Time to be bold about Gold

November 12, 2021No Comments


Hello. My name is Keith Richards, and I am the President and Chief Portfolio Manager of ValueTrend Wealth Management. And this is the Smart Money, Dumb Money Show. Today, we’re going to address sort of a tie-in to the blog that I wrote recently on inflation. And that blog, if you wish to go to www.valuetrend.ca and look it up, it’s called “Beware of the Walking Fed” and I stole that title from a Bank of Montreal research report that I read on that very subject. Now, the point of my blog was to tie into a number of blogs that I’ve written over the past year. You see, we at ValueTrend are finding it very interesting that the entire marketplace and all the talking heads and market pundits are finally realizing that inflation is a problem. If you go back through our blogs, and if you talk to any of our clients, you will know that ValueTrend began positioning our portfolios in September, not of 2021, but September of 2020.

We were more than a year early on this trade and we caught the very beginning of it. What we did was back beginning of September 2020, we began legging into the energy space when oil was something like $40 a barrel. We got into the metals when copper was about half the price it is right now, nat gas and a number of different commodities, like even the fertilizer makers. Materials that are kind of known as. So, this is a trade that we have literally been pounding the table on, and I’ve watched the market go through a number of transitions where it went from denying inflation to recognizing inflation and then buying into the Fed’s talking points about inflation only being transient. Don’t worry. It’s not a problem. It’s just transient. Read the blogs, and I’m saying blogs plural, for more information on this. But in a nutshell, we’re starting to see that even some of the big houses now are beginning to sing the same tune that we have been singing for months and months and months, which is “Sure the spike in inflation is transient but we are not going back to 2% inflation. ”

And the reason behind that is not the supply chain. I agree that eventually, the supply chain will be, if not wholly rectified, at least largely rectified possibly in the next 12 months. I’m not one to call that, who knows, but it’s not a forever thing. The thing that’s been sticky is the amount of spending that the Fed is doing, I should say that the government is doing, through fiscal spending because the Fed only adjusts interest rates. The amount of stimulation that governments are doing, particularly in the United States, is no less than insanity and the current agenda extends well beyond rebuilding the economy through projects like infrastructure spending. Now they’re using the excuse of what was the COVID crisis to start bringing on their promised social spending programs to the Bernie Sanders voters that gave Joe Biden their support and this stuff is going to add up to another dollar figure that begins with the letter T. It’s mind-boggling.

Well, this type of spending doesn’t even do much, or at least as much with economic growth as does outright infrastructure and business spending and that kind of thing. Sure, it can help a bit because it’s still money flow, but it’s less direct. The one thing that that money flow is going to create is more inflationary problems. Now, the other thing that’s been happening is we’re seeing wage increases. And again, I encourage you to read the blog, “Beware of the Walking Fed”, which I wrote recently, and I quote some statistics coming right out of the Bank of Montreal that they quoted, which basically stated that, say that employment figures, in order to go up are going to be pushing higher wages. So that is very sticky inflation. It’s not a momentary thing. The money that comes into the market through fiscal stimulation is there. It’s more permanent and that debt is more permanent.

The wage increases, in order to entice workers to get back into the workforce, that is inflationary. And if you raise somebody’s wage to $15 an hour, it isn’t going back to $14, so guess what happens? The hamburger joint that was selling you a hamburger at $5 is now going to sell it to you for $5 and 25 cents. Move that across the board with a huge number of products and services and funny enough, that’s called inflation. So, this is the reason why we want to be looking at our portfolios, not just for the near term that everybody’s talking about as, you know, momentary inflation, but for the longer term. Because even though inflation will come back down to a point, it is going to be higher than it was two years ago and it’s going to be higher for a much, much longer period of time than the Fed is leading you to believe.

I talk about in my blog, why the Fed wants to convince you that inflation is transitory. It’s not what you think. So, I want you to read that blog, but in the meantime today, we’re going to talk about gold and silver. Because gold, in particular, is thought of as one of the great inflation hedges, although I’ve done correlation studies and it’s not actually the best inflation hedge. It can be an okay dollar hedge. And in fact, I’ve shown charts in the past, through my blog where it’s actually pretty negatively correlated with the US dollar. So, if you want to hedge the US dollar, gold is great. If you want to hedge inflation, gold and silver can be good, but they’re a little bit less negative. They’re more non-correlated to each other. Nevertheless, there is maybe an argument that gold could have a reason to pop if inflation continues to be sticky over the next year.

