At current gold prices, what do we do in our portfolio?

Key Concepts

• Hard Assets: Gold, silver, copper, oil – physical commodities seen as stores of value, particularly during economic uncertainty.
• Parabolic Move: A rapid, exponential increase in price, often unsustainable.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment. Crucial for AI development.
• Stockpicker’s Market: An environment where individual stock selection is paramount, as broad market trends are less reliable.
• Insurance Component (Gold): Holding gold as a hedge against economic or geopolitical risks.
• Momentum Mode (Gold): Investing in gold stocks to capitalize on rising gold prices.
• Leverage: The use of debt to amplify potential returns (and losses).

Market Reactions to Earnings & Commodity Surges

The discussion began with observations of strong earnings reports from Meta, Microsoft, and Tesla, juxtaposed with record highs in gold and silver prices. This immediately highlighted a divergence: positive corporate performance alongside a flight to safe-haven assets, signaling underlying economic anxieties. Gold was nearing $5,600 US, and silver also achieved record highs.

Gold as a “Security Blanket” & Portfolio Strategy

Lyall Stein, President of Forbes Global Wealth Management, characterized the surge in gold as a “security blanket” for investors seeking protection from geopolitical and inflationary concerns. However, he noted the broader trend of rising prices across various commodities – silver, copper, and oil – all considered “hard assets.” He emphasized the challenge for portfolio managers: how to navigate these rising hard asset prices.

Stein detailed his firm’s strategy regarding gold. They differentiate between gold’s role as an “insurance component” (physical bullion) and a “momentum mode” investment (gold stocks). Currently, they are shifting from a portfolio allocation of 10% in gold commodity/bullion and 15% in gold stocks (previously more heavily weighted towards stocks due to leverage) to increasing the insurance component, directly owning more bullion, given the current price run-up. He explained, “We had been much more exposed to the stocks because of the leverage you get from the operating businesses but now with gold running the way it’s been running we’re leaning more to how do we get more insurance into the portfolio so let's own the bullion directly.”

Copper’s Surge & Global Economic Factors

The discussion then turned to copper, which had surpassed $14,000 US a ton, a 10% increase. Stein attributed this surge to two primary factors: deliberate efforts by central bankers and politicians to “run the economy hot” through fiscal stimulus and low interest rates, coupled with a structural deficit in copper mining capacity to meet the growing demands of AI, electrification, and grid infrastructure. He described the price movement as “essentially overnight” and acknowledged the role of speculative activity, particularly from China. He stated the basic copper story is that it’s “in long-term deficit supply. So prices will have a bias to go up in that environment.”

Silver & Speculative Trading

Silver’s price increase was also noted, with Stein suggesting it was driven by similar speculative forces as copper. He highlighted the limited physical silver supply relative to the volume of transactions by speculators, leading to “parabolic moves” and the risk of a rapid downside correction.

Tech Earnings & the AI Capex Boom

The conversation shifted to tech earnings, noting Meta’s positive performance and Microsoft’s less enthusiastic reception. The key focus was on capex (capital expenditure) – the spending on infrastructure to support AI development. Stein emphasized that AI spending is driving a significant portion of US economic growth (estimated at half). Meta’s continued investment in AI, despite past concerns, was viewed positively due to revenue growth. Conversely, Microsoft’s slower growth in its cloud business disappointed investors. This led Stein to characterize the market as a “stockpicker’s market,” where individual company analysis is crucial. His firm holds Amazon, Google, and Micron and is closely monitoring their capex plans in relation to Amazon and Microsoft.

Microsoft, OpenAI & Debt Concerns

A specific point raised was a new disclosure revealing that OpenAI accounts for 45% of Microsoft’s $625 million backlog. This raised concerns about Microsoft’s exposure to OpenAI, whose debt is attracting investor scrutiny. Stein also highlighted Meta’s financing of AI development “off the traditional Meta balance sheet,” raising questions about the sustainability of this funding model. He compared Meta’s projected capex of $115 billion to Canada’s total government spending of approximately $350 billion Canadian in 2023, illustrating the scale of investment. He posed the question, “If they build it, will they come?”

Meta’s Advertising & Business Model Shifts

The discussion briefly touched on the issue of fake ads on Instagram, highlighting Meta’s challenges in controlling this problem. Stein questioned the validity of revenue generated from these ads and the long-term sustainability of the business model. He noted the shift from Meta being a software company to a capital-intensive business, with higher margins but also significant depreciation expenses.

Capital Intensity & Asset Lifecycles

Stein drew a comparison between Bitcoin miners and copper miners, emphasizing the importance of asset lifespan and the capital-intensive nature of both industries. He contrasted the relatively short lifespan of AI chips with the 30-year mine life of a good gold mine.

Conclusion

The conversation painted a picture of a complex economic landscape characterized by strong corporate earnings, surging commodity prices, and significant investment in AI. The flight to hard assets like gold and silver reflects underlying anxieties about geopolitical risks and inflation. Portfolio managers are adapting by rebalancing towards insurance components (physical bullion) in gold and carefully evaluating companies based on their capex strategies and exposure to potentially risky ventures like OpenAI. The market is increasingly becoming a “stockpicker’s market,” demanding a nuanced understanding of individual companies and their long-term prospects. The massive capital expenditure required for AI development raises questions about sustainability and the potential for overinvestment.