We again highlight one of the most important charts in gaining an understanding of how out of favour “physical stuff” is. Yes, I know we have been banging on about this for a number of years now. But bottoming processes do take a “few” years.
Take a look at the (FFGCX), and note the underlying stock exposures and industry group allocations:
Take a closer look at the chart of the fund below (total returns, so gross of dividends) overlaid with the CRB Commodity Index.
The CRB Index measures the performance of the prices of commodity futures, specifically:
“Thomson Reuters/CoreCommodity CRB Index is calculated using arithmetic average of commodity futures prices with monthly rebalancing. The index consists of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar and Wheat. Those commodities are sorted into 4 groups, with different weightings: Energy: 39%, Agriculture: 41%, Precious Metals: 7%, Base/Industrial Metals: 13%.”
The CRB Spot Index measures spot prices of commodities, specifically:
“copper scrap, lead scrap, steel scrap, tin, zinc, burlap, cotton, print cloth, wool tops, hides, rosin, rubber, and tallow”
From a broad perspective, commodity markets don’t look too weak.
We could be accused of praying like the rain man, but has anyone noticed the YTD performance (down 24%) of the Magnificent 7 () compared to the energy sector (), which is down “just” 8%?
By now, you are probably sick or ecstatic (no in between) of seeing the chart below.
S&P 500 Energy Sector relative to (total returns)
When to Sell Out of Gold
You have all probably seen what is going on in the department. However, you probably haven’t seen a chart of gold from a logarithmic perspective (percentage rather than absolute change).
We would say that the upside is only just getting into gear. Remember, for about 10 years, it went nowhere. We aren’t seeing any behavior that is typically associated with a maturing of a bull market such as daily rapid price moves. Furthermore, we aren’t seeing speculative buying activity from retail investors, like what we have seen in the likes of the Mag 7 and Nvidia (NASDAQ:) in particular (up until the last six months at least).
Of course, we can make an argument for considerably more upside due to all the antics of central banks ever since the GFC in 2008 and added to that the COVID crisis where governments tried to print their way out of trouble.
Picking a top in gold will be tricky, but when the average retail investor and fund manager is of the belief that a 5% weighting in gold is as vital as being invested in the Mag 7 now and crypto, well, that will be time to get out. And we are a long way from that condition!
The trick is that one cannot really look at gold in isolation, as its price is relative to something else.
Taking gold and gold miners relative to the well, if you believe in the idea of “mean reversion” it isn’t hard to justify “somewhat more” outperformance in gold and gold miners (that maybe gold and gold miners going up more than the S&P 500 or going down by a lot less).
Gold vs S&P 500 (total return)
Gold miners vs S&P 500
Our feeling is that we probably have to hang onto our gold and positions for another five years, so be cool and let this trend get away from you.
An interesting piece of trivia. has only doubled relative to gold since the start of 2018. With all that euphoria, that is all that Bitcoin could manage relative to gold.
Gold relative to Bitcoin indexed to 100
The Permian Isn’t an Endless Source of Cheap Oil and Gas
Let us not repeat what everyone is talking about and how the market is currently reacting. I.e., Trump’s tariffs are going to collapse the demand for and OPEC can’t help but oversupply the market.
We are not so interested in all this. We strongly suspect that the market is over reacting.
What has our attention is the changing long-term dynamics of US shale. For the last few years, we have been saying that the US shale isn’t far from peaking. We now think that production has already peaked. Let’s talk in black and white and not various shades of grey!
It would seem that problems in the Permian that we have been pointing out for the last couple of years are starting to come to the attention of the press of popular opinion.
From the article:
“U.S. oil producers are grappling with geological limits to production growth as the country’s top oilfield ages and produces more water and gas and less oil – and may be nearing peak output.
The Permian basin was the centerpiece of the shale revolution that began nearly two decades ago and spurred the U.S. to become the world’s top oil producer, stealing market share from the Organization of the Petroleum Exporting Countries (OPEC) and other top producers.
Slowing output growth and rising costs would make it difficult for oil producers to pump more and bring down oil prices to consumers, as envisioned by U.S. President Donald Trump in his “drill, baby, drill” mantra.
The Permian is pumping 6.5 million barrels per day (bpd), a record level and nearly half the all-time high 13.5 million bpd of crude that the U.S. produced in December.
But the Permian is flagging. Since the widespread introduction of hydraulic fracturing, the technique that enabled the shale revolution in the mid-2000s, thousands of wells have perforated the Permian and fractured the rock to extract oil and gas.
Relentless drilling to reach record production has exhausted the core of the Permian’s two largest sub-basins: nearly two-thirds of the Midland formation’s core has been drilled, and slightly more than half in the Delaware formation, according to data from analytics software company Novi Labs.
“We’ve never been in a position before where we were on the back-half of the inventory story of the Permian basin,” Novi Labs head of research Brandon Myers said.
That has rung alarm bells across the industry, as drilling in the fringes of the basin, on lower-quality prospects, means less oil output and more water and gas. At conferences and on earnings calls, analysts and executives are discussing the issue with a growing sense of urgency.”
This is perhaps an echo of what was said a couple of weeks ago:
Our take is that growth in US shale is over, and what is likely is a decline in output (at best a slow decline). US shale accounted for some 80% of the global growth in oil production over the last 15 years. Remember, that was the equivalent of two Saudi Arabias!
Growth in production will have to come from somewhere else. This won’t be able to be met by OPEC+ as they are only a few million barrels off full capacity.
We think this will lead to a revival in offshore exploration and development, although the market seems to think otherwise for the time being.