“Silver and Gold
Silver and Gold
All wish
For silver and gold
How do you measure your worth
Just for joy
Are there here on earth?” – Burl Ives, silver and gold
- Dollar slips as inflation eases.
- Gold is negatively correlated with the dollar, so it could rally if the greenback falls.
- A weak dollar has less of an impact on the technology sector, which generates a lot of sales abroad.
- Interest in foreign stocks could rise if the dollar loses its luster.
The Federal Reserve’s tightening policy to curb inflation appears to be working as inflation slows, causing the US dollar to lose air. If this trend continues, investments that underperformed last year on US dollar strength could rebound this year, suggesting that gold, tech stocks and international equities should be on investors’ radars.
Gold bugs rejoice
Gold should be an inflation hedge. However, the precious metal did not escape last year’s sell-all market. This results in the SPDR Gold Shares ETF (GLD) which is negatively correlated with the US dollar, was down as much as 11% year-to-date in early November.
However, things have changed since November. Namely, US inflation data has weakened, giving the Federal Reserve an opportunity to slow its pace of GDP-destroying rate hikes. Make no mistake, the central bank’s rate hikes have brought us to the brink of recession (bullish for gold bugs, btw). Still, the prospect of fewer and smaller rate hikes in the future has dampened enthusiasm for the US dollar and provided a catalyst for gold to operate.
With the US dollar down about 9% from its September peak, GLD is up 15% from its November lows — an incredibly healthy return. Individual gold stocks have even outperformed. For example Hecla Mining (HL) (Real Money Bruce Kamich’s top stock for 2023) is up a staggering 72% since its September low. Agnico Adler (A.E.M) and DRD Gold (DRD) the top two gold stocks in the ranking system I developed in 2003 are also up an impressive 51% and 83%, respectively, from their lows last fall.
There could also be room to run higher. Speculators turned incredibly bearish on gold near the bottom, suggesting many investors on the sidelines would support more upside.
This week, Real Money Pro’s Carley Garner wrote, “It’s rare to see a speculative position in gold that is anything but broadly bullish, and liquidation events have generally been springboards for new rallies.” Garner has turned bullish on gold , “As the dollar returns gains, the plow that has held back the metals markets has been removed”. She notes that “by September 2022, gold speculators had liquidated almost all of their holdings in the futures markets for the first time since 2018.” This is the closest thing to pessimism, suggesting that the next logical move for gold is up rather than down.
Garner isn’t the only one who thinks gold could keep shining. Real Money Pro’s Doug Kass recently picked a gold rally as one of his “surprises for 2023’s $3,000 level by the end of the year,” including a move away from cryptocurrency (a now-defunct inflation hedge), growing demand from foreign governments, and ongoing global ones tensions.
Technological tailwinds?
Technology stocks perform poorly in the recessionary part of the business cycle, but they are top performers in the early stages, and it can be argued that while we are not officially in a recession yet, a lot of recession pain has been priced into the sector.
Individual stocks peaked in spring 2021, but major indices continued to rise into year-end as they were overweight in large-cap tech companies. So-called FAANG stocks, an acronym for Facebook (now Meta Platforms), Apple, Amazon, Netflix, and Google (now Alphabet), initially masked broader weakness but contributed significantly to the 2022 decline. Overall, the SPDR Technology ETF (XLK) fell about 30% over the past year as large-cap tech stocks lost over $4 trillion in market value.
A drop in valuation multiples due to higher interest rates was a big reason FAANG stock fell out of favor. However, the company also suffered because tech stocks generate 59% of sales overseas, according to Goldman Sachs. The translation of foreign currency sales into a strong US dollar was a significant headwind to growth.
For example, if we remove currency conversion from the discussion, Microsoft’s (MSFT) Revenue would have been up 16% year over year, rather than 11% in the most recent quarter. meta platforms (META) Sales would have been up 2% rather than down 4%. apples (AAPL) Sales would have grown 14% instead of just 8%.
