It took 27 years for the S&P 500 to break even after the 1929 crash
It took 15 years to break even after the Dot Com crash
The Japanese Nikkei hasn’t broken even since its 1989 crash
According to the Buffet Indicator, Tobin’s Q ratio and the Shiller Cape Ratio the equity markets are at historic highs and grossly overvalued
By stepping aside and into gold, investors will make attractive returns during the correction and be in a position to rebalance their portfolio after the correction and invest at major discounts.
Introducing The BMG Diversified Hedge Fund – designed to protect the portfolio during the correction with gold and then acquiring the best of the best mutual funds and REITs.
Unprecedented Triple Bubble in Financial Assets
Market Has Become Overvalued
The main premise of this offering is that we’re heading for a major decline in financial assets like stocks and bonds This particular chart, shows the various bubbles that we’ve had – we’ve had a tech bubble up to 1999 and a housing bubble up to 2008.
Today we have a historic triple bubble in equities, bonds, and real estate. This rise in equity prices is the longest in history.
When faced with an imminent decline the Wall Street maxim of always staying invested is a bad strategy.
One of the measures that equities are overvalued is to compare equity valuations to corporate profits. This chart, shows that since about 2011 corporate profits have declined 4%, whereas the price of the shares has grown by 224%. The differential between these two is the bubble.
We would not be in a bubble if corporate profits increased in tandem with equity valuations.
Overvalued Equity Markets
One of the traditional measures of equity valuation is Tobin’s Q ratio, which measures market cap to asset values.
As you can see by this chart, everything above 1 is overvalued and everything below one is undervalued. The current valuations today are about equal to the tech bubble peak in 2000.
The Shiller cap ratio is also flashing a warning sign with the long term mean at 17.3. For example, the 1929 crash was at 32, in 1999, the tech bubble hit 44 and we’re currently at 38.
Again, equities are grossly overvalued and the average over that long term period is 17.
The final indicator that we are in the midst of an equity bubble is the Buffet Indicator. It measures market cap to GDP and here we see again that the peak was in 1999 at 143, whereas today we are at 203. The long-term mean is 115%.
Again, grossly overvalued.
Record High Margin Debt
What makes matter worse is that since the crash of 2008 the margin debt has grown dramatically and has increased over 479% since 2009.
What that means is that as the markets decline and investors get margin calls, they’ll be forced to sell, resulting in an acceleration of the decline
Long-Term Interest Rates
The other thing is to look at long term interest rates. Today they are about as low as they can go so they’re not likely to go significantly lower. However, if they revert to their long-term average of 6.3% it would not only decimate the bond markets but also cause a major crash in equities and real estate.
The US federal government would barely have enough income from tax revenues to cover the interest cost on $30 trillion in debt.
Overvalued Real Estate Markets
Real estate markets are also in a bubble. This chart compares residential real estate price increases compared to the increase in household income. Similar to equities, you can see there’s a divergence there and the disparity represents a bubble.
Case-Shiller Ratio
This chart shows the Case-Shiller Home Price Index, as we also get confirmation there that we’re in a bubble because we’ve achieved similar highs to those achieved at a peak in 2007 just before the market crash
Real Estate Bubble By City
UBS has identified which cities are in a bubble. And you can see from this that in Canada there are two cities in a bubble, Toronto, and Vancouver
Unsustainable Debt to GDP
Excess debt growth is not necessarily a problem if it keeps pace with GDP. However, in this case the US debt is growing by far greater amounts than GDP. And again, the differential between the two is an indicator that this is also a bubble.
201% growth in debt since 2008 while only a 58% increase in GDP
Too much debt, not enough GDP.
Global Debt at Record Level
Globally, the same thing is happening. The global debt to GDP has increased by 376% since 2000 and is projected to surpass $258 trillion in 2020.
What Has Been the Driving Force Behind the S&P 500
As you can see from this chart, the performance of the S&P 500 is directly correlated to the expansion of the Federal Reserve balance sheet. So as the Fed created more money and put it into the economy and initially has gone into equities and real estate.
However now that we’ve had declines in GDP at the same time as 40-year highs in inflation we are clearly in a stagflationary environment. During previous stagflations gold performed very well and outperformed inflation while financial assets declined.
Performance of Physical Gold vs Stocks during Equity Market Declines
You can see that the first case was in 1976, where the S&P lost 19% and gold went up 53% Similarly, in the recent market crash, S&P declined 56%, while gold increased by 25% These two charts show the last two corrections to the tech bubble in 2002, a real estate bubble 2007.
