When I wrote a column in Cabot Wealth Daily last month, I talked at some length about my transition from commodity supply, demand, and price forecaster to working full-time as an equity analyst. While the job was essentially the same, taking subscriber risk into account meant that I couldn’t remain “agnostic” to markets as many analysts try to do. Instead, I had to embrace the fact that markets are inherently cyclical. And if I were to have any sort of consistent success, it was clear I would have to become a “contrarian” or else I would become a “victim.”
With regard to cycles, every business has one.
In the case of commodity producers like Brazil’s VALE, their cycles tend to be semiannual, marked by extreme fluctuations in their primary commodity – in this case, iron ore.
Source: Tradingview
It’s incredibly easy to see there, as VALE’s ups and downs tend to come at the same times every year and are almost always in a 1:1 correlation to the iron ore price itself.
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In those situations, investing is easy. Just buy low at the right time of year when prices begin to inflect upward. Then sell high six months later when restocking is done and prices begin to flatten out.
This is true across almost the entire natural resource sector. Just look at Arch Resources (ARCH) and metallurgical coal prices…
Source: Tradingview
Or Freeport McMoran (FCX) and copper prices…
Source: Tradingview
Or Occidental Petroleum (OXY) and West Texas Intermediate crude oil prices…
Source: Tradingview
It doesn’t matter which natural resource – if you get the commodity right, you get the stock right.
But when I was forced to broaden my horizons and move beyond commodities into the far more complicated (to me) worlds of currencies and consumer-driven sectors, it wasn’t as easy. There isn’t as obvious or uniform a product in those sectors to be able to track the inputs required to determine price – namely supply, demand, cost and trade.
I can remember the day that I started to put the big picture together, however. I was helping my co-worker with an oil price forecast and he mentioned that because oil is priced globally in U.S. dollars, it tended to have an inverse relationship with the currency. When dollars went up in value, it could buy more barrels and vice versa.
I hadn’t heard that before, so I went to the Bloomberg Terminal to chart it out. And although there were also times when they moved together – which incidentally has been the case since the pandemic – for the most part they had these BIG opposing swings.
Source: Tradingview
While I was at the desk, I got a call from a banker friend who wanted to talk about gold, so I just plopped it on that same chart. And the result took me a bit by surprise, as the trio looked sort of like a three-headed monster, where only two would go up and the other one would fall.
Source: Tradingview
When I mentioned it, my I-banker friend – who had quite a few cycles more experience than I – just chuckled and said two words.
“Interest rates.”
What I was looking at was a long-term view of what fluctuations in interest rates do to currencies and commodities. When they go lower – as they did for 40 years – they make it easier to borrow money, and thereby increase demand for commodities and other asset classes and decrease overall demand for dollars. When commodity prices increase, it shows up as inflationary pressure, which necessitates higher rates, which reverse the cycle.
But “gold in particular,” my friend said, “has an enormous anti-correlation to long-term interest rates. When rates go down, they tend to pump up gold prices, and when rates go up, a little air comes out of gold … but never all of it.”
While true over the very long term, the trend is incredibly obvious when we just look at the period since the dot com bubble in 2000. And with inflation numbers finally softening and Federal Reserve Chairman Powell telegraphing rate cuts in September (or sooner), gold prices have already begun their moonbound excursion.
Source: Tradingview
There are lots of ways to play the move in gold directly, whether it be the SPDR Gold Trust ETF (GLD), a lower-cost large-cap miner like Lundin Gold (LUG.TO), or a torque-y small-cap miner that needs to play catch-up like B2Gold (BTG).
Source: Tradingview
And while gold might be the most obvious benefactor, the move in interest rates will have equally large effects on other sectors as well.
Growth stocks in the tech sector (XLK) will benefit from the lower cost of capital. Demand for real estate (XLRE) will increase, which will in turn begin to increase property values. And large manufacturers (XLI) may be encouraged to dust off expansion plans and increase capex spending.
And when you add that all up, I suspect this point in the market right now – today – has the potential to be the biggest turnaround catalyst we’ve seen since the start of the decade.
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