Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

STRATEGIC INVESTMENT INSIGHTS

PRECIOUS METALS – GOLD

 

STAGFLATION WILL REQUIRE A GLOBAL HEDGING STRATEGY!

Friday’s May CPI number was a real shocker! This came on Monday’s equally shocking Consumer Credit for May. The consensus for May’s CPi was already expected to be high but the actual print blew the doors off!!
  • An 8.6% Y-o-Y increase versus 8.3% expectations which matched April’s report,
  • An accelerating 1.0% M-o-M increase versus a worrying consensus of 0.7%,
  • Every May CPI line number was up across the board with Energy, Food and Shelter being by far the worst!

It is blatantly clear that Inflation is neither “Transitory” nor “Peaking”, but rather still accelerating higher! Meanwhile economic growth is being steadily taken down in both the US and around the world. Stagflation is not only here in the US but globally and is rapidly getting worse around the world with no realistic coordinated policy plans in place to contain it. If anything, any form of global coordination is breaking down! The question is: “Are you personally, properly hedged to protect yourself”?

Let’s talk about some strategic thinking you need to consider while you still have time to protect your ‘real’ investment returns.

 
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WHAT YOU NEED TO KNOW
    • Stagflation is increasingly becoming a serious and new Global issue.
    • 2020 marked a secular low in inflation & yields, the beginning of regime change and a potential decade of social, political, economic & financial volatility.
    • Investment hedges against both domestic and global import inflation are becoming paramount to any investment strategy.
    • When the US dollar is falling, historically gold has been an excellent inflation hedge.
    • When the US Dollar is rising, historically commodities have been an excellent inflation hedge.
    • In the near to intermediate term we see a strong US dollar driven more by poor performance in competitive currencies (Yen, Euro and Yuan).
    • In the longer term we see major structural issues with Fiat currencies and the King-of-Fiat-Currencies (and unfundable debt)– the US Dollar.
    • The US is increasingly facing a political and policy leadership crisis which will inevitably show in the performance of the US dollar.
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STAGFLATION IS NOW A GLOBAL PROBLEM
 
I have outlined previously (most recently in “LONGWave – 05 11 22 – MAY – Recessions & PE Compressions“) that Stagflation is now a growing global problem. The cause of this can be laid at the doorstep of US Policy since the Biden Administration assumed power. Stagflation did not exist before the current US administration assumed power.
 
The handling of Covid-19 with nation wide lock-downs, vaccine mandates in parallel with a perceived need for massive fiscal spending by the US and EU initiated the global shift to Stagflation. The west failed to realize an obvious Supply Shock would occur in concert with the expected Demand shock. Subsequent Climate Change Policies (effectively shutdown fossil fuel investment through policy and regulatory restrictions) and Sanctions against Russia only further accelerated an inevitable stagflation spiral.
 
The resulting problems that US investors face are now global in scope and therefore need to plan accordingly.
 
As caught up as Americans are with the daily impact of rising US Inflation as reflected by Friday’s CPI report:
    • Groceries +11.9% y/y –>Biggest increase since 1979
    • Chicken +17.4% ->Largest ever
    • Restaurants +9% -> Largest ever
    • Fuel oil +107% ->Largest ever
    • Electricity +12% ->Largest since ’06
    • Rent +5.2% ->Largest since 1987
    • Airfare +37.8% ->Largest since 1980
    • Services +5.7% ->Largest since 1990
… US inflation doesn’t really stand out globally.
 
The US is now just above the middle of the pack when ranked the highest to lowest using 111 countries, covering the most up to date data available. In fact, the US is “only” 48th highest on this list.
 
 
Compare this to June last year when the US was ranked 28th highest out of 116 and the Eurozone 84th (now only 2 spots below the US). This was soon after the Biden fiscal package and associated helicopter money. Since then Y-o-Y US inflation has increased around 3%, but many other countries have seen it increase even more.
 
The median global inflation is now 7.9% Y-o-Y. It was 3.05% last June. Inflation is now truly a global phenomenon with Asian economies generally the least effected.
 
    • Natural gas 141%
    • Gasoline 91%
    • Oil 61%
    • Iron ore 45%
    • Wheat 39%
    • Nickel 39%
    • Soybean 33%
    • Corn 30%
    • Cotton 30% YTD
AMERICAN INVESTORS MUST INCORPORATE BOTH A DOMESTIC & GLOBAL
STRATEGY INTO THEIR PORTFOLIOS!
 