These two charts show the last two corrections in the tech bubble in 2002 – 2003 and the real estate bubble 2007 – 2009. During the tech bubble, gold went up 18.7% compared to a loss of 18% for the S&P and 17% for the Dow, with only a slight gain in mining stocks 3.3%. Similar performance in 2008, gold increased by 26% and mining stocks declined 21% Dow declined 42% the S&P declined 46%.
If you don’t own gold…there is no sensible reason other than you don’t know history or you don’t know the economics of it.”
Ray Dalio
Founder & Co-Chairman,
Bridgewater & Associates
(One of the world’s largest hedge funds)
Gold’s Performance In World Currencies
As gold is money, it should be compared to currencies rather than investments.
In this chart, you can see the performance of gold in all the major currencies for every year since 2000. The average return over the eleven years, in US dollars, has been 9.7% with a 14.9% standard deviation.
More importantly though, the downside deviation was 10.5%.
On an overall basis of all the currencies, the global average has been a return of 10.9%, a standard deviation of 15.5% and a 9.5% downside deviation.
The weakest currency was the Taiwan Dollar, which generated returns of 8.3%. The standard deviation was 11.6%, and the downside deviation was 11%.
Gold Is A Barbarous Relic
At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.”
Bank of International Settlements (BIS)
At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.”
Office of the Superintendent of Financial Institutions (OSFI)
A zero percent risk weight to cash owned and held in all of a banking organization’s offices or in transit; gold bullion held in the banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis to the extent gold bullion assets are offset by gold bullion liabilities.”
US Federal Deposit Insurance Corporation (FDIC)
One of the things that is important to understand is the myth that gold is a barbarous relic and is not needed in the modern economy.
This is inconsistent with the quotes that are being made by some of the largest financial institutions. For instance, the Bank of International Settlements has said that at national discretion gold bullion held in own vaults or on an allocated basis to the extent that by bullion liabilities can be treated as cash and therefore risk rated as zero percent.
From the Office of the Superintendent of Financial Institutions, Gold now qualifies as a 0% risk rating for risk-based capital purposes.
From US Federal Deposit Insurance Co A zero percent risk weight to cash owned and held in all of a banking organization’s offices or in transit; gold bullion held in the banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis to the extent gold bullion assets are offset by gold bullion liabilities As you can see, these regulatory agencies do not think gold is an archaic relic.
Gold has Outperformed the S&P 500 Total Return
This next slide shows how gold has outperformed the S&P Total Return Index over the last ten years.
And this chart clarifies the criticisms that gold does not pay interest or dividends. Total Return Index includes dividends whereas gold does not have any interest or dividends. As a result, gold’s performance is not dependent on someone’s promise of performance nor is it someone else’s liability.
As you can see, the performance of gold is more than twice that of the S&P. 500 total return index.
Inflation Adjusted Returns for Gold vs S&P 500
In addition, gold has also outperformed the S&P. 500 on an inflation adjusted basis by 138%. You can see from this chart that the S&P 500 generated 337% since 2000, whereas gold generated 475% over the same period.
Gold Bullion Has Outperformed Mining Stocks
This chart clearly indicates that holding physical bullion is superior to investing in mining stocks.
You can see here that in the beginning of this bull market, up until about 2011 mining stocks did in fact outperform gold. Ever since 2011 however, gold has outperformed mining stocks.
Gold Isn’t Simply Another Commodity
Many people think that by investing in a commodity index gives them some good exposure to gold.
However, when you compare gold bullion against the Bloomberg commodity index you can see that gold has gone up 558% versus 24% for the commodity index. A difference of 534%
Huge Disparity in Global Financial Asset Values and Gold
There’s a disparity between financial markets like stocks and bonds and above ground gold. You can see here that we have $303 trillion in bonds, $123 trillion in stocks and only $2.85 trillion of investable gold.
This shows you a pie chart breakdown of above-ground Gold. While there is about $13.3 trillion above the ground gold, most of it is in jewelry. Some of it’s in industrial parts, and some of its official sector demand. Here we can see that private investment in the gold bullion holding is just $2.85 trillion.
Low Percentage of Gold in Investment Portfolios
This chart shows the percentage that gold represents in an investment portfolio. From this chart you can see that in 1960 it was 5%, whereas in 2020, it was 0.6%. As a result, we have a huge disparity and very few portfolios have any gold whatsoever.
Why $10,000 /ounce Gold
If 5% of investors in the $426 trillion of financial assets allocated to gold or $21.3 trillion, the available supply of above ground bullion would have to rise almost 7.5 times to over $14,416/ounce, if mine supply couldn’t be increased.
Nick Barisheff
Nick Barisheff is often asked how he got “$10,000 Gold” as a title for his book.
