A warm welcome back from holidays from the team at Guardian Vaults to all of our valued clients! We have already seen some big moves in financial markets to start the new year, as the Federal Reserve turns as hawkish as ever. Tech stocks took a big hit overnight in the US with Cathie Woods Ark Invest ETF dropping -7% in a day. Interesting to see gold shrug off the latest FOMC minutes which talked of US Quantitative Easing ending as early as March this year. It’s one thing to stop new purchases of treasuries and other assets, but it’s another to try to unwind the $12 Trillion dollar balance sheet the Fed is now sitting on.
“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes said.
The minutes suggest “fast and furious normalisation” compared with the last round of balance-sheet runoff, said Omair Sharif, founder and president of Inflation Insights. (Via Bloomberg)
Well good luck with that, as we all know quite well how the last attempts to tighten monetary policy in the US went down. This time, debt levels across the board are at the highest levels in history, with US total debt over 800% of GDP. You also have equities trading at one of the most expensive P/E ratios in history, only surpassed by the dotcom bubble of 1999-2000. If ever there was a time where markets were exposed to potential shocks it would be 2022, so buckle up for what could be a very interesting year indeed.
S&P500 Shiller P/E Ratio
Precious metals have one major tailwind in 2022, and that is inflation. Inflationary environments usually coincide with the best performing years for precious metals as investors rush to safe havens and hard assets (just look at the 1970’s). High inflation also keeps ‘real’ bond yields low or negative, which makes gold look like a better alternative, so you might see funds flow out of bonds and into gold should inflation remain persistently high.
To start the year, gold and silver haven’t really woken up just yet, but keep a very close eye on the USD $1,850 level as we move into the new year. If gold manages to push above this point it would confirm the end of the recent downtrend from the 2020 highs above $2,050 USD. We will likely see gold get some attention from the momentum and trend chasing traders if we can manage to break above this level in the coming weeks or months. A break north of $1,850 USD should be the signal that the next leg in the current bull market is under way and would dramatically improve the technical picture for any investors that follow and trade off the back of charts.
Silver remains our pick from a long-term perspective, as the ratio remains well and truly elevated above historical norms (circa 80:1) and we have some really strong industrial demand tailwinds still to come. The Silver Institute expects silver demand from the EV sector to gradually build towards 90 million ounces per annum, which would make up circa 10% of the total global silver demand each year. Solar PV development projects will also continue to expand as many countries move towards greener energy production in order to meet net co2 emissions targets. From a technical perspective we would like to see silver hold above the $21.40 level this year. As the chart below indicates, this floor has acted as significant support in recent times. In 2022 we should see the silver price play some catch up to gold, especially if gold can break north of that $1,850 level in coming months.
To equities now and the US stock market is no-doubt in bubble territory as we start the new year. The most popular stocks with nearly no earnings but big promises of the future are the ones who have lately been seeing the most inflows. The ARKK ‘innovation’ ETF is the classic example of a stock picker chasing the most innovative sounding companies, whilst largely ignoring traditional measures of valuation. Rate hikes negatively impact companies with no earnings more so than ones with safe balance sheets, so it makes sense to see money finally bailing out of the ARKK ETF’s. Currently -44% from the recent all time high.
The ever-popular ARKK Innovation ETF
Warren Buffets famous stock market valuation indicator is in uncharted territory, signaling the most overvalued stock market in history. The Wilshire 5000 Total Market Index hit a new high or $48.99 Trillion this week, as it climbs to 211% of GDP. Buffet famously said that investors who buy stocks when this metric approached 200% were ‘playing with fire’. Add in the fact that the Fed intends on ending QE and raising interest rates at the same time, and we have a potential recipe for a major disaster in equities this year.
There are quite a few black swan potentials for the year to keep an eye out for. China/Taiwan tensions could escalate further (we should all hope not). The Russia/Ukraine invasion story is still ongoing. Evergrande and other Chinese property developers are struggling to prove their solvency, all whilst we have an unpredictable virus which we hope won’t mutate to a more deadly variant. It all adds up to a potentially explosive year ahead for financial markets, but let’s hope it is a great and prosperous one for the very patient precious metals investors among us.
Until next time,
John Feeney
If you have any feedback or questions about this report, you can contact John Feeney direct at johnf@guardianvaults.com.au
Or on Twitter @JohnFeeney10
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