Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Markets Focus on Energy and Precious Metals; So Do We, but Details Matter
It was great to see so many of you here in Durango last week, and we greatly appreciate your joining us. We were delighted for you to meet the team and have the opportunity to interact with them one on one. If you have any additional questions, or would like a copy of the presentation materials, please let me know and we will be happy to get those to you.
There is a great deal to unpack around the events over the last two weeks as they pertain to the MAPS Hard Assets portfolios. The market has appeared to discount the drone strike on Saudi oil infrastructure as largely transitory as it pertains to global oil supply. We saw a massive one-day rally on the back of the strike, but, as of today, energy stocks are essentially right back where they were prior to the strike. This is largely because Saudi Arabia has been quite clear that production capacity will be restored in short order.
In spite of such assurances, a healthy dose of skepticism is warranted. We have no idea of the extent of the damage to Abqaiq, and we believe the impact may have been downplayed by the Saudis given the looming IPO of Saudi Aramco. Still, in our view, there is very little indication that the situation will de-escalate, and we believe the outlook on the Middle East situation bodes well for energy prices.
Thus far, “maximum pressure” economic sanctions have not caused Iran to settle down and play nice. Quite the contrary. The drone strike demonstrates that, if anything, Iran is galvanized and committed to meeting all of the economic sanctions with resistance and possibly even war. The Saudis are likely to retaliate to the attacks on their infrastructure with at least a proportional response, particularly given how committed Mohammad Bin Salman is to launching the Aramco IPO. Ultimately, we see this escalation as a possible threat to the Straits of Hormuz, through which a significant percentage of global oil supply travels.
There were reports yesterday that US national security officials have met to determine what sort of action should be taken against Iran. Economic options have largely been exhausted, and there is no other way out besides backing down – which we do not see as an option for the current administration. This would result in a refocusing by the market on risks to global oil inventories, supply, and upside risk to pricing, albeit with heightened volatility rather than the recent focus on cyclical declines in demand due to the possibility of slowing global economic growth. We might also add that oil is likely to participate in any sustained “reflation trade.”
The last couple of weeks also have seen two key conferences for institutions that are interested in precious metals securities. Attendance was effectively flat on a year-over-year basis, but hedge funds were present in greater numbers as they look to capitalize on opportunities in the sector. There does seem to be some reticence to chase the rally given that a resolution of the China trade issue could result in some near-term downward pressure on the yellow metal.
We have listened to several of the webcasts and have taken away some themes. We are encouraged that, despite gold prices being significantly off of their lows, the messaging from senior producers was one of prudent capital allocation and not factoring in higher gold prices when they make development decisions. There was also healthy conversation around returning cash to shareholders, and how to do that in a way that is sustainable within the operating business model.
Fundamentally, we like the idea of tying the cash flow outcomes for the company to that of shareholders while keeping enough dry powder to grow and optimize their businesses. We like the newly found commitment to capital discipline by the gold sector, and it gives us an increasing level of comfort that future returns on capital will improve, given stable gold prices and easy monetary policy globally. This, of course, should be evaluated on a company-by-company basis.
Once again we thank you for your interest and support.
Chief Executive Officer