Blog 2 Columns

[This blog post is an excerpt from a recent commentary posted at www.speculative-investor.com]

Due to everything we are seeing and expecting, including the performance of the gold price and shortages that potentially will stem from Trump’s trade war, we think there’s a very real possibility that an equity bear market could unfold in parallel with a commodity bull market. If so, it would be very different from anything that happened over the past three decades, a period during which the commodity markets generally weakened when the stock market was very weak, but very similar to what happened during the 1970s. As illustrated by the following monthly chart, a broad basket of commodity prices rose substantially during the equity bear market of 1973-1974.

By the way, the chart also shows the remarkable stability of commodity prices when the US$ was linked officially to gold.

We hasten to point out that right now there is only tentative evidence in the price action to support the above-mentioned scenario. In particular, the first of the following charts shows that equity prices (represented by the SPX and shown in green) and commodity prices (represented by the GNX and shown in black) plunged together in early April and have since rebounded together — price action that does NOT support the idea that commodity prices will be able to trend upward while equity prices trend downward. However, the second chart shows that commodity prices have been strengthening relative to equity prices since early-December of last year.

What we could see over the coming quarters is more of what happened since early-December of last year, with commodity prices generally strengthening relative to equity prices but getting hit during the brief periods when equity prices fall rapidly and there is a rush for liquidity.

[This blog post is a modified excerpt (for example, it contains updated charts) from a recent commentary published at www.speculative-investor.com]

Think back to how bullish almost everyone was about the US dollar’s prospects at the start of this year. Also recall that our view at the time was that the Dollar Index (DX) was set to make a very important peak in January-2025, after which it would trend downward for at least a year. Actually, our view going into this year was that the DX had commenced a cyclical decline in September-2022 and would resume its cyclical decline in January-2025. The fact that it recently made a new cycle low confirms that the DX has, indeed, been in a cyclical bear market since September of 2022 and that the strong rally from the September-2024 low was nothing more than a countertrend move. So, what now?

Before attempting to answer the above question, we present herewith a daily chart and a weekly chart of the DX. The daily chart shows the virtual crash of the past two weeks, while the weekly chart shows that the DX has broken below its July-2023 low and is at its lowest level since April of 2022. Both charts show that the DX is extremely oversold.

Due in part to the performance of the US$ gold price, we doubt that the DX’s cyclical decline is complete. This is because on an intermediate-term basis the gold market does not react to trends in the US dollar’s exchange rate, it projects them. For example, gold’s strength last year projected future US$ weakness against other currencies. The fact that the US$ gold price has just made a new all-time high projects future weakness in the DX.

The way that the DX’s true fundamentals are expected to evolve over the months ahead (they are expected to remain bearish) and the paths taken by the DX following comparable highs in September-2022 and January-2017 also point to additional downside.

However, thanks to the recent collapse it’s likely that the bulk of the decline is in the past.

We have had and continue to have the mid-90s in mind as a target for the DX’s ultimate cycle low. This target may have seemed unreasonably bearish a few months ago, but it is only a few points below the current level. At the same time, a countertrend rebound could result in the DX returning to the 104-105 range.

Further to the above, we are now short-term and intermediate-term neutral on the DX. The ultimate cycle low probably won’t be set until the final few months of this year, but the rebound potential is now at least as large as the remaining downside potential.

[This blog post is an excerpt from a commentary published at www.speculative-investor.com on 6th April 2024]

The effects on the financial markets of Trump’s 2nd April announcement were similar to, albeit not quite as extreme as, the effects of the COVID lockdowns in March of 2020. Like the COVID lockdowns, what was announced on 2nd April constituted a massive government intervention that will disrupt global commerce and that to some extent came as a shock. Markets obviously were expecting widespread tariffs to be announced, but it is clear by the reaction that many market participants were surprised by the magnitude of the tariffs and/or the arbitrary way in which the tariff rates were determined.

