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
