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Gold Finds Support as Key Inflation Rate Hits a 30-Year High

Last week the U.S. dollar advanced against a basket of foreign currencies to hit its highest level in about a year. For consumers and importers, this is…

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This article was originally published by US Global Investors

Contrary to popular belief, what’s good for the goose is not always good for the gander.

Last week the U.S. dollar advanced against a basket of foreign currencies to hit its highest level in about a year. For consumers and importers, this is good news, as it means the greenback offers greater purchasing power.

For exporters, on the other, and for the price of gold and other commodities that are priced in U.S. dollars, this is a headwind. In the chart below, you can see that gold and the dollar share an inverse relationship. When the dollar strengthens, the yellow metal falls; when it weakens, gold soars. It’s important for investors to recognize this relationship because it can help them manage their expectations.

Strong U.S. Dollar Is Weighing on Gold
click to enlarge

It’s also important for investors to keep in mind that gold continues to be one of the most heavily traded assets on the planet, in case they were wondering if Bitcoin is stealing some of its thunder as a store of value.

I often tell people that gold is the fourth most liquid asset, but the most recent data from the World Gold Council (WGC) shows that it’s actually the second most liquid asset following S&P 500 stocks. The precious metal’s average daily trading volume for the one-year period through September 28 was $183 billion, compared to the S&P 500 with nearly $235 billion in average daily volume. That dollar amount is enough to beat currency swaps as well as all government and corporate debt. The WGC measures gold’s liquidity by looking at data provided by global commodity exchanges, over-the-counter (OTC) markets and gold-backed ETFs.

Gold Has Second Highest Trading Highest Trading Volume of Any Asset Class
click to enlarge

Inflation Surging at Fastest Pace Since 1991. Will Gold Benefit?

Gold traded slightly up last Friday following the release of economic data showing that consumer prices jumped the most in 30 years. The personal consumption expenditure (PCE) index, which reflects changes in the prices of goods and services purchased by U.S. consumers, rose 4.3% year-over-year in August, the ninth straight month of accelerating inflation.

Prices Jumped at Fastest Pace in 30 Years
click to enlarge

The PCE, by the way, is the Federal Reserve’s preferred measure of inflation. Fed Chair Jerome Powell, who earlier this year predicted inflation would be “transitory,” admitted last week during a Senate hearing that the bottlenecks and supply shortages that have contributed to higher prices were “frustrating,” and that we should see more of the same pressures into next year.

It’s not just the price of consumer goods that are soaring right now. Home prices, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose 19.7% in the year ended July 2021, the highest annual rate since the index began in 1987. Apartment rents around the U.S. are also heating up. According to Zillow, the average listed rent in August was up 11.5% compared to last year, which some cities in Florida, Georgia and Washington seeing increases of more than 25%.

Oil at Multiyear Highs Despite the Stronger Dollar

Because it’s priced in U.S. dollars, oil ordinarily tumbles when the greenback strengthens, but that wasn’t the case last week. Brent crude, the international benchmark, briefly topped $80 a barrel last Tuesday for the first time in nearly three years due to ongoing supply disruptions. As you can see below, Brent was trading well above both its 50-day and 200-day moving averages, which is a bullish sign.

Brent Crude Touches $80 for the First Time in Nearly Three Years
click to enlarge

What this means is that U.S. exporters are faced with the double-whammy of a stronger dollar and higher fuel costs.

The largest publicly traded exporting company in the U.S. is International Paper. The Memphis-based company, which manufactures paper and packaging goods, shipped close to 220,000 twenty-foot equivalent units (TEUs) in 2020, according to the Journal of Commerce (JOC). That’s second only to the privately held Koch Industries, which was responsible for exporting more than 280,000 TEUs last year. Koch is a massive conglomerate that, like International Paper, focuses a large part of its business on paper and pulp products.

Again, a strong greenback is a tailwind for companies that do a lot of importing. Below are the S&P 500 companies that do the most importing, with Walmart topping the list at a jaw-dropping 930,000 TEUs.

Top 10 Biggest Importers in the S&p 500
click to enlarge

For Airlines, Higher Fuel Costs Are Just More Fud (Fear, Uncertainty and Doubt)

Like a lot of analysts, I see the recent surge in oil prices as a short-term headwind, and already there’s been some contraction due to the stronger dollar and bigger-than-expected inventory build.
As such, this could be an attractive buying opportunity for airline stocks as the share of people fully vaccinated against Covid in high-income countries continues to increase.

