Market Update – August 2018

Aug132018

Market Update – August 2018

Gold assets are part of a portfolio hedge against current and past actions of policy makers to debase currency to socialize risk. In our opinion, rising short-term interest rates are close to reaching the inflection point of testing the global credit structure that has evolved since the extreme monetary policies were put in place following 2008 financial crisis. It is important to note that each financial crisis trigger event has taken place at progressively lower interest rates.

Trade wars, Chinese yuan weakness, firm U.S. dollar, and rising S&P 500 have weighed on gold prices into the seasonally weak period of late July/early August. The historically strong season for gold is mid-August to September. Below is the seasonality chart from Canaccord Genuity with Canaccord’s commentary:

Gold Seasonality – The three seasonally strongest months for Gold are January (2.8%), September (2.0%), and August (1.9%), over the last twenty years.

For an intermediate-term rally into September, Gold is positive 68% of the time in August and 63% of the time in September.

Vanguard ringing the bell for gold low? Vanguard announced July 27th that it was changing the strategy of its $2.3 billion precious metals fund¹. The change in strategy is to take affect in September. In 2000 there were a number of gold mutual funds that either closed or reorganized right at the peak of the market and the low in gold. The following ten years were characterized by significant outperformance of gold mutual funds versus the S&P 50.
Regarding equity valuations and gold, gold assets tend to perform well historically when the Buffett Indicator² is declining.

David Einhorn of Greenlight reminded us of a worthwhile excerpt from one of Vitaliy Katsenelson’s (Contrarianedge.com) essays in his 2^nd quarter letter to his partners that is worthwhile for gold investors:

“Investing is a nonlinear endeavor that is full of ups and downs. Every investor will have periods when his or her strategy is completely out of sync with the market. When the market is roaring on its way up and your portfolio is down, you may be sure that pain will rear its ugly face.

Value investing is almost by definition a contrarian endeavor. Growth investors ride the train of love, harmony, peace, and consensus – they buy companies that Mr. Market is infatuated with and thus prices them for love. (But just so you know, love ain’t cheap and rarely lasts forever, at least when it comes to growth stocks.)

Value investors, on the other hand, live in the domain of hate – they buy what others don’t want. Ironically, value investors may end up owning the same companies that growth investors used to own. When the love is gone, hate goes on a rampage; and trust me, you won’t find anyone who’ll pay extra for hate. It is cheap.

Investment styles go through cycles. Sometimes your stocks are really out of favor. Nothing you do works. You keep telling yourself that in the short run there is little or no link between decisions and outcomes. That’s a truism of investing, and even you believe it on an intellectual level. But every day you come to work and the market tells you you are wrong, you are wrong, you are wrong.”

Read full article HERE.

¹Vanguard makes changes to Two Active Equity Funds. (2018, July 24). Retrieved from https://pressroom.vanguard.com/news/Press-Release-Vanguard-Makes-Changes-To-Two-Active-Equity-Funds-07272018.html

The Buffett Indicator² is the ratio of a country’s stock market capitalization to the overall GDP of the country.

Investors should carefully consider the investment objectives, risks, charges and expenses of the OCM Gold Fund. This and other important information about a Fund is contained in a Fund’s Prospectus, which can be obtained by calling 1-800-779-4681. The Prospectus should be read carefully before investing. Funds are distributed by Northern Lights, LLC, FINRA/SIPC. Orrell Capital Management, Inc. and Northern Lights Distributors are not affiliated.

The Fund invests in gold and other precious metals, which involves additional risks, such as the possibility for substantial price fluctuations over a short period of time and may be affected by unpredictable international monetary and political developments such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. The Fund may also invest in foreign securities which involve greater volatility and political, economic, and currency risks and differences in accounting methods. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. Prospective investors who are uncomfortable with an investment that will fluctuate in value should not invest in the Fund.

Investments cannot be made in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Past performance is no guarantee of future results.

7387-NLD-08/13/2018

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Investors should carefully consider the investment objectives, risks, charges and expenses of the OCM Gold Fund. This and other important information about a Fund is contained in a Fund’s Prospectus, which can be obtained by calling 1-800-779-4681. The Prospectus should be read carefully before investing. Funds are distributed by Northern Lights Distributors, LLC, FINRA/SIPC. Orrell Capital Management, Inc. and Northern Lights Distributors are not affiliated.

MUTUAL FUNDS INVOLVE RISK INCLUDING POSSIBLE LOSS OF PRINCIPAL

There is no guarantee that the Fund will achieve its objective.

The prices of securities of gold and precious metals producers have been subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political developments such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. Because the Fund concentrates its investments in the gold mining industry, a development adversely affecting that industry (for example, changes in the mining laws which increase production costs) would have a greater adverse effect on the Fund than it would if the Fund invested in a number of different industries.

Many of the companies in which the Fund invests are smaller capitalization companies (namely, companies with a market capitalization of $4 billion or less). Smaller capitalization companies typically have relatively lower revenues, limited product lines, lack of management depth and a smaller share of the market for their products or services than larger capitalization companies. The stocks of smaller capitalization companies tend to have less trading volume than stocks of larger capitalization companies. Less trading volume may make it more difficult for the investment adviser to sell stocks of smaller capitalization companies at quoted market prices. Finally, there are periods when investing in smaller capitalization stocks falls out of favor with investors and the stocks of smaller capitalization companies underperform.

Medium capitalization companies tend to be more susceptible to adverse business or economic events than large capitalization companies, and there is a risk that the securities of medium capitalization companies may have limited liquidity and greater price volatility than securities of large capitalization companies.

There are risks associated with investing in foreign common stocks that are in addition to the risks associated with investing in U.S. common stocks. The U.S. dollar value of foreign securities traded in foreign currencies (and any dividends and interest earned) may be affected unfavorably by changes in foreign currency exchange rates. An increase in the U.S. dollar relative to the foreign currencies in which securities held by the Fund are traded will adversely affect the Fund. The Fund may invest in stocks of foreign companies that are classified under the Internal Revenue Code as passive foreign investment companies (“PFICs”). To the extent that the Fund invests in these securities, the Fund may be subject to an interest charge in addition to federal income tax (at ordinary income rates) on (i) any “excess distribution” received on the stock of a PFIC, or (ii) any gain from disposition of PFIC stock that was acquired in an earlier taxable year. This interest charge and ordinary income tax treatment may apply even if the Fund distributes such income as a taxable dividend to its shareholders. To the extent possible, the Fund will adopt tax strategies to avoid the interest charge and the ordinary income tax treatment. Such tax strategies may accelerate the recognition of income by the Fund (without the receipt of cash) and increase the amount required to be distributed by the Fund to avoid taxation. In addition, such tax strategies may require the Fund to liquidate other investments to meet its distribution requirement (including when it may not be advantageous for the Fund to liquidate such investments), which may accelerate the recognition of gain and affect the Fund’s total return. Foreign securities markets tend to have less trading volume and are more volatile than U.S. securities markets. Less trading volume makes it more difficult to sell foreign securities at quoted prices. There is the risk that political, social or economic events in a country may adversely affect the Fund’s investments in the country. There is the risk that investors in a foreign securities market may not be afforded the same protections as investors in U.S. securities markets. This is also the risk that it may be more difficult, costly and slower to enforce legal rights of the Fund in foreign countries.

Market Update – August 2018

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