IN-DEPTH: TRANSCRIPTION - LONGWave - 10-09-24 - OCTOBER - CONFLICT--Changing Commodity Complex
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
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Geo-Political conflict in multi-faceted forms is increasingly making Commodities more appealing as an important element of your investment portfolio.
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As such I want to continue with our recent videos on this increasingly important focus area, but with a different view which we simply didn’t have time for in our prior videos.
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This time I want to highlight some of the current sectors of the Commodities Complex that are increasingly attracting institutional investors attention.
As such I would like to cover the subjects outlined here.
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Let’s start with a few charts which I used previously that illustrated where we currently see the overall complex to be from a Technical Analysis perspective.
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For our long time followers you know we indentified the turn in 2020 and our anticipated lift in what we felt would be Wave 1 of an Elliott Wave 5 Wave count.
We also identified the Wave 2 Corrective Consolidation which we are currently in and identified here as a potential ABCDE count. From a CRB Commodity Index perspective this count is likely to end sometime in Q1 of next year.
What this chart hides is two salient points.
First there are many sectors that have already ended their corrective - consolidation stage – such as:
- Precious Metals like Gold & Silver
- Strategic Materials like Lithium, Cobalt and Nickel
- Energy products like Hydrogen & Uranium
- Food Producers between the Farmer and the Grocery Store.
We will talk about some of these in a moment.
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Secondly, not all Commodity indexes are showing the same pattern because of different members and weighting.
The Goldman Sachs Commodity Index suggests that Wave 2 is likely to end later this Quarter.
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The Bloomberg Commodity Index has Wave 2 possibly ending prior to year end.
When you look inside the indexes this is because individual components and their specific index weightings have already started their Wave 3 quite aggressively.
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The equity markets are over-valued against most measures because of the tremendous distortions the top 10 stocks and Magnificent 7 are doing to the other 490 stocks of the S&P 500. Institutions are in the process of seeking out better value propositions.
They are finding them in various elements of the Commodity Complex.
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It is our strong belief that Inflation is a long way from being brought under control, especially since ”Excess Liquidity” is being taken to unprecedented levels while Financial Conditions are looser than we have seen before, other than when we faced major financial turmoil.
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So how does Commodities fit into this new world of Conflict, Financial Turmoil and elevated Government Debt levels?
What makes them now standout besides being simply undervalued? Investments can stay undervalued for a long time – as Commodities have already demonstrated!
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We have written many times and produced video’s describing the “Indirect Exchange”.
The current environment is one in which the concept of the Indirect Exchange works best in. We did a video specifically showing how Warren Buffett has used it for years in investing in Insurance and why he has been so successful in investing in that sector.
The Indirect Exchange argues that you:
- BUY Productive Assets that will maintain their Pricing Power and appreciate in Value over time.
- PAY for those assets using Debt that will lose its Purchasing Power through fiat currency debasement over time.
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Additionally, there are four emerging elements that are becoming increasingly important in the current Post “Great Moderation” environment for adding commodities to your portfolio consideration:
They are Government Policy, Choke Points, Supply and Resource Depletion.
POLICY
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- Scarcity is now being written into law through government legislation and regulation
CHOKE POINTS
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- Transportation Routes, Regime Change, Limited Suppliers, Strategic Minerals. Production Lags, Environment Restrictions are increasingly important.
SUPPLY
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- We have witnessed an alarming lack of long term investment in production to sustain current and future demands.
RESOURCE DEPLETION
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- A low level of increasing the expansion of undiscovered or unused resources.
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There are also mounting Economic Inflation drivers exerting increasing price pressures:
INFLATION WAVE 2 is still ahead AND WILL BE ABOUT:
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- Services (Skilled Wage Pressures)
- Import Costs (Tariffs)
- Energy (Regulatory Crippling of Utilities)
- Food (Shortage of Agricultural Land)
INFLATION WAVE 3 is likely TO BE ABOUT:
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- Shelter (Shortage and Property Tax Rates)
- US$ Weakness (Currency Debasement)
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With these factors and drivers in our minds let’s look at some Technical’s starting with Precious Metals.
