Get Ready for a Commodities Comeback

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Gold keeps heading higher … watch for the commodities supercycle to continue resume in 2023 … Eric Fry’s commodity rec … Alan Greenspan doesn’t see us escaping a recession

Gold keeps climbing, having just notched a six-month high.

Since gold’s record high in summer 2020, the precious metal has had plenty of bullish surges, but none turned into a sustained breakout to new all-time high.

What makes this latest bullishness unique is that it has the support of the crashing dollar. In early December, we suggested this dollar weakness was a “this time it’s different” tailwind.

Below, we look at the last one-and-a-half years of relative performance between the U.S. Dollar Index (in green) and gold (in black).

The inverse correlation is stark and helps explain gold’s consistent gains since the fall.

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Chart showing the relative performance of the US Dollar Index and Gold since summer 2021, clearly showing an inverse correlation

Source: So, will 2023 bring new all-time highs for gold?

That’s what many analysts are predicting, though the Fed’s monetary policy will greatly impact whether it happens.

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Here’s CNBC with more:

A full dovish pivot by central banks this year would likely have major implications for gold prices, according to strategists.

Eric Strand, manager of the AuAg ESG Gold Mining ETF, said last month that 2023 would yield a new all-time high for gold and the start of a “new secular bull market,” with the price exceeding $2,100 per ounce…

“It is our opinion that central banks will pivot on their rate hikes and become dovish during 2023, which will ignite an explosive move for gold for years to come. We therefore believe gold will end 2023 at least 20% higher, and we also see miners outperforming gold with a factor of two.”

We echo the bottom-line made in our early-December Digest:

If you have zero gold exposure, consider a small position. If you own gold or gold miners, definitely don’t sell.

We could finally be seeing a sustained bullish shift as the dollar continues falling.

Meanwhile, gold isn’t the only commodity with a bright 2023 forecast

A few weeks ago, Goldman Sachs released its 2023 Commodity Outlook research report. In short, it found that the “commodity supercycle” we’re in today isn’t over yet.

If you’re not familiar with the idea of a commodity supercycle, let’s go to our macro specialist Eric Fry, editor of Investment Report.

It was all the way back in summer 2020 that Eric identified our current commodity supercycle and positioned his subscribers to benefit (resulting in a handful of triple-digit winners).

Here’s Eric from two-and-a-half years ago:

Unlike stocks, which tend to move higher over time, commodity prices cycle through powerful multiyear booms, followed by spectacular multiyear busts.

These are called “supercycles.”

No two supercycles are identical. But they all share two distinct traits:

1. In their youth, they produce huge investment gains.

2. In their advanced years, they produce huge investment losses.

That’s why it’s so important to pay attention to them early on. They grow up so fast.

The easiest way to monitor a commodities supercycle is through the TR/CC CRB Commodity Index (CRB), which holds a basket of global commodities.

Below, we look at the CRB Index over the past 20 years, noting the exceptional timing of Eric’s “buy” recommendation, based on his identification of a new supercycle.

© Provided by Investorplace News
Chart showing the CRB Commodity Index over the last 20 years, as well as where Eric Fry correctly called the beginning of the latest supercycle

Source: But clearly, the supercycle fizzled out last year – does this mean it’s over?

Let’s return to the Goldman Sachs 2023 Commodity Outlook research report:

Commodity supercycles never move in a straight line; rather, they are a sequence of price spikes, with each high and low higher than the previous spike.

Commodity prices, unlike financial markets, perform an economic function of balancing supply and demand, so once high prices have rebalanced the market in the short term, the high prices are no longer needed, and prices come crashing back down as we witnessed late [last] year.

But ending one spike doesn’t mean the end of the supercycle – long-run supply issues take years to resolve.

We like to say that commodities, while short-run unpredictable, are long-run predictable. The exact timing of these short-term price spikes are difficult to forecast, as it was in 2022.

Conversely, the long run state of the market is predictable as supply and technological trends are far more persistent, with all the conditions required for another spike present in 2023.

