Regarding… Vol 3 no 4 – Golden

Dear Fellow Investors and Friends,

Welcome to this edition of my newsletter, where I share my efforts to understand markets and the world around me.

I do appreciate you taking the time to read this.

Today is Thursday, February 6th, the 37th day of the year. There are 328 days until the end of the year.

On this day, 189 years ago, Charles Darwin arrived in Van Diemen’s Land (Tasmania) aboard the good ship Beagle. Darwin’s experiences in Van Diemen’s Land played a crucial role in shaping his thoughts on evolution. The geological evidence he encountered raised questions about traditional views of creation, leading him to consider the extensive timescales required for such geological formations to develop. This reasoning would later significantly contribute to his theory of evolution, culminating in his seminal work, On the Origin of Species.

We named our BEE investment company after Darwin’s ship to acknowledge the evolutionary role that constructive empowerment can play in a nation with significant income disparities, such as South Africa. You can read more about the RECM Foundation here and its investment vehicle, Beagle (Pty) Ltd, here.

Like Beagle, Gold is performing exceptionally well. It is doing so with very few investors participating, reaching all-time highs in every currency, including the mighty dollar.

What does it signify, though?

Utilising the power of inversion, when gold reaches all-time highs, fiat currencies are at all-time lows. New lows are not bullish; the market is voting with its feet.

As Benjamin Graham said:

“All these inventions have one feature in common to distinguish them from the standard money of an earlier time. Their value and their stability depend upon the wills of men, mortal men, more certainly consistent than the rest of us. The dollar, the pound, the mark, the franc could be given a higher or lower purchasing power by administrative fiat. The financial authorities who bear this responsibility mean honestly to hold the value of money to a fairly definite level, but muscles tire, and nerves falter.”

In April 2024, Jamie Kennedy, director of digital content for Golf Digest, posted a fascinating analysis of Tiger Woods’ historic 2000 season on the PGA Tour. Universally considered the greatest individual performance in golf history, Woods earned $10.7 million in prize money for his accomplishments, an incredible sum for that period. Kennedy’s workings showed those same results would have won him $92.3 million in 2024, or around 9 times more. The average price of gold in 2000 was approximately $270 per ounce. In 2024, it was closer to $2,400, about nine times higher. Coincidence?

Simon  Mikhailovich – the co-founder and lead manager of The Bullion Reserve (TBR), a firm specialising in gold investments –  tells another great story about the stable purchasing power of gold. Upon leaving the Metropolitan Museum of Art in New York with his granddaughter recently, he walked up to the hot dog vendors in front of the entrance, curious about the going rate. At $4 each, the price was much higher than he remembered from his youth. With gold trading at approximately $2,700 an ounce, he calculated that one American Eagle would buy 675 hot dogs. Back home, he found a picture from 1906 showing hot dogs priced at three cents each or two for a nickel. At the time, the US dollar was convertible to gold at a fixed price of $20.67; an ounce of gold would have bought 690 hot dogs. Another coincidence?

Just like cryptocurrencies, fiat currencies have no intrinsic value. The issuing government guarantees the value of fiat money, relying on the public’s faith in that government’s stability and economic management. This concept is often summarised as “backed by the full faith and credit of the government.”

If fiat currencies are at new all-time lows, it must imply that faith in the system is also at an all-time low.

There is a reason why the currencies of banana republics in Africa always reach the functional equivalent of zero. That reason is that the governments of those countries simply do not engender trust. They abuse the system by skimming “something off the top” whenever and wherever possible. They fail to invest in infrastructure or their people and are shamelessly in it for themselves. In fact, they display the garish proceeds of their ill-gotten gains – Gucci, Prada, and Louis Vuitton – with the ignorant pride of a fool.

Sound familiar?

That’s the South African political leadership in a nutshell. The monetary straitjacket imposed by the Reserve Bank prevents our currency from going completely to the dogs. Our political leaders have long since given up trying to move the country forward. It’s too difficult; it’s far easier to amend laws to compel hard-working plebs to surrender their assets to the grasping hands of their political superiors.

Hard assets – gold (alongside other physical commodities), land, bitcoin, art(?), and wine(?) – provide the best protection against a breakdown in trust. Portable hard assets are superior to those that cannot be easily transported. The political class flourishes by confiscating assets that are not easily movable.

Until recently, financial assets domiciled in the USA also acted as protection. However, tariffs may complicate matters.

From Gavekal Research:

“Investors have anticipated tariffs by marking up the US dollar against other currencies. This is partly because of the theoretical argument that import tariffs enhance the relative competitiveness of the US. And it is partly because of the belief that the US economy will fare better than others in a global trade war because of its relatively low trade dependence; in 2023, trade equalled 25% of US GDP, compared with 37% for China, 67% for Canada and 73% for Mexico. This makes the US dollar appear to be a relative safe haven.

