The Assets That Benefit from Political Disorder

Well, the market doesn’t seem to care too much about three more years of dysfunctional politics in Australia. After trading warily at the start of the day Monday, the ASX 200 finished 35 points higher yesterday, or nearly 0.7%.

143 stocks rose on the day, while only 43 declined. The big winners were gold and commodity stocks. What’s that telling you? That central banks will react to any type of political upheaval with lower interest rates.

That’s the only interpretation I can come up with. While the RBA kept rates on hold when they met yesterday, the view is that political uncertainly will force them to move faster than they otherwise would have.

Great, so an ungovernable country is bullish for stocks!

I mentioned in Monday’s Markets and Money that Australia had pretty much got it right by rejecting both major parties, their lack of leadership, and their negative campaigning. I wasn’t thinking of Pauline Hanson when I wrote that, though. The Queen of ‘the politics of fear’ is back. And this time she is calling for a Royal Commission into…Islam!

Where would you start with that? The birth of Mohammed? Seriously…

While it’s all well and good to reject the major political parties, it does come at a cost for the nation. It’s fracturing, divisive, and it gives special interest groups — a small but vocal minority — an even greater say.

And I’m not just talking about the minor parties. Even in the Liberal Party, factions are trying to squeeze more out of the volatile situation. As The Australian reports:

Malcolm Turnbull is facing a partyroom revolt from Coalition colleagues who are demanding a say in what he can offer independent MPs in order to secure power, setting the first major test of his leadership in the wake of the shock election result.

Ministers and backbenchers have held talks on plans for a partyroom meeting as soon as next week to ensure they are consulted on the crossbench negotiations and are not presented with a “fait accompli” if Mr Turnbull needs to strike a deal.

Even if Turnbull gets in, his grip on the leadership looks weak. The bitterness over challenging Abbott for the leadership last year won’t go away. The conservative wing of the party was never happy about someone so genuinely liberal as Turnbull taking the reigns.

Turnbull failed to control this dissident faction. He couldn’t manage the politics. And now look where we are…

Whose fault is it, though?

Tony Abbott’s approval rating at the time of the leadership challenge was abysmal. Had he remained, the Coalition would have arguably suffered an even greater swing against them on the weekend, leading to outright defeat.

Instead, Abbott’s posse sniped from the sidelines, undermining the campaign. And now some want to see his return…or at the least an elevation of more conservative liberals to the frontbenches. Not a bad outcome for helping to sabotage the authority of their leader, hey?

Bill Shorten loves it, and is adding to the chaos by calling for Turnbull to resign. As the saying goes, nature abhors a vacuum, and nowhere is that truer than in the world of politics and power.

There is a political power vacuum right now; things are going to be ugly and uncertain for some time. There is no one to take control.

What does this mean for the world of money?

Well, what is happening in Australia is representative of what is going on in other parts of the world. The upcoming US Presidential election looks to be just as devoid of genuinely good choice as the Aussie election. And Britain remains horribly divided post-Brexit.

Yet markets have barely reacted. This tells you there is still a fair amount of faith in monetary policy and central bankers. Or does it?

The biggest winners over the past few months have been the monetary metals — gold and silver. In a shortened trading session overnight (due to US Independence Day celebrations), gold rose to US$1,350 an ounce, while silver jumped more than 7% at one stage.

The chart below shows the performance of the US based Silver ETF [NYSE:SLV]. It doesn’t match the spot silver price exactly, but it’s a good proxy for price movements.

As you can see, since bottoming at around US$13 at the start of the year, SLV is now trading at around US$18.75. That’s a gain of roughly 45% in six months.

Source: BigCharts
Click to enlarge

This is in stark contrast to how the metals responded to coordinated monetary stimulus in 2012 and 2013. That is, they fell sharply back then, as investors saw the stimulus as a ‘good’ thing for stocks.

But the ongoing attempts by the European Central Bank and the Bank of Japan, to pump liquidity into their financial systems, and the negative interest rate environment this is bringing about, is having a different effect.

The precious metals are now outperforming stocks for the first time in years. Have a look at the next chart below. It shows the performance of gold stocks (as measured by the HUI index) relative to the S&P 500.

The downward sloping line reflects the S&P 500 outperforming gold stocks. But the turn from the start of the year tells you that gold stocks are now outperforming — and are doing so strongly.

Source: StockCharts
Click to enlarge

This marks a major shift in market dynamics. It reflects the market’s opinion that monetary stimulus is now having a damaging effect on stocks and economies. Capital is clearly moving back into precious metals as a way to hedge or protect against uncertainty and monetary disorder.

Monetary and political disorder is always good for gold. If Trump wins the election later this year, the price will go through the roof!


Greg Canavan,
Editor, Crisis & Opportunity

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Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Greg Canavan’s Investment Advisory.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

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