When he wrote the book in 2013, he calculated that it if only 5% of the investment in stocks and bonds were redirected into gold, the price, at the time, would have to rise above $10,000 per ounce.
In today’s terms 5% of the $426 trillion in financial assets not currently allocated to gold, would equate to $21.3 trillion dollars. Without an increase in the available supply, the price today would have to increase to over $14,416 dollars per ounce.
As far-fetched as this may seem, this is the result of the huge distortion between financial assets and the amount of the available investment grade bullion.
When the long overdue correction in financial assets happens, it is likely to result in much higher gold allocations than 5%
To reduce risk, it is necessary to avoid a portfolio whose securities are all highly correlated with each other. One hundred securities whose returns rise and fall in near unison afford little protection than the uncertain return of a single security.”
Harry Markowitz
Nobel Memorial Prize in Economic Sciences
REITs & Gold Bullion Best Performing Assets
This periodic table of the major asset classes shows the best and the least performing asset classes in each year.
Importantly, it also includes REITs and gold. In many cases, when these are published by Wall Street, they only have stocks, bonds and cash. You can see can how asset classes have performed for the past 17 years. REITs have been the best performing, followed by gold, stocks, bonds, and then cash.
This provides a clear visualization why diversification is important.
Gold = Low Correlation to Other Assets
For diversification to work the portfolio needs to hold non-correlated assets. You can see from this chart, that gold is the least correlated to the financial assets as well as silver and platinum.
So in order to fully understand the strategy of the Hedge Fund, it’s important to rethink conventional investment strategies.
Always Staying Invested – A Flawed Premise
Conventional Wall Street thinking is to always stay invested. This may be an acceptable strategy for institutions, but for individual humans, you have to take life span considerations into account. From this chart you can see that 1929 bubble it took 27 years just to break without considering the effects of inflation. The 1966 peak took 26 years to break even. The tech bubble in 2000 took 15 years to break even. Today since the majority of investors are Baby Boomers they likely won’t live long enough to break even.
Japan’s equity markets peaked in 1990 and have not yet broken even – 30 years.
The Nasdaq took 14 years to break even, and 18 years on an inflation adjusted basis.
Gains Necessary to Break Even
If we took inflation into account, many of those numbers would be dramatically greater. What most people don’t appreciate is the performance needed to get you back to break even. So for instance if you lose 50% of your portfolio you need to gain 100% just to break even.
In this example, we look at the Royal Bank of Canada decline in the 2008 crash. If you stayed invested through the decline the gain would have been 87% .
However, if you sold at close to the peak and reinvested at the bottom in 2009 your growth would have been 349%.
This REIT declined 84% from $46.32 to get to the bottom of $7.30 in 2009. The dividend yield at that time was 30. The reason for this anomaly is that while the share price declined that there was very little change in the rental income of the office buildings. Lawyers, accountants, and financial professionals were still paying the same rent to top as they were on the bottom so you could see by simply waiting for the bottom the spectacular performance you could achieve by buying that REIT for $7 and getting a 30% dividend yield.
Corporate Structure
As you can see by BMG’s corporate structure, the main subsidiaries consist of BMG Management Services which manages BMG’s Mutual funds and the BMG Hedge Fund.
Bullion Marketing Services is registered as an exempt market dealer in Ontario and is responsible for distributing the funds.
Bullion Custodial Services provides high net worth investors the ability to purchase London Bullion Market Association (‘LBMA’) bars and stores them with Brinks in multiple international jurisdictions.
Permanent Portfolio: A Simplistic Approach
When we started looking at how to build a diversified portfolio, we first examined the Permanent Portfolio developed by Harry Browne in in the mid-seventies. It simply divides the portfolio into four equal components consisting of equities, precious metals, cash and bonds. The strategy is to rebalance back to the original percentages every year.
And that’s it.
However since this strategy lacked any allocation to REITs it was not fully diversified or balanced.
Permanent Portfolio Outperforms with Lower Risk
a 60% equity 40% bond balanced portfolio is not balanced; stocks and bonds are both positively correlated when inflation expectations are more volatile than growth expectations, and negatively correlated when they’re not…”
Ray Dalio
The second thing we looked at was the world’s largest balanced fund, which is Ray Dalio’s, All Weather Fund This represented an improvement over the Permanent Portfolio. You can see the mix here. While he did include 7% in gold, surprisingly, it has no REITs or real estate in this portfolio.
This portfolio is also not fully balanced or diversified.
Comparison of Three Portfolios
This chart gives you a comparison of these three portfolios. It compares the Permanent Portfolio, The All Weather Portfolio as well as the traditional portfolio consisting of 60:40 stocks and bonds which many advisors have structured for their clients. So, as we can see, that the All Weather portfolio has out performed until 2008. The Permanent Portfolio was the best performing since then, only selling slightly below the 60:40 in 2021.
