Gold & metals & oil…oh my!

The 1939 film of the Wizard of Oz is a movie that withstands the test of time. In one scene, Dorothy walks down the yellow-brick road with the scarecrow, tin man and lion while chanting “Lions & tigers & bears…Oh my!” This light hearted chant was an attempt to dissipate their fears of unseen dangers in the forest. Today, we are seeing rallies in gold, metals and oil.  I have been hammering on these sectors for most of the winter – well before the rallies began. Are these these sectors now signaling dangers in the forest? I think they are.

War, what is it good for?

Edwin Starr sang the iconic song “War (what is it good for?)” in 1969. Clearly, war is the most destructive unhumanitarian force on earth. So, what is it good for (as Starr asked)? His answer was “absolutely nothing”. True, that! But war does have consequential side effects.

Way back in March of 2022, when addressing the Russian invasion of Ukraine, I noted that energy (and in subsequent blogs & videos gold and materials) can prosper in times of war. I’ve been harping on those sectors (gold, metals, oil) as potential profiting sector in an environment of war, AND as a hedge against what I have suggested (since 2021!) would be an environment of long termed stagflation. I’ve long suggested inflation will settle near 3% (vs the 2% Fed/BOC goal since 2021).  The last 2 decades have trained us to accept 2% as “the norm” for inflation. The future may not be what it used to be, methinks.

“We are one event in the Middle East or Russia away from a real 1970s, runway stagflationary regime.” Larry McDonald

Liberal politicians (Canada & USA) have been promising 2% inflation targets since 2021. This, while spending/printing money like drunk sailors.  This strategy is akin to promising to lose weight while eating bacon cheeseburgers & donuts.
Stagflation (slower but not recessionary economy, stubborn inflation) is good for commodities. Further: The case for oil, metals and gold has only expanded since 2021, given the growing demands on our electrical grid.

Canadian budget is out next week. Anyone wanna bet me that it will be fiscally prudent? I’ll take the other side of that bet!  Don’t expect the USA to keep a tight fiscal ship as Biden heads towards a November election, either. Stagflation! Solution: Gold & metals & oil. Oh my!

When Justin Trudeau took office, a Canadian household earning the median income could cover the costs of owning an average home by spending 39% of their pay, according to RBC. Now that figure is 64%The Economist  econ.st/3xh7Zly

 

The charts. Gold & metals & oil producers. Oh, my!

Here are charts of the producers, rather than the commodities.

“Over the past six weeks, a commodity index has seen a notable uptick following an extended period of bearish market conditions. This shift in price momentum bodes well for commodities and stocks. Historically, when commodities hinted at an improving economic backdrop, investors were rewarded by owning more economically sensitive sectors.” Sentimentrader

 

Oil Producers: XEG ETF

Energy producers broke out recently. Approaching overbought levels.

Industrial Metals Producers: ZMT ETF

Disclosure: We hold the ZMT ETF. With copper’s monster move of late, no surprise the producers moved right back to the 3-year resistance point. MFI and RSI are at or near overbought levels. As good stewards, we’ve been holding off on buying both this ETF and our mining stocks for new client money.

Don’t get me wrong – We think the sector will break out – you know that from my hammering out the bullish metals message for months now on this blog. MACD is moving up against that price resistance wall, suggesting a longer termed bullish atmosphere. But there’s a reasonable chance the sector might do a short pullback.

 

Gold producers: XGD ETF

“It’s pretty clear who is driving gold to record highs: Asians (who have been the largest consumers of physical gold for a very long time). Not Westerners who are relatively minor players in the physical gold market.  This story is an example of the extremely high interest in gold (and miners) in the East: “Shares of Chinese gold miners also have produced stellar gains this year. Zijin Mining Group Co. and Shandong Gold Mining Co. have both risen more than 50% from their respective lows earlier in the year.” In contrast, interest in U.S. & Canadian-based miners remains subdued. Another sign of Western disinterest in gold: the Sprott Gold & Silver Trust (CEF) is trading at a 4.5% discount – a level closer to that seen at gold bottoms. Their lack of interest will likely change” Fred Hickey, High Tech Strategist

Disclosure: We hold the XGD ETF. Has a giant symmetrical triangle been forming over the past 4 years? While RSI (bottom pane) is approaching overbought, MACD and MFI are just getting started. Good potential for a breakout. If so, we measure the “fat” part of the triangle to estimate a target -the concept being that prior swing moves can return. Lets say an $11 low, $26 high. That’s $15 upside upon a breakout out of the triangle ($20). Theoretical target is 20+15 = $35. Resistance points at $21, $23, $25 before that happens. Either way, not a bad chart.

Behavioral finance webinar

I’m doing a free webinar with the MoneyShow Wednesday, April 17, 2024, 10:40 am – 11:10 am EDT.

I’m covering my favorite topic – contrarian investing and behavioral finance.  I wrote my thesis on this subject when applying for my CMT designation 24+ years ago, and I’m still studying this fascinating subject. The webinar will draw from my most recent book, Smart Money/ Dumb Money, and I promise to inject some humor into this fascinating way of discovering market risk / reward tradeoffs

Here’s the link to register. 

4 Comments

  • I read your recent post on parabolic moves and then this morning on gold metals etc. In the case of gold, its’ price looks rather parabolic to me, but perhaps my timeframe is too short? I’d appreciate your thoughts.

    Reply
    • Near termed possibly overbought, but not so parabolic in a traditional irrational exuberance crowd behavior pattern. See my comment to David.

      Reply
  • Keith I got a bit of a mixed message from this blog. I read hold these sectors if you are in but wait for a pullback to buy. Maybe an exception to that with XGD. Is that a correct read?

    Reply
    • Correct! Temporarily overbought, but longer termed many reasons to be bullish. Mind you, if the current resistance is broken for a couple of weeks, one might expect that prices will keep going…on all of these sectors

      Reply

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