I’ll be blunt: When it comes to airlines, the oil price increase is just more FUD (fear, uncertainty and doubt). It’s true that fuel is one of the airline industry’s biggest fixed costs, but what’s important for investors to understand is that higher oil prices have historically helped carriers demonstrate a certain level of capacity growth restraint. Unprofitable routes have been cancelled, for instance, which has contributed to higher load factors.

Plus, I would recommend investors pay more attention to airlines’ ancillary revenues, which play an increasingly important role in driving sales and cash flow. More and more, these revenues help offset higher fuel costs, something that was not necessarily the case 10 years ago when oil was above $100. In 2020, ancillary fees fell in absolute terms, but they represented a bigger piece of airlines’ total revenue.

Top 10 Biggest Importers in the S&p 500
click to enlarge

Right now, vaccination rates and government policy are in the pilot’s cabin, so that’s what investors should be focused on instead.

Before the delta variant, leisure air travel had already returned to 2019 levels. Now that vaccination rates look good in most high-income countries and international travel restrictions are being lifted, I expect to see business travel make some progress.

Speaking for myself, I was recently able to attend the Gold Forum Americas conference in Denver, and I’ll be in Dubai later this month at the AIM Summit. Obviously more progress needs to be made before we’re back to normal pre-pandemic life, so I think this is a very attractive time to start participating with airlines.

Speaking of the AIM Summit… If you’ll be in the Dubai area on October 12, make sure to catch my panel on mining Bitcoin with sustainable energy. Apply to attend by clicking here!

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The PCE price index, released each month in the Personal Income and Outlays report, reflects changes in the prices of goods and services purchased by consumers in the United States. Quarterly and annual data are included in the GDP release. The S&P CoreLogic Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate nationally. The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (09/30/2021): United Airlines Holdings Inc., Delta Air Lines Inc., Southwest Airlines Co., Wizz Air Holdings Inc., Spirit Airlines Inc., Allegiant Travel Co., Ryanair Holdings PLC, Azul SA, easyJet PLC, Hawaiian Holdings Inc., Alaska Air Group Inc., American Airlines Group Inc., The Home Depot Inc., Nike Inc., Amazon.com Inc.













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Economics

UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

“In stark contrast with the mindset of corporate leaders who are dealing…

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UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

In stark contrast with the mindset of corporate leaders who are dealing daily with the reality of higher and persistent inflationary pressures, the transitory concept has managed to retain an almost mystical hold on the thinking of many policy makers,” El-Erian wrote in an Oct. 25 op-ed in Bloomberg.

“The longer this persists, the greater the risk of a historic policy error whose negative implications could last for years and extend well beyond the U.S.,” he argued.

It would appear from the accelerating flattening of the yield curve, that the market is believing El-Erian’s narrative.

Expectations for rate-hikes are being pulled forward by the market…

Pushing 2Y Yields above 50bps for the first time since March 2020…

And as rate-hikes are increasingly priced in, the long-end of the curve is tumbling…

Crushing the yield curve to its flattest in 18 months…

We give the last word to El-Erian, who said he fears that Fed officials will double down on the transitory narrative rather than cast it aside, raising the probability of the central bank “having to slam on the monetary policy brakes down the road—the ‘handbrake turn.’”

“A delayed and partial response initially, followed by big catch-up tightening—would constitute the biggest monetary policy mistake in more than 40 years,” El-Erian argued, adding that it would “unnecessarily undermine America’s economic and financial well-being” while also sending “avoidable waves of instability throughout the global economy.”

His warning comes as the Federal Open Market Committee (FOMC) – the Fed’s policy-setting body – will hold its next two-day meeting on November 2 and 3.

Tyler Durden
Wed, 10/27/2021 – 09:25





Author: Tyler Durden

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Economics

CAD treading lightly ahead of BOC

The Canadian dollar has traded quietly so far this week as the economic calendar has been light. The remainder of the week is busy, with the Bank of Canada…

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The Canadian dollar has traded quietly so far this week as the economic calendar has been light. The remainder of the week is busy, with the Bank of Canada policy meeting later today and the September GDP report on Friday. USD/CAD is currently trading at 1.2419, up 0.24% on the day.

Will Bank of Canada taper?

