Madness

“What have I done ?”

– Colonel Nicholson (Alec Guinness), The Bridge on the River Kwai, 1957.

Rightly considered a masterpiece, David Lean’s The Bridge on the River Kwai, adapted from the novel by Pierre Boulle, deals with British prisoners of war forced to build a river crossing to accommodate the Burma-Siam railway, unaware that allied forces are planning a commando raid to destroy it. It soon becomes clear that in their own way, both the British Colonel Nicholson, played by Alec Guinness, and the Japanese camp commander, Colonel Saito, are obsessive.

The concept of collaborating with a sworn Eastern enemy doesn’t seem so alien in our politics today. The Conservative Budget just announced might almost have been drafted in Beijing. In economic matters, the Tories have become utterly detached from any lingering Thatcherite source code. Chancellor Rishi Sunak brazenly claims to be committed to tax cuts even as he raises taxes and spending to their highest levels for 40 years – in large part in response to an alleged pandemic that originated in China. If the Tories weren’t trying to deliberately blow the economy to smithereens, they are doing a pretty good job of pretending that they are.

But then blowing up economies is not a uniquely British form of economic suicide these days. Alleged President Biden is doing comparable damage across the pond. Conscious that all political dialogue in these strange times fosters enmity, we move swiftly on to matters of investment..

Otavio Costa is a portfolio manager at Crescat Capital and he has just published on Twitter an impressive selection of charts highlighting the compelling valuations now available in the precious metals and precious metals miners market. For example:

Miners are now trading at the cheapest fundamental multiples we have ever seen.

Assuming the current 2022 free-cash-flow estimate relative to the current enterprise value, the median company among the 50 largest miners in the US and Canada exchange now trades at an unprecedented 7% yield.

Note that in aggregate terms, the same basket of companies also trades at its highest free-cash-flow yield in history:

Believe it or not, today, 73% of the top 50 gold and silver miners are profitable on a free cash flow basis. That is the highest level we have ever seen…

Silver remains historically undervalued relative to money supply and is now technically forming a double bottom.

As inflation continues to develop in the economy, see below the incredible link between gold and CPI since the GFC. Note how after the pandemic lows, gold front ran the potential risk of a rise in consumer prices and the entire precious metals market appreciated sharply.

As Otavio also points out,

Precious metals are now at their cheapest levels relative to other commodities since 2009. The other 2 times this ratio reached such depressed levels also marked incredible buying opportunities.

In summary,

Gold and silver miners have never looked this cheap relative to the S&P 500. Their free-cash-flow yield is almost twice the overall market. The value and growth proposition embedded in miners today is unmatched by any other time in history.

Essentially, buy precious metals (in particular, the monetary metals, gold and silver, and cash-generative related mining concerns with little or no debt); wear diamonds.

Intriguingly, given rising global inflationary pressures,

If gold and silver miners were considered a sector, it would be the only part of the economy today that generates higher free-cash-flow yield than inflation.

You can follow Otavio on Twitter for the full analysis via @TaviCosta.

In last week’s commentary we highlighted the views of Jeff Currie, Global Head of Commodities Research at Goldman Sachs:

..the revenge of the old economy will leave its mark. Periods of commodity price pressure will reoccur as broad-based demand meets inadequate infrastructure.

If policymakers’ goals of broad-based prosperity and a massive buildout in green infrastructure are to be met, commodity prices will need to significantly overshoot to the upside to provide the incentive for investment. This is needed to compensate for the growing risks involved in long-cycle capex projects and the inherent complexities surrounding the green energy transition. As we argued a year ago, a new commodity supercycle is upon us.

It is both gratifying and exciting to us to observe that in the midst of the most confused and confusing global environment for investors perhaps in history, there are still some compelling investment themes for those investors with the stomach for the fight, notably gold and silver. Given the inflationary backdrop, the word ‘compelling’ does not seem like an exaggeration to us.

Back to the film. <Spoiler alert.> The Bridge on the River Kwai ends in chaos. Having determined to complete the bridge, Colonel Nicholson is thrown into confusion by the allied attack on it. Wounded and dazed by the discharge of a mortar, he stumbles towards the detonator and topples onto the plunger, bringing down the bridge and a train sent to mark its opening.

Watching the carnage unfold, the British Major Clipton looks on in disbelief and utters one word: “Madness !” Which, in light of the bizarre response to Covid and an equally bizarre commitment by governments worldwide to battle the unscienced non-issue of climate change, seems like a pretty good summary of our current economic and political situation.