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The Downside of the Index Market – The Big Get Bigger
Elements is AuAg's monthly letter highlighting macroeconomic observations from the previous month. Our focus is on events that impact the investment environment for precious metals and green tech elements. These observations are presented with images and charts laid out efficiently and concisely.
Gold, Silver, and Fiat Currencies
After gold’s record high of 2,790 USD on October 30, its price has cooled slightly, ending November at just under 2,650 USD, a decline of -3.52% for the month. As the dollar strengthened against most other currencies, the decline was smaller in EUR at -0.72% and in SEK at -1.28%. The price of silver, which is more volatile, fell by -6.27% in USD during the month.
After this month’s corrections, gold and silver are now up equally for the year, approximately +28.5% in USD, and an additional +5.6% in EUR and +10.2% in SEK. It has been an exceptionally strong year for precious metals, and in our “Outlook 2025,” which will be published in December, we foresee an equally strong 2025 ahead.
With just under a month left in the year, we see that our target for gold in our “Outlook 2024” of 2,475 USD (+20%) was slightly conservative, and our revised target of 2,750 USD from August appears more relevant. However, silver still has a way to go, and it is here that we see the greatest potential moving forward. The GSR (Gold-Silver Ratio) is above 86:1 but was as low as 74:1 earlier this year, presenting significant "opportunity" as silver gains momentum and the GSR moves toward 70:1.
The U.S. and its incoming president have initiated a currency war using the U.S. dollar as a weapon. This gives the impression of an empire using threats to force the rest of the world to submit to the dollar. It is difficult not to draw parallels to the events described in Jim Rickards’ book “Currency Wars” from 2011. The dollar strengthens initially, yet Trump seeks a much weaker dollar. The EU may yield, but will BRICS countries really accept a world and global trade dominated by one country and its currency? When the currency war escalates in 2025, there will only be two currencies in the international monetary system without counterparty risk: gold and silver.
Silver in Industry
The biggest use of silver is in industrial applications. Data from the Silver Institute suggests that 2024 will be a record year, as the industrial sector has never used so much before (see image below). Its unique properties make it nearly impossible to replace, and its applications span a wide range of uses. Almost every computer, mobile phone, and car contains silver. It is the ideal material for coating electrical contacts—such as those in circuit boards—due to its high electrical conductivity and durability.
Silver membrane switches, which activate with a light touch, are used in buttons on televisions, phones, microwaves, toys, and computer keyboards. These switches are highly reliable and withstand millions of on/off cycles. Silver is also used in conventional switches, such as those that control room lighting.
Vehicles are becoming increasingly computerized, and silver plays a central role in their operation. For example, every electrical connection in a modern car is activated using silver-coated contacts. Starting the engine, opening electric windows, adjusting power seats, closing an electric tailgate, and key safety functions are all performed using a silver membrane switch.
Silver is a frequently used catalyst in manufacturing processes for products used daily. Silver accelerates the process without undergoing any transformation itself. When metal components such as pipes, faucets, ducts, and electrical wires need to be joined, silver is essential. Without silver, none of these connections would be as strong, tight, or electrically conductive as the original materials.
Engines that operate continuously at high temperatures require stronger bearings than other machinery. When steel ball bearings are electroplated with silver, they become stronger than any other type of bearing. Jet engines on airplanes, for example, rely on silver bearings to ensure safer flights.
Silver also plays a crucial role in solar cell production and has extensive applications in healthcare.
Even before people fully understood how silver functioned as an antibiotic, it was used to inhibit the growth of harmful bacteria. During long sea voyages, for example, silver coins were dropped into barrels of water and wine to keep the liquids fresh.
The Downside of Index Investing
We want to draw your attention to a phenomenon that we believe will have significant effects on investors' portfolios in the future.
“Big gets bigger.” The U.S. has been the world’s largest stock market for many decades and continues to grow. The U.S.'s weight in the global index (MSCI All-Country World Index) is now a staggering 73%. The question is: when you own a global index in your portfolio, do you actually hold global exposure, or is it just a U.S.-proxy index?
It is the growing investments in “low-cost” global index funds and ETFs that drive purchases into the largest companies that have the most weight in the index—and those companies are predominantly American. The market value of these companies automatically increases with the rising inflows. The larger the market value, the greater their weight in the index, which in turn drives even more automatic purchases of these companies' shares by the growing global index funds.
This phenomenon has been long warned about by the "father of indexing," John Bogle, founder of Vanguard. How will the market function if indexes simply buy indexes? What will corporate governance look like when the largest shareholders are three mega-fund companies with no individual engagement?
As a side effect of this snowball effect, the market value of the 10 largest American mega-companies in relation to the U.S.'s GDP has reached an astounding 63.8%. During the dot-com crash, the top 10 companies accounted for only 28.4%, compared to today’s 63.8%.
This phenomenon—the downside of index investing, where big gets bigger—will likely continue to feed itself, and many will be able to profit from the trend.
However, this concentration in a single country and its 10 largest companies may one day lead to a reverse movement, where declines feed further declines in an unprecedented spiral. But as long as the market keeps rising, there’s no immediate danger—except that the underlying problem grows bigger and bigger.
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Featured content this month
Use our unique "Research Centre" on an ongoing basis to take part in our current view of the market and the macro environment. We communicate all the time. Here are a few media links from the past month:
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AuAg Gold Rush
Portfolio updates from the fund managers for AuAg Gold Rush.
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Gold Crushes the Stock Market in the 21st Century: "Everyone Should Own Some Precious Metal"
Gold has outperformed the stock market both this year and since the turn of the millennium. Fund manager Eric Strand predicted this year's rally and now forecasts a 25% price increase for next year.
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