Amid AI hype and metaverse mania, where can true contrarians and value investors park their capital with confidence? For one Wall Street expert at least, the proverbial needle in the market’s haystack is hidden in plain sight, in an asset class that never really goes out of style.
Granted, it feels like slim pickings when mega-cap technology stock valuations are stretched and so few short-term financial traders are alert to the market’s vulnerabilities. If you invested in the year 2000, then you know it’s a problem when the entire house of cards is held up by a handful of high-flying tech names.
Evidently, stock traders are willing to climb the wall of worry even as Treasury yields curves become deeply inverted and banks continue to tighten their lending conditions. Credit is the lifeblood of the U.S. economy just as much as consumer spending is, so restrictive lending could wreak major havoc in 2023’s second half.
Meanwhile, the Federal Reserve is almost certainly not finished with its course of interest rate hikes this year. Stock traders celebrated the “pause” in rate hikes, but it was more like a “skip” as the Fed observes sticky inflation that’s nowhere near the central bank’s 2% target.
Making matters harder for the Fed is Thursday’s jobs data, which indicates a labor market that’s surprisingly resilient. In June, the U.S. private sector added 497,000 jobs, a huge jump from 267,000 in May and the biggest increase since July of 2022. Economists, in contrast, had only expected a gain of 220,000 private-sector jobs in June.
On the face of it, jobs market strength might seem like a blessing. The Fed doesn’t see it that way, though, as high employment tends to lead to high inflation. Thus, the probability of an interest rate hike at this month’s FOMC now stands at a lofty 92%.
Previously, Federal Reserve Chairman Jerome Powell indicated that enacting two consecutive interest rate hikes in the upcoming FOMC meetings isn’t off the table. Yet, somehow the market has decided to ignore this likely outcome, perhaps because traders are so forward-looking that they’re discounting real and present dangers.
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Despite all of this, Tavi Costa, a portfolio manager at Crescat Capital, evidently sees pockets of value within an otherwise treacherous market. Even as Treasury yield curves invert and structural conditions don’t favor a strong economy, Costa still discerns a “true generational wealth period for a lot of investors.”
What Costa observes is “chronic underinvestment in natural resources.” This is an issue that I’ve noted for years, especially when it comes to precious metals as well as the industrial metals that will be needed for the transition to clean energy.
If gold hasn’t had its shining moment yet in 2023, the pivot point could be just around the corner. As Costa sees it, gold will “re-emerge not only as a central bank asset, which has been the case recently, but also as an inflation hedge as well.”
Furthermore, Costa cited two bull runs for gold: the 1970s, when gold rose amid a high-inflation backdrop, and the early 2000s. It’s been a while since precious metals had their day in the sun, so patience will be a virtue for gold investors.
Clearly, it’s not mere happenstance that central banks and smart-money investors are buying gold now. I personally like silver as well, as it has the potential to move quickly once the gold price starts to run.
Most of all, don’t be too hasty to take profits in precious metals after their prices take off. After all, a “generational” wealth-building opportunity suggests that the gains could last for years, not just months.
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