Francisco de Orellana was a Spanish explorer. Investors may not recall that he reached the Amazon River in 1545. Statues have been erected in his honour in Spain. He is famous for conquering the Inca empire.
Orellana had immense energy and courage. He braved cholera and harsh terrain. The Inca empire was a sprawling entity. At its height, the empire covered about one-fifth of South America and was larger than the 13 original colonies of the USA.
Investors in 2023 should pay attention to his looting. Orellana once visited an Omagua village. The Omagua are an indigenous community that dominates the banks of the Amazon. Orellana stumbled upon a massive gold statue. It was over 7m tall. It was greater than the height of the Sir Stamford Raffles near the Padang.
To Orellana’s astonishment, the villagers ignored the statue. The villagers were unaware of the wealth in their midst. The village was poor and ramshackled. Orellana got his men to loot the statue. It was shipped off to Spain. Orallena’s crew made fortunes. Their families are still living off these ill-gotten gains.
Hedge against inflation
A similar opportunity has arisen this year. Gold is up 7% in 2023. It has flirted with all-time highs.
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This year marks the 50th anniversary of the formal abandonment of the gold standard. Gold prices have traded freely since then. Gold prices have risen 47 times in 50 years, a CAGR of 8%. These returns are much more than investing in bonds. If you held US 10 treasury bonds in that period, you would be down 51%.
The case for gold seems even stronger than in 1545 or 1973. Gold is a hedge against inflation. It has outperformed the dollar in the last half-century.
Covid-19 may not be a serious threat anymore. But, it is haunting us in economic terms. The pandemic has led to massive fiscal and monetary expansion. In 1973, the federal debt was 50% of the US GDP. Today, the US dollar is not backed by a hard asset. The federal debt is US$31 trillion ($41 trillion), or 1.4 times the US GDP.
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The US$1.9 trillion relief package has worsened the debt. This includes economic relief checks for Americans. US federal spending was US$5 trillion in 2022. Only half of the spending was collected through taxes.
The monetary expansion has been even faster than the fiscal one. Almost one-fifth of the dollars in circulation were printed in the last three years. Gold has also emerged as a safe haven.
There have been grave fears of a banking crisis. The Silicon Valley Bank collapse has seen investors scampering for gold. The scamper turned to a stampede with the recent fears about the debt ceiling. Many investors have traded physical commodities. Others have piled into Gold ETFs.
Investing in gold, miners, and retailers is an excellent proxy. The last gold boom was after the global financial crisis. As inflation fears rose, gold prices nearly doubled from December 2008 to May 2011. Some jewellery stocks outperformed the precious metal.
The best proxy for gold may not be trading the metal. It may be in the stock prices of the jewellery shops. Singapore and Hong Kong are the centres of the gold trade. The stocks seem undervalued. Of the 19 listed jewellery stocks, only five are trading about their book value. Nine are trading below the inventory on the balance sheet. The gold in the jewellery shops is worth more than the stock price. The stocks have dropped by an average of 25% since March 2020.
Taka Jewellery Holdings 42L is a Singaporean jeweller. Though it is a household name, it trades at 0.4 times P/B. Its inventory of $80 million is double its market capitalisation. Chong Fai Jewellery Group operates a retail shop in Hong Kong’s Kowloon. It trades at 0.4 times its inventory and 0.6 times its book value. The company is a jewellery and pure gold retailer. Investors seem to be ignoring it. Its inventory consists of gold, silver and diamonds.
Most investors may not loot villages like Orellana in 1545. They don’t need to travel to South America. There is gold staring them in the face.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column