Translation – there’s plenty of gas left in the tank.

Regular Digest readers know that Eric is incredibly bullish on one commodity in particular – copper

That’s because it’s a critical component of countless next-generation tech products.

Yesterday, in his free newsletter, Smart Money, Eric urged investors to consider copper yet again. Here he is explaining the overwhelming copper demand from just the electric vehicle sector:

Because electric vehicles (EVs) require large quantities of metals like copper, nickel, lithium, and manganese, mining companies have become the newest heartthrobs of the global auto industry.

The car companies are realizing that if they wish to ramp up EV production, they must secure long-term supplies of the “battery metals” that make their eco-friendly new autos possible.

The average EV, for example, uses almost half as much copper as the average American house. And EVs aren’t the only “green” products that require electric metals.

Our advice about adding gold to your portfolio today is equally true for copper. For a long-term investor, it’s a no-brainer investment.

For more of Eric’s research on commodities as an Investment Report subscriber, click here.

Finally, let’s check in on the condition of the U.S. economy before we sign off

As we’ve highlighted many times in the Digest, we believe the key issue in 2023 won’t be inflation. Instead, it’s how the U.S. consumer and corporate earnings will hold up in the wake of historic interest rate hikes from the Fed that are working their way through the economy (with the brunt of their impact ahead of us).

We believe a recession is coming – the unknown is the extent of its damage.  

Yesterday, former Federal Reserve Chair Alan Greenspan said he expects at least a “mild” recession.

From Bloomberg:

Former Federal Reserve Chair Alan Greenspan said a US recession is the “most likely outcome” as the central bank tightens monetary policy to curb inflation.

While the last two monthly reports showed a deceleration in consumer-price increases, “I don’t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession,” Greenspan said…

Wage increases, and by extension employment, still need to soften further for the pullback in inflation to be anything more than transitory, said Greenspan, 96. 

“We may have a brief period of calm on the inflation front but I think it will be too little too late,” he said.  

The risk of lowering rates too quickly is that inflation “could flare up again and we would be back at square one,” Greenspan said. 

The minutes released today from the Fed’s December meeting support Greenspan’s takeaway

Those minutes show that Fed members believe that while October and November data were “welcome reductions in the monthly pace of price increases,” it would take “substantially more evidence of progress to be confident that inflation was on a sustained downward path.”

Plus, also this morning, we learned Kansas City Federal Reserve President Esther George said she wants to raise rates to over 5% and hold them there “for some time.”

If we focus in on the tech sector, it’s possible we’re seeing the first faint signals of the coming recession thanks to the Fed’s efforts. Yesterday, The Wall Street Journal reported that the tech sector has been laying off workers at the fastest pace since the 2020 pandemic.

From the WSJ:

The figures are rough estimates and don’t capture all layoffs, but reflect a trend that is playing out in many of the largest tech companies.

For years, many tech companies aggressively added workers amid strong revenue growth and rising share prices. The hiring pace picked up during the pandemic as individuals and companies leaned on technology to help get through lockdowns and other Covid-related disruptions.

Now, the same businesses are laying off employees, implementing hiring freezes and cutting costs, as spending on tech products slows and the outlook for digital advertising dims.

Amazon is spearheading these layoffs. It’s now confirmed they’ll be slashing headcount by 18,000 employees.

Now, is it possible this weakness and these job cuts could impact the Fed’s monetary policy? Perhaps it could result in a pause in rate hikes sooner than expected?

Greenspan doesn’t think so:

I do not expect the Federal Reserve to loosen prematurely unless they deem it absolutely necessary, for example, to prevent financial market malfunctioning.

Whether we’re talking gold prices, interest rates, U.S. consumer health, stock prices, or tech layoffs, there’s tons riding on the Fed’s monetary policy. On that note, all eyes are on February 1, when the Fed convenes its next policy meeting.

We’ll keep you updated.

Have a good evening,

Jeff Remsburg

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