STAGFLATION STRATEGY CONSIDERATIONS
 
There are two elements of Stagflation that require focus: i) Growth and ii) Inflation.
 
INVESTING WITH SLOW GROWTH
 
We are already witnessing investor shifts towards areas that perform better during slow growth such as Consumer Staples and Utilities. This is part of what we can expect regarding ongoing importance of a preference towards value versus growth, staples versus discretionary and dividend/yield versus capital gains. All these investment areas must however be examined under the light of inflation – both domestic and global.
 
HEDGING AGAINST INFLATION
 
If the US was a self-sufficient, autonomous island, then approaches to inflation investing would be simpler. However, this is not the case in a highly interconnected and competitive world of imports and exports. This is the domain of Currencies. The value of a country’s currency has a profound impact on the realities of inflation and pricing.
 
In this month’s LONGWave video: “Peak Inflation versus Gold“, we spent time on understanding the relationship of the volatility and pricing of gold. What we didn’t spend time on was the impact of currency and how the US dollar’s value impacts the price of gold.
 
Gold like Commodities is traded globally and hence its price is a function of the currency being used for its purchase and sale.
 
    • When the US Dollar rises in value, it buys more gold than when priced lower against a basket of global currencies.
    • When the US Dollar falls in value, it buys less gold than when priced higher against a basket of global currencies.
 
This is pretty obvious and well understood. However, Commodities historically perform differently because of the powerful role of the US Dollar being the dominant Global Reserve currency, which many commodity producing countries are very dependent on in managing their current accounts. With many commodity countries dominantly dependent on exports of a single or a few commodities, their economic current account and balances are tied to the pricing of those commodities.
 
The dollar, as their primary foreign exchange reserve holding, plays an outsized role in pricing their commodities for export. US Foreign aid and dollar denominated debt further ‘hardens’ this relationship. Therefore, historically we see that:
 
    • When the US Dollar rises in value, then Commodities rise in value,
    • When the US Dollar falls in value, then Commodities fall in value.

 
 
The US Dollar moves against other currencies based on the following important drivers illustrated below:
 
 
 
What this translates into is the following realities regarding Inflation Hedging for US Investors:
 
GOLD AS AN INFLATION HEDGE
 
WHEN THE US DOLLAR IS FALLING, GOLD IS AN EXCELLENT INFLATION HEDGE
 
As we highlighted in this month’s LONGWave video, Gold tracks closely to US Treasury yields driven by Fed Monetary Policy, Inflation Breakevens and Real Rates. Clearly the US Dollar plays a subordinate role in these drivers.
 
Today Gold is about $1,871 per ounce (that price fluctuates daily and intraday). That’s nearly 10% lower than the $2,069 all-time high of Aug. 6, 2020, and nearly 9% below the interim high of $2,043 of this March 8.
 
The bottom line is, Gold is lower today than it was two years ago. It was $1,870 on July 22, 2020 and it’s $1,871 Friday almost two years later. There have been some spills and thrills along the way including two peaks over $2,000 and several smashes down into the $1,680 range, but always followed by a reversion to a persistent central tendency that hasn’t moved much at all.
 
The reason for this is that Gold is fighting the headwinds of a strongly rising US Dollar! (see dollar charts below)
 
WHAT IS THE LIKELY INTERMEDIATE TERM DIRECTION FOR THE DOLLAR?
 
As we have pointed out in recent newsletters and videos, the US Dollar has been experiencing at “Flight-to Safety” as the Japanese Yen, the Euro and the Chinese Yuan have been under sustained pressures. The US Dollar is in fact “the least dirty shirt at the party” and is perceived the place to “hideout” in.
 
In the short-to-intermediate term we don’t see this quickly reversing and therefore Commodities should prove to be the safest place to hedge with a focus on Energy and Food. Both have tailwinds that will not be quickly countered.
 
COMMODITIES AS AN INFLATION HEDGE
 
Commodities on the other hand have been rising dramatically with the US dollar strength! There are clearly elements of shortages at play here but the underlying fact is the consistency that Commodities historically rise with a strong US Dollar.
 
WHEN THE US DOLLAR IS RISING,COMMODITIES ARE AN EXCELLENT INFLATION HEDGE
 
 
GOING FORWARD IN 2022
PAY CLOSE ATTENTION TO POTENTIAL DEVELOPMENTS IN THE US DOLLAR
 
 
ADDENDUM TO LAST NEWSLETTER
 
IS AN EV CAR AN INFLATION COST SAVINGS?
 