BMG Diversified Hedge Fund
The proposed allocation for the BMG Diversified Hedge Fund is 20% in REITS, 20% in bonds, 40% in stocks, 10% silver and 10% in gold
Buying the Best-of-the-Best Underlying Funds
No ETFs – Eliminating counterparty risks or reliance on Authorized Participants
- BMG’s Diversified Hedge Fund adapted asset allocation model captures both stability and growth
- Full diversification by including the best and second-best asset classes in the BMG Diversified Hedge Fund (real estate / precious metals), it will outperform the competition and lower volatility
- Buying the best of best Canadian, U.S. and underlying mutual funds
- 12-16 underlying funds that must outperform their index and their peers for 10 years
- No ETFs – Eliminating counterparty risks or reliance on Authorized Participants
BMG Hedge Fund Model Outperforms
By doing that, the BMG Hedge Fund is structured that it would buy the best of the best underlying funds after the correction. More specifically the BMG Hedge fund included the best and the second-best performing asset classes. What we selected was 12 to 16 underlying funds and all of them were selected to outperform their index and their peers over ten years.
As a result, the back tested model of the BMG Hedge Fund since 2000 would have out-performed both the Permanent Portfolio as well as Ray Dalio’s All Weather Portfolio.
Why Will the BMG Diversified Hedge Fund Outperform Tradiitional Balanced Funds?
Traditional balanced funds and pension portfolios are not balanced or fully diversified:
- All omit the best-performing asset classes – real estate and gold
- üThe banks, especially, invest in their own underlying bond and equity funds and as a result are not the best of the best funds
Stocks and bonds are not negatively correlated. In certain scenarios, they are expected to correlate precipitously during the next correction.
As we said before, traditional balanced funds and pension portfolios are not balanced or diversified and omit the best performing asset classes. Banks especially only invest in their own underlying funds. as a result, they do not invest in the best of the best underlying funds.
By only holding, stocks and bonds, the entire portfolio is not diversified or balanced since the assets are not negatively correlated. In certain scenarios they will decline precipitously together during the next correction
Executive Summary
$500 Million Private Offering
- $499 Million investment in Class E15 Units (0.5% Management Fee) of the BMG Diversified Hedge Fund
- $1 Million Investment in convertible Royalty Units
- Royalty Units receive 10% of BMG Management Fee less Trailer Fees plus 10% of the Performance Bonus of 20% of the amount by which the Fund outperforms 60% S&P/TSX Composite Index and 40% S&P Canada Aggregate Bond Index
This is a private equity investment structured to take advantage of the coming correction in the financial markets. Participation in a unique fund with enormous growth potential and one that will stand above all others. The BMG Hedge Fund consists of two individual securities. The total offering is $500 million with $499 million invested in Class E15 units of the BMG Gold Bullion Fund and one million invested in convertible Royalty Units of BMG Group. The royalty units receive 10% of the management fee BMG earns from the hedge fund plus a performance bonus of 20% of the amount by which the BMG Diversified Hedge Fund outperforms 60% of the S&P TSX Composite Index and 40% of the S&P Aggregate Bond.
Two stage investment strategy
- Stage 1 – $499 Million Invested in Class I Units of the BMG Gold BullionFund
- Stage 2 – commences when a major correction ends, whereupon the investment portfolio will transition into a balanced portfolio of the best-of-the-best Canadian and International mutual funds and REITs across four asset classes – equities, fixed income, real estate, precious metals.
The BMG Diversified Hedge Fund involves a two-stage investment strategy. Stage one is when $499 million is initially invested only in class E15 units of the BMG Gold Bullion Fund during what BMG believes will be a major correction in the financial markets. Stage two commences when the correction ends and the investment portfolio, transitions into a balanced portfolio of the best of the best Canadian and international mutual funds and REITs across four asset classes – equities, fixed income, real estate and precious metals. Buying at the bottom of a correction will ensure attractive performance going forward.
BMG sees an enormous opportunity in creating a properly balanced and diversified fund.
The Canadian Opportunity – $800 Billion
As you can see from this chart, the vast majority of the retail investment funds in Canada are invested in balanced funds with over 52% allocated to balanced funds. This is the main investment category in mutual funds with over $800 billion invested annually.
Largest Canadian Balanced Mutual Funds
These are the best Canadian Balanced Funds
This chart shows the largest Canadian Balanced Funds based on Assets Under Management. As you can see, the average AUM is 6 billion. The performance of these funds have a 7.2% average annual return and 5.7% standard deviation over the last eleven years. The best performing balanced fund is the Compass Balanced Fund that has generated, a 8.2% return with a 5.3% standard deviation.
