Uncertainty = Risk = Volatility

10 June 2024 By PDSNET

We live in uncertain times. Among the sources of this uncertainty are the final outcome of the recent local elections (i.e. what the shape of our future government will take) and the prospect of the American elections on 5th November 2024. In the background are the wars in Ukraine and the Middle East which constantly threaten to escalate.

The uncertainty means greater risk and has led to markets being more volatile as investors constantly reposition themselves to either benefit from what is coming or protect themselves against it.

One of the most important axioms in the stock market is that:

Uncertainty = Risk = Volatility

The least volatile chart in the markets is a straight line – preferably (at least from an institutional perspective) one which slopes gently upwards yielding a capital gain of between 15% and 30% per annum for an extended period of time. Any departure from this ideal adds to the risk inherent in the investment and results in it being re-rated downwards.

In times of uncertainty, the smart money moves into relatively low return, low risk assets until the uncertainty has passed or at least fallen to acceptable levels. Usually, this means a move out of emerging markets like South Africa and into secure investments like US Treasury Bills.

Of course, the most secure of all investments is gold. Its security lies in the fact that it is scarce and the fact that all investors have recognised it as the most secure asset for at least 5 000 years.

Because it is the most secure of all assets, it has a zero return.

The only reason to hold gold is to protect your wealth from the weakness of the many “paper” investments – such as US T-bills, property, shares, bonds and dozens of others.

Right now, gold has broken very clearly above its long-term resistance at $2060 and is trading for around $2310. That is a considerable jump for an asset which does not pay any interest, dividends or rent. It means that a huge amount of international cash is now just sitting in gold, earning a zero return, because investors are worried about impending uncertainties.

Bitcoin shares many of gold’s characteristics – it also offers no return at all and it has no fundamental value beyond the fact that some people believe it has value. There are, however,  a number of key differences.

  1. Cryptocurrencies are a very recently invented digital “asset”. Fifty years ago, nobody had ever heard of cryptocurrencies. Gold, on the other hand, has been around for millennia. It has literally been accepted as the ultimate store of value since the dawn of civilisation.
  2. Most people in the world still do not know much about cryptocurrencies or believe them to have great value.
  3. Bitcoin has no physical presence. You cannot hold it in your hands. It is an alignment of electrons on the cloud and inherently intangible. It requires a “leap of faith” to believe in its value.
  4. Almost every central bank holds large amounts of gold as a reserve asset. Only three central banks - China, the US, and Germany - have any significant holdings of cryptocurrencies.

Since Bitcoin has no fundamentals, it can only be evaluated technically. Consider the chart:

Bitcoin: 5th of January 2024 - 7th of June 2024. Chart by ShareFriend Pro.

You can see that Bitcoin made a cycle low in January this year at $38896. Then it rose to a new all-time record high of $72657 on 13th March 2024. After that it made a second top on 8th April 2024 at $71792 and then just a few days ago it made a third top on 5th June 2024 at $71677. If it falls further from current levels, this could become what technicians call a descending triple top  – which is arguably one of the most bearish formations in technical analysis.

It means that one or more very large holders of Bitcoin are off-loading massive quantities of the asset in a controlled manner. Whenever it goes much above the previous record high at $68536, someone very big (and hence probably very knowledgeable) is quietly getting out because they are seeing the top of this market.

Our advice remains the same: If you have them, sell them. If you don’t have them, don’t buy them.


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Bell Equipment

We are often asked what prompts us to add a share to the Winning Shares List. The answer is that it is a variety of factors – but usually because the share appears to be very cheap in relation to its fundamentals. In other words, we expect it to be upwardly re-rated as its fundamental value becomes recognised by the institutional fund managers. A

JSE All Time Record High

On Friday last week, the 12th of July 2024, the JSE Overall index closed at 81686 – an all-time record high. Consider the chart:

The chart shows that the Overall

Construction

The entire construction industry was decimated by the 2008 sub-prime crisis, the ANC under Jaco Zuma’s presidency and then finally by the pandemic in 2020. Hundreds of thousands of jobs were lost and massive companies like M&R were reduced to penny stocks on the JSE.

The JSE Construction and Materials Index (JS5011)

Murray & Roberts

A company’s debt is critical in establishing the risk inherent when investing in its shares. High debt levels expose the company to high interest and capital payments and can swallow up a large part of whatever profits it makes. Low debt levels give the company the headroom to invest in further growth either organically

Mr Price

Mr Price is a well-known and focused retailer of clothing in South Africa. It is a quintessentially South African company, and its performance is a direct reflection of the state of the economy and the level of consumer spending. It is an extremely well-managed company in a very tough and competitive market. Clothing is sold by many dedicated outlets in South Africa and almost

Winning Shares List

Investment in the share market is not about certainties – it is about probabilities.

Success comes from bending the odds in your favour, so that it becomes like playing a roulette table where you have a 60% or 70% chance of winning.

That, of course, means that you must fully expect to lose 30% or

Wall Street and the Rand

As South Africa edges closer to election day, the ANC has been desperately doing everything in its power to pass populist measures to bolster its waning support, especially with the country’s lower income groups. This includes the signing of the highly controversial National Health Insurance (NHI) bill into law by President Ramaphosa.

There

Pan African Resources

In our opinion, the gold price in US dollars should continue to perform well for the rest of 2024 with the potential for rising inflation and increasing political instability in various parts of the world. The upward trend will, of course, be marked by corrections, but the overall direction of the trend is clear. Consider the chart:

Market Overview

This week, the US Federal Reserve Bank’s monetary policy committee (MPC) held interest rates unchanged at their historically high levels and said that they intended to hold rates at these high levels for longer than previously expected. This information was followed by the April 2024 non-farm job creation number which came in at 175 000 – considerably

Correction

The progress of the S&P500 index of the 500 largest companies on Wall Street is important because stock markets around the world, including the JSE, tend to follow it sooner or later.

On 19th January this year, something momentous happened when the S&P broke above its previous all-time record high