Monday, 12 December 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[5 min read]

Dear Reader,

Three big factors are swirling around the Aussie market right now, and, in a way, all relate to China.

They are gold, iron ore, and oil.

I’m long the first two and short the last one.

However, the market moves like lightning. I’m not so fixed in my views that I can’t do a 180 anytime, either. You need to be like that in today’s market.

Take, for example, the recent sanctions that came in on Russian oil. Did you notice something?

I did. It’s the fact that the oil price kept going down. Don’t you think that’s notable? Russia is (or was) one of the biggest energy exporters in the world.

But the oil market has clearly stopped panicking about the loss of supply coming from the war in Ukraine.

One reason is that China, India, and other countries are prepared to buy cheap Russian oil. That keeps the market in balance.

But clearly, demand is coming off the boil as well. How can we be so sure of that?

Oil product prices have been declining since the crazy heights they hit midyear. That’s great news for you and me: cheaper petrol is back and here to stay!

This plays out on the share market and will keep doing so.

Personally, I don’t own oil shares. That’s not an environmental position. I don’t think they’re worth the risk. Oil could sink badly in 2023.

We have a weak China, tight money, and slowing global trade.

The market seems conflicted about China. So am I. Any relaxation of their COVID lockdowns is, theoretically, bullish for commodities.

However, it’s not clear what happens if COVID rips through the country in the way the Chinese Government fears.

If there’s a genuine health crisis, Chinese consumers may voluntarily lock themselves away from public, or at least high-risk activities like, say, flying. 

It’s hard to get excited about Chinese trade and demand in such a situation. There’s a chess term called zugzwang.

It’s when any move you make leaves you in a worse position. Either China stays in lockdown or lets COVID rip. Neither choice looks pleasant.

Why, then, the rallying iron ore price? It’s back up to more than US$100 and may even threaten US$120 before Christmas.

Truth be told, your guess is as good as mine. I’m just going with it while the momentum is there.

Here’s one thing few people point out when it comes to iron ore…it’s extremely profitable.

What I mean is everyone loves projecting lithium demand into the future and gets hot and bothered about the potential for nickel to soar, and on it goes with the battery metals.

Iron ore has no exciting story. But the producers mint money at this price, and they’re doing it right now, not in 2024 or 2025.

Some of the junior mining stocks are still battered from the last drop a few months ago.

Meanwhile, their margins are inflating again, and their costs are coming down as diesel prices go back to normal.

You might like to keep an eye on a few: Fenix Resources [ASX:FEX], Mt Gibson Iron [ASX:MGX], and Grange Resources [ASX:GRR] are all nicely profitable at this price.

And if iron ore tanks again?

Personally, I’ll cut and run!

That brings me to gold shares…

Can they keep running?

My bias is to say yes. But I’m aware we’re dependent on what the US-dollar gold price does.

A falling oil price helps gold because it will bring inflation down and, therefore, interest rates.

My colleague Brian Chu has mentioned the oil-gold ratio on these pages recently. That ratio is getting better for gold by the day.

Here’s another thought: a falling oil price could weaken the US dollar.

That’s a weird one, at least historically. Falling oil would once have boosted the dollar.

I’ve seen some recent research that shows the traditional relationship between the dollar and oil has flipped. Both move up and down together, at least for now.

We’ll see if this holds true in the next month or two. But a falling US dollar would help gold as well.

And right now, the market is backing gold shares. I can see the buying and momentum in this sector because it’s so clearly absent from so many other sectors.

At the moment, it almost feels like you either long gold shares or stay out of the market, at least in the short term. The market is listless.

There’s one exception to this, and that’s if you’re a patient investor. Trading short term is tough currently, but anyone with a medium-term outlook (two years) should be scooping up whatever bargains they like the look of.

There’s just so much opportunity out there. However, human nature is what it is.

We’re all wanting fast results, a quick buck, and immediate positive feedback.

Which type of investor are you?

If you like the sound of buying low to sell high in a few years, make sure you go here to see the best bargains on offer now.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

We float on a ‘sea of lies’, says Harvard Professor Jeffrey Sachs.  

‘Most of them come from the government’, he says.

Remember how Donald Trump claimed he had created ‘the best economy ever’? It was a lie. The economy was getting worse, especially after ‘The Donald’ pumped an extra US$5 trillion into the economy to offset the effects of his COVID Lockdown policies.

And then, along came Joe Biden. ‘The U.S. is in a better economic position than almost any other country’, says the big spender.

But the US economy is an abstraction…what really matters is how the people in it are doing. And here’s the latest from CNBC:

‘The share of retirement savers who withdrew money from a 401(k) plan to cover a financial hardship hit a record high in October, according to data from Vanguard Group.

‘That dynamic — when coupled with other factors like fast-rising credit card balances and a declining personal savings rate — suggests households are having a tougher time making ends meet amid persistently high inflation and need ready cash, according to financial experts.

‘Nearly 0.5% of workers participating in a 401(k) plan took a new “hardship distribution” in October, according to Vanguard, which tracks 5 million savers. That’s the largest share since Vanguard began tracking the data in 2004.’

Fleeced by the feds

Staggered by falling real wages. Walloped by rising real prices. The US’s middle-class families are raiding retirement accounts just to keep up.

But here comes the left hook. From Markets Insider:

‘A recession is imminent but central banks won’t be able to support markets this time by loosening policy….

‘“Recession is foretold as central banks race to try to tame inflation. It’s the opposite of past recessions,” BlackRock strategists said.’

What? Nobody told you that Fed bailouts just lead to more debt…and more problems down the road? And didn’t someone tell you…that the feds’ stimmies…giveaways…and unemployment boosters would have to be paid for somehow?

And how about all this help we’re giving the Ukrainians? Who was supposed to pay for that?

Nobody mentioned that the middle class would pick up the bill? Must have slipped through a crack in the news cycle. Because, surely, the feds wouldn’t lie to us. They’re ‘public servants’, doing their level best for the benefit of ‘The People’, right?

Wrong. Sachs is right. We live with so many lies; we wouldn’t know what to do without them. COVID…Ukraine…terrorism…the economy — every subject is so fattened on lies it can barely move.  

Intended consequences

What these lies all have in common is that they are a nuisance to the common man. All the lies are designed to support ‘policies’. All the policies cost money. And the poor middle-class, salt-of-the-Earth citizens must pay for them.  

Should the Donbas be governed by Ukrainians? Or by Russians? Or by the Donbassians themselves? The typical American could care less. But the ‘defence’ industry grows richer and richer by throwing its weight around…and he pays for it.

Was there really any reason to shut down the whole economy to stop the COVID virus? Did it make sense to flood the economy with money so that ‘The People’ didn’t mind being locked up in their own houses? No, it didn’t. And now, the middle class is paying the price for those policies too.

And what does the average US citizen gain by cutting off the flow of Russia’s energy to Europe? The Europeans still need energy. And when they buy US gas, it just raises the price of fuel for Americans.

Professors of political science talk about ‘man’s relationship with the State (government)’, but that is the biggest lie of all. The ‘government’ or ‘the State’ is just another abstraction. What counts are our relationships with other people — such as the people who run the government.  

Yes, there are the governors…and the governed. Nowhere, except maybe in the smallest township, do ‘the people’ rule. Instead, the people are ruled by a bullying elite. And when these public servants become the masters…with too many laws, programs, policies and lies…the middle classes pay dearly.

Regards,

Bill Bonner,
For The Daily Reckoning Australia