A golden pullback

Thursday, 22 February 2024

Twitter (X): @JCooperGeo

[6 min read]

Dear Reader,

Every so often you come across a podcast or report that crystalises your understanding.

That happened to me last week while listening to a short interview from the well-respected commodity analysts, Ole Hansen.

You can find Ole’s podcast via my X (Twitter) feed above.

Ole has become a trusted voice in the commodity world and has a style that I like… He combines fundamental macro outlooks with technical analysis.

Ole’s point is that it’s easier to find winning stocks once you read the market correctly.

This is especially the case for commodities, which are cyclical.

Commodities: understanding the big picture

Taking a top down approach is a great way to put the odds in your favour.

Commodities are a complex beast.

The outlook for a metal depends on dynamic forces involving geopolitics, supply chains, global mining output and demand.

Each factor can have a critical influence on the underlying spot price.

And each commodity is nuanced.

Take copper, the fortunes of any ASX-listed copper stock will depend on what’s happening in Chile, by far the world’s largest supplier.

In recent months, Chile’s state owned company Codelco, has been hit with cost blow-outs and lack of capital.

2023 was also the company’s worst production year in a quarter of a century!

Understanding problems at the supply coal face allow you look ahead at the emerging opportunities closer to home.

Then there’s lithium, the new kid on the block.

Uniquely, it has just one demand driver… the EV battery market.

That makes it exceptionally volatile, as the last two years have shown.

Its long term outlook also depends heavily on government renewable energy policies.

The point is, you can’t simply look at what a company is doing on the ground, you need to have an understanding of the forces driving the underlying commodity.

Now, another key strategy for investing in the commodity market is this…

You can either be a generalist or a specialist

At my paid service, Diggers & Drillers, I offer readers a generalist view of the commodity market.

We try to cover the full spectrum of opportunities on offer.

From energy to future facing metals such as graphite or copper.

To industrial commodities like titanium or zinc.

Given the geopolitical climate we’re in today, there’s certainly a lot to cover!

Commodities sit at the heart of complex issues in today’s economy.

Now, a generalists certainly has its advantages.

We can tip toe our way through the various opportunities… while one commodity falls another could be emerging into a new bull market.

Yet, right now there is one area of the commodities market that deserves special attention… precious metals.

In fact, in the Ole Hanson’s podcast I highlighted above, he spells out clearly why gold and silver could lead the market in 2024.

As you know, rates are set to fall in the US.

Lower US yields will diminish the appeal of US bonds and cash for investors.

That will boost the appeal of gold as an investment class.

It will also weaken the US dollar.

Given gold and silver are priced in USD, a weakening US dollar will make purchases more attractive to foreign buyers.

That has the potential to increase demand and create higher prices.

Enter… Fat Tails resident gold expert

No doubt, you’ve read some of Brian Chu’s insights in Fat Tail Daily.

You probably realise too, that this guy is obsessed with gold and silver!

Brian could probably tell you the specific details of every gold stock on the ASX, even if the company isn’t listed in he’s portfolio.

All from memory!

It’s why I like to sit down with Brian, chew the fat and get his updates on the precious metals market at least once every couple of months.

I always get a lot from those discussions.

And that’s what Brian is offering all Fat Tail readers tomorrow night.

Put in your diary!

Brian’s going in-depth about the opportunities in gold and silver across developers and explorers.

He’ll also be taking a top down look at this important market.

It is certainly worth listening in.

They’ll be a live Q&A session, and it’s happening tomorrow night, 7pm.

To reserve your spot you can do so here.

Enjoy!

Regards,

James Cooper,
Editor, Mining: Phase One and Diggers and Drillers

James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.

[3 min read]

“What I’m describing is military rule…It’s the inversion of democracy.”

~ Mike Benz

As you’ll recall from our episodes this week…

John Hussman predicts, with 99.9% certainty, a big drop in stock prices…particularly the Magnificent 7.

His figures suggest an average decline of only 12%. But he bases this on an analysis of the period 1972-2023. This period, however, included the biggest stock market boom in history, boosted by the most successful ‘fake’ (not backed by anything) money system ever invented.

We expect he is right about the likelihood of a stock decline. But he may be wrong about the damage it will cause. In 1990, the Japanese market collapsed by 80%. It still hasn’t recovered — nearly a quarter of a century later. In the US, the Dow peaked out in 1929, dropped 88% and didn’t really recover until 1961.

