On Target Newsletter
2021.04.24

In this issue:

  • Gold 
  • Expat mistakes to avoid
  • Moving to nicer places
  • Second passports
  • Electricity boom
  • Investment strategy
  • Japan’s nuclear waste
  • Property boom

Gold: Signs of a Renewed Upsurge

This year is the 50th anniversary of America’s decision to scrap the dollar’s link to gold. Until then, foreign governments could exchange American paper for federal government owned metal freely and without limit. Which increasingly they did, building a crisis that forced the US to abandon the dollar’s backing.

Coincidentally, although not surprisingly, the currency has since lost 50 times its value since then. It now requires 50 times as many dollars to buy one ounce of the yellow metal.

It’s looking increasingly probable that this anniversary year we’ll see a renewed major upsurge in the gold price.

There are encouraging signals.

The Chinese government has just given banks permission to import about 150 tonnes during April/May. There’s been a surge in industrial and retail demand for gold in China. There could also be more central bank accumulation, but we don’t know. Some analysts say China is building huge reserves as part of a long-term plan to make its renminbi currency convertible into gold, which would destroy the greenback’s global primacy if/when it happens.

Other countries’ central banks, after a pause in buying activity brought about by the pandemic, have resumed interest. Hungary has tripled its gold reserves in one of the biggest purchases by a central bank in decades. Poland says it wants to buy another 100 tonnes.

Poland is one of several countries, including Germany and Australia, that have moved gold they own from the UK, the US and France to their own central bank vaults. They don’t have complete trust that other governments won’t freeze their assets in time of war or political disputes.

India’s demand for bullion has rebounded from a pandemic-induced slump, with record-breaking imports in March of 160 tonnes. India and China are the world’s largest consumers of gold.

Technical analysts now seem to be increasingly optimistic about the outlook for the gold price. Charts suggest prices bottomed in March, completing the corrective

down-phase from August, when its rise looked overextended. The current recovery seems to be signalling a positive outlook of medium-term significance.

The biggest theme for investors since the global financial crisis 13 years ago has been the dominance of liquidity – abundant credit and minimal interest rates – as the fuel to inflate asset prices. For many years easy-money policies were expected to bring an explosion in inflation, That didn’t happen. But the sheer scope of money-creation now suggests that this time it will.

Later this year an exuberant world economic recovery and spending of trillions of stimulus dollars could bring an explosion in anticipations of inflation, which VanEcke Investments say could “spiral out of control.”

Other catalysts favourable for gold could emerge such as a weakening American economy, debt problems, US dollar weakness and/or “black swan” events caused by radical fiscal and monetary policies.

Inflation isn’t always good for gold. What matters is whether interest rates are raised enough, or not, to match inflation.

Eoin Treacy says gold thrives in an environment of negative real interest rates. There is no way central banks are going to allow positive real interest rates to re-emerge. They need to erode the massive quantities of debt taken on to fund pandemic remediation measures. Financial repression is the only way to do that – prevailing interest rates will be kept below inflation rates for years to come.

Great for values of many investment assets, but particularly for gold.

Top Expat Mistakes and How to Avoid Them

By Chad and Peggy Creveling

Many expats tend to lead event-filled lives driven by travel, new opportunities, increased social obligations, and managing the challenges of everyday expat life. This leaves little time and energy for the more mundane chores of everyday life, like managing an investment portfolio. Unfortunately, the complications of cross-border finances, multiple tax jurisdictions, currency choices, and planning for a retirement overseas, require even more attention and involvement than they would back home.

With the increased complexity and lack of time, the same types of weaknesses in expat portfolio management tend to crop up repeatedly, negatively impacting performance and ultimately the attainment of financial goals. Here are some of the top mistakes expats make with their portfolios and some ideas of how to avoid them.

1. Maintaining Too Many Accounts

Given the transitory lifestyle of the typical expat, it is far too easy to collect an excessive number of bank, brokerage, pension, and other financial accounts. Each month, the typical expat is inundated with numerous online and paper financial statements from various institutions. In some cases, they’re collecting months of financial statements at home country addresses. Other people even lose track of the accounts they own. In this situation, it’s impossible to manage finances or an investment portfolio effectively.

The solution is to rigorously rationalize accounts and get online access. Rather than splitting your investment portfolio among various banks, investment firms, and brokers, consider holding all the investment assets at one global custodian that provides online management and allows access to a global range of products and markets. This will simplify your life and make it far easier to manage your investment portfolio as a coherent whole rather than a number of neglected, disparate pieces.