Due to the adverse consequences for global economic growth, commodity prices plunged along with equity prices over the final two trading days of last week. For some industrial commodities the current price levels are not surprising to us in that we expected to see new cycle lows, but what we expected to unfold over the next few months occurred over the space of just two days.

For example, we expected that the rebound in the oil price from its early-March low would be followed by a decline to new cycle (multi-year) lows within the next few months, but the following weekly chart shows that last week the oil price plunged from a 1-month high to its lowest level in almost four years. In oil’s case, the negative reaction to the growth shock that potentially will stem from the tariffs was exacerbated by an OPEC announcement that the first three months of its planned production increases will be lumped together, meaning that OPEC oil production will increase by 411K barrels/day rather than the expected 135K barrels/day next month.

The oil price probably hasn’t bottomed, but by plunging to a new cycle low last week it has done as much as we thought it would do prior to the start of a cyclical upward trend.

For another example, a week ago we wrote that we perceived a lot of downside risk in the copper price, but we didn’t expect the downside risk to materialise immediately. Instead, the copper price fell 14% last week and removed any doubt that a multi-month price top was set via the spike up to US$5.40 during the preceding week.

The commodity and equity markets reversed course following their lockdown-related crashes in March-April of 2020 due to 1) the extent to which they were stretched to the downside and 2) the upward price pressure exerted by unprecedented monetary intervention. Based on Powell’s words late last week, the Fed is not close to doing anything supportive on the monetary front. Therefore, currently there is no reason to expect anything more bullish than a countertrend rebound.

[This blog post is an excerpt from a commentary published at www.speculative-investor.com last week]

We are revisiting a long-term cycle that we began tracking several years ago. This cycle, which is illustrated by the vertical red lines drawn on the weekly chart displayed below, has been elongated for the same reasons as other cycles/trends over the past couple of years. Before we get to the current situation, a recap is in order.

Over the past two decades, gold mining stocks as represented by GDX have set major peaks relative to general mining stocks as represented by XME approximately every four years, that is, the GDX/XME ratio has tended to make a multi-year peak approximately every four years. Furthermore, the major peaks in the GDX/XME ratio have coincided with major peaks in the gold/GYX ratio (the US$ gold price relative to the Industrial Metals Index), which, in turn, have coincided with the crescendo of an economic or debt crisis. To be specific, the Q1-2009 peak was linked to the Global Financial Crisis, the Q1-2012 peak was linked to the euro-zone sovereign debt crisis, the Q1-2016 peak was linked to the shale oil bust in the US and the general bust in industrial commodity-related investment, and the April-2020 peak was linked to the COVID lockdowns.

The continuation of the 4-year cycle would have led to major peaks in the GDX/XME ratio and the gold/GYX ratio last year. However, this didn’t happen. There was a substantial rise in the gold/GYX ratio, but the GDX/XME ratio did little more than ‘chop around’ near its cycle low.

This prompted us to conclude, in the 23rd September 2024 Weekly Update:

“Either the GDX/XME ratio is going to peak at a much lower level during the current cycle than it ever has in the past, or the current cycle has been elongated and is still a long way from its completion.

The latter possibility is the more plausible. The main reason is that the GDX/XME ratio is driven by the gold/GYX ratio, and as noted above past peaks in the gold/GYX ratio have coincided with the crescendo of an economic crisis or a debt crisis.

Mainly because of aggressive government deficit spending designed to postpone a recession, but also because of Fed/Treasury actions that have boosted financial market liquidity in the face of tightening monetary conditions, there has been nothing resembling an economic/debt crisis during the current cycle to date. The crisis has, we think, been shifted from 2024 to 2025 or perhaps even later. Consequently, the cycle top in the GDX/XME ratio that was ‘due’ to occur this year probably won’t occur any sooner than H2-2025.

An implication of the above is that it will make sense to favour gold mining stocks over other mining stocks for at least another 12 months.”

Turning to the current situation, since late last year there has been a significant increase in the GDX/XME ratio (shown in the top section of the following chart), while the gold/GYX ratio (shown in the bottom section of the following chart) has continued its strong upward trend. GDX/XME is now at its highest level since mid-2021.

