It’s been one of those weeks – they happen unfortunately. There seems to be a perfect storm of negative news stories, and markets have got the jitters.
First, there’s the mounting conflict on the Russia-Ukraine border, the implications of which are tremendous. Never mind the potential imminent war, it has also revealed just how vulnerable the divided West now is.
Then there’s the triple threat emanating from the US Federal Reserve, America’s central bank, as it faces the challenge of inflation, which is now very real and present, even if you use the central bank definitions (asset price inflation has been rampant for decades, now it has spread into consumer prices).
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So why do I say triple threat from the Fed? There is the likelihood that interest rates go up; there’s the tapering (with the Fed reducing the amount of money it prints to buy bonds); and there’s so-called “quantitative tightening” (QT) – whereby the Fed actually sells off some of the $9trn in assets it currently holds.
Whether the Fed will follow through with this triple threat remains to be seen. We’ll have more of an idea this evening (UK time) when Fed chair Jerome Powell makes his next utterance and tells us all what has been decided at its latest meeting. Tighter policy will be needed to control inflation, he has said – but how tight can the Fed go? “Not very”, is the answer; Wall Street is addicted to stimulus.
Goldman Sachs argued yesterday that the Fed will need to raise interest rates four times this year. Respected market historian Russell Napier estimates that 1.5% is the most markets can take. Currently, we stand at zero.
Add to this perfect storm the unwinding of one of the most incredible bull markets we have ever seen in history – the tech bubble or bull market of the last ten years, your choice of words will depend on whether you were invested or not – and you can see why it has been such a gruesome week.
The big names in the Nasdaq stock index propped it up in the latter part of last year, while the non mega-caps were in decline. But in 2022, even once-seemingly impervious big names such as Facebook, Amazon, Apple, Microsoft and Alphabet have taken a battering.
And, of course in the land of bitcoin another cryptocurrency winter is upon us.
The price of “real” stuff is holding up nicely
Times like this, however, can be very instructive. What holds up best will be the place to be when the inevitable rebound comes. I have bad news for Powell – what has held up best are metals and energy.
Usually when you get these periodic pops of the “everything bubble”, you would expect them to sell off harshly too. They have sold off a bit, but nothing like what we have seen in tech.
This bad news for Powell? Because the rising prices of metals and energy, especially, lead to a very apparent rise in the cost of living and are likely to make their presence felt in the forthcoming consumer price inflation data, putting more pressure on Powell to tighten.
Both Brent and West Texas International crude oil remain around $85 a barrel – seven-year highs. The same goes for heating oil and gasoline. Natural gas always seems to do its own thing, but it is making a low after its October-December sell-off.
Turning to the metals, in the base category, the uptrends in lead, iron ore, zinc and aluminium are all intact. Nickel to an extent too. Some have been more volatile than others, nickel especially, but the broader trend is upwards.
Copper is in consolidation mode after its bonanza in 2020 and the first half of 2021, but it is holding up near its multi-year highs.
Even the perennial disappointers – gold and other precious metals – have stood firm. Gold sits at $1,845 an ounce, having been rising steadily since early December. Silver has also been rising steadily since mid-December, though it has been weak these past few days (as you would expect in a broad market sell-off – it is a speculative metal). Even so, it is at $23.80 an ounce, when it was $21.50 a month ago. Platinum and palladium, the latter especially, have had a fair time of it too.
The short of it is this: it looks like metals and energy are going to have a pretty good 2022. They are the place to be.
The simplest way to play this is to own a company I have touted many times before, and continue to tout, BHP Group (LSE: BHP), which is diversified across the energy and metals sector. Or you might consider the BlackRock World Mining Trust (LSE: BRWM), the BlackRock Energy and Resources Income Trust (LSE: BERI) or iShares Oil & Gas Exploration & Production ETF (LSE: SPOG). These are all low-risk ways to play the bull markets in metals and energy.
Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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