Those are significant discounts considering these companies generate tens of billions of dollars in quarterly revenue. For example, Apple’s revenue was over $90 billion (yes, billions!) last quarter. The dollar’s impact on the sector is clearly not small change.
The greenback’s recent decline should bring some relief this quarter compared to the previous quarter. However, let’s assume that it weakens further or stays near current levels. If so, it becomes a tailwind for growth as early as the second quarter as the US dollar index is currently trading at levels similar to last May.
An “emerging” opportunity
Last year, a strong dollar made foreign stocks far less attractive to US investors. A weaker dollar this year could prompt investors to rediscover stocks in Asia, Europe and elsewhere.
In Reign of ‘King Dollar’ to End in 2023, Real Money’s Alex Frew McMillan writes:
“2023 looks like King Dollar will be dethroned. It’s been an extremely strong 18-month period for the greenback, but it’s likely to end as the Federal Reserve nears the end of its rate-hike cycle and the US economy enters a potential recession.
This is a strong argument for holding unhedged positions in Japanese equities as the Japanese yen has seen some of the biggest weaknesses against the US dollar. But the same trend of dollar weakness will play out in other markets as well. Many Asian equity markets will therefore provide a passive advantage for US investors in 2023 as the local currency appreciates against the dollar. Any gains then converted back into the weaker greenback look larger after this transaction.”
McMillan previously wrote that the Bank of Japan’s surprise decision to change policy and raise 10-year interest rates slightly was particularly optimistic for Japanese banks and life insurers.
Those views are supported by others, including hedge fund manager Dan Niles, who has chosen Japanese bank Mitsubishi UFJ ADR (MUFG) as one of his top 5 picks for 2023.
In selecting MUFG as a target, Niles wrote, “Mitsubishi UFJ Financial Group is down 27% while the Nikkei is up 102% and the S&P is up 235%. This December, however, JGB 2-year yields turned positive for the first time since 2015. Therefore, Japanese banks should finally be able to do decent money lending. To position our own fund for this opportunity, we own a basket of names including Mitsubishi UFJ Financial Group ($MUFG), the ADR of Japan’s largest bank.”
Besides Japan, investors can also consider other markets including China and Europe. China’s plan to reverse the severe COVID lockdowns that have hit its economy from January 8 could be a catalyst for Chinese stocks. Meanwhile, a stronger euro could boost interest in European equities.
The intelligent game
Exchange-traded funds are an easy way to play out a weak dollar trend because they allow for fast and liquid intraday trading while removing the risk of picking the wrong individual stock.
For example, those who want to own gold might buy the GLD if they are uncomfortable with the single stock risk associated with the stocks mentioned above.
Even as technology stocks struggle this year due to economic woes, a broad ETF like SPDR Technology ETF XLK offers quick exposure to the sector, whose risks are easier to track and manage than individual stocks. But of course, if you prefer individual stocks, big-cap stocks, including FAANG stocks, could also be worthy targets for buyers.
Investors wanting overseas exposure could also use ETFs.
For example, investors interested in Japan could buy the IShares MSCI Japan ETF, which owns 237 Japanese stocks, including MUFG, its third-largest holding. This ETF is up 14% from its October low. Or Franklin’s FTSE China ETF (FLCH) owns 971 Chinese companies, including top holdings in Tencent and Alibaba. It’s up 45% since the end of October. Other option? Vanguard’s FTSE Emerging Markets ETF (VWO) owns over 5,500 foreign companies in emerging markets such as China and Brazil. The expense ratio is just 0.08% per year and is up 17% since the end of October. Finally, if you are interested in exposure to Europe, consider the iShares Europe ETF (IEV) if you do not wish to purchase individual ADRs traded on US exchanges.
As for currencies, I avoid trading them directly on the volatile futures markets. Instead, you could sell the US Dollar Index (UUP) Go short or buy an ETF that mimics the relationship between a foreign currency and the US dollar. For example the Invesco CurrencyShares Euro Trust (FXE) approaches the movement of the euro against the US dollar. However, consult your tax adviser before trading with them as they may have special tax considerations e.g. B. if they are taxed as ordinary income.
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