OCM MARKET UPDATE- JULY
OCM Investment Case for Gold Assets – A Familiar Theme
- Gold price (US$) correlation to Total Federal Debt Outstanding since President Nixon closed the “Gold Window” in 1971 is 91%. The correlation since 2001 stands at 88% (see Chart 1). Total Federal Debt has risen from $23.2 trillion to $26.4 trillion or 12% in the first six months of 2020. In our opinion, Total Federal Debt Outstanding is on an exponential trajectory as lower tax revenues and fiscal stimulus to fight Covid-19 impacts may just be the beginning of a cycle of lower revenues and higher levels of government spending.
- Chart 1
- Fiscal and monetary discipline on the part of U.S. policy makers has given way, in our opinion, to the need for “free money” to assuage both leveraged financial markets and political pressure for increased spending on social agendas. It is a de facto embrace of MMT (“modern monetary theory”, or “magic money tree”) – governments cannot default so print whatever is needed to meet the needs of the people. The demise of fiat currencies historically follows a similar script at the end of a fiat currency life cycle.
- Negative real interest rates in the U.S., Japan, UK, and Europe removes the opportunity cost argument “gold pays no interest” and, in our opinion, enhances the attractiveness of owning gold as a hedge against ongoing currency debasement. With total global negative yielding debt standing at $13 trillion, a small allocation of capital moving away from negative yielding debt toward gold may have a meaningful positive impact on the gold market, in our opinion.
- The latest round of extreme monetary policy responses by major
central banks, in our opinion, underscores the inability of central banks to “normalize”
balance sheets without setting off untenable financial asset market convulsions
as global liquidity has proven fragile. As
shown in Chart 2, gold prices have shown positive correlation to increases in
central bank balance sheets. As Jim
Grant of Grant’s Interest Rate Observer once opined, “if it is so easily
reproduced, what is it worth?” when referring to the U.S. dollar and the explosion
of the Fed’s balance sheet at the onset of Quantitative Easing (QE) in 2009.
- Chart 2
- The debate of whether past extraordinary monetary policy measures will ultimately lead to price inflation or a credit cycle bust causing a deflationary spiral appears to be resolving in the favor of inflation, in our opinion. The most recent round of “unprecedented” monetary policy measures shows a willingness by central banks to expand asset purchases to as many asset classes as needed to maintain financial asset prices and global liquidity. Former Federal Reserve Chairman, Ben Bernanke, may have been correct when he dismissed deflation fears saying the Federal Reserve had the printing press and could drop money from helicopters if need be. Further we believe inflationary pressures may come from increasing curtailment of open trade as production shifts back from low cost manufacturing centers that essentially exported deflation for years while money supply growth grew significantly greater than GDP.
- In our opinion, the rise of social tensions in the United States is enforced by the domestic conflict associated with the widening wealth gap between those with financial assets that have benefited from the $15 trillion central banks have pushed into the financial system since 2008 versus those who are in debt (student loans, etc.), working and living pay check to pay check. We believe democratic party-political gains in the November 2020 election would hasten calls for wealth transfer through student debt forgiveness, higher minimum wages, universal health care, higher education subsidies and reversal of the Trump corporate tax reduction.
- Increased central bank gold purchases over the past ten
years (Chart 3), specifically, China, Russia, India, and Turkey, in our
opinion, signals growing unease over U.S. dollar hegemony and escalated geopolitical
tensions surrounding U.S. foreign policy. We believe central banks are not only
diversifying away from U.S. dollar reserves as a hedge against the prospect of
U.S. sanctions, but setting the stage for a competing currency bloc or new
monetary order based on gold.
- Chart 3
- Gold bullion exchange traded funds (ETF’s) through the first six months of 2020 set a record for inflows both in terms of tonnage and dollar value at 734 tonnes and $39.5 billion. Gold holdings in all bullion ETF’s tracked by the World Gold Council stood at 3,621 tonnes as of 6/30/20. The lack of “available” or deliverable physical gold in the London marketplace in the second quarter was highlighted by the SPDR Gold Trust needing to borrow gold from the Bank of England to meet its holdings requirements. Further robust ETF demand, in our opinion, may overwhelm central bank and bullion banks’ ability to “manage” the market in an orderly fashion.
- Newly mined gold supply has shown to be inelastic to higher gold prices as the lead – lag time from an economic discovery to production is approximately ten years. Newly mined gold supply is further constrained by the lack of shovel ready projects needed to offset declining production of aging and depleted mines as industry exploration has been challenged to discover large deposits of 5 million ounces or more over the past 12 years.
