Resources/Weekly Insights

Volume 13, Edition 11 | May 18 - May 24, 2024

All That Glitters in Your Portfolio

Doug Walters, CFA

Gold has had quite the run. We look into the drivers and how we see the precious metal fitting into a well-diversified portfolio.

Contributed by Doug Walters, David Lemire, Eh Ka Paw, Max Berkovich

In the realm of investable assets, gold has always held a unique allure. I’ve seen gold’s shimmer catch many an investor’s eye, and for good reason, in my opinion. But not all commentators agree. In the wake of a significant rally in gold, we talk about the drivers and delve into why we see gold as not just a precious metal but a precious component of any well-diversified portfolio.

A Timeless Treasure

Gold’s role as a store of value is as ancient as civilization itself. From the coins of Lydia to today’s exchange-traded funds (ETFs), gold has been a symbol of wealth and worth. That is not to say gold is stable, though. Detractors will point out that gold is quite volatile. And long-term studies show that its price has done little more than keep pace with inflation over the long term. So, what possible use is it in a portfolio?

A Valuable Rebalancer

It turns out gold is an excellent diversifier. Its reputation as a store of value draws investors in when uncertainty is high. When the stock market roars, gold may whisper, but when the market retreats, gold often stands firm. This dynamic plays perfectly into the hands of evidence-based opportunistic rebalancers like us. Gold is often there, providing the needed “dry powder” to buy stocks when they are at their lowest. This can lead to portfolios with both higher returns and lower volatility (the delicious free lunch of a well-diversified portfolio).

The Global Demand

Despite material declines this week, gold is up over 13% from the start of the year. Central banks, particularly China, have been stockpiling gold, helping to drive up the price. There is no indication as to when this buying will slow. For now, those like us who are overweight gold in their portfolios are enjoying the ride.

A Look Forward

We are not in the prediction business and do not have a forecast for the price of gold (note – you might want to reconsider your investment approach if it requires you to know the future). We prefer long-term exposure to gold and then watch for anomalous moves that may prompt us to over- or underweight the precious metal. Clearly, we are keeping a close eye on this most recent run in the glittery diversifier.

262%

Annual growth in NVIDIA sales

Thanks to AI, NVIDIA quarterly sales grew from $7.2B to $26.0B in just one year! How do evidence-based investors like us participate in this success story? Momentum. We focus on proven factors, of which one is momentum. NVIDIA’s meteoric rise has it appearing in funds that focus on price momentum.

Headline of the Week

AI, Nvidia, and Utilities

We will take a break from the latest inflation flip-flop and shift to other areas of intense interest. Hardly a minute goes by without another breathless news story on artificial intelligence and its ability to transform everything, everywhere, all at once. The potential seems undeniable, exciting, and even a bit scary (sometimes). At the same time, a healthy bit of skepticism is not unwarranted when it comes to society’s ability or even willingness to integrate AI’s potential into our daily habits. Stories are rampant comparing AI’s impact to the steam engine, the automobile, the internet, and the smartphone. Maybe, hopefully, but the timing may disappoint.

One area where reality continues to beat expectations is Nvidia. GPU could be the acronym of the year. Nvidia’s sales and earnings continue to astound. A few articles started to hint at competitors adjusting their strategies, which could reduce Nvidia’s growth prospects from astronomical to merely excellent. But again we shall see.

And lastly, did a utility just crack into the Magnificent 7? Not officially (yet), but the AI craze drifted into this historically stodgy corner of the market. The power generation story continues to gain traction. Apparently, it’s not enough to have a bunch of Nvidia GPU’s and Sam Altman’s brain – you also need an unbelievable amount of electricity.

OK, that’s enough fun for this week. The Fed or inflation will probably do something next week to grab our attention, but AI will continue to fight for this “headline.”

The Week Ahead

A short week due to the holiday will leave little doubt that investors will focus all their attention on the inflation report on Friday.

The Mantra

Unless we get a pronounced decline in inflation numbers when the Personal Consumption Expenditures Index (PCE) is released, expect to hear the “higher for longer” mantra to continue to make its rounds.

Previously, the Consumer Price Index came below expectations. However, it was only slightly better than expectations.
The PCE was 2.8% in March on a year-over-year basis, and after some softening in retail sales and hourly earnings, investors are looking for a much more deflated number.
Market implied odds have already moved to less than ½ of a percent of cuts this year, and now there is roughly a 60% chance of a cut in September.
Next week will also be the last week Central Bankers can chant the “higher for longer” mantra in public as they face a pre-meeting blackout period starting on June 1st.
Other than the Beige Book and another revision to the 1st quarter Gross Domestic Product, it looks like most of the action will be overseas.

Foreign Affairs

The major data points that global investors will be watching are inflation numbers from Eurozone and Japan and a Purchasing Managers Index from China.

Eurozone inflation numbers should be the deciding factor on whether the European Central Bank will be the first major to cut.
President Lagarde has been steering the markets to June all year, and lo and behold, June is now upon us.
Japan is on the other side of the spectrum; their central bank is waiting for a sign to move rates higher.
So far, the fundamentals have not paved the way for a hike in Tokyo.

Holiday

Markets will take Monday off for Memorial Day.

We are honoring the heroes who bravely served this country and remembering the fallen heroes and their families who made the ultimate sacrifice.
Happy Memorial Day!

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