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Navigating Two Megatrends with Commodities Exposure

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Stockholm (HedgeNordic) – Precious metals specialist Eric Strand has launched a fund boutique out of Gothenburg that manages a diverse range of funds focused on various metals. These include a fund exclusively dedicated to silver, one focused on essential metals crucial for the green and high-tech future, and an ETF centered on gold mining companies. A fourth fund from this lineup, AuAg Precious Green, represents the modern alternative to the classic 60/40 portfolio that offers exposure to two megatrends – monetary inflation and the green transformation.

It all Started with “What is Money”

Eric Strand’s answer to the question of “what is money” has laid the foundation of the “AuAg” brand. The “AuAg” brand combines the periodic table symbols for gold and silver, rooted in the historical use of these metals as a standard currency before the widespread adoption of fiat or paper money. “If one studies the history of money, you always come to gold and silver,” says Strand. “The reason for that is gold and silver are the only forms of money without counterparty risks.”

“If one studies the history of money, you always come to gold and silver.”

As Alan Greenspan, Former Chair of the Federal Reserve of the United States, once noted: “I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature.” According to Greenspan, “credit instruments and fiat currency depend on the credit worthiness of a counterparty.” In addition to the lack of counterparty risk, both gold and silver possess unique physical properties, such as electrical and thermal conductivity, malleability, and unreactivity, among others, that contribute to their intrinsic value.

As evidence that gold serves as ‘real’ money, the yellow metal has served as an effective hedge against monetary inflation over a long time horizon due to its limited supply and inherent worth. Gold has delivered an annual return of about 7.7 percent in U.S. dollar terms since August 15, 1971, when the U.S. abandoned the gold standard. “The U.S. dollar has experienced a cumulative devaluation of 97 percent relative to gold since the historic date of August 15, 1971,” a devaluation that reflects monetary inflation – the increase of the supply of money in the economy.

“What we see in the financial system is that it doesn’t really matter what the central banks say; everything is about what they do,” argues Strand. And what Strand and everyone else observe is that the balance sheets of central banks have been expanding rapidly. “This trend has been growing stronger as central banks have more tools at their disposal,” he argues. “In this existing fractional reserve banking system, we have a debt system. The more debt and credit we create, the more money there is in the system.”

“Unfortunately, we are pretty sure that we will never have a sound financial system. The second-best thing you can do then is to invest in gold and silver.”

The problem behind – and bigger problem resulting from – the 2008 financial crisis was the debt situation, according to Strand. “We quickly fixed the financial crisis with liquidity, but we haven’t solved the problem,” he argues. “We have two to three times more debt in the system, which means the problem has become larger, and we are kicking the can down the road.” For that reason, AuAg Precious Green allocates about 40 percent of its portfolio to precious metals, mainly gold, as a robust portfolio protection against monetary inflation and the erosion of the purchasing power of money. “We love a sound financial system. Unfortunately, we are pretty sure that we will never have a sound financial system,” argues Strand. “The second-best thing you can do then is to invest in gold and silver.”

The 60 of Strand’s 60/40 Portfolio

AuAg Precious Green redesigned the classic 60/40 portfolio by substituting bond exposure with physical gold as robust portfolio protection. The remaining 60 percent replace the stock allocation with investments in green-tech companies, providing exposure to the green transformation megatrend. “We believe that green-tech stocks will outperform global equity markets and that gold will outperform bonds in the coming decades,” Strand explains the rationale behind the design of AuAg Precious Green.

“We believe that green-tech stocks will outperform global equity markets and that gold will outperform bonds in the coming decades.”

The equity exposure of AuAg Precious Green comprises four distinct pillars to ensure broad exposure to the green transition theme. The first pillar includes companies engaged in the production of green energy, primarily solar cell companies. “We have strong confidence in solar energy because the advantage of solar lies in its scalability, from large-scale installations to smaller setups,” explains Strand. The second pillar is dedicated to investments in energy storage companies, while the third pillar focuses on companies that provide solutions for more efficient electricity use and engage in recycling activities. 

The fourth and final pillar consists of mining companies focusing on copper and lithium, two essential metals for facilitating the green transition. The fund’s focus on copper is particularly noteworthy, as this metal plays a critical role in technologies essential to the energy transition, including electric vehicles, charging infrastructure, solar photovoltaics (PV), wind power, and batteries. 

According to Strand, “the rapid, large-scale deployment of these technologies globally, EV fleets particularly, will generate a huge surge in copper demand. Major investments in the power grid to support electrification will further amplify the trend.” Copper’s importance extends beyond the energy transition, as it continues to be an indispensable material in other industries as well. “The growth associated with the energy transition, in addition to the growing demand from more traditional uses, is projected to result in a more than twofold increase in copper demand by 2050.”

“Our approach involves distributing our investments across these four different strategies within the green transition, which not only gives us a better equity exposure but also offers focus with a good level of diversification.”

AuAg Precious Green diversifies its 60 percent portfolio across 20 companies, allocating to five companies among each of the four pillars. “Our approach involves distributing our investments across these four different strategies within the green transition, which not only gives us a better equity exposure but also offers focus with a good level of diversification,” says Strand. “Some funds are focusing on being active but for us, it’s enough to have such a good strong case and to make a rule-based management within the case.”

Role in a Portfolio

Since launching AuAg Precious Green exactly three years ago, Eric Strand positioned the fund as a truly alternative, special fund. “This is an alternative fund in a UCITS structure. It’s so unique that even Morningstar cannot give it a category,” notes Strand. AuAg Precious Green has celebrated its three-year anniversary this September, having delivered an annualized return of 16.5 percent in Swedish krona over the three years with a correlation of 0.35 to the SIX Return Index. As such, “AuAg Precious Green can work well in any portfolio,” says Strand. “The fund’s strategy is fully transparent and investors can see all investments in real-time, so everyone knows what they are buying into at any given time.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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