Precious metals and bonds make impressive gains in August

• As a result of these developments, alternative investment strategies such as the "Permanent Portfolio" have performed quite well.
• The average yield of Universal Pension Funds in Bulgaria remained relatively stable
• Bitcoin has had a relatively bad month, despite its widespread perception as a "safe haven asset."
• The yield curve has remained inverted in the US - how long it stays that way shows how strong the signal is that a recession is coming

In the weeks immediately following the severe correction in equity markets in early August, things seemed to calm down. Although there was a significant amount of volatility, there was no second major correction for the rest of the month and indices almost stabilized. Make no mistake, however, this stabilization does not mean that risks have disappeared. The trade war between the US and China continues to worry everyone and remains the most serious source of short-term risk for US stocks. In the longer term, investors’ concerns are mainly related to the slowdown in global economic growth and the increasingly current expectations of a recession.

These expectations are particularly relevant in Europe, where the problems of key economic giants such as Germany and Italy continue. After this happened in Italy two quarters ago, economic activity in Germany also fell slightly in the second quarter of 2019. Ironically, countries such as Portugal and Greece, which were the epicenter of a huge financial crisis a few years ago, are now among the better-performing economies within the Eurozone. Of course, this is unlikely to continue if Germany enters a serious recession. As I have repeatedly noted, such a development would drag the entire European Union into an economic crisis.

While equity markets stagnated, the price of gold continued to perform admirably. The huge jump of $80 per ounce in the first week of August was not repeated, but the price continued to rise and reached $1,537 per ounce in the first days of September. The price of silver, of course, followed a similar and even sharper upward trajectory in recent weeks. Bonds, the traditional safe haven when stocks are underperforming, also saw their prices rise significantly in August. Vanguard’s index fund invested in long-term (U.S.) government securities gained more than 10% in August compared to July.

As a result of these developments, alternative investment strategies, such as Harry Brown's "Permanent Portfolio," which we replicate in our Virtual Pension Fund, have performed quite well in recent weeks. Those of you who are registered with our virtual fund know that this strategy made a profit of 4.26% in August, mainly thanks to gold and long-term government securities. Meanwhile, the average yield of universal pension funds was not seriously affected by the problems of the stock exchanges. It fell only slightly to 0.5% in August compared to July. Remember, pension funds invest mainly in debt instruments, and their prices, as I mentioned, have risen significantly over the past month, precisely because of the anxiety related to stocks.

In the realm of alternative investments, Bitcoin did not have a particularly good month. Although many people consider cryptocurrencies to be a "safe haven asset", a bad month for stocks did not make for a good month for Bitcoin. August was actually worse for Bitcoin than July, with its price falling nearly 8.5% during the month. I personally remain skeptical about the idea that cryptocurrencies can play the role of a "safe haven asset". First, because so far they have moved more in line with the movements of stocks, and second, because cryptocurrencies have been the "boom" asset of the last few years, similar to internet stocks in the late 1990s. This type of investment can never play the role of a "safe haven asset". They move with, not in opposition to, the business (credit) cycle.

The U.S. yield curve has remained inverted in the weeks immediately following the initial inversion on August 14, although there has been some recovery in recent days. The performance of the yield curve over the coming months will reveal a lot about the direction of the U.S. economy over the next few years. If the curve remains inverted for several months to come, then it is a sure sign of a recession. However, if the inversion in August turns out to be short-lived, lasting only a few weeks, then the recession signal may turn out to be a "false positive."

In the past, there was only one such case in 1998 when the curve slightly inverted for about a month. There was no recession in the next 3 years – it came only after a second and longer-term inversion in 1999. But my expectations have long been clear – a recession is certainly coming, with the risk being most tangible in Europe. Central banks will have to take unprecedented measures to prevent it, and even then they will most likely not succeed.

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