Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Much Ado About … Much

We take time away from this very heavy week of earnings to bring you this week’s “Hard Assets Insights.” We are still processing and digesting an enormous amount of data, and are beginning to develop a theme or two around what we are hearing.

It has been a very big week on the precious metals side, with gold up 3.7 percent to seven-year highs due to a safe-haven bid around renewed concerns about the impact of coronavirus on the global economy. In addition, silver has begun to show signs of wanting to participate in the precious metals rally, and was up 4.3 percent for the week. The HUI performed quite nicely, closing the week up 10.5 percent. Junior golds as represented by the GDXJ Van Eck Junior Gold Miners index were up 9.3 percent.

We believe that the recent positive relative performance of the gold stocks to bullion may very well be a sign that the market believes this rally in the underlying commodity is sustainable. We are beginning to see a bit of cost creep, but nowhere near what we saw during the so-called “commodity supercycle” period between 2004 and 2008. As we see year-end reserves reports trickle out, we continue to think that the industry is going to have to continue to consolidate as reserves and production profiles are beginning to decline. Platinum group metals continue to be in melt-up mode as rhodium was up 11.3 percent, platinum up 1.4 percent, and palladium up 11.3 percent on supply tightness.

Global natural resources did not generally fare as well for the week. Copper closed the week down 56 basis points, nickel was off 2.7 percent, iron ore was essentially flat, zinc was off 1.7 percent. The industrial metals markets have struggled year to date as fears continue to mount around demand from China. The one-two punch has produced a very mixed reaction in terms of quarterly results thus far, and there were several high-profile disappointments both in terms of production and 2020 guidance.

In contrast, crude closed the week up 1.8 percent, but the stocks reveal no conviction that the rally is sustainable. The SPDR S&P Oil and Gas Exploration and Production index was off 27 basis points, the XLE Energy Select Sector SPDR was off 1.2 percent, and the VanEck Oil Services Index was off 4.3 percent. Broadly, there is confirmation that the theme of reduced spending and capital discipline on the part of independent E&P companies is coming to pass, many companies favoring dividend increases over growing their businesses. Given the oil price environment as well as the poor performance in the stocks, we think it is prudent for companies to rein in growth if they are not being paid adequately to grow.

More defensive hard assets stocks had a mixed week, despite the 10-year yield having fallen to its lowest level since Q3 of 2019. We find that fact interesting, and somewhat different than in months past as a general rule. The VNQ Vanguard Real Estate ETF was off 20 basis points. We have heard from many of the REITs, and while it is late in the real estate cycle, we continue to see robust, albeit slowing, income growth from many property types. Year to date performance is property type- and company-specific. Industrial demand continues to be strong, and retail continues to slow dramatically. In general, in this area as well as across the broader market, momentum begets momentum from a stock price performance perspective, and we believe patience is a virtue.

Infrastructure overall treaded water for the week. The ProShares Global Infrastructure Index was off 56 basis points, but this was largely due to energy infrastructure performing poorly. The Alerian MLP ETF was off 3 percent despite solid earnings and guidance from many of the index constituents. Although we recognize that slowing domestic volumes impact utilization at the margin, high quality assets continue to operate close to capacity, and the relative value to utilities as a whole is extraordinary. Speaking of utilities, the Dow Jones Utility Average was off 59 basis points for the week, although they have largely executed reliably except for a few stock-specific situations.

We thank you for your continued interest.

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC