MARKET UPDATE – FEBRUARY 2022

Gold Has Performed Well in Past Fed Interest Rate Hike Cycles

There is a general misconception of the relationship of Fed interest rate hike cycles and gold prices.  Gold prices did not have a negative correlation to the Fed Funds rate in the past two hike cycles and certainly not in the last inflationary cycle.  We look at charts of the 1976-1980 inflation interest rate hike cycle and the last two cycles, 2004-2008 and 2015-2019.  Positioning in gold and gold assets ahead of a Fed rate hike cycle has proven to be a prudent investment decision in the past, in our opinion. 

OCM Gold Investment Thesis: 

• Impact of Federal Reserve’s extraordinary monetary policy measures starting to play out.

• Fed admits its “inflation is transitory” narrative was incorrect. 7.0% 2021 inflation. First print in January shows inflation remains sticky at 7.50% yoy. We believe the Fed will continue to talk tough on inflation, but its options without crashing financial asset prices are limited.  Fed attempting to hold on to institutional credibility, in our opinion.  
• Inflation – a structural shift.
  • Low-cost labor countries exported deflation for decades masking Fed money supply growth greater than GDP growth.
  • Covid exposed global supply chain frailties requires structural shift toward “re-shoring”. Further, ESG carbon initiatives leading to higher costs and natural supply constraints.
  • Structural labor shortage giving labor wage leverage for first time in decades.

• Fed unlikely to tighten enough to cause demand destruction to offset supply constraints              
• Real rates to remain negative.
  • Federal Reserve forced to stay behind the curve due to high global debt levels or risk financial assets implosion. As Stephen Roach commented, “The Fed is so far behind the curve it can’t even see it”
• In both the 1965 to 1975 and 1975 to 1985 stagflation periods, gold only major asset class to deliver positive beta to CPI.

• Fed policy error more likely than not.
• Central bank liquidity tightening cycle threatens risk asset prices with an uncertain spillover outcome.
• Sea change at “Peak Financializaton” from financial assets to real assets.
• Gold is a monetary asset.  Global central banks hedging U.S. dollar with gold purchases for fear U.S. dollar’s reserve currency status at risk.
• Gold Assets are Under-owned. Sentiment washed out.

• Cryptos are a risk asset, not a monetary asset. Gold assets positioned to capture capital flows out of crypto in liquidity contraction event.
• Gold relative performance versus S&P 500 may be about to flip.

Gold Miners

Philadelphia Gold Silver Share Index (XAU) historically cheap versus Gold and the S&P 500.  We believe in a rising gold price environment, generalist investors will no longer be able to ignore the attractive free cash flow yield and strong balance sheets of the precious metals sector, especially if it coincides with an economic contraction that causes S&P 500 companies to suffer declining earnings.  

The precious metals mining industry saw profound cash flow leverage when gold prices rose from $1300 to $1800 from June 2019 to July 2020.  Yet, the strength of the broad market and other asset classes has meant the industry’s fundamental financial metrics have been largely ignored by investment capital flows.

Gold Mining Sector Select Financial Metrics vs. S&P 500

OCM GOLD FUND – OCMAX

For more information, please contact us at 1-800-779-4681

OCM Gold Fund Advisors Class rated five stars overall by Morningstar among 64 Equity Precious Metals Category funds. Three-year rating: 5 stars/64 funds. Five-year rating: 5 stars/59 funds. Ten-year rating: 4 stars/50 funds as of Dec 31, 2021. Ratings reflect risk-adjusted performance. The Overall Morningstar Rating for OCM Gold Fund is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year Morningstar Rating metrics.

“Best Precious Metals Equity Fund 2021”

                3-, 5- and 10-Year periods

OCM Gold Fund Advisors Class Best Fund out of 17 eligible investment companies for the three- and five-year periods and 15 eligible investment companies for the ten-year periods ending 12/31/20 based on consistent annualized total returns, risk adjusted relative to peers, as evaluated by Refinitiv Lipper.

For more information or to schedule a call with Greg Orrell, Portfolio Manager, please call 1-800-779-4681.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the OCM Gold Fund. This and other important information about a Fund are contained in a Fund’s Prospectus, which can be obtained by calling 1-800-779-4681. The Prospectus should be read carefully before investing. Funds are distributed by Northern Lights, LLC, FINRA/SIPC. Orrell Capital Management, Inc. and Northern Lights Distributors, LLC are not affiliated.

The Fund invests in gold and other precious metals, which involves additional risks, such as the possibility for substantial price fluctuations over a short period of time and may be affected by unpredictable international monetary and political developments such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. The Fund may also invest in foreign securities which involve greater volatility and political, economic, and currency risks and differences in accounting methods. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. Prospective investors who are uncomfortable with an investment that will fluctuate in value should not invest in the Fund.
XAU Index is the Philadelphia Gold and Silver Index.  It is an unmanaged capitalization weighted index composed of 16 companies listed on US exchanges involved in the gold and silver mining industry.
HUI Index also known as gold BUGS index is the NYSE Arca’s index measuring gold companies that do not hedge their gold production beyond a year and a half.

The S&P 500 Index, a registered trademark of McGraw-Hill Co., Inc. is a market capitalization-weighted index of 500 widely held common stocks. You cannot invest directly in an index.

Barron’s Gold Mining Index (BGMI) is an industry average of publicly traded gold mining stocks. 

Investments cannot be made in an index. Unmanaged index returns do not reflect any fees, expenses, or sales charges.
Past performance is no guarantee of future results.

A cryptocurrency is a digital representation of a stored value secured through cryptography. Although Bitcoin might be one of the most widely known cryptocurrencies today, there are many others. The markets for cryptocurrencies remain highly volatile and risky. Before turning your hard-earned cash into crypto, use the resources below from FINRA and other regulatory authorities to learn more about these markets and products

Past performance is no guarantee of future results

“The Morningstar Rating for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history.  Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes.  It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance.  The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.  The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics.  The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns.  While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.”

The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers.

The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk adjusted performance measure calculated over 36,60 and 120 months.  The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award.  For more information see lipperfundawards.com Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper.

NLD Code: 6160-NLD-02082022