The BoC has shown the markets that it is serious about tightening policy as the economic recovery finds its footing. The BoC was the first major central bank to trim bond purchases and is widely expected to trim again, reducing bond purchases from CAD 2 billion to CAD 1 billion.

The Canadian dollar has soared in October, with several drivers for the upswing. Domestic data, such as the falling unemployment rate, a rise in retail sales and high inflation. Investor risk appetite has been moving higher, and the jump in oil prices has been boosted the loonie, as Canada is a major oil producer.

The BoC could end its bond purchase scheme before the end of the year, but it remains unclear what bank policy makers plan to do about rate policy. No change is expected to the current rate of 0.25%, but will today’s meeting hint at a rate hike sometime next year? If so, USD/CAD could test some multi-month lows. Conversely, if the BoC is silent about rates, that could generate some disappointment and send USD/CAD higher. Investors will also be interested in what the bank has to say about the surge in inflation. September CPI hit 4.4% (YoY), much higher than the bank’s inflation target of 2%. Like the Federal Reserve, the BoC continues to insist that inflation, which is running way above the bank’s target of 2%, is transitory, but that stance is increasingly being questioned, with no signs that inflation will ease up anytime soon.

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 USD/CAD Technical

  • USD/CAD is testing resistance at 1.2422. Above, there is support at 1.2475
  • There is support at 1.2302, followed by 1.2235






Author: Kenny Fisher

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Economics

7 A-Rated Energy Stocks to Buy Before Winter Strikes

The fact that the Federal Reserve is contemplating shifting its easy money policies as early as mid-November shows that inflation isn’t as transitory…

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The fact that the Federal Reserve is contemplating shifting its easy money policies as early as mid-November shows that inflation isn’t as transitory as thought a couple months ago. And that’s great news for energy stocks.

When inflation rises, the dollar weakens as interest rates rise. That means it takes more dollars to buy commodities like oil, for example. Certainly, the supply chain problems have something to do with this but it’s also a lack of supply that started during the pandemic last year.

Now, demand bounces back — until the delta variant slowed things down again — but it’s tough to ramp up production in a quarter or two. It’s certainly a unique situation.

But that doesn’t mean you have to wait until things get better before stepping into the market. Energy stocks like the ones below can be a great addition now, as we see that energy prices will remain high for some time to come. Another noteworthy aspect of these stocks is that each has an A-rating in my Portfolio Grader.

  • Continental Resources (NYSE:CLR)
  • ConocoPhillips (NYSE:COP)
  • Diamondback Energy (NASDAQ:FANG)
  • Marathon Oil (NYSE:MRO)
  • HollyFrontier (NYSE:HFC)
  • ONEOK (NYSE:OKE)
  • Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B)

Energy Stocks to Buy: Continental Resources (CLR)

Source: Maksym Vynohradov / Shutterstock.com

Exploration and production (E&P) companies are also called upstream energy companies. That means they’re the ones finding oil and natural gas and then selling it downstream.

CLR is an E&P player that primarily works out of the Bakken Shale in North Dakota and Montana. Its energy leans more toward oil than natural gas but it produces both. And both are in great demand, especially in global markets.

Since extraction costs are more or less fixed for E&P companies, the higher the price of oil and gas means the bigger the margins. And that’s precisely why CLR stock is up 203% year-to-date. But even after that run, its current price-to-earnings ratio is 48x. That’s a little high, but there’s a good chance earnings will be rolling in to justify it.

ConocoPhillips (COP)

a sign in front of the Conoco Philips office buildingSource: JHVEPhoto / Shutterstock.com

COP is a global E&P player with a nearly $100 billion market cap that also operates some midstream (pipelines, transportation) services to move production to demand markets.

This is a good time for COP since natural gas is in high demand in Europe and Japan, and oil is in demand in China. With a global E&P and distribution operation, COP can supply them with what they need efficiently. And COP can realize expanding profit margins.

The stock has risen 95% YTD and is richly valued. But this is the way the energy markets work — big swings in either direction — and we’re in an multi-year uptrend now. Earnings will catch up.

COP also still has a 2.5% dividend, which isn’t beating inflation, but it’s a nice kicker.

Energy Stocks to Buy: Diamondback Energy (FANG)

Image of an oil filed at the Permian Basin.Source: FreezeFrames / Shutterstock.com

FANG is a land-based U.S. E&P that has operations primarily in the Permian Basin, an energy-rich area in West Texas and Southeast New Mexico. The company has numerous properties in the basin and uses unconventional drilling methods — fracking and horizontal drilling — to access the reserves.

