Energy and Gold Buys


I am beginning positions on XES and IAU. 

XES is the SPDR Oil & Gas Equipment & Services ETF.

IAU is the iShares Gold ETF. 

See the this MarketWatch article for my rational. It is also in the forum. Below is a rough draft that was edited but includes the gold section.

 

Five years ago, in the article that landed me a role here at MarketWatch’s Trading Deck,I wrote that there was “one general thing that changes everything for America.That one thing was the advent of cheap enough American oil. Today, we are on the cusp of another monumental change. A change that will bring volatility, risk and opportunity. 

Today, in my last column for the soon to sunset Trading Deck, I will discuss the massive economic change that is likely to occur soon. Possibly by this spring.  I can not overstate how important of a change this will be. We are on the cusp of seeing the dollar no longer being the lone global reserve currency. 

The Dollar Rally

Readers should know that I have been a dollar bull for a long time. I am NOT one of the doomsayers who have been calling for a dollar collapse for a decade or more only to be wrong at every turn. I have believed the dollar to be the best currency on the planet. My list of reasons is long, but ultimately it always comes back to the American people, our diversified economy, security, being a nation of laws and our unique geographic advantage. Those might not be enough anymore to keep the dollar as the single global reserve currency though.

What I am saying today is going to draw doubt because recency bias always rules the day for most people. So, while the dollar is flying high right now, I don’t expect many people to take action. That is a shame. A lot of people are going to lose money by not taking quick tactical action in coming months.

Right now, the dollar is at its highest valuation since 2002 against a basket of international currencies. The greenback might not have long left on that perch though. In fact, it might not be a perch the dollar is on, it could be a cliff.

Back in a September 2009 letter to clients I made the following statement: “Because I believe we now know that the dollar will remain at least “a” reserve currency for decades and China is growing very fast, it is very possible that the U.S. Dollar and Chinese Yuan somehow share reserve currency status in the future.”

Those of you who have read my columns the past 5 years might remember that in April 2012 I argued the dollar was going to start a long-term bull market at precisely the time when many were dooming it to collapse. In that article, I teased the gold bugs and described why the dollar would remain strong. Although the comments are no longer available on that article, I can assure you that I was roundly pilloried for deriding gold and championing a “fiat currency.” Since then, the yellow metal has crashed in price and the dollar soared.

Last May, I touted the dollar in an article titled “5 Reasons the Dollar will Get Stronger.” That analysis concluded that the dollar was about to embark on another big run-up. That rally is what we find ourselves in now.

Today, Fed tightening is a reason given by many that the dollar will get stronger yet. I think that notion is misplaced. Instead, my 2009 idea that the Yuan could share reserve currency with the dollar eventually, seems to be accelerating. I had believed the Yuan would share a place as a global reserve currency sometime around the 2030s.  I now believe that shared future between the Dollar and the Yuan is imminent.

The Old Glide Path

Over the past eight years, the Obama administration has followed a path of the least resistance with China. America accepted a steep trade deficit in return for some access to Chinese markets and financing after the financial crisis. During this time, we focused on rebuilding the U.S. economy internally. 

Such an arrangement was seen as beneficial for both nations. The Chinese continued to manufacture, sell to America and pull their people out of poverty. The U.S. continued to modernize its economy with cheap financing, helping to rebuild about half of the American middle class, while we all consumed cheaply with stronger dollars. 

Simultaneously, the U.S. dramatically grew its domestic oil and gas production, as part of an “all of the above” energy strategy. We also continued to import cheaper oil from OPEC and Canada. The import of oil from Saudi Arabia has been a key to keeping the dollar the global reserve currency. By doing so, we maintained the “petrodollar” arrangement that has been the lynch pin in international trade for two generations. 

American relations with Saudi Arabia have been strained since 9/11. Under President Obama, that strain increased as he did not want to engage troops in Middle Eastern wars and provide the traditional American military support to Saudi Arabia. During his administration, U.S. oil imports from OPEC have decreased by roughly half according to the EIA. That alone has put the petrodollar in question. 

The petrodollar was going to disappear eventually no matter what. As I covered in “The Beginning of the End for the Oil Age,” oil use is going to decrease in coming decades no matter what. That alone would end the petrodollar arrangement. The glide path away from the petrodollar the U.S. has been on for eight years, now appears to be about to make sudden leap.

Enter President Trump

President-elect Trump has made it very clear that he no longer wants to import oil from Saudi Arabia. His plan is to maximize U.S. revenue from oil while it can still be done. He doesn’t want our oil to be stranded. That is a clear departure from President Obama who was full force towards reducing fossil fuel use.

At the same time, the Trump administration is also putting pressure on China to open up to more trade. While it is understandable to want more access to the Chinese market, there isn’t much give to the Chinese. They will do what they believe is in their best interest and that is where negotiations will be centered as far as they’re concerned. 

