Market Update November 2 2022
We remain convinced gold assets are just biding time before sentiment shifts away from the U.S. dollar. Most likely, it will be the point the Federal Reserve abandons its inflation fight in favor of fighting off systemic risks in the credit markets, in our opinion. Please enjoy our latest thoughts.
Greg Orrell | President | OCM Gold Fund
As of 11.2.22
OCM Gold Investment Thesis Summary:
- Impact of Federal Reserve’s extraordinary monetary policy measures playing out as evidenced through inflation
- Inflation – a monetary issue made worse from structural issues
- Gold was the best performing asset in the 1970’s stagflation period
- Fed likely to pivot as political pressures overwhelm Powell and Board Governors. Fed institutional credibility on the line – fight inflation or avert systemic risks.
- Record sovereign debt levels leave central banks few alternatives but to monetize debt through balance sheet expansion or risk massive deflationary forces.
- Freezing of Russian central bank assets weaponized the U.S. dollar creating demand for neutral reserve assets – Gold
- Financial asset declines remove opportunity cost of holding gold assets.
- Historically high equity valuations reverting to mean as margins face contraction and growth expectations fade.
- US Treasury Bonds no longer risk-off portfolio hedge.
- Crypto assets exposed as risk asset – not store of value.
- Gold is an under-owned investment asset despite providing superior returns to S&P 500 since 1971.
- China and Russia spearheading a new world monetary order to disrupt dollar hegemony. A battle between producers of real assets versus producers of financial assets – East vs. West. Chinese and Russian gold accumulation over the past two decades may prove to be at the center of a new monetary order.
Precious Mining Equities Investment Thesis Summary:
- Historically undervalued versus both gold and broad equities (S&P 500)
- Gold resources in the ground being valued at $30 per ounce – similar to 2001 when gold was $300/oz. An indication of washed out sentiment toward the sector.
- Market appreciation of gold reserves in the ground set to increase if Comex ability to meet physical delivery of paper contracts is compromised in higher gold price environment
- Precious metals equities historically outperform S&P 500 in the ten/eleven-year period following peaks in consumer confidence. Consumer confidence peaked in 2018.
- Precious metals industry major and intermediate producers with strong relative balance sheets and improved capital discipline compared to past gold bull market cycles.
- In an environment of rising gold prices and economic contraction, precious metal miners’ earnings have the potential to provide one the few sectors with growth and expanding cash flows
Housing Rollover Historically Unemployment Precursor
The housing market is feeling the weight of 30-year mortgage rates doublingto 7% so far this year with both new and existing homes sales declining markedly. A major component of the U.S. economy is set to unleash higher unemployment if the above chart plays out. Does the Fed react to unemployment or continue its inflation fight?
U.S. Dollar Strength a Crisis in the Making?
Scramble for U.S. dollar liquidity in the past has coincided with major economic events requiring a central bank liquidity response. Does a crisis provide cover for Fed and Powell for the next bazooka monetary policy move? If the Fed pivots with inflation still running hot to avoid a market crisis the Fed’s institutional credibility will be seriously questioned, in our opinion, Wall Street and equity markets will most likely rejoice with the return of the punch bowl.
Nouriel Roubini – Good Bloomberg Interview Summarizing Market Risks
Nouriel Roubini, who called the 2008 GFC, had a good interview with Bloomberg last week. He describes the debt trap as well as the current game of chicken between the Treasury and the Fed. Watch here.
Gold – Bull market in most currencies….waiting on gold to break out in U.S. dollars.
Gold Priced in USD Down Seven Months in a Row – Yet Physical Demand Strong
Gold prices in October suffered the seventh consecutive monthly decline for the first time since 1968, the year the London Gold Pool was abandoned. The London Gold Pool was spearheaded by the U.S. and a number of European central banks to maintain the gold price at $35/oz. As spending on the Vietnam War ballooned the U.S. fiscal deficit and civil rights and anti-war protests dominated the news, the market was taking all the physical gold it could get at $35. Not wanting to lose all its gold, central banks gave up the peg at $35.
The parallels to 1968 to 2022 are interesting. Physical precious metals products are trading at a premium with silver Eagle coins fetching a 50% premium to spot currently. Though the prices of both gold and silver have been going down since April, the precious metals market is being cleaned out of physical at current prices across the U.S. and Europe, similar to 1968. With the unleashing of inflation along with code red geopolitical tensions, one has to ask if the gold market is being “managed” again? Paul Volker advocated “influencing” the gold price to keep inflation expectations anchored. Perhaps Powell is using that page of the playbook. As the breakup of the London Gold Pool showed, there is a limit to gold price suppression.
Federal fiscal deficit set to soar
Federal Interest expense exploding. Add 8.7% COLA on entitlement programs and along with other COLA increases and the Federal deficit could explode with a recession.Gold historically 92% correlated to total federal debt since Nixon closed gold window in 1971.
OCM Gold Fund is a precious metals mutual fund designed for investors seeking portfolio diversification and a hedge against monetary debasement. OCM Management has a strong belief and understanding in gold’s monetary attributes and seeks to deliver investment performance through a disciplined approach utilizing it’s in depth knowledge of gold and the precious metals mining industry
OCM is a 2021 & 2022 Refinitiv Lipper Award Winner for “Best Precious Metals Equity Fund” across 3, 5, & 10 year periods.
OCMAX is rated 5 stars overall by Morningstar™
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.
Past performance is no guarantee of future results
Morningstar Ratings – 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.”
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 12/31/2020 based on consistent annualized total returns.
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 Refinitive 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.