Taming the Bull by Any Means Necessary: Paper vs. Hard Assets

Let's start off with a quick market recap: Growth has been selling off aggressively, oil and rates have been ripping, and it looks like we may be either entering a growth to value rotation or a correction. Our thesis remains the same, hard assets are the market to be in. By hard assets we mean Gold, Silver, Oil, etc. Today we are gonna talk about the differences between paper and hard assets and when it makes sense to hold one or the other. 

Paper assets are assets that represent something; they represent assets. These could be stocks, bonds, currencies, money market accounts, and investments that are not physically stored or held. “For paper assets to have a tangible value, there must be a working financial system in order to back them up and exchange them. In the cases where a financial system collapses, paper assets commonly sharply decline along with it.” 

“Hard assets contain actual value in the nature of the item itself. There are many forms of hard assets, but among the most popular are gold, silver, diamonds, oil, platinum, land, and other such physical holdings.” Hard assets are used in downturns, and are associated with having a “negative beta”, which means that when financial markets correct or go down, these assets tend to rise. 

When does it make sense to hold paper assets, and when does it make sense to hold hard assets? Generally speaking, a healthy combination of the two is perfect. Those who trade and invest with a heavy macro thesis may prefer to trade hard assets over paper assets, while equity traders usually hold paper assets. There are also some paper assets that move similarly to hard assets, among them gold and silver miners, royalties, and ETFs (exchange traded funds). Furthermore, oil drillers, exploration companies, hydraulic fracking companies, oil and gas companies, and oil refineries can all be replacements to hard assets. While these are paper assets, they move similar to hard assets because they deal in commodities markets, and their profits and losses are heavily affected by the prices of hard assets. We believe an allocation of at least 10% of net liquidity to hard assets such as gold, silver coins, and various cryptocurrencies—as they tend to outperform in a bearish market. 

Finally, our macro/value views. We remain bearish on growth stocks as a whole and are bullish on commodities. We would heavily advise against holding indexes such as the QQQ or SPY, and, if you decide to make any investments in capital markets, we recommend doing the proper research on individual securities—if you are able to do so. Long term, we see the travel explosion trade to still be playing out, and we do not believe that it has fully priced in yet. The only thing to look out for is the valuation of oil and commodities companies, as they are rallying and may reach levels where they will be considered “growth stocks.” Again, holding growth isn’t bad, just make sure you're holding the individual companies rather than indices. We must warn that holding individual securities is only for the investor that truly has the knowledge and time to look into a company's balance sheets and income statements, to an extent where the investor has supreme confidence in a position. If you are not able to do said research, we strongly advise against holding individual securities.We strongly believe that we will see either a recession or hard pullback in the coming 6-8 months, and this will be a phenomenal time to buy distressed value and growth. We will talk about that next week. We are going to leave you off with two charts: BP Prudhoe Bay Royalty Trust BPT and Glencore GLNCY, both stocks that have potential long term value to them because they go along with the travel explosion trade. Additionally, they seem to have not priced in yet.




Sources:

 “What Are Paper Assets?” Herold Financial Dictionary, December 8, 2016.

https://www.financial-dictionary.info/terms/paper-assets/#:~:text=Paper%20assets%20stand%20apart%20in,and%20other%20such%20physical%20holdings. 

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