Despite its meaningful increase over the past three months, the chart suggests that there is plenty of scope for additional relative strength by the gold sector. We are referring to the fact that over the past two decades the GDX/XME ratio has never made a cycle peak below 1.2, which is more than 50% above the current level.

We expect that both the GDX/XME ratio and the gold/GYX ratio will make their cycle peaks this year, but those peaks probably aren’t in place and in the case of GDX/XME the peak could be a long way above today’s level.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

We generally don’t engage in unprovable/unfalsifiable conspiracy-linked speculation to explain market performance or government policy, but today we are making an exception because we are struggling to come up with a more straightforward explanation for Trump’s recent actions.

Tariffs would be negative for the US economy even if they were not large in percentage terms and were introduced in a measured way, but the haphazard way in which large tariffs have been imposed and changed over the past two months greatly magnifies the economic damage that will be done. Furthermore, another intervention under consideration could be even more damaging than the tariffs that have been threatened/implemented to date. We are referring to the port fee plan discussed in an article posted at lloydslist.com on 11th March. Here is an excerpt:

“The US Trade Representative announced on February 21 that it plans to levy exorbitant port fees — in some cases over a million dollars — for every US port call by Chinese transport operators, Chinese-built ships, all operators that have any ships on order at Chinese yards, and according to one interpretation of the proposal (based on a presidential draft order obtained by Lloyd’s List), all operators with any Chinese-built ships in their fleets.

The USTR plan would also mandate that a portion of US exports be carried on US-flagged and, eventually, US-built vessels.

Respondents had until Monday to submit comments to the USTR if they wanted to testify at the hearing on the proposal on March 24. They responded in droves, overwhelmingly negatively, with several predicting a disaster for importers, exporters and the US economy in general if the USTR did not kill the port fee plan.

Some executives also bluntly asserted that if the plan was approved as written, their companies would go out of business or leave the US.”

If the port fee plan is implemented it will inflict a devastating blow on the US economy, with no potential upside in either the short-term or the long-term. Why, then, is it even being considered?

The port fee plan and the reckless way in which tariffs are being imposed/threatened only make sense if the Trump Administration is trying to ensure that the US economy goes into recession soon. If this is the plan then there is already evidence of success, in that the High Yield Index Option Adjusted Spread (HYIOAS), an indicator of US credit spreads, generated a recession warning signal last week. The signal is the weekly close above the 65-week MA (the blue line on the following chart).

Why on earth would the Trump team want a recession to happen ASAP?

One reason is that a recession this year could be blamed on Biden. In a way this would be appropriate, because the US economy probably would have gone into recession 12-18 months ago if not for the Biden Administration’s use of aggressive deficit-spending and other tools (mainly, issuing a higher percentage of short-term debt as mentioned below) to delay the inevitable until after the November-2024 elections.

Another reason is that a recession would create a financial/economic backdrop in which there was much greater demand for Treasury securities, enabling the US Treasury to ‘term out’ the government’s debt at lower interest rates. By way of further explanation, during 2023-2024 the US Treasury under Janet Yellen substantially increased the use of short-term debt to finance the government’s deficit and in doing so reduced the average term of the total debt. The new Treasury Secretary (Scott Bessent) must now return the average term of the debt to where it should be, which only could be done by increasing the issuance of long-term debt relative to the issuance of short-term debt. This would put upward pressure on long-term interest rates, but if there were a recession then this pressure probably would be more than offset by an increase in the demand for the relative safety provided by long-dated Treasury securities.

A third reason is that if a recession occurs this year, then the economy probably will look fine by the time the mid-term elections roll around in late-2026.

There’s now a high probability that if a US recession is not already underway then it will begin within the next three months. Therefore, if this is happening according to a plan to get the inevitable recession out of the way in 2025, then the first part of the plan is coming together.

[This blog post is an excerpt from a commentary at www.speculative-investor.com]

We haven’t discussed global monetary inflation for a while, mainly because very little was happening and what was happening was having minimal effect on asset prices or economic performance. However, the global money-supply situation is now noteworthy.