The most likely result of pushing on China and continuing to walk away from Saudi Arabia is that those two nations will forge stronger ties. Last autumn, they signed fifteen agreements to work together more. It would not be surprising to me to see them continue down that path. In fact, I believe it will happen soon.

In December I asked, “could Trump, China conflicts take the U.S. to recession?” A scenario I proposed was that the Chinese would cut a deal with Saudi Arabia to buy oil in Yuan. That would be the end of the petrodollar.  

Because the Chinese and Russians already trade oil in Yuan, being able to buy oil in Yuan from the Middle East would make the Yuan a sort of “junior” reserve currency. The Chinese opening of the Asian Infrastructure Investment Bank was a step towards expanding the Yuan as well. Many U.S. allies joined that institution, although it is still much smaller than the U.S. led Asian Development Bank.

The dollar as the reserve currency has been a verifiable free ride for a long time. We got financing cheap and were able to spend far more than we otherwise could have. The skim we enjoyed from global trade being in dollars will be reduced when the Yuan joins the Dollar as a reserve currency. 

Many who understand that the dollar could not last as the single reserve currency have predicted epic collapse when we move to a multipolar currency world. Their fearmongering is completely overdone to sell books and subscriptions (buy mine instead). I don’t believe the doomsayers and you shouldn’t either. Change is difficult and volatile, but it comes with massive opportunity for tactical thinkers.

This economic cycle is near its end and any push towards recession will likely take hold. However, the underlying strength of the American economy,  along with the Trump administration’s infrastructure plans – if passed by Congress – will keep any recession short and shallow. Only a stubborn Congress could doom us to something more severe. Americans need to remember that nobody in the world wants to see the U.S. in a deep recession as that is bad for all of them as well. If we get a deep recession, it is internal. It is worth keeping a focused eye on the Congress. 

Ultimately, in a world where merit will take precedence over time, the United States should remain not only a currency leader, but emerge as a greater leader in high-end manufacturing, technology, energy and food exports. These essentials will be the key to pulling over 2.4 billion people around the world out of poverty and moving them into the middle class. The opportunities in that are huge. The trick will be making sure most Americans benefit from the wealth created in helping others. 

Two Trades

With a focus on domestic energy by the Trump administration, oil and gas investments are a good place for investors to add some weight. Oil and gas services and equipment companies are poised to do very well with increased U.S. oil and gas production again. They are at least as leveraged to rising oil and gas prices as most exploration and development companies. I have talked to several large distributors I know and they are taking orders right now that they haven’t seen in 3 years. As the U.S. uses more domestic oil, and natural gas exports continue, the prices of both will be firm and likely to rise more than expected from a weaker dollar.

The SPDR Oil & Gas Equipment & Services ETF (s:XES) is my choice for this type of security. I prefer its non-market cap weighted portfolio because I believe the mid-size companies will do best in an extended bull market. 

Here I am going to do an about face. I have not been much for gold for a very long time. And to be sure, I only see it as a trade. However, the time has come to start nibbling in on gold. Many are forecasting it to go lower. And it might, in which case I will buy more. There is significant support at about $1050 per ounce that will be hard to break below. As we are near that level now, a first bite is in order. If I am right and we get an inflationary set of events, headlined by tax cuts and spending which are promised, and then exasperated by a weaker dollar, then gold will again shine. There isnt’ much long-term risk in gold right now of absolute loss, but in the long-run, more productive assets are best. The low downside risk, but potential for a large gain make gold a long side trade in my opinion.

I  am a buyer of the iShares Gold Trust (s:IAU) as it is a little cheaper than its peers and is easier to sell cash-secured puts on. 

Goodbye Sort Of

As I mentioned at the top, the Trading Deck is riding into the sunset. I am still out here writing and working. I hope you will find me. If you’d like links to where I am writing, please visit my newsletter or investment firm, which links out to where I am published. I am releasing a new special report on January 16th titled: 2017 – The Return of Volatility to Markets. It is designed to cover many of the scenarios that investors will have to face in coming years. It’s free, so sign-up to my monthly e-letter to get a copy when it’s edited. Thank you for all the reads. I hope you track me down on the interwebs.

Disclosure: Subscribers to Kirk’s investment letter Fundamental Trends have previously been recommended FCG & IAU. Certain clients of Bluemound Asset Management own FCG & IAU. No new recommendations or transactions are planned in the next three trading days for the discussed securities. Opinions subject to change at any time without notice. Follow me on Twitter @KirkSpano for a free stock pick of the month or Facebook for a free stock pick of the month with analysis. Sign-up for a free monthly piece of research at Fundamental Trends. January’s report is: “2017 – The Return of Volatility to Markets” due out January 16th.