2. Not Having a Coherent Investment Plan

Typically, the role of an investment portfolio is to preserve and accumulate wealth to achieve a specific financial goal. This can’t be done if you haven’t first identified the objective or developed a suitable investment plan for achieving it.

For many expats, financial goals tend to be only vaguely formulated, and very rarely are investment plans developed and linked to clearly articulated goals in terms of return objectives, risk tolerances, time horizons, currency exposure, and other parameters.

Start by identifying clear financial goals in terms of amounts, time frames, currency requirements, priority, and other parameters. Then develop an investment plan that is linked to the specific attainment of those goals. You will greatly increase your chances of success.

3. Inappropriate Asset Allocation

Asset allocation is the primary driver of long-run investment returns and the type of volatility you will experience in your portfolio; it has a far greater impact than stock picking or market timing strategies.

Having an asset allocation that is not appropriate for your objectives, ability to bear risk, stage of life, and other unique factors ― or perhaps worse, having none at all ― can seriously derail your financial plans.

Success in investing comes from the consistent application of a dedicated investment strategy that you can adhere to over time and through all market conditions. This allows you to capture investment returns that compound over time and leads to the accumulation of wealth.

An inappropriate or poorly constructed asset allocation strategy often results in poor risk-adjusted returns and excessive portfolio volatility that can spook investors into emotionally driven destructive cycles of buying high and selling low.

Research has repeatedly shown that the average investor consistently underperforms passively managed indexes by a wide margin. This is because he/she gets seduced into buying at market peaks and spooked into selling at market bottoms.

Devise an asset allocation strategy you can live with even in tough market conditions. If you know you are susceptible to making investment decisions that are driven by emotion, consider working with an advisor who can help keep your investment plan on track even in difficult market conditions.

4. Not Separating Funds Intended for Short-Term Goals

Funds that may be needed for emergencies or short-term goals have no business being invested in a long-term portfolio that includes equity investments. This may seem like an obvious statement, but the global rush for cash seen in the extreme March 2020 market sell-off indicates that far too few investors understand the importance of separating funds in terms of short-term and long-term.

Strip out or exclude cash required for short-term needs (up to the next five years) from your long-term portfolio. At a minimum, set aside funds as an emergency cash reserve. Depending on your specific situation, your cash reserves should cover at least several months of living expenses, possibly more.

You may also have other specific short-term goals, such as a deposit for a property purchase, education for your kids, or moving expenses. Keep funds earmarked for each of these goals invested in cash or short-term fixed-income investments in the appropriate currency, and separate from your long-term portfolio.

5. Having a Portfolio That Doesn’t Make Sense for Your Situation

If you don’t pay attention to your investment performance, you won’t know if you’re on a path to achieve your goals, nor will you be able to determine if you’re taking on too much risk or if your portfolio is delivering the type of return it should for the amount of risk you’re taking.

It’s not enough to have a vague idea of what your portfolio or an individual investment did in any given year. To achieve your financial goals, you need to take an acceptable amount of risk for your situation, and to receive an acceptable rate of return for the amount of risk you’re taking ― both in any given year, as well as throughout your entire pre- and post-retirement period.

Without measuring performance, you will not be able to tell if you’re taking too much risk, nor if you’re on track to achieve your objectives, running into trouble, or need to make adjustments.

With all the inexpensive financial software available these days, it is relatively easy to track your portfolio’s performance. A multi-currency choice could be Intuit’s Quicken program.

6. Not Paying Attention to Investment Costs

Many expats are not fully aware of the layers of fees that may be charged on their investment portfolios. These run the gamut from custodian fees, advisory fees, front-end loads, and back-end loads, to bid-offer spreads, fund management fees, surrender fees, and various types of commissions.

For the average expat portfolio, these fees may total from about 2 per cent on the low side to as high as 4 to 5 per cent of the underlying portfolio each year. If that does not sound like a lot, consider that the typical diversified portfolio can be expected to generate an average annualized real return (the return above inflation) of about 3 to 5 per cent over time. That means that anywhere from 40 to 100 per cent of the portfolio’s inflation-adjusted returns is being paid away in investment fees. This can make it nearly impossible to achieve your investment goals.

Summary: To learn more about how to avoid making mistakes on your portfolio, try reading an investment book. There are a number of excellent ones, but for starters check out either The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between by William J. Bernstein or A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing  by Burton G. Malkiel.

