1964, a decade before one of the surviving copies was put on microfilm and smuggled out of the country. It was published in the West in 1980, and finally in Russia only in 1988, after Gorbachev’s glasnost liberalization policy took effect.
In any event, the novel is a kind of War and Peace for the 1940s, exhibiting similarly profound philosophical insights with the addition of scientific insights, as well. These are expressed through the central character, a nuclear physicist named Viktor Shtrum, who is modeled partially on the prominent Russian physicist Lev Landau. During the course of the story (and here I’m getting to my point), Viktor is troubled by the experimental results coming out of his lab, which he can’t reconcile with the prevailing theories of the time regarding the atomic nucleus. He goes back and forth, performing the experiments over and over again to try to see if there were some mistake in procedure or calculation.
One night when Viktor is walking home, disturbed about a political conversation that took place earlier at a friend’s house, all of a sudden it comes to him that the experiments were exactly right. What was wrong was the underlying theory; the experimental results suggested an entirely new way of looking at the world.
Incidentally, this is often how science actually works. Discordant or seemingly anomalous experimental data simply don’t jibe with existing theories – and then these stimulate an “ah hah!” moment (or moments) that redefine how reality was previously perceived.
This is a phenomenon described in Thomas Kuhn’s The Structure of Scientific Revolutions, a landmark publication analyzing the history, philosophy and sociology of science.
The reason I mention it here is that it occurs to me that this kind of “ah hah!” feeling is going to strike many money managers relatively soon. In comes in a context in which…
- America’s days of world hegemony have passed
- The old rules of investing really don’t apply any more
- A major new asset class has been born, and it’s called ‘Precious Metals’ or ‘Gold’
Now, we’re not exactly sure of what all the new rules will be and how they may apply, but we can say with some degree of certainty that gold stocks, both big and small, are very likely to appreciate very substantially.
Interestingly, some people appear to have had an intuitive, even preternatural, grasp of truths long before others recognize them. While my own approach for the past 10-12 years has involved a detailed rational and analytic investigation of how and why gold and commodities will become increasingly more important, I have a friend whose enthusiasm for gold since the 1990s, while based on keen analysis, has come down to the fact that “he sees it”, almost in a way most people see furniture. He once describes gold’s future ascent as a “metaphysical certainty”. He has never had the slightest doubt about it and still doesn’t. “There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy.”
This friend sent me an article recently which reminded me of how remarkably small the universe of gold actually is at present. That is to say – and we ran our own calculations on this – the entire universe of gold mining companies available to investors has a market capitalization of less than that of Apple’s (AAPL) stock.
Now we like Apple a lot, but let’s get real. In our new world, we do think that the total collection of gold stocks (even if you don’t include the SPDR Gold Trust ETF (GLD)) should be worth considerably more than the capitalization of a single stock – even one as important as Apple. Especially when you consider silver and silver stocks etc., and all the other ways one can diversify within the category, this should at least be an asset class unto itself.
The implications are stunning. With trillions of dollars held by insurance companies, mutual funds, hedge funds, etc., clearly gold/precious metal’s capitalization of less than one stock leaves a lot of room to grow.
Prospects for gold stocks and gold in general are now higher than ever. An important factor here, something we’ve discussed before, is the role of China. A recently released WikiLeaks document has verified China’s commitment to accumulating gold – for a variety of reasons, including as a reserve currency and to combat inflation by getting it into their population's hands.
They can’t very well do the same thing with silver, zinc or copper, although we see the prospects for those metals as also very good. (And eventually they will need more of them, to be sure.) But gold has the ironic advantage of not being used in very many industrial processes.
One implication here is that you are almost surely not going to see a major correction in gold. Maybe 7 – 10%, at most, would be our guess.
Coming back to the major point here: There is no reason we can find at this time to not call gold an asset class. As we have pointed out, for more than two generations it has outperformed the S&P 500 including dividends. Again, there are ways to diversify within the class, and the fact that no one owns it in any meaningful way, other than foreign countries, suggests that the upside for gold and gold-related assets is simply enormous – even from where we are now.
So as we stated earlier, we expect an “ah hah!” moment to strike lots of money managers very soon concerning gold. This is indeed a new world. Maybe even Warren Buffett, whom we have long admired, will come around to this point of view – although at age 80 it might be more difficult for him to make such a change.
These are, at any rate, times that require a profound change in mindset. It may involve more of a psychological ‘flash’ of insight rather than the usual methodical, scientific reasoning process. But once you’ve realized what’s happening with gold, you can still make a lot of money from it. It is indeed an asset class, one that’s extraordinarily undervalued and likely to continue to rise despite occasional – but not particularly severe – corrections.
We continue to recommend a diversified portfolio of gold and gold shares: either with individual stocks or with ETFs such as SPDR Gold Shares (GLD), Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ).
In conclusion: You have a new asset class staring you in the face. And the longer you wait to participate, the less secure your future and your family’s future will be.
Disclosure: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.