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SIMPLY BUYING commodities or resources to hedge against your economic fears or excessive amounts of paper money isn’t quite as easy and obvious as Finweek’s cover story last week may have suggested. In fact, commodities – or the shares of resources producers – could perhaps be exactly the wrong medicine, as some of us actually experienced painfully in 2007/2008 when the fear was at its worst.
Before you hedge yourself against anything, it’s first necessary to work out very clearly what you fear and what your risk is. Even SA Airways failed to do that before it went and hedged itself about 10 years ago against a rand that was going to weaken forever. That cost South Africa’s taxpayers around R10bn. Don’t allow your hedging to cost you even more.
Start with diagnosing your fear. In 1993, some people had fears about the new SA that would hit us in 1994. They bought small farms near Ventersdorp and Brits and hoarded supplies of tinned food, Krugerrands and candles. Ridiculous though that may now sound, at least the people first identified their fears and then tried to prescribe the right medicine.
If your current fear is that the large amounts of paper money being printed worldwide to save bankrupt governments are going to cause inflation and economic chaos, gold might not be a bad hedge. Resources, metals/minerals and energy sources used and consumed in a period of sound economic growth aren’t a hedge against such fears at all. The fear that too much paper money will create inflation and destroy economic growth can’t be hedged by buying coal or iron ore reserves.
Gold could help. This metal and silver seem to be going hand in hand, but copper no longer fits into this company.
The price of copper and also the price of crude oil seem to be the two best indicators of current and future economic activity. If the world economy blooms, as it did in the five wonder years between 2002 and 2007, the prices of copper and crude oil go up. There’s good reason why the copper price was given a doctorate in economics.
Even platinum, a precious metal, doesn’t provide good hedging at all against the fears for paper money. Platinum is now an industrial metal, a resource – like copper – but with much more practical applications. Platinum is used as a catalyst to ensure the exhaust gases of vehicles are cleaner. If the excessive printing of paper money is going to cause inflation – and an inevitable economic collapse – then platinum isn’t a good hedge. More paper money won’t sell more cars.
If you have fears other than just the printing of paper money – including the fear the global economy is going to collapse completely – resources are clearly not the place to hide. Rather ask your broker to tell you more about the so-called fear index, internationally known as the VIX. The graph shows that the VIX is currently high again but still well below the heights reached in 2007/2008. The VIX is the right place to hedge your fears about too much paper money.
By the way, if you read the VIX along with the copper price, both are currently predicting uncertainty about future world economic growth. That’s a forecast certainly not so difficult. Almost the entire global economy is so full of state debt that governments have no choice but to increase taxes and cut expenses in the future – and periodically lose elections. That predicts lower economic growth.
The hedging advice is threefold: buy VIX and sell copper short. If you aren’t familiar with transactions such as this, keep away from all commodities and take route three.
Some of those who bought Krugerrands in 1993 and went and buried them in order to hedge themselves against Nelson Mandela fears ultimately didn’t do so badly. Since 1993, the price of Krugerrands increased much more than the JSE’s Alsi and any of the retirement funds offered by clever asset managers.
The same thing could happen again. But don’t go and bury a lot of Krugerrands in your back garden. Rather buy Absa’s gold fund, which is listed on the JSE. The code is GLD. Absa really keeps on your behalf the gold guaranteed by the piece of paper. So many investors like that route the exchange-traded funds (ETFs) already have a larger market value than Satrix’s own Top 40.
And if you still mistrust everything and everyone South African, take your R4m offshore and ask your broker to buy international gold. There are ETFs on Wall Street that follow the gold price exactly. The best known and easiest to remember is a fund that also trades under the code GLD. Remember: it’s always better to buy gold itself than to go for hedging via a gold share. The managements of especially South African gold mines over the past decade or so have succeeded brilliantly in destroying value. The price of Absa’s GLD versus the gold producers index tells enough of that tale.
To sum up: the right medicine for the relevant fears is spelt out in “The Fear Factor” table shown above.
The graph of the fear index shows it rose by 87% in 2007, increased by 63% in 2008, fell by 44% in 2009 and has already recorded an increase of 48% this year.
On the other hand, the fluctuations in commodity prices over the past 52 weeks (see diagram) look rather boring. If you fear excessive paper money, buy the VIX rather than the shares of an iron ore producer or the shares of a has-been fluorspar producer like Sallies.