- Gold is not only rising versus all currencies over the past two years, it is also rising versus financial assets as depicted by the Dow Jones/Gold Ratio contracting from a September 2018 high of 22.29 to 14.6 in June of this year. While not shown on the monthly chart below (chart 4), the Dow Jones/Gold Ratio in the extremis has reached 1:1 twice before – 1932 and 1980.
- Chart 4
OCM Case for Shares of Gold Mining Companies
- As prices of gold and silver rise versus all currencies, precious
metals mining companies as a group are experiencing the benefit of lowering
cost structures and disciplined capital allocation over the past seven years to
deliver the operating leverage investors, like ourselves, expect when investing
in shares of gold mining companies.
Consequently, investor sentiment toward the sector appears to be turning
positive as represented by the contraction in the Gold/XAU (Philadelphia Gold
& Silver Industry Sector Index) ratio contracting. Prior to 2008 Financial Crisis,
the Gold/XAU ratio traded in a range between 3 to 6 for 25 years (The ratio
currently sits at 12.92 as July 17th). Investor sentiment turned negative when per
share dilution, as a result of undisciplined capital allocation and equity
issuance, destroyed confidence in industry management. Gold mining companies were viewed as debasing
shareholder value per share faster than central banks were debasing currencies.
- Chart 5
- Rising cash flows into the precious metals mining sector is allowing companies to return cash to shareholders through increased dividends and share buybacks while exhibiting improving balance sheets. Mining company managements are increasingly understanding that in addition to paying attention to per share metrics, shareholders must participate in the cash flow of operations to attract long-term investors into the space.
- The uncertainty of the ability of the LME (London Metals Exchange) and COMEX to meet physical gold delivery obligations in April and May shook investor confidence in the sanctity of paper gold contracts. Conversely, mining companies’ reserves in the ground are gaining greater appreciation as the scarcity of physical gold versus questionable paper gold contracts is becoming better understood by a wider market audience, in our opinion.
- The adoption of technology into the mining sector, such as autonomous vehicles (electric and diesel) and remote machinery, we believe is in its infancy and holds the promise of increased productivity to offset natural ongoing inflationary operating cost pressures.
- Gold mining share indices (XAU and HUI) appear to have
broken out of seven-year base patterns as shown by the XAU chart (Chart 6)
- Chart 6
OCM GOLD FUND – as of 6/30/2020
- Link to OCM Gold Fund Quarterly Fund Fact Sheet that includes the following chart showing OCM Gold Fund performance versus the S&P and XAU over the past 20 years. We believe OCM Gold Fund’s disciplined tiered investment strategy of owning senior producers and royalty companies, intermediate producers, junior producers and exploration and development companies based on its long tenured industry experience has allowed the Fund to outperform the XAU and S&P 500 over the past 20 years.
“Best Precious Metals Equity Fund”
GOLD FUND ADVISORS 3-Year (OCMAX)
OCM GOLD FUND INVESTORS 10-Year (OCMGX)
Granted to funds in each Lipper classification that achieve the highest
score for Consistent Return, a measure of a fund’s historical risk-adjusted
returns relative to its peers (as of 12/31/2019). There were 18 eligible investment companies
in the 3-year category and 16 eligible investment companies in the 10-year category.
|Average Annual Returns %||YTD||1 Year||3 Year||5 Year||10 Year|
|OCM Gold Fund Advisor||32.81||68.75||23.97||19.86||1.19|
|OCM Gold Fund Investor Without Sales Load||32.27||67.13||22.89||18.90||0.49|
|With Sales Load (4.50%)||26.27||59.63||21.01||17.82||0.02|
|S&P 500 Index||-3.08||7.51||10.73||10.73||13.99|
|Phil. Gold & Silver Index (XAU)||21.32||54.80||17.94||16.30||-2.00|
The Fund’s Total Annual Operating Expenses for the OCM Gold Fund Investor Class and Advisor Class are 2.46% and 1.96% respectively. Please review the Fund’s Prospectus for more information regarding the Fund’s fees and expenses. The table presents past performance, which is no guarantee of future results and may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions are reinvested in the Fund. Net Asset Value (NAV) Index returns assume dividends of the Index constituents in the Index have been reinvested. For performance information current to the most recent month-end, call toll-free 800-628-9403.
|NLD Code: 2271-NLD 7/21/2020|