These are the best Canadian Balanced Funds
The BMG Gold BullionFund since January 2022, has dramatically outperformed all the balanced funds with performance of 10.3% in Canadian dollars, whereas the best balanced fund was 4.7%.
The reason BMG believes this is a major opportunity is because competing balanced funds are not really diversified, or balanced nor do they hold the best to the best underlying funds.
Competing Balanced Funds Not Diversified or Hold the Best-of-the-Best Underlying Funds
Competing Balanced Funds
- Are not balanced or diversified, typically holding cash, stocks and bonds. Stocks and bonds have been correlated since 1979 – Ibbotson Associates
- Most balanced funds do not invest in real estate or bullion – the best and second-best performing asset classes
- Do not invest in the “best of the best” Canadian and international underlying funds and limit themselves to their own funds that do not outperform their indexes or their peers
Balanced Funds typically hold cash stocks and bonds. According to Ibbotson & Associates, stocks and bonds have been correlated since 1979. Most balanced funds to not invest in real estate or precious metals. And these are the best and second-best performing asset classes.
They also do not invest in the best of the best Canadian and international underlying funds and limit themselves typically to their own in-house funds that often do not outperform their indexes or their peers.
Unique Investment Strategy
To summarize, this is an opportunity to acquire uncompromised physical gold at an institutional level management fee and receive an annual income from the royalty units.
- An opportunity to acquire uncompromised physical gold at institutional level management fees and receive annual income
- The investment strategy of the Hedge Fund is designed as an initial tactical allocation during the first stage – the Interim Bullion Strategy, to take advantage of a coming significant correction and paradigm shift in the global financial markets. It becomes a strategic allocation in stage two – the Long-Term Balanced Strategy
- During the Interim Bullion Strategy, the Fund has no counterparty risk, uses no financial intermediaries, is not hedged, leveraged, loaned, rebalanced, market-timed, or dependent on the skills of a portfolio manager (uncompromised investment fund); the Fund’s LBMA good delivery bars are stored on an allocated and fully insured basis.
- Back testing this strategy from the 2008 correction has shown returns in excess of 26%
Back Testing of Strategy With Actual Performance Since 2008
If you could have invested $25,000 in a BMG Diversified Hedge Fund strategy in December 2008 and converted to the Balanced Fund in March 2009:
- 13 year compound annual growth rate for underlying funds is 26.5% at standard deviation of 14.3% and the portfolio would have increased to $594,937 plus the investor would have received $57,958 in dividends.
Based on the back tested actual performance of the underlying funds if you could have invested $25,000 in the BMG Diversified Hedge Fund in 2008, and the Hedge Fund converted to a balanced fund in March 2009. The 13-year, annual, compounded rate of return, would have been 26.5% with a standard deviation of 14.3%. The portfolio would have increased to $594,937 from $25,000, and the investor would have also received $57,958 in dividends.
Based on $25,000 Minimum Investment
This is where we can see, especially coming out of the correction in 2009, the returns were 66% that year. In summary the BMG Diversified Hedge Fund would have averaged 26.5% per year over the entire period with only 2% in 2016 due to a decline in equities.
Unique Investment Strategy – Gold with Income
- $500 million initially allocated Class I Gold BullionFund (no management fee)
- Minimum Subscription – $25,000. Normally limited to institutional investors only
- $24,950 allocated to Class E15 (0.5% management fee) Units of BMG Diversified Hedge Fund
- $50 allocated to Royalty Units
- Royalty Units earn 10% of BMG management fees, plus 10% of the performance bonus
- Commissions are 10% of Royalty Units paid by BMG Management Services Inc.
- Commissions are 3% of Hedge Fund Units paid by the subscribe
In Summary
- Asset-based, risk-balanced Hedge Funds
- Unique Convertible Royalty Investment Feature
- Structured as a private equity offering
- $500 Million Private Offering – Private Equity Investment with minimal downside and significant capital gain, plus shares of BMG Group Inc.
- Fully Diversified Portfolio with Lower Volatility and Improved Performance
- Participation in a unique fund with enormous growth potential in the fastest growing sector of the mutual fund industry
- A strategic combination of the best performing asset classes
- Buying the Best-of-the-Best Canadian, U.S. and International Underlying Mutual Funds
We hope you have found this presentation informative on how to strengthen the foundation for the future.
To request a Term Sheet or for further information on this great opportunity, contact us at:
(905) 474.1001 or email us at info@bmg-group.com