About 60% of its production is oil, another 20 is natural gas and the remaining 20% in natural gas liquids (NGLs). All these products are in high demand.

The trouble is, FANG has been struggling to keep its earnings in positive territory recently unlike other energy stocks. This shouldn’t be a problem moving forward, now that global energy demand has kicked into gear.

FANG stock has gained almost 130% YTD and has a 1.6% dividend. There’s still plenty of upside left.

Marathon Oil (MRO)

Marathon Oil (MRO) gas station carport on sunny day with blue sky backgroundSource: Jonathan Weiss/shutterstock.com

Like other E&P plays, earnings haven’t been great for MRO as we slowly emerge from the pandemic and the delta variant wave. But now we’re in recovery mode and demand it rising in all sectors, including energy stocks.

That’s great news for MRO, which has been drilling for black gold since 1887. And with that kind of legacy, today’s markets aren’t anything new to this company. It has seen a few things just as crazy since Grover Cleveland was president.

MRO stock is up 146% YTD and has a sub-1% dividend. But we’re not concerned about dividends now. This is about energy demand growth, and MRO will be a beneficiary.

Energy Stocks to Buy: HollyFrontier (HFC)

Pipelines in the desertSource: bht2000 / Shutterstock.com

Once you get the black stuff out of the ground and ship it along a pipeline, the business of turning it into viable products begins at the refinery. And that’s where HFC comes in. It operates about a half dozen oil refineries and three asphalt terminals.

In energy parlance, refineries are part of downstream operations, along with distribution and marketing to retailers and wholesalers. This is a key part of the process since getting the oil out of the ground doesn’t mean much if it can’t be refined in a timely manner.

HFC is one of the smaller refiners in the U.S. — it has a $6 billion market cap — which means its gains will amplify in current markets. The stock is up 43% YTD and still trades at a decent current P/E around 31x.

ONEOK (OKE)

Image of a gas burner with a blue flameSource: Shutterstock

Founded in 1906 as the Oklahoma Natural Gas Company, OKE is a leading natural gas and NGL marketer in the U.S. NGLs are derivatives found in raw natural gas that are then used in various industrial processes or for fuel.

The most common are ethane (plastic bags, anti-freeze), propane (fuel), butane (synthetic rubber, lighter fuel), isobutane (refrigerant, aerosols), pentane (gasoline) and pentanes plus (gasoline, ethanol).

The U.S. is like the Saudi Arabia of natural gas supplies. Even as prices have risen domestically, overseas prices are triple or are higher than they are here, which makes for great export opportunities.

This is a very good time for natural gas companies regardless of where they sit in the supply chain. And OKE is a sure beneficiary of the current demand but also a growing transition to cleaner burning (more efficient) fuels, which also boosts its interest with ESG investors.

OKE stock is up 75% YTD yet it only has a current P/E of 22x and offers an inflation-pacing 5.8% dividend.

Energy Stocks to Buy: Royal Dutch Shell (RDS.A)

The Royal Dutch Shell (RDS.A, RDS.B) logo on a gas station in Iceland.Source: JuliusKielaitis / Shutterstock.com

As measured by revenue, Shell is among the largest companies in the world. That’s some rarified air. But if you can recall a few years ago, when energy prices were headed in the opposite direction as they are today, RDS.A wasn’t very attractive. It had cut its dividend and was tightening operations, shuttering wells … the whole nine yards.

But in good times, the big integrated oil companies are like the desert blooming after a rain. Big energy stocks can grow their margins upstream, midstream and downstream. And just a little growth in margins is huge when you’re talking about the scale of RDS.A.

Plus, Shell is actively looking to establish itself in renewable and alternative energy markets as well. For example, it can convert some of its natural gas into “blue” hydrogen and then begin to use its filling station networks as distribution points.

The stock has risen 35% YTD and it has a P/E of 34x. It also has a 2.6% dividend that’s unspectacular but dependable.

On the date of publication, Louis Navellier has a position in COP in this article. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Louis Navellier, who has been called “one of the most important money managers of our time,” has broken the silence in this shocking “tell all” video… exposing one of the most shocking events in our country’s history… and the one move every American needs to make today.

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