Without a doubt, you’ve heard about the breakout in Aussie stocks on Friday.
The market made a huge move to lift nearly 3% in one day.
What you might not know is that gold stocks were already roaring from last Monday. Friday was just further icing on the cake.
What’s interesting about this is the background to the surge.
It was only two weeks ago that Fed Chair Jerome Powell gave his press conference and spooked the market with further tough talk on inflation.
Gold stocks tanked 6–10% the following day.
I know that acutely because I’d just bought two gold stocks earlier that week!
I held on.
And it seemed to me there were clear signs of accumulation happening as volume came into the sector on the dip.
It’s been straight up since.
Check out the top five Aussie stocks last week. Four are gold stocks:
The only share to do better was Origin — and it’s under a takeover offer.
What’s going on with gold stocks?
The least we can say is there is value there.
One of the discrepancies in the gold market in Australia is that the stocks have done much worse than the Aussie gold price lately.
You can see that via this chart here:
Part of the explanation here is that gold stocks are still companies with expenses.
And those expenses — labour, diesel, etc. — have been inflating at a high and fast rate.
And rising interest rates were another headwind for sentiment.
Now the gold price is catching a bid in US markets.
That would suggest the market is expecting rate rises to cool off and the US to be in recession in 2023.
Hint: Investors are making a defensive move!
Many of the Aussie producing gold stocks were down 50–70% over the last two years.
It’s a simple equation sometimes: cheap stocks and a rising commodity price = bull move!
However, one week doesn’t mean much in the grand sweep of the year.
Can the gold sector keep running?
Truth be told, your guess is as good as mine. One complication we have is the US dollar.
A rising US dollar is, generally speaking, a headwind for gold.
The US dollar has pulled back in recent trading. But whether it keeps falling is not so clear…and it’s to do with oil.
There’s a shift happening in the markets right now that most investors won’t appreciate because the change is so huge but also barely noticeable.
The US dollar is now linked to oil inversely to the way it’s traded for the previous 20 years.
It used to be that a rising oil price would correlate with a falling US dollar.
That’s because the US imported so much energy from overseas, mostly the Middle East. Oil also made US trade deficit worse than it already was. The dollar weakened when oil went up.
But the world changes…
A rising oil price is now BULLISH for the US dollar.
The US is now the premier energy country in the world, with staggering oil and natural gas resources.
It’s also capturing market share from Russia as the EU diversifies its supply away from Ukraine.
That means a rising oil price needs to be watched for gold investors too.
As it is today, oil is still a very healthy US$90 a barrel. That can drive huge revenue through energy producers.
So there’s opportunity in energy stocks as well.
Now put this in the context of the general market. Growth is very hard to find for most sectors.
A lot of companies are battling rising costs, and there’s a muted outlook for consumer spending as rate rises bite. Housing has cooled. Unprofitable companies are on the nose generally.
That puts resource stocks in the spotlight as the place to be.
It only took a hint of China ‘reopening’ this month to send BHP, FMG, and RIO firing back up.
Then we have the ever-present trends of decarbonisation and electrification in the undercurrents as well.
I’m thrilled that my publisher, Fat Tail Investment Research, is launching a dedicated advisory to tackle all the opportunities here.
Our latest Editor, James Cooper, is a trained geologist. I can hardly think of a more exciting runway over the next five years. Make sure you check out his upcoming presentation on what he calls ‘The Age of Scarcity’ by registering here.
Editor, The Daily Reckoning Australia