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Gold Rallies on Ukraine War Talk. Why It Could Head Higher

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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

Ukraine Rumors Fuel Gold Spike

Weekly Update
The Aden Forecast
Feb. 11: Gold is breaking out on the upside!! [The spot gold price rose 1.26% Friday to $1,860.60 an ounce.] A jumping rise has started and it’s being fueled by fears that Russia will soon invade Ukraine. High inflation is also a booster….Gold is ending the week in its best rise in three months, and it’s very strong above $1,830.

Gold shares are following gold’s strength with the The

index jumping up and approaching its 65-week moving average. It’s very strong above 260. Silver is not as robust as gold and the miners, but it’s still firm above $22.50, and it would be in a breakout above $25. Keep your positions.

Inflation: Causes and Cures

Talking Points
BMO Capital Markets
Feb. 11: Inflation is a process, not an event. As staggering as the U.S. January CPI was—and it was staggering at 7.5% for the headline and 6.0% for core—it’s just one small part of a process that’s been underway for well over a year now. There is no single factor to point to that led us here, but instead, a series of unfortunate events. Ultra-easy monetary policies, ultra-stimulative fiscal policies, a global shift to buying goods instead of services, workers unable or unwilling to work, supply-chain snarls, and profound shifts in the global oil market have all conspired to bring us to where we are today. To come back down the inflation mountain, we may need to see a reversal or some relief on every one of these factors. That is shaping up to be a long process.

In the inflation forecasting Olympics, Team Transitory missed the first gate, fell on the first jump, slipped at the first corner…you get the gist. Now, I am far, far too big a person to say ‘I told you so’ on the inflation front. But faithful readers of this space will know that we’ve been in the Larry Summers camp for the past year, warning that inflation was going to run a lot hotter and last a lot longer than the consensus expected. Even we have been somewhat taken aback by just how forceful U.S. inflation trends have turned out to be, and have ramped up our estimate on CPI a number of times in the past year. We now expect headline CPI to average more than 6% this year before fading to just below 3% in 2023, both a long, long way from the 1.7% average in the decade prior to the pandemic.

Disruptors, Beware Disruption

Global Investment Strategy
BCA Research
Feb. 11: Tech-stock enthusiasts tend to forget that the disruptors themselves can be disrupted. History is littered with tech companies that failed to keep up with a changing world: RCA,

Polaroid, Atari, Commodore, Novell, Digital, Sinclair, Wang, Iomega, Corel, Netscape, AltaVista, AOL, Myspace, Compaq, Sun, Lucent, 3Com,

Palm, and RIM were all major players in their respective industries, only to fade into oblivion. All but one of the 10 biggest tech names in the

S&P 500 IT
index in 2000 underperformed the broader market by a substantial degree over the subsequent 10 years.

Today, the incentive for startups to emerge has never been stronger. Venture-capital funds are flush with cash. Tech profit margins are near record highs, making challenging the incumbents an increasingly enticing goal. About one-third of the outperformance of U.S. tech stocks since 1996 can be explained by rising relative profit margins, with faster sales growth and relative P/E multiple expansion explaining 45% and 23% of the remainder, respectively.

China’s Loan Growth Perks Up

ING Snap
Feb. 10: January usually sees a big increase in China’s loan growth from December, as Chinese banks tend to book loans at the beginning of the year. But this year’s jump is significant even on a year-on-year basis. This indicates that underlying economic activity is stronger than last year.

loan growth increased 11.5% year over year in January, to CNY3.98 trillion, which means loans outstanding were CNY196.65 trillion by the end of January. Most of the loan growth came from corporate longer-term loans. These corporate loans signal growth in corporate investment. This matches our expectation that investment in semiconductors, telecommunications, healthcare, data privacy, and hardware infrastructure projects started in January. The increase in loan growth indicates positive momentum in investment in the first and second quarters. We should see an increase in services and manufacturing activity [in China] in the area of IT and processing of building materials in a couple of months.

Bullish Commodities Outlook

The Weekly Speculator
Marketfield Asset Management
Feb. 10: For commodities, the path higher has the potential to keep going. Investor flows are far from excessive, and unlike prior peaks such as 2008 and 2011, there has not been a massive expansion of new exploration and development helping boost supply well above consumption. It would appear that the Omicron scare was an excellent buying opportunity for energy in particular, and we suspect that the long period of consolidation for industrial and precious metals will be resolved to the upside. We would note that iron ore has staged an impressive recovery from its 2021 collapse, and that lumber, the boom and bust story of 2021, is once more experiencing a very rapid increase in prices. This is important, since it suggests that even if some key prices recede in 2022, this may prove to be a temporary respite unless underlying demand is clearly impaired (this was obviously not the case with lumber).

Pain Point for Mid-Caps

U.S. Investment Policy Notes
Feb. 10: Deterioration in small-cap stocks has been documented for months, and now that weakness has spread to their mid-cap cousins, according to Lowry Research, a CFRA business. Both mid- and small-caps had been lagging large-caps from a price perspective, as seen in the relative performance charts for the S&P 400 Mid-Cap Index and the S&P 600 Small-Cap Index, which recently set new 52-week lows relative to the

S&P 500.
Lowry’s Segmented Percent of Operating Companies Only (OCO) Stocks 20% or More Below 52-Week High, which represents the weakest stocks in each capitalization group, currently indicates that small-caps have weakened significantly since July, followed by mid-caps dating from late November. Typically, deteriorating health begins with small-caps and spreads to take mid-caps and finally large-caps. When the latter falls, the market usually can no longer resist the sellers. For now, elevated caution remains warranted.

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