Jul182022

MARKET UPDATE – July 2022

Inflation Running Hot – Why is USD Gold Price not Going Up?

While gold prices denominated in euros and yen have advanced 12.24% and 18.90%, respectively ytd, the USD gold price is lagging investor expectations. Why? First off, the global dash for U.S. dollar liquidity has weighed on the USD gold price in 2022 along with expectations the Fed’s hawkish stance on inflation will succeed in breaking the back of inflation. Secondly, we have seen a precipitous sell-off across the metals complex in response to recession expectations, with precious metals getting swept up in the sell-off. In our opinion, we are in the prelude period to a massive flow of capital that will be searching out a store of value as central banks, specifically the Federal Reserve, weigh the political and systemic risks of a global recession versus aggressively tackling inflation.

Federal Reserve – The Blink

We believe the Fed’s history of socializing market risk through extraordinary monetary policy (Fed balance sheet expanded 10 times since 2008) over the last 20 years shows it is more fearful of systemic financial risks than inflation. The yen and euro are down versus the USD and gold precisely because the Bank of Japan and European Central Bank have foregone joining the Fed in tightening for fear their respective economies are too fragile to withstand higher rates despite elevated inflation. At the first hint the Fed has acquiesced to political and market pressures to ease its hawkish stance, we believe its institutional credibility will come into question sending global investors scrambling toward gold assets.

U.S. Dollar – 20yr Highs = Forex Potential Crisis Looming?

The Fed’s hawkish inflation stance has attracted dollar demand sending the U.S. Dollar Index (DXY) to 20-year highs. The two main DXY components, the yen and euro have dropped 20.62% and 11.69% respectively, year to date. The strong dollar is compounding pressure on food and energy globally. The clock is ticking, in our opinion, on how much longer the global economy and policy makers can tolerate a strong dollar without attempting some type of coordinated accord. Street protests in Ecuador and Sri Lanka protesting higher food and energy costs are examples of the mounting social pressure spreading the globe.

Precious Metals Equities Suffer Tough Three Months

After peaking April 18^th up 29.33%, the XAU has crashed to being down 16.53% year to date. Fear of operating cost inflation along with gold prices declining $122.70 over the past 60 days has led to what we perceive as extreme fears of margin compression. Additionally, short sellers have piled into the space playing up cost and capital inflation theme. The Gold/XAU ratio is the highest it has been in over 2 years at 16. In March 20—the gold / XAU ratio stood at 12.00 and prior to the 2008 GFC the ratio was 4.58.

Counter Intuitive Gold Price Action

G-7 Bans Russian gold production from Western markets – gold price drops $100 over the following three weeks. Russia is the number three global gold producer at 300 tons per year. In theory removing 10% of global gold production from the market should be price positive. Granted, Russian oil finds its way to market in India among other markets, perhaps it is reasonable to believe the gold market assumed the same.
Each inflation print over the last couple of months coming in at 40 year highs is met with the gold price getting monkey hammered lower on the announcement. It would not be unreasonable to believe there is official intervention taking place in the gold market to lower inflation expectations. Interestingly, JP Morgan and Citigroup recorded an approximate 10-fold increase in precious metals derivative exposure in the first three months ($28b to $330b).

Important Disclosures

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: 6676-NLD-07152022

Investors should carefully consider the investment objectives, risks, charges and expenses of the OCM Gold Fund. This and other important information about a Fund is 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 Distributors, LLC, FINRA/SIPC. Orrell Capital Management, Inc. and Northern Lights Distributors are not affiliated.

MUTUAL FUNDS INVOLVE RISK INCLUDING POSSIBLE LOSS OF PRINCIPAL

There is no guarantee that the Fund will achieve its objective.

The prices of securities of gold and precious metals producers have been subject to substantial price fluctuations over short periods 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. Because the Fund concentrates its investments in the gold mining industry, a development adversely affecting that industry (for example, changes in the mining laws which increase production costs) would have a greater adverse effect on the Fund than it would if the Fund invested in a number of different industries.

Many of the companies in which the Fund invests are smaller capitalization companies (namely, companies with a market capitalization of $4 billion or less). Smaller capitalization companies typically have relatively lower revenues, limited product lines, lack of management depth and a smaller share of the market for their products or services than larger capitalization companies. The stocks of smaller capitalization companies tend to have less trading volume than stocks of larger capitalization companies. Less trading volume may make it more difficult for the investment adviser to sell stocks of smaller capitalization companies at quoted market prices. Finally, there are periods when investing in smaller capitalization stocks falls out of favor with investors and the stocks of smaller capitalization companies underperform.

Medium capitalization companies tend to be more susceptible to adverse business or economic events than large capitalization companies, and there is a risk that the securities of medium capitalization companies may have limited liquidity and greater price volatility than securities of large capitalization companies.

There are risks associated with investing in foreign common stocks that are in addition to the risks associated with investing in U.S. common stocks. The U.S. dollar value of foreign securities traded in foreign currencies (and any dividends and interest earned) may be affected unfavorably by changes in foreign currency exchange rates. An increase in the U.S. dollar relative to the foreign currencies in which securities held by the Fund are traded will adversely affect the Fund. The Fund may invest in stocks of foreign companies that are classified under the Internal Revenue Code as passive foreign investment companies (“PFICs”). To the extent that the Fund invests in these securities, the Fund may be subject to an interest charge in addition to federal income tax (at ordinary income rates) on (i) any “excess distribution” received on the stock of a PFIC, or (ii) any gain from disposition of PFIC stock that was acquired in an earlier taxable year. This interest charge and ordinary income tax treatment may apply even if the Fund distributes such income as a taxable dividend to its shareholders. To the extent possible, the Fund will adopt tax strategies to avoid the interest charge and the ordinary income tax treatment. Such tax strategies may accelerate the recognition of income by the Fund (without the receipt of cash) and increase the amount required to be distributed by the Fund to avoid taxation. In addition, such tax strategies may require the Fund to liquidate other investments to meet its distribution requirement (including when it may not be advantageous for the Fund to liquidate such investments), which may accelerate the recognition of gain and affect the Fund’s total return. Foreign securities markets tend to have less trading volume and are more volatile than U.S. securities markets. Less trading volume makes it more difficult to sell foreign securities at quoted prices. There is the risk that political, social or economic events in a country may adversely affect the Fund’s investments in the country. There is the risk that investors in a foreign securities market may not be afforded the same protections as investors in U.S. securities markets. This is also the risk that it may be more difficult, costly and slower to enforce legal rights of the Fund in foreign countries.

MARKET UPDATE – July 2022

Important Disclosures

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