<img src=’http://www.fin24.com/downloads/Media/article_images/fweng_img/2007/sep/ee_may100610.gif’>
Before you hedge yourself against anything, it’s first necessary to work out very clearly what you fear and what your risk is. Even SA Airways failed to do that before it went and hedged itself about 10 years ago against a rand that was going to weaken forever. That cost South Africa’s taxpayers around R10bn. Don’t allow your hedging to cost you even more.
Start with diagnosing your fear. In 1993, some people had fears about the new SA that would hit us in 1994. They bought small farms near Ventersdorp and Brits and hoarded supplies of tinned food, Krugerrands and candles. Ridiculous though that may now sound, at least the people first identified their fears and then tried to prescribe the right medicine.
If your current fear is that the large amounts of paper money being printed worldwide to save bankrupt governments are going to cause inflation and economic chaos, gold might not be a bad hedge. Resources, metals/minerals and energy sources used and consumed in a period of sound economic growth aren’t a hedge against such fears at all. The fear that too much paper money will create inflation and destroy economic growth can’t be hedged by buying coal or iron ore reserves.
Gold could help. This metal and silver seem to be going hand in hand, but copper no longer fits into this company.
The price of copper and also the price of crude oil seem to be the two best indicators of current and future economic activity. If the world economy blooms, as it did in the five wonder years between 2002 and 2007, the prices of copper and crude oil go up. There’s good reason why the copper price was given a doctorate in economics.
Even platinum, a precious metal, doesn’t provide good hedging at all against the fears for paper money. Platinum is now an industrial metal, a resource – like copper – but with much more practical applications. Platinum is used as a catalyst to ensure the exhaust gases of vehicles are cleaner. If the excessive printing of paper money is going to cause inflation – and an inevitable economic collapse – then platinum isn’t a good hedge. More paper money won’t sell more cars.
If you have fears other than just the printing of paper money – including the fear the global economy is going to collapse completely – resources are clearly not the place to hide. Rather ask your broker to tell you more about the so-called fear index, internationally known as the VIX. The graph shows that the VIX is currently high again but still well below the heights reached in 2007/2008. The VIX is the right place to hedge your fears about too much paper money.
By the way, if you read the VIX along with the copper price, both are currently predicting uncertainty about future world economic growth. That’s a forecast certainly not so difficult. Almost the entire global economy is so full of state debt that governments have no choice but to increase taxes and cut expenses in the future – and periodically lose elections. That predicts lower economic growth.
The hedging advice is threefold: buy VIX and sell copper short. If you aren’t familiar with transactions such as this, keep away from all commodities and take route three.
Some of those who bought Krugerrands in 1993 and went and buried them in order to hedge themselves against Nelson Mandela fears ultimately didn’t do so badly. Since 1993, the price of Krugerrands increased much more than the JSE’s Alsi and any of the retirement funds offered by clever asset managers.
The same thing could happen again. But don’t go and bury a lot of Krugerrands in your back garden. Rather buy Absa’s gold fund, which is listed on the JSE. The code is GLD. Absa really keeps on your behalf the gold guaranteed by the piece of paper. So many investors like that route the exchange-traded funds (ETFs) already have a larger market value than Satrix’s own Top 40.
And if you still mistrust everything and everyone South African, take your R4m offshore and ask your broker to buy international gold. There are ETFs on Wall Street that follow the gold price exactly. The best known and easiest to remember is a fund that also trades under the code GLD. Remember: it’s always better to buy gold itself than to go for hedging via a gold share. The managements of especially South African gold mines over the past decade or so have succeeded brilliantly in destroying value. The price of Absa’s GLD versus the gold producers index tells enough of that tale.
To sum up: the right medicine for the relevant fears is spelt out in “The Fear Factor” table shown above.
The graph of the fear index shows it rose by 87% in 2007, increased by 63% in 2008, fell by 44% in 2009 and has already recorded an increase of 48% this year.
On the other hand, the fluctuations in commodity prices over the past 52 weeks (see diagram) look rather boring. If you fear excessive paper money, buy the VIX rather than the shares of an iron ore producer or the shares of a has-been fluorspar producer like Sallies.
<img src=’http://www.fin24.com/downloads/Media/article_images/fweng_img/2007/sep/ee_may100610.gif’>