First of all, attempts to reflate clearly are being made in some parts of the world. From our perspective, the most significant of these attempts are evident in the following monthly charts showing the monetary inflation rates in Australia and Canada. In both cases, year-over-year (YOY) money-supply growth rates have rebounded strongly from negative territory (monetary deflation territory, that is) to around 7%. These rebounds are setting the scene for economic booms, but we suspect that the booms won’t start until next year and that in the meantime there will be more economic weakness.

However, in the world’s most influential economies/regions there is no evidence, yet, that a concerted attempt to reflate is underway. In particular:

1. The following charts show that although the money-supply growth rates of both the US and the euro-zone have rebounded from the deep deflationary levels of 2023, the current levels (around 2%) are very low by historical standards. The current levels have tended to be associated with recessions and/or credit crises, not booms.

2. The next chart shows that while China’s YOY M2 growth rate remains moderately high by Western standards, it is near a multi-decade low. This means that the monetary stimulus introduced last September in China is yet to have a discernible effect on monetary conditions.

By the way, normally we show China’s M1 growth rate rather than its M2 growth rate, but the PBOC changed its M1 calculation methodology in January-2025 and in doing so made comparisons with previous months/years impossible. As far as we can tell, China’s M1 is roughly unchanged over the past year.

3. Our final chart shows that Japan’s YOY M2 growth rate is near an 18-year low, so the BOJ’s concern about price inflation in Japan is leading to tight monetary conditions. These tight monetary conditions probably will lead to economic weakness, much lower price inflation levels and additional Yen strength over the next 12 months, prompting the BOJ to return to its pro-inflation ways. Like all central banks, the BOJ is adjusting monetary policy based on what it sees in the rearview mirror.

The combination of the malinvestment that occurred in response to the massive monetary inflation of 2020-2022 and the current low levels of monetary inflation in the world’s most important economies increases the risk that the world is heading towards a period of widespread economic weakness.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

The official US gold reserve is 260M ounces and is an asset on the balance sheet of the Fed. Currently the asset is valued at $11B, which equates to only US$42.22/ounce, whereas the actual market value of the asset is around US$770B. There recently has been speculation that the asset would be re-priced to reflect its current market value. What is the chance of this happening and what would be the likely effects? We will deal with the second part of this question first.

If the value of the asset on the Fed’s balance sheet were increased by US$750B, the re-valuation would, we assume, result in the Fed adding $750B to the Treasury General Account (TGA — the federal government’s demand account at the Fed). In effect, the Fed would be creating 750 billion new dollars that the government could spend. Therefore, the revaluation immediately would increase the US money supply by $750B. In addition, as the money was spent by the government, that is, as the money made its way from the Fed to the commercial banks, it would boost bank reserves.

The monetary injection into the economy that would occur as the government spent its newly acquired 750 billion dollars would give the economy a short-term boost. This means that if the revaluation were to happen within the next couple of months it could postpone a recession and provide some support to the stock market. It would not, however, be bullish for gold, unless gold is now a pro-cyclical asset.

Although the initial effect on the economy would be positive, the economic boost would be of a short-term nature only. One reason is that it would result in higher inflation and therefore higher long-term interest rates. A related reason is that it would prompt the Fed to extend its QT in order to absorb the additional money and reserves created by the revaluation.

Due to the short-term nature of any positive effect on the economy, from a purely political perspective it would make more sense to implement the revaluation during the final year of the Presidential term (2028, that is) rather than during the first year. This suggests to us that the probability of the revaluation happening this year is low. Furthermore, in an interview last Thursday (20th February) Scott Bessent, the US Treasury Secretary, stated that revaluing the official gold reserve was not what he had in mind when he recently mentioned the possibility of monetising the balance sheet, although he wouldn’t be drawn on whether revaluing the gold was under consideration.

We suspect that if the official US gold reserve is revalued it will happen as part of a stimulus package during the next recession or it will be done to give the economy a short-term boost during the lead-up to the next Presidential election. It’s not likely to happen within the next few months.