However, this overlooks the interplay between the US stock market and the US dollar. A steep fall in US equities in response to tariffs might dampen foreign investors’ enthusiasm for holding US stocks. More to the point, a steep fall in US equities would blow a hole in US households’ net worth. The entire increase in US net wealth since 2022 is attributable to higher equity prices. So, if US households respond to a fall in equities by curtailing their consumption in order to save more of their earnings, growth in the highly consumer-dependent US economy would suffer.

In turn, weaker demand and softer growth in the US could lead to easier monetary policy in the US relative to other economies, resulting in a weaker US dollar. And a decline in the US dollar could reduce foreign investors’ appetite for holding US equities, in a self-reinforcing spiral.”

So, the time of US equities acting as a safe-haven asset might be over. There is a school of thought that even the USA is Zimbabwifiyng (Is that even a word?) The political parties in the USA are in a race to the bottom, and a trust breakdown is in full swing.

Historically, when governments encounter this predicament, they tend to take the easy way out: by printing money. Regularly choosing the easy option encourages a habit that is hard to break.

Thankfully, large-scale money printing has not happened. Yet. But if history is any guide to the future – and it usually is – money printing is as inevitable as tomorrow’s sunrise.

Once you have a trust breakdown AND money printing, hard assets (including gold) go parabolic. As it has done in terms of Zimbabwean dollars, Malawian Kwacha and Nigerian Naira. Incidentally, the gold price in Nigerian Naira is 4 176 390 today, up from 500,000 two years ago. Here is a long-term chart:

Is gold more valuable – or is the Naira busy disappearing?

And could that happen in the USA? What about South Africa?

The possibility is not zero, which suggests that the appropriate weighting of gold in your asset allocation should not be zero. You must ask yourself, do I trust the government to act honourably? The correct allocation to gold in your portfolio should correspond with your level of trust.

Even if you think it is a barbarous relic.

In previous letters, I have often argued that IPOs are bad for your health – like smoking – and should be avoided as far as possible. But Palantir seems like the exception that proves the rule. The alternative hypothesis is that it is emblematic of speculative juices running wild in the American stock market.

Let’s have a look. First, the share price since listing:

It’s a ten-bagger since it was listed a short 4 years ago!

Palantir’s shares have increased by 520% over the last 12 months, leaving the enterprise software provider with a $236 billion market capitalisation, or 70 times its full-year 2025 revenue forecast.

It’s a win-win! Or is it? Here’s a snippet from their income statement, provided by @Ross_Hendricks on X:

My take: What is Palantir’s business? I have no idea, but they are super-successfully moving a lot of money from shareholders’ pockets to that of the insiders. Maybe that’s their business?

Coco Chanel said: “If you’re sad, add more make-up and attack”. Well, Estee Lauder shareholders are sad because its clients are definitely not putting on more make-up. Recently, sales were reported to be down by 6%, with earnings per share down by around 30%.

Management blamed weak Chinese sales and an uncertain global environment. Apparently, management themselves had nothing to do with the poor performance. Here’s the market’s verdict:

The shares are 80% lower than they were just two years ago.

I recently acquired a small starter position in EL for the MWI Worldwide Flexible Fund (aka “the Cockroach”) as part of its 10-stocks forever portfolio. The recent results have shaken my confidence in management’s ability to turn this ship around.

My take: EL’s product isn’t smeared; at worst, it’s just a bit faded. They have strong brands and strong distribution. The Chinese consumer is going through a tough time but will come back. The big question is whether management has completely lost the plot. EL has morphed into a turnaround from a stable, defensive business. Turnarounds are complicated, take longer than expected, and have low success rates. I will report back on my thinking (and actions) in the future.

A few weeks ago, I boasted about how well the MWI Worldwide Flexible Fund (aka the Cockroach) had performed since I changed the investment process in August 2020. This week, I’m going to boast about the Value Fund.

Rudi van Niekerk manages the Value fund, with occasional input from me. It is a South Africa-only equity fund managed using a value investing philosophy.

Here’s the bragging part: according to FE Analytics, the Value fund was the top-performing general equity fund in South Africa (out of 153 funds) over the past five years, with a return of 16.4% p.a. This compares to the All-Share Index return of 11.3% p.a. over the same period. The Value fund also had the highest Sharpe ratio in the sector, meaning it had the highest risk-adjusted return.

I don’t usually make predictions, but I believe the fund will win even more awards in the future.

My take: Who says value investing is dead?

If you would like to gain a better understanding of how both the Value fund and the Worldwide Flexible fund (aka “the Cockroach”) are managed – and what’s inside the funds – you can read their quarterly reports: here for the Cockroach, and here for the Value fund.

The shares are 80% lower than they were just two years ago.

I recently acquired a small starter position in EL for the MWI Worldwide Flexible Fund (aka “the Cockroach”) as part of its 10-stocks forever portfolio. The recent results have shaken my confidence in management’s ability to turn this ship around.