Alternatively, find a financial advisor you trust and have him/her walk through the concepts mentioned above.

Despite the demands and distractions of expat life, it can be even more important to stay on top of your finances than in your home country. Eliminating these common weaknesses in your investment plan can go a long way to helping you simplify your life, effectively manage your portfolio, and ultimately achieve your financial goals.

The Crevelings are Thailand-based CFAs who advise expats on personal financial planning and investments. To learn more visit their website. 

There’s a Booming Business in Second Passports

Strangely, as the pandemic has choked international travel, the market for second or even multiple passports has grown even faster.

The big increase in buyers for what is called citizenship-by-investment —  “golden visas” — has come from wealthy Chinese, expats living in Mideast countries, the post-Soviet rich, Nigerians and South Africans.

John Dizard reports: “Emirati-based expats have been among the most desperate passport bidders. Within a day they can go from an upper middle class life to joblessness and expulsion, depending on an employer’s whim or a weaker oil market.” If that happens, they and their families can move easily to other places if they acquire second passports.

They are no longer as attractive as they used to be as a means of keeping their personal affairs secret. In the case of most tax havens, details of their applications and bank arrangements are readily available for electronic perusal by agencies of countries such as the US, the UK.

However that accessibility doesn’t apply to all offshore centres. Anyone obsessed with secrecy can, for example, go on-line using his/her VPN (virtual private network), paying $130,000 to the Pacific island-nation of Vanuatu, along with $5,000 to an intermediary, to get a passport in 30 days.

Dozens of other small countries offer their citizenships and passports quite cheaply. In the Caribbean several, such as Antigua, Dominica and St Lucia only want donations to their governments of $100,000.

There is an upper class of larger and more reputable vendors of passport and residency schemes…

► The European Union has been trying to shut down regional  programmes with little success. Although Cyprus has suspended its plan after its politicians were exposed helping a fictitious Chinese money launderer to buy nationality. Malta and Bulgaria still have offers. Austria grants citizenship to wealthy foreign investors who bring talent and highly qualified skills to the country.

► The US offers its EB-5 visa. For investing as little as $900,000 for job creation in a distressed part of the country, the visa offers a path to permanent residency and citizenship.

► Canada has abandoned its federal “landed immigrant” scheme but its Quebec province has an Immigrant Investor Program. This requires a “legally-acquired” net worth of C$2 million, a five-year passive investment of at least C$1.2 million, professional skills and an intention of settling in Quebec (promise to try to speak French).

Prospects in a Sizzling Boom

Precious metals consultant Matt Watson predicts that we’re going to see electrification of “everything” over the next century, encompassing not only transportation but also smart cities, heavy industries, internet-of-things.

That “will drive a supercycle in demand for certain metals, Copper, for example, three-quarters of which is used in wiring. A major growth area for demand will be electric vehicles, in their power trains, safety systems, infotainment, driver assistance. Watson reckons that growth in demand for the metal will overwhelm supply; that the global copper deficit over the next ten years will mount to 29 million tons.

Silver is a metal you wouldn’t expect to see benefit from electrification, but Watson predicts its use on solar panels will grow from 10 to 20 per cent of annual demand.

Platinum group metals’ primary use is in automotive catalysts, but they are essential components for many electronic devices because of their rare characteristics. They are also scarce. Nearly all reserves of the resources are in South Africa, Russia and Zimbabwe. Mine output isn’t expected to grow enough to match demand, especially for extremely rare rhodium, which already commands more than $50,000 an ounce,

Electrification of road transport vehicles will generate massive growth for battery materials, particularly lithium. Almost half its global reserves are in Chile.

Researchers at Swiss bank UBS reckon that electric cars are now becoming so competitive that they will account for 20 per cent of sales by 2025, 50 per cent by 2030, and 100 per cent by perhaps 2040.

To reach those figures will require expanding production of batteries by 22 times over the next decade. However: “We don’t think that the raw material supply-side is ready for the wave of demand that is coming.” While some of the commodities needed are not considered scarce, there’s a lack of projects to meet the pick-up in demand. In the case of lithium, total supply available will only be enough to make batteries for 22 per cent of the cars that are to be made. Prices of the minerals will have to rise.

Consequently UBS rates as buys the production companies Glencore, IGO, Norilsk, Galaxy, Syrah and Orocobre.

A Changing World for Investment Strategy

By getting right what central banks will do and simply overweighting index-tracking products, investors have profited substantially from both equity and bond investments. But this “may well be changing,” says well-known commentator Mohamed El-Erian.

