Did You Have To, Jerome?
A month ago I thought things were finally sorted. The Fed made its highly telegraphed tapering move while assuring everyone they would not raise rates at least until the taper job was done by mid-next year. That created a clear runway, finally, for gold to act as an inflation hedge in a highly inflationary environment.
And for two whole weeks that is exactly what we got. Gold gained on news of inflation and, since there’s inflation news almost every day, it pushed the yellow metal up 6.5% to hit $1874 per oz. in mid-November.
Apparently, two weeks of clear sailing is all we got.
Ten days ago the gold market seemed to get whacked on news of Jerome Powell’s reappointment as chair of the Federal Reserve. As I wrote last week, I don’t think the reappointment of a dove-tending chair known for telegraphing his moves and being pushed back from tightening fairly easily was really what pressured gold; I think it was that rising COVID case counts in Europe prompting new restrictions pressured the Euro, which boosted the US dollar, which pressured gold.
OK, that was fair enough. But yesterday wasn’t fair.
In his semi-annual testimony to Congress, Powell said it was time to retire the word ‘transitory’ in discussing inflation and suggested they might speed up the taper timeline. He continued to say that he still expects inflation to ease significantly over the next few months as supply chain issues resolve but traders were too busy dumping gold and oil and buying the US dollar to listen. They did that assuming Powell’s comments meant rate hikes would now happen sooner.
Oh, the ebb and flow. Only five days earlier, news of Omnicron had pushed rate hike timing expectations farther out and lifted gold.
I of course don’t know how this will actually play out. But here’s some food for thought.
The last time Powell started pushing for hikes was in late 2018 when he said that rates, which were already rising, remained “a long way from neutral.” That statement sparked the market meltdown at the end of that year and stocks didn’t really recover from that selling until Powell, a few months later, backtracked and started cutting rates.
There are lots of ways 2021/2022 is different from 2018/2019 but I don’t think we should forget that a tantrum from the markets – then dubbed the Taper Tantrum – forced the Fed to backtrack. Would the same happen if markets threw a fit at rate hikes? I think it’s likely…and has a good chance of creating the same backtracking response. (I’ve coined the descriptor Rate Rage. Let’s see if it catches on.)
Second, this will all depend on inflation. Powell’s timing on retiring ‘transitory’ might end up ironic…because lots of forecasters are now predicting inflation will peak over the next three months and then slowly recede.
The Paris-based OECD issued this chart, suggesting inflation will ease as people return to the labor force and supply bottlenecks fade. I think it’s a pretty reasonable outlook – it’s not like inflation is likely to stay at 5 to 6% for a long time, even with ongoing supply chain challenges.
So. If inflation eases over 2022 – stays relatively strong, perhaps averaging 4%, but slides rather than continuing to climb – then Powell will have less rationale to raise rates. And any Rate Rage that does transpire (let’s be honest – traders do not want higher rates because that might detract from the All Stocks All The Time mentality that’s driven markets to all-time highs, while also threatening solvency issues and the like) would have better grounding.
I think the market overreacted to Powell’s testimony. Perhaps others do too. On the chart below you can see how gold plummeted following Powell but regained some of that ground before the end of the day (red) and then traded sideways today (green).
I’m not saying the Fed won’t raise rates. I am saying that it doesn’t matter whether Powell trots out ‘transitory’ or not or whether the first hike happens in April or June – what matters is that significant rate hikes are very unlikely.
And so we remain in a negative real rate world, and one where a market tantrum over rate hikes could make safe havens attractive and where inflation will remain notable if not rampant. That all works for gold.
It also works across metals, because it’s also a world undergoing an electrification revolution that is driving metals demand way higher.
Certainly, major mining companies are getting more, not less, confident in a positive market ahead. I say that because, even though we always wish for more deals, bigger deals, more splash – the M&A market is actually pretty good. I was reminded of that on Monday when news broke of two significant deals: Capstone Mining merging with private company Mantos Copper to create a new Go-To name in the copper space given the scale of production, growth pipeline, and leverage to copper, and Northern Star getting a major foot in the door at Osisko Mining via a $154-million convertible debenture and an agreement to negotiate the terms for Northern Star to earn as much as a 50% stake in OSK’s Windfall project.
Both are good and interesting deals. The Capstone-Mantos deal sets new Capstone up to leapfrog its copper peers as a leading copper opportunity. It’s a bit funny how, for a market as large as copper, the list of large copper-focused miners is quite short. Only one of the two companies shown on the slide below as larger than new Capstone (once it gets two imminent projects underway), First Quantum, is focused on copper. Teck produces copper alongside zinc, coal, and oil.
Long story short: it is far from quiet in the mergers and acquisitions world. Action has been slowly ramping up across the metals space (this list covers gold, lithium, and copper). If you want the full list of the deals I found the most exciting, you can subscribe to the full newsletter.
I will end this rambling with my mantra: Don’t stress the day-to-day – just be in. That’s how I feel about metals, even when gold can only maintain a clear runway for two weeks!
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