And if you keep track in terms of gold, you could have traded 18 ounces of gold for all the 30 Dow stocks of 1929. By 1980, it only took 2 ounces of gold. And twenty years later, it was at over 40.

All of which is to say that stocks swing up and down dramatically, sometimes a lot more than 12%. This is why, academic researchers believe, the rate of return from stocks should be higher than from bonds. There is a ‘risk premium’ that you get from stocks, theoretically, to compensate you for the big, episodic drawdowns in stock prices. NB: today, you can take 18 ounces of gold and buy all 30 Dow stocks again, just as you could in 1929. So, the real value of the best stocks on the market has not increased over the last 95 years.

Clusterf*ck of Woe

Yesterday, we looked more closely at why the next 40 years will probably not be as felicitous as the last 40…that is to say, the Dow/gold ratio is probably more likely headed to 2 rather than to 40. It may not be the ‘cluster of woe’ Hussman predicts, in other words, but a real ‘clusterf*ck of woe.’

After the funny money was introduced in 1971, the unfaithful dollar seemed to introduce an insidious, infectious disease…faithlessness crept into America’s vital organs. We saw how the elites of both parties try to limit voters’ choices, for example…in order to ‘protect democracy.’ The media has been captured by them too, and used to promote policies that serve their interests, but not those of ‘The People’ they are supposed to serve.

After 1971, marriage rates declined. Young people moved in with their parents. In 1971, you could buy an average house for $25,000. Now, The New York Times reports on a new trend: shrinkflation in housing, with tiny houses of only 600 sq. ft. selling for almost $300,000. Single income families have become rare. More children are born out-of-wedlock…and then, childbearing has declined to the point where, without immigration, the population would decline and Social Security would go broke.

Drug use increased. (Legal and illegal.) The prison population grew. Wages gains ceased. Americans got fatter. Federal debt rose 100 times. And the rich and poor parted company; by 2010, the top 5% earned more than the entire 90% of the population beneath them.

Americans have no dog in the Ukraine-Russia fight. But hundreds of billions of their dollars are used to keep it going. So too are billions of US dollars sent to Israel so it can buy weapons from the US firepower industry. All of which leads us, and Mike Benz, to believe that Congress, the administration, and the press are so deep in the pocket of the firepower industry, they can’t get out.

Gov Spooks and Jackboots

Dwight Eisenhower warned about it in 1961. Today, the danger he foresaw has not only arrived…it has taken a shape even he did not foresee — a silent military coup d’etat. Joe Biden doesn’t appear on TV as ‘Generalissimo Biden,’ bespeckled with medals and ribbons. Tanks do not patrol Pennsylvania Ave. Nor are dissidents rounded up, tortured and killed.

But, says Mike Benz: the military and the spooks rule. Few members of Congress dare to oppose them. Few mainstream media outlets dare to present their situation reports without the opinion of some retired, often disgraced, general officer. And, says Forbes, the firepower industry has become a ‘defining feature of the US economy.’ Forbes:

Congress in December belatedly passed an omnibus appropriations bill for fiscal 2023 including $858 billion for national defense, roughly half of which will be dispersed in the form of contracts to the private sector.

That is, by any measure, big business. In fact, at over $400 billion annually, defense contracts awarded to the private sector are worth an amount equivalent to a quarter of the entire Russian economy.

The Congressional Research Service estimates the U.S. defense industrial base currently includes over 200,000 companies...the bottom line is that the defense industry has become a permanent, in fact defining feature of the U.S. economy.

The US defence budget when Eisenhower issued his famous warning was $47 billion. It’s now over $850 billion — 18 times higher. Even adjusted for inflation, it’s three times what it was during the Cold War. Why? Do we have thrice as many enemies now as then? We send billions to ‘protect’ Europe and Israel. Why? Both are rich and fully capable of protecting themselves.

The explanation is given to us by the aforementioned Mike Benz. The firepower industry has become expert, he says, in using the media to promote its own agenda.

We’ll hear from Mr. Benz more tomorrow…and you’ll get more of our Spenglerian view: this time, the West really is in decline.

Regards,

Bill Bonner,
For Fat Tail Daily