Thoughts from Themes: Two Cobras in the Jungle

Cobra Kai season six on Netflix opens with Daniel LaRusso and Johnny Lawrence rallying their students in preparation for the prestigious Sekai Taikai tournament. Despite their past rivalries, they work hand in hand to train a formidable team. After decades of an intense rivalry that dates back to the Karate Kid movies of the 1980s, they have finally realized that not only can both styles exist, but they can thrive, in the Valley and beyond, moving into the future. Even if persistent nemesis John Kreese and founder of the original Cobra Kai determined to reclaim Cobra Kai dominance and disrupt the newfound harmony, both LaRusso and Lawrence bring different attributes and styles to overcome the conflict, along with an understanding that their similarities are greater than their differences.

Just like how the karate scene in the Valley eventually unites for the greater good between Miyagi Do and Eagle Fang, gold and Bitcoin can co-exist in the investment landscape, each offering unique benefits without needing to compete against each other.

Hedging Against Inflation

Historically, gold has been a trusted hedge against inflation. It retains its value over time, providing stability during economic downturns. Bitcoin, as a digital asset, has also shown potential as an inflation hedge due to its limited supply and decentralized nature. In times of economic instability, Bitcoin's scarcity can drive its value up. Gold has been a store of value for centuries, treasured for its physical attributes and intrinsic worth. Bitcoin has the potential to offer a “modern” store of value of sorts; its blockchain technology may offer security and transparency, making it appealing to tech-savvy investors the younger generation. So why do investors think one has to lose in order for the other to win?

Much like the unity seen in the fictitious California Valley’s karate scene, gold and bitcoin can rise in tandem, catering to different investor preferences. Investors can benefit from including both gold and bitcoin in their portfolios. Gold is a relatively stable, traditional asset that has been steadily rising with lower volatility. While Bitcoin can be quite volatile, it offers growth potential, technological innovation, and a return profile that has been one of the best performing asset classes since its inception. Gold's stability complements Bitcoin's dynamism, and investors can potentially leverage the strengths of both to balance risk and reward in their portfolios.

Just as the Valley's karate scene united for the greater good, gold and Bitcoin need not compete but could coexist harmoniously. Each serves a distinct role in hedging against inflation and acting as a store of value; together, they can provide a robust investment strategy in the face of a new paradigm of economic challenges.

Mind the Miners

Due to a confluence of macroeconomic and geopolitical uncertainty, gold and silver prices have risen significantly in recent months. With both gold and silver prices at or near all-time highs, what does all of this mean for gold and silver miners? Higher bullion prices generally mean higher revenues and cash flows, as well as sharp increases in profitability. Costs are relatively fixed, and the margins of miners are magnified given higher prevailing prices.

Recent returns on gold and silver miners have reflected this dynamic. Over the past year, gold miners have delivered a +76.61% return as measured by the Solactive Global Pure Gold Miners Index (SOLGLPGM), triple the +25.16% return delivered by the S&P 500 Index (SPXT) over the same time period, while silver miners have delivered a +60.86% return as measured by the STOXX Global Silver Mining Index (STXSILVV). Both gold miners and silver miners have delivered significantly higher returns than either gold (+44.74%) or silver (+42.71%) bullion as well.

With average all-in sustaining costs (AISC) for gold miners at $1,345 per ounce, gold miners are producing historically high margins of over +$1,500/ounce. Similarly, with AISC for silver miners at $17.18 per ounce, silver miners are producing historically high margins of over +$15.83/ounce. Additionally, the valuations of both gold and silver miners remain significantly below the S&P 500 as measured by their price-to-book (P/B) ratios, and thus may have more room to run from a valuation standpoint.

Investment Themes

Walmart (WMT) showed strong e-commerce growth, a crucial component in the evolution beyond its brick and mortar retailer roots to rival pioneer Amazon, with revenues and earnings growing substantially in Q4. However, investors were concerned with their outlook for the consumer as inflation remains persistent. Much of the talk on the post earnings call revolved around continuing to provide value and service to its customers, which investors perceived as pressure on margins. Shares sold off as did some competitors over concerns that the consumer strength seen in past years may not continue. How Walmart navigates growth and profit margins will be a key for the next leg higher.

Block (XYZ) outlined a strategy of building a payment community between buyers and sellers, announcing an expansion of account executives and business development staff to aggressively expand its growing network. It intends to use an AI marketing approach to target long term growth. But investors were not impressed as Q4 earnings came in below analyst estimates and guidance for 2025 was underwhelming. The shares slid more than more than 9% in after hours and premarket Friday morning.

United Healthcare: (UNH): The Wall Street Journal reported that the Department of Justice has launched an investigation into its Medicare billing practices. The new civil fraud probe is investigating whether United’s practices for recording diagnoses that trigger extra payments to its Medicare advantage plans (including medical groups United owns) were fraudulent. Shares of UNH were trading down nearly 10% premarket.

Nvidia (NVDA): Unlike past earnings seasons, the lead up to Nvidia earnings is relatively quiet and the overall market sentiment seems less concerned that its report will make or break it. Nvidia enters this earnings season as an add on, perceived to be under stress from more and more competitors that are encroaching on its AI chip dominance. This may be a good sign for the chip giant to finally take a next leg up. As the AI pie continues to grow, Nvidia stands to grow with it. Perhaps the lack of attention is just what NVDA needs to surprise investors when it reports its earnings next Wednesday.

SoundHound (SOUN) creates voice AI solutions that allow businesses to have conversational experiences across multiple industries, including voice assistants to improve customer service experiences. As agentic AI grows, the ability for businesses to provide unique experiences specific to customer needs through AI agents will move to the forefront. Investors have rewarded SOUN and will be interested in enterprise adoption as a guide to future growth.

Major US Economic Reports & Federal Reserve System Speakers (Times in EST)

MONDAY, FEB. 24

None scheduled

TUESDAY, FEB. 25

3:20 am Dallas Fed President Lorie Logan Speaks in London

9:00 am S&P Case-Shiller Home Price Index (20 Cities)

10:00 am Consumer Confidence

WEDNESDAY, FEB. 26

10:00 am New Home Sales

THURSDAY, FEB. 27

8:30 am Initial Jobless Claims

8:30 am Durable-Goods Orders

8:30 am Durable-Goods Minus Transportation

8:30 am GDP (Second Revision)

10:00 am Pending Home Sales

1:15 pm Cleveland Fed President Beth Hammack Speaks

FRIDAY, FEB. 28

8:30 am Personal Income

8:30 am Personal Spending

8:30 am PCE Index

8:30 am PCE (Year-Over-Year)

8:30 am Core PCE Index

8:30 am Core PCE (Year-Over-Year)

8:30 am Advanced U.S. Trade Balance in Goods

8:30 am Advanced Retail Inventories

8:30 am Advanced Wholesale Inventories

9:45 am Chicago Business Barometer (PMI)

10:00 am Existing Home Sales

10:00 am Consumer Sentiment (Final)

10:15 am Chicago Fed President Austan Goolsbee Speaks

Disclosures

All data sourced from Bloomberg as of 20 February 2025

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