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Gold is clearly well along in its Elliott Wave – Wave 3.
Gold is the best performing asset so far in 2024. Black gold or Oil is not and is still in a protracted corrective consolidation which could end with a geo-political shock like an attack on Iranian oil fields.
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Rising geopolitical tensions and the coming US election are likely to reinforce what some investors call the “DEBASEMENT RADE” thus favoring both gold and possibly Bitcoin.
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The big driver for Gold is the significant accumulation by Central Banks – and China specifically – of gold Bullion for FX Reserves.
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China had let-up slightly as Gold soared, but the PBoC is back at it again ... further loading up on gold.
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Momentum in gold remains powerful, but you are not alone being bullish gold here.
This chart shows CFTC net long minus short position in futures for the Managed Money category.
Interest in Gold is broadening!
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Retail as well as central banks is buying the "real thing" that is physical, segregated gold bullion.
Not Futures, Not ETFs
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To some degree we have seen the interest in major Gold Integrated Producers, but it hasn’t been overwhelming as in Bullion.
You notice some weakness now showing here.
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Gold Bullion is still in a major Wave 3 at multiple degrees. It likely needs to consolidate here but if the dollar falls and real rates falls as the Global Macro appears to be telling us, then Gold has potentially much further to go!
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Silver also - could be huge
A proper close above the $32 area and this thing could take off. A retest of $50/ Oz is not at all out of the realm of a possibility?
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A report from the Russian news agency Interfax last week reveals Russia's plans to substantially increase its precious metals reserves in the coming years.
The report states that Russia's State Fund plans to acquire:
- Gold,
- Silver,
- Platinum,
- Palladium,
- Gemstones
Russia's decision to add silver to its reserves distinguishes it from most other central banks, which have largely focused on accumulating gold while overlooking silver. Along with several other bullish factors, Russia's silver purchases could be a key driver in pushing prices to $50 and beyond.
Bloomberg's translation of the original Interfax report reveals that Russia's State Fund plans to allocate 51.5 billion rubles (that is $538.7 million or over half a $Billion) to precious metals and gemstones in 2025, with the same amount set for 2026 and 2027
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That silver versus gold gap is starting to see the "catch up" possibility for those portfolio managers that watch the Gold : Silver ratio closely.
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With the US 10 year Inflation Breakevens surging since the local low less than a month ago the precious metals are getting a lot more attention from Institutional Money Managers.
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How about other commodity areas that are associated with increasing scarcity associated with some of the chokepoints I mentioned earlier?
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The Food and Agriculture Organization of the United Nations' Food Price Index, which tracks the international prices of a basket of globally traded food, averaged 124.4 in September, up 3% from August and 2.1% higher versus the same month one year ago. The FAO noted in the report that sugar, including wheat and edible oil, was the leading cause of the overall spike.
The world could be on the cusp of another food inflation shock as the benchmark for world food commodity prices recorded the fastest monthly increase in 18 months in September.
A perfect storm of war in Eastern Europe and broadening conflicts in the Middle East, snarled maritime supply chains, extreme weather across croplands, de-growth climate change policies pushed by the far-left in the West, and rogue central bank money printing have all contributed to sticky food inflation.
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The FAO Sugar Price Index registered the largest increase in September, rising by 10.4 percent. This was driven by worsening crop prospects in Brazil and concerns that India's decision to lift restrictions on sugarcane use for ethanol production
The FAO Cereal Price Index increased by 3.0 percent during the month, led by higher wheat and maize export prices. International wheat prices increased due largely to concerns over excessively wet conditions in Canada and the European Union, World maize prices also climbed, influenced by low water levels on key transportation routes along the Madeira River in Brazil and the Mississippi River in the United States of America.
The FAO Vegetable Oil Price Index increased by 4.6 percent from August, with higher quotations across the board for palm, soy, sunflower and rapeseed oils.
The FAO Dairy price Index rose by 3.8 percent in September, with quotations up for whole milk powder, skim milk powder, butter and cheese.
The FAO Meat Price Index increased by 0.4 percent, mainly due to higher poultry meat prices driven by strong import demand for Brazil's product.