[This blog post is an excerpt from a commentary published last week at www.speculative-investor.com]

The war between Russia and the NATO-supported Ukraine that began almost exactly three years ago with Russia’s invasion of its neighbour, is one of the more stupid and unnecessary wars of the past century involving the US and/or Europe. It’s likely that this war never would have begun had there been formal acceptance on the parts of the major Western powers that Ukraine would remain neutral, that is, that Ukraine would never be part of NATO. Instead, the push to make Ukraine part of NATO that began in 2008 continued, with the result that millions of Ukrainians have been killed or lost their homes and a lot of Ukraine’s infrastructure has been destroyed. With negotiations now underway between the US and Russia governments, what are the chances that this unnecessary and devastating conflict will end within the next few months?

The short answer is that we can’t quantify the chances, but it’s clear that while it won’t be easy to arrive at a settlement there are strong incentives for both sides to end the fighting. The incentives for Ukraine and NATO are:

1) Stop the loss of Ukrainian lives and property.

2) End the costly transfer of military support to Ukraine — support that is achieving nothing other than prolonging the agony.

3) Prevent Russia from gaining more of Ukraine than it already has, the reality being that the longer the war goes on the more Ukrainian territory will be lost and the closer Ukraine will be to a complete military collapse.

4) Prevent Russia from becoming a bigger military threat to Europe. A large part of the official justification for NATO’s involvement in the war was to prevent Russia from threatening other parts of Europe, but at the outset of the war it was clear that Russia posed no military threat whatsoever to NATO. This was evidenced by the incompetence demonstrated by Russia’s armed forces during the first six months of the war. However, one of the unintended and ironic consequences of this war is that it has resulted in Russia’s military becoming much larger and more capable than it was, that is, it has resulted in Russia becoming a much bigger threat than it otherwise would have been. Furthermore, it’s likely that the longer the war continues, the stronger Russia will become militarily.

5) For the Trump Administration, there is the incentive of making good on a campaign promise and the fact that if the war were to continue beyond this year it would become as much Trump’s war as Biden’s war.

The Russian government also has incentives to bring the fighting to an end. They are:

1) End the massive transfer of resources from the broad economy to the war effort. Although Russia’s government has taken steps to keep a lot of the war-related costs off its own books, the war is creating major problems for the Russian economy. The most visible of these problems is rapid price inflation, which is causing the central bank to maintain its targeted interest rate at 21%. The longer the war goes on, the greater will be the wealth destruction within Russia. Putin almost certainly realises this.

2) End the sanctions that are making it more costly for Russian companies to export and limiting Russians’ access to imports.

3) Reduce the political risk for the current leadership. The longer the war goes on and the more distorted Russia’s economy becomes as a result, the greater the risk to Putin.

The incentives are there, but ending the war still will be difficult because the only deal that will be possible now will be worse, from a Ukrainian/Western perspective, than the deal that was rejected by Ukraine, at the behest of the US and the UK, a month after the war started. Increasing the degree of difficulty is that the bulk of the analysis of the war disseminated by the Western media is unrealistic. According to much of what is seen/read in the West, if ‘we’ can keep the costly military support for Ukraine going for a little longer, then Russia may be defeated. If not, then the Russian expansion won’t stop with Ukraine.

For the West, we think that being realistic involves accepting that:

1) Ukraine will never become part of NATO.

2) There will be no NATO ‘peacekeeping’ troops in Ukraine.

3) Most of the Ukrainian territory that has been taken by Russia up to now will stay with Russia.

And for Russia, we think that being realistic mainly involves accepting that Ukraine, as an independent country, will be free to elect its own government and maintain its own military. Also, although Russia will not accept Ukraine being in NATO, it may have to accept Ukraine being in the EU.

Hopefully the war, and along with it the bloodshed and destruction, will end within the next few months. Shortly after it does end, the rebuilding of Ukraine will begin. The rebuilding effort will, we think, be bullish for most industrial commodities.