2018 Year-End Letter, Part 4: Bonds and Gold


We’ll limit our narrative on bonds to the investment grade space (high quality corporates and treasuries) and keep it short and sweet.

In years past, and no doubt in years to come, we have been (will be) active participants in the bond market. As that sentence implies, we’re not at all active at the moment. Reason being, bonds are where we generally go for stability and for income, over extended periods of time. And the thing is, while the income from high quality bonds you can count on, stability of principal is all about existing general conditions.

For our purposes, bonds typically occupy the portion of client portfolios that we manage with preservation of capital as our top priority, which is why we prefer individual bonds over bond mutual funds. As, with individual bonds, we know precisely what we’re getting; we know when we get our money back (maturity) and we know how much income we’ll receive along the way. But here’s the thing about “along the way”, if we buy a bond when interest rates are historically low, and they rise over the course of “along the way”, the principal value of our bond declines, sometimes — depending on when it matures and the extent of the rise in interest rates — dramatically. 

Now, I’ve had people tell me that the point I made in the previous paragraph doesn’t matter; “if you just hold the bond till it matures you’re not out any money.” Oh how I beg to differ!

If, during a period of low interest rates, you’re going to capture any yield of consequence (again, we’re only talking high quality bonds here), you’re going to have to buy a bond with a maturity at least a few years out. Do that, then watch interest rates rise, and, aside from the beating your account statement will take as your bond tanks in value (but you’re not worried because you’ll get it all back at maturity), you’ll be losing out on years of what would’ve been a higher yield had you exercised patience and waited for rates to move off of those historic lows.

For us, general conditions come first: When the environment is on balance growthy, we’re pretty much out of the bond market and into CDs and money market funds with that chunk of client portfolios where safety is paramount. When general conditions point to a contraction (recession), that’s when we get active. And, typically, that period begins from a higher level of interest rates.

Presently, despite recent headwinds, our assessment is that general conditions remain on balance growthy, and, thus, we’re not presently inclined to go wading into the bond market. Oh, but make no mistake, the cycle will ultimately peak (along with interest rates), which is when we’ll be looking to lock in some attractive yields as we navigate the next recession/bear market. Thereafter, as the next recession begins to bottom and makes way for the next expansion we’ll be talking about carefully adding a smidgen of high yield bonds (lesser quality) into the mix, as they tend to perform exceedingly well during the early stages of expansion. Whether (assuming we go there) we add high yield debt into the growth or conservative portion of a portfolio will be determined at the time. Again, now is not the time…


Gold, frankly, fascinates me. Not so much the metal itself, but the attachment to it in certain circles. I swear, in certain circles, gold is a cult! And its followers are an interesting bunch to listen to.

Before I get into the weeds, let me get this statement out of the way. 

NEVER take advice on gold from an organization that has “gold” in its title! 

I’ll assume I don’t need to elaborate…

Okay, so, Gold, what do we do with it. Well, I don’t believe we crown our teeth with it much anymore. But some of us wear it. Folks in other parts of the world wear it a bunch. In the past I’ve traded it (long) for myself around the wedding season in India when I thought other factors supported the price. At other times I’ve traded it on the short side when I thought macro factors should depress the price. At times my results had me feeling smart, at others, well… depressed…

Actually, gold really isn’t that hard to figure out at any given time. Thing is, it’s different things at different times that effect the price.

It’s had a decent run of late, and some folks (some who have the word “gold” in their websites’ titles) have said it’s rallying out of justifiable fear that the world’s in very deep economic doodoo. I say that’s doodoo! Gold has had a decent run for the simple fact that the Fed is backing off, and, therefore, adding to other forces (which I’ll touch on in the next section), the dollar has been in a sour mood of late. For months now — and this is not always the case — the strongest correlation I’ve seen is between gold and Fed policy. 

To cut to the chase, while we’re not opposed to adding a long-term position in gold when the stars align, we’re not looking to go there at the moment. That said, I wouldn’t trade against it either, not until the Fed gets back on track with interest rate hikes (which’ll eventually come if our present economic assessment holds) — unless, that is, gold begins trading on other factors in the meantime.


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