We Can Win Either Way
Hello dear readers!
Things are picking up as we mentioned last week. This is true for both Uranium and Oil. But for this week I wanted to continue the longer term discussion by sharing with you an updated chart by Goehring and Rozencwajg (G&R) showing the relative valuation of commodities versus the DJIA. I think this chart is a foundational pillar to the bull case thesis for commodities over the next decade.
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This chart was taken from G&R’s Q2 quarterly commentary, which I think you might find quite insightful. They essentially break down the bull case for commodities in a very clear, concise and pragmatic manner. Definitely worth a read, in my opinion.
This provides a nice backdrop for our review of current economic events as it relates to your commodity portfolio. All eyes are currently on the CPI print that is coming out next Wednesday, as it will dictate the Fed’s next move. Up until recently, odds were firmly in favor of pausing rates (and cutting shortly thereafter) thanks to cooling economic data, however the recent PMI data is signaling a potential rebound of inflation. This does not come as a huge surprise to us. After all, we anticipated that higher energy prices, combined with sticky wages and rents, would lead to a reflation scenario.
What does that mean for commodities? The read-through is that rebounding inflation may push the Fed to keep fighting the good fight and raise rates once more. This would be a disaster for most commodities as business activity would decline even more. Gold, traditionally the safe-haven, might not be spared as retail investors ditch the yellow metal in favor of high-yielding treasuries.
But this event may be the perfect opportunity to strike and start scooping up mining equities at bargain prices. Of course, it could get even worse before it gets better so we have to be patient and disciplined. It probably won’t be pretty at first but braving the storm could reward us handsomely in the future.
This brings us to our next topic: stagflation. The PMI revealed to us that while consumption was decreasing, the cost of goods was increasing – exactly what you would expect in a stagflationary economy. In this scenario, energy and industrial commodities should perform quite well even though the economy is slowing. After all, energy is the key ingredient in transporting goods, and it takes a lot of energy and labor to grow crops and to mine mineral resources.
G&R do an excellent job summarizing the bull case thesis for energy, for uranium, for copper, and for gold. Again, I encourage you to give it a quick read if you have not already. In short, the common threads across the industrial commodities, including energy, are low inventories, dwindling supply, and increasing demand (regardless of recession risks).
As for gold, the chart below is another foundational block. I personally believe a correction back to reality, where real time equals real money, is necessary for the global economy to form a new floor from which to reach new heights.
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If this is anything remotely close to the 1980’s, we are in for a doozy.
I realize I have only covered a very small portion of current economic events, and there are many to discuss, but in today’s letter I wanted to take a step back. I think this context can help us make sense of what is happening in the markets today and have the strength to follow our convictions when we are tested.
That’s it for this week. Things are looking up and I remain bullish for our next post in the a week’s time!