It was a challenging week for commodities, especially the agricultural markets and industrial metals. Ags faced a correction as the hot and dry weather patterns are shifting to more normalized temperatures in the coming weeks. Looking at the one-week relative performance of many of the most traded agricultural products, Oats -18%, Canola -16%, Cotton - 14%, Corn -13%, and Soybeans -11%. Why are we discussing ags on a primarily precious metals website? Because the two primary concerns of the Fed, Politicians, and the public are food and energy costs. Politicians know they must get inflation down ahead of the November elections at all costs. Once inflation declines, the current administration will declare victory, and the Fed will pause raising rates. That is when the administration acknowledges the recession and announces an infrastructure bill. The goal will be to restimulate the economy while the Fed transitions to dovish and considers a rate cut from the overtightening.
Daily Nasdaq Chart
Over the coming weeks, I expect U.S. equities to continue to roll over on recession fears, weaker earnings, and equity fund redemptions. This week we saw the first significant outflow of funds as investors sold down their equity exposure in the range of $17 billion. The equity redemptions, recession fears, and higher borrowing costs have caused corporations to cut back on expanding their workforce (Netflix's second round of layoffs). Something I watch and is one of the best proxies of the global economy's health is Copper, and this week we saw prices fall 6.5% on the heels of deteriorating PMI data. Both June Services PMI and June Manufacturing PMI data reached 2-year lows sending Copper down 16% YTD and below $4/pound, allowing us to position for the long run.
Daily Copper Chart
Our Strategy intermediate-term
You will want to continue to reduce overweighted equity longs while taking shorts on indices such as the Nasdaq and Russell. That is where the technology and small-cap companies remain and are most affected by higher borrowing costs. At the same time, year-over-year comps will show significant deteriorations when the next round of earnings comes out. You will want to use spikes in interest rates to build long positions in Gold and U.S. Treasuries (For when the Fed pauses/pivots). As interest rate expectations begin to decline, Credit should bottom first. For instance, the market is pricing 7 more 25bps rate hikes from the Fed, followed by 15 in the Eurozone and 7 in the U.K. I don't think 3/4 of the expected rate hikes happen because of the economic damage and the softening of input costs. To help you identify different technical analysis formations such as tops and bottoms in the markets, I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold but can easily apply to Silver." The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Gold.
Our Strategy long-term
We all know that the Fed will not be able to crush every aspect of inflation completely; however, once they meet their new expectations, they will declare a victory lap. At this point, you will want to go bottom picking longs in crypto, equities, and base/industrial metals such as Copper, Platinum, and Silver. (if you currently hold these, this will be your best opportunity to average down). I believe if the administration thinks it has any chance of maintaining power, it will do anything it can to restimulate the economy. The most likely scenario is an infrastructure bill, electrical grid upgrade, and green energy initiative. Additionally, I believe that declining demand for consumer electronics will cause chip makers to shift their focus to supplying automakers. That will help boost auto production and bring it back to pre-pandemic levels allowing Copper and Platinum to rally. To learn more about trading precious metals, we completed a new educational guide that answers your questions on how to transfer your current investing skills into trading "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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