It was a tough week for commodities, especially agricultural markets and industrial metals. Ags faced a correction as hot and dry weather patterns move towards more normalized temperatures in the coming weeks. Looking at the one week relative performance of several of the most traded agricultural commodities, oats -18%, canola -16%, cotton -14%, corn -13% and soybeans -11%. Why are we talking about ags on a mainly precious metals website? Because the two main concerns of the Fed, politicians and the public are food and energy costs. Politicians know that they must at all costs reduce inflation before the November elections. Once inflation is down, the current administration will declare victory and the Fed will halt the rate hike. It was then that the administration acknowledged the recession and announced an infrastructure bill. The objective will be to stimulate the economy while the Fed turns to moderation and considers a rate cut following the excessive tightening.
Daily Nasdaq Chart
Over the next few weeks, I expect US equities to continue to ride on fears of recession, falling earnings and equity fund redemptions. This week we saw the first major outflow of funds, as investors sold their equity exposure by around $17 billion. Stock buybacks, recession fears and higher borrowing costs have prompted companies to scale back workforce expansion (a second round of Netflix layoffs). Something I watch that is one of the best indicators of the health of the global economy is copper, and this week we saw prices fall 6.5% on the heels of deteriorating PMI data . The June Services PMI and June Manufacturing PMI data hit 2-year lows, sending copper down 16% year-to-date and below $4/lb, giving us allows us to position ourselves for the long term.
Copper daily chart
Our medium-term strategy
You will want to continue to reduce overweight long positions in equities while taking short positions in indices such as the Nasdaq and Russell. This is where technology and small cap companies remain and are most affected by higher borrowing costs. At the same time, the year-over-year comps will show significant deteriorations in the next round of results. You will want to use interest rate spikes to create long positions in gold and US Treasuries (when the Fed stops/pivots). As interest rate expectations begin to decline, credit should hit bottom first. For example, the market expects another 7 rate hikes of 25 basis points from the Fed, followed by 15 in the Eurozone and 7 in the UK. I don’t think 3/4 of the expected rate hikes are happening because of economic damage and slowing input costs. To help you identify different technical analysis formations such as market highs and lows, I’ve gone through 20 years of my trading strategies to create a new “5-Step Guide to Technical Analysis for Gold But which can easily be applied to money”. The guide will provide you with all the technical analysis steps to create an action plan used as a basis for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Gold.
Our long-term strategy
We all know that the Fed will not be able to completely crush all aspects of inflation; however, once they have met their new expectations, they will declare a victory lap. At this point, you’ll want to pick the bottom in crypto, stocks, and base/industrial metals such as copper, platinum, and silver. (if you currently hold them, this will be your best opportunity to lower the average). I believe that if the administration thinks it has a chance of staying in power, it will do whatever it can to revive the economy. The most likely scenario is an infrastructure bill, a power grid upgrade, and a green energy initiative. Also, I think the drop in demand for consumer electronics will cause chipmakers to focus on supplying automakers. This will help boost auto production and bring it back to pre-pandemic levels, allowing copper and platinum to rally. “real assets”, such as the 10 oz gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.
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