Frankly I was appalled when I listened to Senator Debbie Stabenow (D: MI) during a recent congressional hearing when she proudly and somewhat arrogantly stated “It didn’t matter how high gas Is because I drive an electric vehicle”. Listen to her thinking (video right bottom) and then to Karl Rowe’s response (top right). It is embarrassing how out of touch our elected representatives are with the realities of the average American.
 
Karl’s response was necessarily brief because we are a sound byte society, rather than carefully considering what someone is saying and then thinking about it carefully as Karl did.
 
Karl should have added what I wrote in our last newsletter regarding exploding costs associated with Lithium and therefore rising EV product cost. We should add the following to Karl’s comments:
 
  • The Senator is paid $175,000/year as a US Senator.
  • The average American family makes less than a third of this and requires a car.
  • The average price of an EV is $65,000. The average American price for a vehicle is $46,000
  • It is already a stretch to own and maintain a vehicle (or two) for an America family or worse for a single parent.
  • To add a charger to your home will cost of $10,000. IF you don’t add one, it will take 40 hours to charge using you house circuitry.
  • To charge an EV it costs approximately $15 and is much slower and time consuming for hurried Americans with daily commutes rather than pulling into a gas station.
Karl Rove blasts Democrat bragging about pricey electric car
Debbie Stabenow: 'Didn't Matter How High' Gas Is Because I Drive Electric Vehicle
 
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EV IS NOT THE FUTURE DUE TO SUPPLY REALITIES
 
GREEN HYDROGEN IS THE FUTURE
 
SOLAR PANELS AND WIND IS NOT THE FUTURE DUE TO STORAGE & CAPACITY LIMITATIONS
 
NEW NUCLEAR TECHNOLOGY IS THE FUTURE
 
(For more on the above statements see the 2022 Thesis Paper: “SUSTAINABILITY: For Whom?”)
 
 
 
 
CONCLUSION
 
Real average hourly earnings have eroded by 3.0% Y-o-Y. This is resulting in the rising cost of everything Americans consume which is outpacing the rise in their wages!
 
CHART RIGHT: Y-o-Y, Services, Food, and Energy all accelerated further in the May report.
 
This has been going on relentlessly for 14 straight months. Is it only a coincidence that Biden has been president for 16 months?.
 
BIDEN IS FAILING TO LEAD THE WORLD IN A COORDINATED RESPONSE TO GLOBAL STAGFLATION
 
President Biden is stuck in his behavior as a 40 year US Senator versus the leader of the free world! He has not risen to the challenge and is at best acting as a US Vice President without taking full responsibility and demonstrating the vision expected from the critical and bold role required of the leader of the free world.
 
President Biden’s response (and I quote @Forbes): “There’s nobody suggesting there’s unchecked inflation on the way, no serious economist.” [Listen to video]. This is a US politician speaking – not a world leader! This is a leader who spends most weekends in Delaware (which he has habitually done for 40 years), instead of at the White House’s control center in constant contact with world leaders and hosting them like former Presidents did in time of crisis with informal and personal sessions at Camp David. He is absent from the pulpit with constant updates, plans and actions of his administration to combat the issues impacting the daily lives of the average American! Scripted teleprompter addresses only leaves America nervous, frustrated and wondering who is actually in charge – if anyone?
 
Gas is $5/gallon, 10 year old Honda Civics cost $20,000, suburban middle class homes cost half a million dollars and rent exceeds $2000/month. With working Americans, who keep the country running, currently making less than $20/hour – how exactly do they exist and buy an EV auto to commute to hold down a job?
 
 
 
According to Biden, Inflation is currently the fault of:
 
    • Putin
    • Climate change
    • Oil companies
    • Profiteering corporations
    • The Fed
    • Shipping companies
LATEST: “I HOPE CONGRESS TAKES ACTION ON SHIPPING COMPANIES’ PRICE INCREASES” – Biden 06/10/22
 
 
The frequency with which the Biden admin is now ‘referring’ all inflation questions to the Fed suggests Chairman Powell will take the full fall for all the coming damage.
 
These are not the approaches and excuses a world leader portrays. These are not the leadership attributes that Democrat President John F Kennedy outlined in “Profiles of Courage”.
 
 
THE WORST IS STILL IN FRONT OF US
 
EXPECT A SHORT TERM BEAR MARKET COUNTER RALLY
 
FADE THE UNFOLDING COUNTER RALLY – SELL THE RIPS
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