Lord Rothschild Reiterates Warning

Almost exactly a year ago, arguably the most famous name in global finance, Rothschild, and in this instance Lord Jacob Rothschild, said this:

“The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.” 

That is only part of what he said and this was only part of a full article we wrote outlining why gold tends to go up when shares go down.  It is certainly one worth revisiting here.  One cannot understate the power this name has wielded in finance for over 250 years.

Late last week he was out again with his annual report and this is what he had to say:

“We do not believe this is an appropriate time to add to risk. Share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured. The S&P is selling at 25 times trailing 12 months’ earnings, compared to a long-term average of 15, while the adjusted Shiller price earnings ratio, which averages profits over 10 years, is approximately 30 times.  

The period of monetary accommodation may well be coming to an end. Geopolitical problems remain widespread and are proving increasingly difficult to resolve. We therefore retain a moderate exposure to equity markets and have diversified our asset allocation towards equity investments where value creation is driven by some identifiable catalyst or which are exposed to longer-term positive structural trends.”

This comes fresh after our recent article where Ray Dalio, the head of the world’s largest hedge fund, likewise warned people to get some of their money into gold before this plays out.

Whilst, as Rothschild and Dalio say, shares valuations are hitting new highs, gold is effectively bouncing along the bottom.  Even so, this year gold has outperformed both the S&P500 and Dow Jones.  In Australia, our stronger Aussie dollar has taken most of the shine off those 11% USD spot gains, up only 1.3% so far this year.  That said, everything is relative and our own All Ords is up only 1.4% and depending where you live, property has even seen declines.  As Lord Rothschild warns, the whole setup looks particularly fragile at the moment.  When, not if, financial markets correct, history tells us gold and silver will languish no more.