I want to look at gold and silver charts today and their producers just to get an idea if anything is setting up for the future. So. let’s do that. That was a bit of a long preamble for me before we brought on a chart, but it had to be said. Let’s go right to the gold chart and this is from stockcharts.com. And you can see that gold really, since 2020, has been in a pretty big consolidation. You know, in the near term, it looks like a downtrend. Certainly, lower highs, lower lows, but that series of lower lows seems to be reversing. And this is forming what’s called the symmetrical triangle. Because we’re getting higher lows, but lower highs, that means that it’s not really the definition of a downtrend anymore. It’s a consolidation and what that means is that if this consolidation breaks out one way or the other, you have a big move ahead of you.

I suspect that because we’ve already had a bit of a downtrend in place that formed part of this triangle, that gold may just break out and may not break out next week, may not break out next month but I think it’s setting up. We’ll see though because you never trade a consolidation like a triangle until it breaks out. So, my opinion is just as good as anybody else’s out there regarding whether gold will break out to the upside. My 2 cents worth is, I’m going to bet that it will break out, but I’m not putting my money where my mouth is because really don’t own a lot of gold right now. Let’s get to the gold producers ETF, which is the iShares TSX global gold producers.

And you can see that it’s a little different than the symmetrical triangle of the bullion itself. It actually has been heading down. And it’s right now at the top of that trend channel that I’ve drawn. Again, it’s similar to the idea of the bullion, not as bullish though, because it does not really have those rising troughs. Nevertheless, if this downtrend line is broken, it might give us some hope for the producer stocks of gold. Keep that in mind. Again, we’re looking at a situation that may or may not break out, and it is my opinion, if we go back to the bullion chart, that gold itself will lead the charge before the producers’ breakout. So, let’s go on to silver now. So silver is an industrial metal, as I mentioned, and it also has some kind of precious metals because it’s often used as not just for industrial or commercial purposes, but for jewelry and whatnot.

So, it’s a little bit of both. It’s not as renowned as a currency hedge. It is not as renowned as a quasi-inflation hedge, but it’s worth watching. The pattern for silver has been rectangular. It’s been pretty precise. It seems to bounce off of about 22 bucks. And it seems to really like hitting $28 and then failing. And it’s been a tradable pattern. So right now, it’s bounced off of the $22. Once again, could very well head into that $28 zone. Could be a pretty good trade from here. I’m going to suggest that it, again, will need to lead the producers before we are a hundred percent convinced that the producers are a great place to be.

But having said that, we at ValueTrend, do own a position in this stock, which is Wheaton Precious Metals. Now they do have gold mining in them but they’re a little bit more focused on silver, so I chose to use this as an example of a silver producer. You can see that it’s in a bit of a right-angle triangle formation. It’s not a symmetrical triangle like we saw with gold. The troughs are relatively flat. It’s kind of rough, but they’re more or less flat lately and the peaks are declining. Theoretically, if we get a breakout past here, past around 57 or so on Wheaton, we should see a positive move perhaps up to the old highs of around 75. So, we have held a position in Wheaton for a little while now, probably the better part of a year. It’s really not done a heck of a lot for us. I don’t know if we’re break even or close to it, but I certainly have not made any money. Our belief is that if gold pops, this might be taken with it to a certain extent.

And if silver reaches the top of its trading zone that we were just looking at here, then again, that might benefit Wheaton, but this is an early trade, and I don’t necessarily recommend that people with a low-risk tolerance get into this trade because it really hasn’t demonstrated that it wants to break out. It’s a very early situation, but if you’re a believer that this type of investment may be an inflation hedge and may continue to act as a non-correlated asset to stocks and to inflation, then you might want to consider looking at this type of vehicle. Not necessarily silver Wheaton but take a look at the precious metals. The most important advice I would give you is to wait for the breakouts if you’re more of a traditional conservative investor, and we’re certainly not seeing that, so you’d want to see the breakout on the gold producers, and you’d want to see a breakout on gold itself before you got to bold with gold. So that’s really the message today, which is it’s not time to be too gold orientated and too bold with gold, but it’s something we should definitely keep our eyes on. It can be, if not a negatively correlated asset, it can be a non-correlated asset to stocks and to inflation. I hope that helps. And we’ll see you again next week. Thanks for watching.

 

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