As we begin 2021, everyone is still feeling the chill from the pandemic. Lockdown restrictions, travel curtailment and closed schools. In contrast, some financial sectors are running red hot. This guide explains why and show you where you can run with the crowd.
Large US Quantitative Easing Program making USD weak
While governments are busily fighting the pandemic, traders and investors are profiting from a few booming sectors.
At the top of the list is the crypto market. Take a look at the crypto currency Bitcoin, one of the most prominent digital assets. It was the first to use the ground-breaking blockchain technology.
A sensational uptrend is developing there. ‘Mooning’ is what the crypto traders call it, describing prices ‘going to the moon’. At this rate of increase, it is not far off the mark. Prices have been rocketing non-stop since last September.
At $37,000 per coin, Bitcoin’s market cap is estimated to be US $690 billion. Only a handful of companies in the world is bigger more than this. Bitcoin’s dizzying rise is propelling related securities and coins like Ethereum and digital coin miners higher. A buying panic is taking place in these securities.
But have you wondered what is driving this dazzling rally?
First, a limited supply helps. Bitcoin’s algorithm only allows 21 million coins to be mined. Currently 18 million coins have already been mined. A limited pool of coins means it is a ‘valuable’ commodity. Companies are buying and hoarding these coins, including one 169-year-old US insurance company, Massachusetts Mass Mutual, which recently bought $100 million worth of Bitcoin for its reserve.
The second reason driving Bitcoin rally is the persistent fall in the US Dollar. This fall is caused by a near unlimited supply of the greenback.
Remember the US central bank is buying about $120 billion worth of assets every month, ie $1.44 trillion annualised. No wonder the US Dollar is sinking. The US Dollar Index has fallen by more than 10 percent in the last nine months (see below).
What Happens When the USD Keeps Falling?
The first thing to note is that all dollar-priced goods go up, particularly international commodities like gold, silver, copper, platinum, crude oil et cetera. Most of you are probably familiar with the chart of gold. But did you know, food commodities are also rising sharply?
Take a look at Soybeans below. Prices are rocketing through multiple resistance levels. Meanwhile, both Wheat and Sugar developing a massive multi-year base breakouts.
Energy contracts like Brent and WTI are rising despite the ongoing lockdowns in Europe. Both trade above $50.
Related Guide: How to Trade Commodities: A Quick Guide
The second effect of a falling USD is that inflation may go up faster than expected due to higher commodity prices. Bond holders are now very nervous about this possibility.
Almost every asset is appreciating, creating inflationary pressure. At the same time, interest rate are still very low or negative. This twin impact is squeezing real bond returns.
Investors are starting to sell US bonds. Take a quick glance at the long-maturity US bonds below (TLT). Prices are sliding into multi-week lows, gearing for a nasty technical breakdown. Those who bought Treasuries during the pandemic will be looking at paper losses.
Seeing a rise in inflation may lead the Fed to curtail their QE programs earlier than expected.
Commodity Stocks Benefitting From the Macro Trend
Rising commodity prices due to the USD weakness and a bullish sentiment in stock markets helps to drive commodity-related stocks higher.
Look at Rio Tinto’s (RIO) long-term chart. A massive multi-year breakout is taking place above £50. Prices are surging into new all-time highs.
Most other mining stocks are rising, including a number of FTSE stocks like Antofagasta (ANTO), BHP (BHP), Anglo American (AAL), Glencore (GLEN) and Fresnillo (FRES).
This means that the FTSE 100 Index may perform better than expected this year due to the large presence of these miners in the index. The Footsie’s corresponding ETF is iShares FTSE 100 (ISF).
Related Guide: How to invest in Stocks: A Quick Guide
Other commodity subsectors are doing reasonably well include:
- Gold and Silver miners
- Copper miners
- Uranium miners
- Rare earth miners
- Lithium miners, et cetera
Bear in mind that a few of these miners have rallied a long way from their 2020 lows. Furthermore, the profitability of miners depend on the quality of the mine and management. For readers unsure which one to pick, a portfolio approach with an ETF may be a better approach.
In the US, Gold Mining ETF (GDX) or Junior Gold Mining ETF (GDXJ) are two such ETFs.
Some agri-related companies like Archiel Daniels Midland (ADM) are doing well too. ADM is breaking its long-term resistance levels at $50 (see below).
The investment landscape has shifted dramatically over the last two months. The introduction of a covid vaccine in November sparked a dash into the stock market. Stock valuation has risen to the point that one long-tem investor, Jeremy Gratham, thinks ‘the long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.”
Investors are no longer running solely with the FAANGS. Instead, they are positioning in stocks that are benefitting from a rise in commodity prices due to the weak dollar and a normalisation of the world economy. Many miners have hit fresh highs.
So should you buy them now? With the Fed continuing to weaken the USD, the answer is positive. From the risk-reward perspective, however, the current entry point is not ideal. Waiting for a modest pullback may be better.
Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.