Antifragile

COVID-19 resurgence, tapering, global materials shortage, energy crisis…  The global economy has never been in a more fragile position since the subprime crisis.  Moreover, the quantitative easing implemented over the past decade increased the systemic risk and reduced the specificities across different financial markets. How to become antifragile?  

Antifragile is a term introduced by Nasim Taleb at the dusk of the subprime crisis that anticipates well the current situation. In a nutshell, antifragile means more than being robust or resilient. Robustness stems from well diversified optimal investment portfolios with sound hedges. But, when the systemic risk gives no leeway for offsetting bets, the concept of robustness becomes irrelevant. The crypto-maniacs point that the crypto-universe is the only hedge for systemic risk events generated by dysfunctions in fiat currency systems. But, as we all know, institutional investors have massive positions in crypto, thereby exposing Bitcoin and Co to the unforeseen risks of the fiat universe.

Being antifragile consists of the ability to absorb massive losses triggered by a “black swan” event. Unfortunately, such risks are by nature unhedgeable, and the only solution relies on one’s capacity to operate when the surrounding environment goes through a phase of dislocation.

Seemingly, NFTs investments cannot hedge disruptions in gas deliveries...

It is as if the mission of modernity was to squeeze every drop of variability and randomness out of life— with the ironic result of making the world a lot more unpredictable, as if the goddesses of chance wanted to have the last word. Nassim Nicholas Taleb, Lebanese-American essayist, mathematical statistician, former option trader; Antifragile: Things That Gain from Disorder

Market overview

The Dow Jones is in the red for the second week in a row. Fears fuelled by COVID infections resurgence in Europe plunged the global market sentiment. Tech shares are performing well, the NASDAQ reaching this week its all-times climax. Oil prices dropped significantly because investors foresee a shrinking demand amid the fifth wave of the pandemic.

Federal Reserve Governor Christopher Waller and Fed Vice Chair Richard Clarida mentioned on two different occasions that asset purchase wind-down could speed up over the next few weeks. However, tapering the bond purchase opens the gate to raise interest rates, which will increase the pressure on the equity markets.

Bitcoin enters negative territory amid technical sales driven by the dollar’s rally.

Focus:

Royal Gold

Hedging inflation risk has become the key concern for both institutional and retail investors. The first wave of the pandemic marked the beginning of the overwhelming quantitative easing strategy that resulted in solid equity returns. Gold prices had a zig-zag trajectory, thereby delivering returns below the market’s expectations. Mining companies are sound alternatives to precious metals for inflation hedging.

Royal Gold, a Denver-based royalties company, fits this narrative. The firm does not mine physical gold but acquires and manages precious metal streams and royalties. In addition, Royal Gold manages a global portfolio of rights from mines operated by other companies. The firm has interests in almost 200 worldwide projects mining for gold, silver, copper, nickel, zinc, lead and cobalt. Thus, Royal Gold’s revenue is exposed to a basket of metals, thereby fully profiting from the current rally in rare metal prices.

Focus:

Sony

Sony’s share gained more than 3% ahead of Black Friday, where its highly anticipated PlayStation 5 gaming console is the key attraction. The Japanese consumer electronics conglomerate was one of the major winners of the pandemic. Like all consumer electronics producers, Sony is suffering from a global chip shortage. Investors bet on PS5’s commercial success and Sony’s resilience. The only manufacturers that can strive in the current volatile environment are those that have a strong vertical integration.

Forex:

US Dollar

The fifth wave of the coronavirus pandemic is ravaging Europe. Even countries with a high rate of vaccination in the general population are facing a COVID surge. The perspective of a new lockdown is closer, Austria and the Netherlands taking already steps in this direction. Thus, the Euro is losing ground while the dollar is rising.  The US Dollar Index (DXY), which tracks the American currency against an average of six leading currencies, rose 1% this week, hitting a 16-month high on Wednesday.  

The market bets on the dollar, anticipating Fed’s future tighter monetary policy.

Commodities:

Gas

Global gas markets face supply-chain issues like many other commodities markets. Over the past weeks, gas prices have been particularly bullish and volatile. Gazprom, the Russian energy giant, has an ambivalent behaviour, generating worries about the gas deliveries to Europe over the following winter.

The German energy regulator suspended the process for the Nord Stream 2 gas pipeline linking Russia’s gas explorations to German consumers.

The situation on the LNG market is not better, the levels of European storage being low. The distressed condition of maritime shipping does not facilitate the arrival of LNG cargoes to replenishment points. Therefore, the TTF gas prices in the Netherlands rose by 15%  this week.  The US gas prices have also increased ahead of the cold season.  The US gas production shows record figures, which could bring some ease to the market.

Market outlook

The Dow Jones Index lost ground over the past week ending just near 35,600. The anticipated tapering of bond repurchases should trigger the beginning of the decline.

Bitcoin ended the week below USD 58,500, losing more than 10% in one week. While the technical sales will continue, it is not expected to see the leading cryptocurrency below 50,000 USD.

The energy crisis triggered by a bubble in power, gas, and coal prices impacts oil prices. Nevertheless, COVID resurgence pushed bifurcated the energy market, with oil prices moving into negative territory. If more countries opt for lockdown, we could see a descendent trend in oil prices.

The Gold ounce ended the week on a negative note closing near USD 1,846. The foreseeable market contraction and the inflationary context are good arguments for believing that gold prices could soar in the near future.