“Powered by ample and predictable liquidity injection, investors set aside many traditional economic and political influences as the Fed vacuumed up securities at non-commercial prices.” It has been buying $120 billion worth every month. This conditioned investors to buy every market dip, whatever the cause, “and allocate more capital into ever-riskier investments.”

But now investors must take into account government’s “going big” – extra spending on an unprecedented scale. A stimulus plan of $1.9 trillion (about 9 per cent of GDP) is to be followed by a package focused on infrastructure, taking the total to about $3-4 trillion (14 to 19 per cent of GDP).

When is so much stimulus excessive? The argument for this is that it will fuel inflation (too much of it), which will drive up interest rates and increase the probability of “a market accident.” The Fed could be reluctant to taper (reduce) its stimulus, facing “lose/lose policy options – let the risk of financial instability rise and threaten the real economy, or intervene further in the functioning of markets, worsen wealth inequality, and risk more distortions.”

Japan to Dump Its Nuclear waste

The Japanese government has announced that in two years’ time it will start releasing into the Pacific Ocean treated radioactive water from the wrecked Fukushima nuclear plant.

Since the 2011 disaster water containing radioactive particles has escaped from the damaged primary containment vessels, been captured, and accumulated in more than a thousand storage tanks. Their capacity will be full before the end of next year.

The water will be treated and diluted, removing most of the radionuclides, before being released into the sea.

Japan’s neighbours are furious, as are some domestic opponents, but the US supports the controversial decision.

There is no practical way to remove from contaminated water the radioactive isotope tritium, but the government says it will be diluted to one-seventh of the standard for drinking water set by the World Health Organization.

Everyone is exposed to some radiation from natural sources, with higher doses from X-rays or taking a long-distance flight.

South Korea: Pricier Property

The South Korean government has introduced 25 rounds of property tightening since taking office in May 2017. These include, among numerous other measures, a capital gains tax of 70 per cent for owners who sell within a year of purchase. This crackdown has occurred at a time when Korean households were already heavily exposed to local property, having an estimated 72 per cent of their assets in property. (There is no capital gains tax levied on equities).

Record low interest rates, as well as limited supply, have been driving property prices ever higher in the desirable residential areas of Seoul such as Gangnam. Apartment prices there have risen by 43 per cent under the Moon government, compared with a 20 per cent gain nationwide – the opposite of what the government hoped to achieve.

Those who do not own property face almost zero returns on their bank deposits. The Korean home ownership ratio remains relatively low at 58 per cent.

Tailpieces

Capitol riot: The chief medical examiner of the District of Columbia, Francisco Diaz, has ruled that policeman Brian Sicknick, the only victim whose death could be attributed to pro-Trump protestors, died of natural causes. There was no evidence of internal or external injuries. This confirms that it was a lie that pro-Trump rioters killed him.

At the time it was reported that Sicknick died because he was beaten to death  with a fire extinguisher by the rioters. It was the key to a massive propaganda campaign at the time that the mob violence could be blamed on Trump, as the only other deaths were those of Trump supporters.

A measure of the level of anti-Trump hysteria stoked at the time was that  Democrat leader Chuck Schumer ridiculously equated the riot as a threat to democracy comparable with Pearl Harbor, the event that initiated the Pacific second world war.

Cheap food: It’s the product of globalization, which has fostered industrial-scale farming and enormous retail chains such as Walmart, but one consequence is the explosion in consumption of unhealthy foodstuffs. Mexico’s National Institute for Public Health reports that between 1988 and 2012 the proportion of overweight women between as the ages of 20 and 49 increased from 25 to 35 per cent; the number of those obese expanded from 9 to 37 per cent.

Pointers: The Marketplace consultancy specializing in identifying consumer-focused start-ups and private companies reckons these are now the ten best American selections: Vacasa (travel), StockX (streetware), Rover (pets), Goat (streetware), Thredup (fashion), Viagogo (tickets), Turo (transportation), Outschool (education) and Outdoorsy (travel).

Property: Investment bank JP Morgan predicts an average long-term annual return of 5.9 per cent for core US real estate, with more than 80 per cent of that sourced from high-quality, stable income streams.

Death mysteries: Sorry about the literal mistake last month. The US annual flu figure was 56,000, not 56 million.

Emerging markets: The four most vulnerable when US interest rates rise and the dollar strengthens, says HSBC, are Brazil, Indonesia, Mexico and South Africa.

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