My take: EL’s product isn’t smeared; at worst, it’s just a bit faded. They have strong brands and strong distribution. The Chinese consumer is going through a tough time but will come back. The big question is whether management has completely lost the plot. EL has morphed into a turnaround from a stable, defensive business. Turnarounds are complicated, take longer than expected, and have low success rates. I will report back on my thinking (and actions) in the future.

I recently watched a panel discussion hosted by RV Capital on whether China was investable. Importantly, the participants were all Chinese or of Chinese descent.

Some interesting points emerged:

• The most common point was that of overcapacity in just about every industry.
• The Chinese system is Darwinian, viciously so. If you can make it in China today, you can go global. And that’s starting to happen.
• Consumption expenditure is too low, as investment has been prioritised. Changing this is the big push going forward.
• However, due to uncertainty, principally around real estate valuations, people are more inclined to save than spend.
• China is getting to a point where its products are world-class. People will want them despite tariffs.

The bottom line, from all panellists – things are changing, albeit slowly.

You can watch the discussion here.

Also, a South African named Dawid Krige runs a fund in London that invests exclusively in China. Last week, he was in Cape Town seeing clients. He has kindly allowed me to link to his presentation. I highly regard Dawid and his team. If you are interested in China, you could do worse than reaching out to them.

My take: Over the next few years, China could develop into one of the best investment opportunities in a generation. I plan to visit to get a first-hand picture of what’s happening.

And now for something completely different. Are you just as tired of all these index-hugging fund managers with their overweight-this-underweight-that inability to take a stand as I am? You will enjoy this quarterly comment from Steven Bregman, fund manager at Horizon Kinetics. It’s refreshingly different and highly insightful.

You can read it here.

Their primary argument is that the tech sector is overvalued and disproportionately represented in indices. The optimal way to capitalise on world-changing technological advancements is by being a service provider. They contend that the limiting factor for data centres is:

• Land: No one wants them in their neighbourhood. They are noisy and take up a lot of land – the most recently announced one in Virginia is over 800 acres.
• Energy: If AI is the fastest-growing sector in the economy, how can energy providers not be far behind?
• Water: A 1GW data centre requires 150 000 to 200 000 barrels of water per day for cooling, while a 1GW natural gas combined cycle plant uses 115 000 barrels of water daily to generate steam.

HK’s investment process focuses on finding companies that provide these services to the tech sector. The big winner they have identified in this regard is Texas Pacific Land (TPL), which I first wrote about in October last year.

My take: TPL is a core holding in the MWI Worldwide Flexible Fund’s “hard asset” component. This argument by HK explains why.

The Red Hand Files is an online newsletter project by one of my favourite singer-songwriters, Nick Cave. He uses it to respond directly to fans’ questions without moderation or monetisation.

His writing is a joy to read, and I recommend you subscribe.

Last week, Cave appeared on the BBC show Desert Island Discs, where Lauren Laverne interviewed him. You can listen to the show here.

Cave’s father died when he was 21, he was a heroin addict for 20 years, and he has lost two sons, both under tragic circumstances. I think it’s fair to say he has endured some hardship in his life, probably more than most of us.

Despite that, he can still write beautifully about how to live life:

“We are broken things, amongst other broken things. We are imperfect and characterised by our capacity to f*ck things up, yet still, we can move incrementally towards the greater good. This serves as grounds for both self-forgiveness and hope and reflects our inherent human loveliness.

We all have a job to do, and it is urgent business. We must make this world as bearable as we can. I believe, with no small amount of awe, that we have tremendous potential to achieve just that. I marvel at our collective and individual ingenuity. We are broken, yet – wow, o wow – look what we can do! We can be good to one another! We can love one another! We can be kind!”

My take: I have grown up with his music, from his punk rock days in the early 80s with his band The Birthday Party to his most recent album with the Bad Seeds “Wild God” – which was one of my albums of the year last year. Both his music and his writing are a joy.

Tomorrow morning at 9:00, I will be discussing investments with some of my colleagues at Merchant West Investments. The discussion will be chaired by our CEO, Daniel King. If you are interested in the perspectives of a few bright youngsters (as well as my more cynical viewpoints), click the link here to register.

For the fifth consecutive year, I will present at the BizNews conference. Although I am a presenter, the conference remains one of the highlights on my calendar. Alec Hogg and his team have curated a comprehensive programme featuring diverse perspectives. This includes politicians from various backgrounds, stock market insights from brilliant analysts – all of whom I admire – and contributions from a wide range of intriguing individuals.

You can view the programme and buy tickets here. There are still a few seats left, but the event usually sells out. So, if this is your kind of thing, it’s best to commit soon. Objective journalism has become rare and BizNews is one of the few remaining practitioners.

That’s all for this week, except for the small matter of riding a bike race with my wife and son on Saturday. Wish me luck! Getting old is not for the faint-hearted.

Please be careful out there. We will.

Piet Viljoen
RECM