A Lonely Corner of the Market — A Secular Bull Market Began.

Do you remember at the start of the year, after the market had a big post-lockdown rally, many were thinking a correction was imminent?

It was a reasonable assumption. Small-caps were flying, as were the big miners and the banks.

There was very little value on offer.

I remember thinking about this at the time. Value (as in attractively priced companies) is usually found where no one is looking.

And by not looking, I don’t mean ignoring or just passed over as uninteresting. I mean actively rejecting a stock or a sector because of X, Y, or Z reason.

When you see this happen, it’s a red flag…or possibly a green flag. What I mean is, it’s your signal to look more deeply. You should interrogate the consensus thinking and see whether it stacks up.

At the start of the year, this was the case with coal, especially thermal coal producers.

The initial global shutdown in 2020 caused coal prices to plummet. On top of this, the green movement was in full swing, pushing the narrative that coal was finished. While coal-fired generators are certainly in trouble in Australia, the developing world likes their energy cheap and reliable.

So as their economies recovered from the shutdowns, so has the demand for thermal coal.

The price is now around decade highs. From The Australian:

Chinese demand for thermal coal over its summer months has also been boosted by a severe drought earlier this year in the south of the country, which knocked some hydro-electric generators out of the system, increasing its reliance on coal-fired power plants.

CBA analysts put the price of high-grade Australian energy coal at $US167.05 a tonne on Monday, up from $US160.95 at the close of last week, with the market for the commodity running hot despite dire predictions of accelerated global warming from the UN’s Intergovernmental Panel on Climate Change this week.

Thermal coal prices in Europe have also soared over the last month as electricity demand returns after the pandemic, and thermal coal prices in South Africa are also around decade long highs.

With export capacity from Australia’s biggest coal port at Newcastle returning to normal levels in August, as a shiploader damaged in storms last year returns to action, Australian producers are poised for a strong second half of the year.

This is a 180-degree turn on sentiment from just six months ago. At the time, I recommended Whitehaven Coal Ltd [ASX:WHC]; it was only just recovering from an 85% decline in the last bear cycle. When a stock falls by that much, you can bet that not many investors want to touch it.

While my subscribers are up nicely from that original entry point (nearly 60% in about six months), it wasn’t all smooth sailing. The company had some geological issues at its Narrabri underground mine. That caused the share price to tank momentarily.

It raises the question though, where is the value to be found today?

The market in general is now much more bullish than it was at the start of the year. There is very little ‘value’ to be found.

I ask you then, what is the most overlooked and ‘I wouldn’t touch this sector because of X, Y, and Z reasons’ sector on the market?

I think it’s gold.

Gold ‘should’ be rising. You know, inflation and all that.

But it’s not. Bitcoin [BTC], the new kid in town, is now the inflation hedge. Or so the narrative goes.

The thing is, gold is not an inflation hedge. This is a myth borne out of the 1970s bull market. Yes, the US had high inflation in the 1970s. But that was the result of the monetary chaos trigged by Nixon’s closing of the gold window.

The 50th anniversary of that day is on Sunday, by the way. Do you think 50 years is a long enough time span to judge the wisdom, or otherwise, of that move?

You only have to look around…

Anyway, the immediate result of that was monetary disorder. That’s why gold soared in the 1970s. The inflation was just a symptom of that.

Central bankers got the system under control in the ‘80s and ‘90s, which is why gold went into a deep slumber. There was no need for monetary insurance in those generally prosperous decades.

But the new millennium began with the bursting of the first tech bubble. This brought central bankers and monetary policy back into the picture. Gold stirred. A secular bull market began.

And with monetary chaos continuing, gold remains in a secular bull market. Although it’s a strange bull market, that’s for sure.

I mean, it’s trading below where it was 10 years ago.

And early this week, it had another one of those weirdly timed price plunges that, on interrogation, make no sense at all. You can read about that here.

Despite claims of a rigged market, despite the fact that gold has gone nowhere for 10 years, it continues to intrigue.

I think most people instinctively know that gold is insurance against monetary disorder.

Right now, the market is eyeing a possible recovery and the Fed is tapering its asset purchases because of this. Bond yields are creeping higher again. That’s not a great environment for gold.

But you’ve seen this movie before. Just because the market wants to believe in impossible things, doesn’t mean that’s how it will play out. The Fed cannot raise rates. It is in a debt trap. That will become apparent.

When it does, gold will once gain be popular with the cool kids. It’s already been correcting lower for just over a year. Patient gold bugs might not have much longer to wait for the next leg up.


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Greg Canavan,
Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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