How Billionaires are Preparing for the Next Bear Market
No one likes to lose money, even if you have billions to spare.
It’s why the prospect of a bear market – a prolonged downturn which sees stock prices fall by at least 20% over two months or more – is something that keeps even the world’s most elite investors awake at night.
To hedge against this concern, the world’s billionaires use a variety of strategies and tactics to protect their wealth, including setting up their portfolios with specific asset allocations that can help soften any blow caused by an extended market downturn.
Today’s animation comes to us from Sprott Physical Bullion Trusts and it highlights a strategy being used by billionaires ranging from Ray Dalio to John Tudor Jones II.
Because market sentiment can change so quickly in the market, these elite investors protect themselves by having diverse portfolios that include uncorrelated assets.
While this sounds complicated, uncorrelated assets are simply investments that don’t move up or down in the same direction as the other asset classes in the portfolio. A small allocation to these uncorrelated items can help protect the value of a portfolio when market sentiment changes.
The King of Uncorrelated Assets
What kind of asset classes can be used for this kind of purpose?
While options like real estate, commodities, and cash can contribute to a more diversified portfolio beyond traditional stocks and bonds, many experts say that gold is the undisputed king of uncorrelated assets.
The price of gold doesn’t usually doesn’t move with the wider stock market – and often, because of its history, the yellow metal can even increase in price during the course of a bear market.
Here are some of the reasons billionaires turn towards an allocation in gold:
- Gold has acted as a store of value for thousands of years
- Gold can lower the volatility of a portfolio
- Gold can act as a hedge against inflation in some scenarios
- Gold is a traditional safe haven asset that investors flock to when the market goes astray
To kick off 2019, a new billionaire jumped onto the gold bandwagon – along with previous advocates such as Ray Dalio, David Einhorn, John Paulson, and John Tudor Jones II.
The newest entry to the club is Sam Zell, the pioneer behind real estate investment trusts (REITs). He bought gold for the first time in January, citing that it is “a good hedge” and that “supply is shrinking” as new mine discoveries dries up.
With market volatility back in the fray, it’ll be interesting to see how many more of the world’s elite investors also jump on the bandwagon.
All the World’s Metals and Minerals in One Visualization
This massive infographic reveals the dramatic scale of 2019 non-fuel mineral global production.
All the World’s Metals and Minerals in One Visualization
We live in a material world, in that we rely on materials to make our lives better. Without even realizing it, humans consume enormous amounts of metals and minerals with every convenient food package, impressive building, and technological innovation.
Every year, the United States Geological Service (USGS) publishes commodity summaries outlining global mining statistics for over 90 individual minerals and materials. Today’s infographic visualizes the data to reveal the dramatic scale of 2019 non-fuel mineral production.
Read all the way to the bottom; the data will surprise you.
Non-Fuel Minerals: USGS Methodology
A wide variety of minerals can be classified as “non-fuel”, including precious metals, base metals, industrial minerals, and materials used for construction.
Non-fuel minerals are those not used for fuel, such as oil, natural gas and coal. Once non-fuel minerals are used up, there is no replacing them. However, many can be recycled continuously.
The USGS tracked both refinery and mine production of these various minerals. This means that some minerals are the essential ingredients for others on the list. For example, iron ore is critical for steel production, and bauxite ore gets refined into aluminum.
Top 10 Minerals and Metals by Production
Sand and gravel are at the top of the list of non-fuel mineral production.
As these materials are the basic components for the manufacturing of concrete, roads, and buildings, it’s not surprising they take the lead.
|Rank||Metal/Mineral||2019 Production (millions of metric tons)|
|#1||Sand and Gravel||50,000|
|#3||Iron and Steel||3,200|
These materials fertilize the food we eat, and they also form the structures we live in and the roads we drive on. They are the bones of the global economy.
Let’s dive into some more specific categories covered on the infographic.
While cement, sand, and gravel may be the bones of global infrastructure, base metals are its lifeblood. Their consumption is an important indicator of the overall health of an economy.
Base metals are non-ferrous, meaning they contain no iron. They are often more abundant in nature and sometimes easier to mine, so their prices are generally lower than precious metals.
|Rank||Base Metal||2019 Production (millions of metric tons)|
Base metals are also the critical materials that will help to deliver a green and renewable future. The electrification of everything will require vast amounts of base metals to make everything from batteries to solar cells work.
Gold and precious metals grab the headlines because of their rarity — and their production shows just how rare they are.
|Rank||Precious Metal||2019 Production (metric tons)|
While metals form the structure and veins of the global economy, ultimately it is humans and animals that make the flesh of the world, driving consumption patterns.
A Material World: A Perspective on Scale
The global economy’s appetite for materials has quadrupled since 1970, faster than the population, which only doubled. On average, each human uses more than 13 metric tons of materials per year.
In 2017, it’s estimated that humans consumed 100.6B metric tons of material in total. Half of the total comprises sand, clay, gravel, and cement used for building, along with the other minerals mined to produce fertilizer. Coal, oil, and gas make up 15% of the total, while metal makes up 10%. The final quarter are plants and trees used for food and fuel.
Silver Series: Perfect Storm for Silver (Part 2 of 3)
In the second part of the Silver Series, we show that the supply and demand fundamentals are potentially shaping up for a perfect storm in silver prices.
The Silver Series: A Perfect Storm for Silver (Part 2 of 3)
In Part 1 of the Silver Series we showed how precious metals can be a safe haven during times of volatility in a debt-laden era.
Today’s infographic is Part Two of the Silver Series, and it comes to us from Endeavour Silver, outlining some of the key supply and demand indicators that precede a coming gold-silver cycle in which the price of silver could move upwards.
Silver is produced primarily as a by-product in the mining of non-precious metals, and there is currently a dwindling supply of silver as a result of low base metal prices.
However, silver is more than just a precious metal and a safe haven investment. Its industrial uses also create a significant demand on silver stocks.
As the production of green technologies such as solar cells and EVs quickly escalates, upward pressure is being placed on the price of silver, indicating the potential start of a new gold-silver cycle in the market.
Just like gold, silver has functioned as a form of money for centuries, and its role as a store of value and hedge against monetary inflation endures.
Currency debasement is not new. Governments throughout history have “printed” money while silver’s value has held more constant over time.
In today’s age, the average investor does not own physical silver. Rather, they invest in financial instruments that track the performance of the physical commodity itself, such as silver exchange-traded funds (ETFs).
Until recently, ETF investment in precious metals has been relatively flat, but there has been a surge in the price of silver. Meanwhile, demand for silver-backed financial products have increased the demand for physical silver and could continue to do so.
Silver is also helping to power the green revolution.
The precious metal is the best natural conductor of electricity and heat, and it plays an important role in the production of solar-powered energy. A silver paste is used in photovoltaic solar cells which collects electrons and creates electricity. Silver then helps conduct the electricity out of the cell. Without silver, solar cells would not be as efficient.
As investments and the green revolution demand more and more silver, where is the metal coming from?
A Perfect Storm for Silver: Supply Crunch
The bulk of silver production comes as a by-product of other metal mines, such as zinc, copper, or gold mines.
Since silver is not the primary metal emerging from some of these mines, it faces supply crunches when other metal prices are low.
Silver supply is falling for three reasons:
- Declining mine production due to low base metal prices
- Declining silver mine capacity
- Declining reserves of silver
The demand for silver is rising and the few companies that produce silver could shine.
Don’t miss another part of the Silver Series by connecting with Visual Capitalist.
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