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As a result the FTSE 350 Food Producers Index in 2023 has clearly broken out of its’ corrective consolidation pattern.
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The Invesco DB Agricultural Fund shows the same break out pattern in 2024.
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Though Crude Oil as measured by WTI and Brent prices are within a trading range, the use of energy as measured by power output is getting more expensive. This can be seen in Utility stocks.
Prices are rising and investors are piling in.
The XLU has an almost “Madoff like” trend channel – almost too perfect!
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Morgan Stanley and others are highlighting the potential for a positive turning point in sentiment for Decarbonization and Electrification:
- Power demand is shifting higher alongside powering AI
- Wholesale power prices are expected to rise through 2026;
- Clean power equipment is deflating rapidly
- Investment in renewable equipment supply chains are becoming evident across the world
- Grid Capex is intensifying to support higher power demand with more distributed generation.
There are many elements of energy and materials that are experiencing a global resurgence in investment.
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There are expectations for global power consumption to grow 26% faster through 2030 than in the last decade (2.4x faster ex. China). Expectations are for this to lift wholesale prices by 20-25% compared with 2019 and push up returns for power producers globally to near-record highs.
- Higher power consumption,
- New investments in conventional power generation,
- Low clean power equipment costs, and
- A lower interest rate outlook …
… point to a Goldilocks scenario for power producers, grid operators and power equipment supply chains, especially outside China.
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When you look at earnings growth of the S&P 500 and Energy in particular it is hiding what is currently going on.
It is not uncommon for a sector that is the worst one year to be the best a year or two later!
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As I said Crude is within a trading range but you never short a trading range low.
The move higher over past sessions has been aggressive and we are once again trading above the 50 day.
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When it comes to power and energy there is a real overlap with supporting materials from concrete, aggregate materials to copper, nickel mined products to produced products like steel, aluminum et al.
These are seeing prices, earnings and pricing power increase.
Why? Some see the:
- China stimulus.
- Fed cutting into an accelerating profits cycle giving us Reflation.
- Positioning: Large cap long-only managers are underweight, while hedge funds have reduced their net long positions.
- A decade of underinvestment in manufacturing, particularly mining and equipment replacement, could drive higher returns.
- Ask Dr. Copper: Rising copper prices are expected to boost Materials' performance.
- Engagements up? New household formation next.
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Strategic Metals, Materials and Rare Earth have exploded onto the scene in importance since Covid as everyone has now become acutely aware of serious exposures, supply chain disruptions and simple scarcity of supply as more and more nations compete for the same critical resources.
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Uranium has surged on the scene as a result of Nuclear energy becoming an almost mandatory solution to exploding electrical energy requirements to drive the grid.
New Nuclear Energy power solutions now bypass the exposures of nuclear heavy water and the degree of nuclear waste with smaller modular generation stations needing Uranium fuel.
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The measure historically used to assess industrialization is Dr Copper because of its ability to detect patterns before it is clearly evident to everyone.
Dr Copper is beginning to detect this as its controlling trend channels are starting to steepen. No sure thing here but certainly reflective of much of what is already evident.
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So what can we conclude?
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- IT IS AMAZING THAT THE COMMODITY COMPLEX HAS DELIVERED AS WELL HAS FOR SO LONG??
- We take it for granted,
- Like water when we turn on the tape we just expect it to be there.
- It takes Infrastructure and all the commodities that support that infrastructure
- IT IS RIPE FOR FRACTURE FROM MULTIPLE DIMENSIONS
- Global Conflict and the Emergence of the power of the BRICs is a major development which we discussed in a previous video.
- THE ELEMENT OF GEO-POLITICAL CONTROL
- Commodities are increasingly becoming a Geo-Political lever of power and control.
- STAGNATION, STAGFLATION & DEBT CRISIS
- As the Economic Stagnation, Stagflation and an eventual Debt Crisis becomes part of the Beta Drought Decade, Commodities may be a place you what to have exposure to in your portfolio.
The time to buy is before the Wall Street machine starts beating the drum – that is historically always been after they have quietly build their positions.
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
