Santiago Capital
301 Battery Street, 2
nd
Floor, San Francisco, CA 94111 (415) 699-8972
www.santiagocapital.com
January 2015
“We are in the midst of an international currency war.”
Guido Mantega, Brazilian Finance Minister, September 2010
“Here’s what I know. Russia is buying 100s of tons of gold. China buying 1000s. Americans could care less. Someone’s righ
t,
someone’s wrong.”
Tweet by
Jim Rickards, Author of Currency Wars & The Death of Money, November 2014.
“It’s not the critic that counts…The credit belongs to the man in the arena, whose face is marred by dust and sweat and blood.”
Theodore Roosevelt
“Deja Vu”
As we start of 2015 and look back over 2014,
I’
m reminded of my introductory paragraph from last January. It ended with the phrase
$%&+*^#!*!
And so it does again. It was another very frustrating year for those of us working in the precious metals world. And no doubt doubly frustrating for those investing in it. I was wrong about the price direction again this year and Santiago Gold Fund again lost money. In reviewing the last few years it hasn
’
t been gold
’
s fall in price that has been the biggest surprise. We came through the initial correction relatively well. But the duration of the correction, while perhaps not a surprise to some, has indeed been a surprise to me. This is what has hurt our performance the most and I take full responsibility for getting this wrong.
Santiago Capital
301 Battery Street, 2
nd
Floor, San Francisco, CA 94111 (415) 699-8972
www.santiagocapital.com
“David and Goliath”
So
…
to say that the last few years have been a difficult time to be operating in the precious metals arena would be a dramatic understatement. And in talking to many of my colleagues in the gold world, it in many ways feels that we are fighting a losing war against
the most powerful and entrenched entities on the planet. Out sized. Out gunned. With no one thinking we have chance and most of them thinking we are crazy. In many ways it is the proverbial David vs Goliath situation. So after 3 down years, what should a gold investor do? Should we continue to fight Goliath? Or should we admit defeat, lick our wounds and sound the retreat? It probably won
’
t surprise you to hear me say we fight. Emphatically! This answer is probably the biggest frustration that the main street media and typical Wall Street analyst has with those of us who promote gold. They want to know why can
’
t we just admit we were wrong, admit that gold is too risky, get over it and move on? Are we so stubborn that even after 3 years we can
’
t take a hint? The first thing I would point out that while gold in fact may be volatile, it is not in fact very risky. Volatility encompasses the day to day price movements while risk involves the potential for a permanent loss of capital. Gold
’
s price may indeed fluctuate wildly from time to time. But unless it was a short term investment based on short term trends, rather than a long term play based on long term trends, these price fluctuations shouldn
’
t really matter.
Because there is almost no chance of a permanent loss of capital when talking about gold. It has held its value over a longer period of time than any other asset I can think of. But the gold bears do have somewhat of a point here. Those of us who promote gold have indeed been wrong on the short term direction of gold prices. And I think it
’
s important for us to acknowledge this. So if the gold bears need someone from our industry to stand up and admit it, then here I am. Guilty as charged. I have been wrong for 3 years. But if we are going to play that game, then turn around is fair play. Because when you step back and think about it, is it any more ridiculous to continue to believe that there might just be at least a small place in your overall portfolio for the most enduring asset in history, than to continue to believe that the FED is going to raise rates anytime soon? Especially after they have been saying the exact same thing for six years?
Santiago Capital
301 Battery Street, 2
nd
Floor, San Francisco, CA 94111 (415) 699-8972
www.santiagocapital.com
So yeah, maybe gold bugs have been wrong for three years. But the Fed has been wrong for as long as I can remember.
Yet the markets still hang on their every word. Who is it that has really lost credibility here? Furthermore, is continuing to believe there might be a small place in your portfolio for the most enduring asset in history really that much more crazy than starting every year for the last 5 with the expectation for US GDP to grow at 3%, only to see it get revised down quarter after quarter, year after year? Why is it that gold bugs are the only ones castigated for myopic tunnel vision, but the main street media, equity perma-bulls and economists are not held to the same standard? Some people will say yes, that
’
s true. But even though interest rates are still down and GDP is stagnant, the stock market is up. What
’
s not to love?
Fair enough. But past returns are not guaranteed to hold going forward.
And
deep down, whether they will admit it or not, I think most people know that the returns of the stock market have been derived by the expansion of Central Bank balance sheets and monetary stimulus. If this is not the case, and if the economy is actually as strong as stock prices suggest, why can
’
t the Fed normalize interest rates? Why can
’
t we get any GDP traction? Why can
’
t we reduce these central bank balance sheets? I would also argue that every investment, regardless of what it is, and regardless of what it has returned in the last few years,
should be measured on its potential reward vs the potential risk in the years going forward.
|