DIAGNOS Inc. (TSXV: ADK | OTCQB: DGNOF), a company we have followed for several years out of Montreal, announced a landmark move for the Canadian healthcare sector this morning. DIAGNOS Inc., a pioneer in artificial intelligence (AI)-driven health solutions, has announced a significant distribution agreement with global ophthalmic leader EssilorLuxottica. This exclusive Canadian contract, unveiled on December 11, 2023, signifies a pivotal moment for DIAGNOS, cementing its place in the market with its cutting-edge retinal analysis technology.

Renowned for its effectiveness in the early detection of eye conditions, DIAGNOS’s technology will now reach a broader audience through EssilorLuxottica’s expansive network, promising an enhancement in the quality of eye health care. The three-year agreement, which includes a renewal option, entails a per-patient exam payment model to DIAGNOS. André Larente, DIAGNOS’ President, highlighted this partnership’s role in broadening the accessibility of their innovative technology, aligning with their mission to foster visual health in Canada and globally.

Market Watch: Global and US Economic Indicators

As the business day commences, futures indicate a downtrend, shadowing a dip in commodities like oil and gold. In the U.S., we are awaiting the Federal Reserve’s monetary policy meeting and upcoming inflation data, which will shed light on the possibility of a soft landing for the economy. European shares are also experiencing a downturn, while Japan’s Nikkei has seen a rebound. The U.S. dollar is gaining strength against the Japanese yen.

U.S. Central Bank’s Interest Rate Decision

The U.S. Federal Reserve is set to release its interest rate decision on Wednesday, following last month’s unchanged benchmark rate. Wall Street is increasingly optimistic about maintaining the status quo in December, as efforts to curb inflation without triggering a recession seem fruitful.

In recent global and U.S. economic updates, the market is witnessing a downward trend in futures, mirroring declines in commodities such as oil and gold. Investors in the U.S. are particularly focused on the upcoming Federal Reserve’s monetary policy meeting and the release of inflation data, which are crucial in assessing the prospects of a soft economic landing. Meanwhile, European shares are experiencing a downturn, in contrast to Japan’s Nikkei which has shown a rebound. The U.S. dollar is strengthening against the Japanese yen.

The U.S. Federal Reserve is poised to announce its decision on interest rates this Wednesday, following a period of unchanged rates. There’s a growing sentiment on Wall Street that the Fed might maintain the current rates in December, buoyed by successful measures to control inflation without pushing the economy into recession.

Some Business News Highlights:

• In corporate developments, French AI company Mistral AI, founded by ex-employees of Meta and Google, has raised €385 million in a second funding round, marking a significant milestone. This funding, led by investors such as Andreessen-Horowitz and LightSpeed Ventures, positions Mistral AI as a key player in the global AI landscape. The company also launched Mixtral 8x7B, an AI platform intended to compete with leading AI platforms like OpenAI’s ChatGPT and Google’s Bard.
• In the healthcare sector, U.S. insurer Cigna (NYSE: CI) has ended its merger talks with Humana Inc. (NYSE: HUM), citing price disagreements, and instead announced a significant $10 billion share buyback plan. This development follows several years after regulatory interventions blocked major consolidations in the health insurance sector.
• In the tech industry, NVIDIA Corporation (NASDAQ: NVDA) is expanding its footprint in Vietnam, partnering with leading tech companies in the country. This expansion, announced by NVIDIA’s CEO, focuses on AI and digital infrastructure, aligning with Vietnam’s ambitions to advance in chip design and manufacturing, especially in the context of ongoing U.S.-China trade tensions.
• In the energy sector, Occidental Petroleum Corp. (NYSE: OXY) has confirmed its acquisition of CrownRock, an energy producer in the Permian basin, in a $12 billion deal. This acquisition is a strategic move for Occidental’s growth in the energy sector.
• TC Energy Corp.’s (TSX: TRP | NYSE: TRP) Coastal GasLink project is currently facing legal challenges due to construction delays, which could significantly impact its financial liabilities. This comes as the C$14.5 billion project was completed at over double its initial budget.
• In corporate leadership news, Tellurian Inc. (NYSE American: TELL) has announced a major change by removing its chairman and co-founder, Charif Souki, from his executive role. This change is part of the company’s strategy to improve its prospects, particularly focusing on its Driftwood LNG project.
• Tesla Inc. (NASDAQ: TSLA) is under pressure from Nordic pension funds to respect collective bargaining rights for its employees. Concurrently, the company is defending its use of “Autopilot” and “self-driving” terminology amid regulatory examination in California.

Globally, the Middle East continues to experience intense conflict with no resolution in sight. The UK’s manufacturing sector is showing signs of recovery, which could bolster the sector in the coming year. UK Prime Minister Rishi Sunak faces a critical week with a COVID-19 inquiry and a key parliamentary vote on asylum policy. The EU has reached a provisional deal on AI regulation, which includes governing biometric surveillance. Bosch is adapting to changing auto sector demands, leading to significant job cuts. Signa Development Finance’s potential insolvency proceedings highlight ongoing market challenges. Lastly, BP Plc’s Bilbao Plant sale to Gunvor reflects BP’s strategic transformation and commitment to becoming a net-zero company.

We kicked off our morning by tweeting our Top 10 Trending columns and videos for the last week that we encourage you to review:

1. Top 10 Trending on #InvestorNews, in the #1 Position, READ: #TechnologyMetals Week-in-Review: The British Stake Claim in #Quebec and the #Uranium Boom in North America https://bit.ly/47jhbmH cc: @IN8News @Energy_Fuels @F3Uranium @Ucore @FirstPhosphate @CriticalMnlInst #criticalminerals
2. Top 10 Trending on #InvestorNews, in the #2 Position, READ: The #CriticalMineralsInstitute Report (CMI 11.2023): #Neodymium price is down 33% over the Past Year, Record Plug-In #EV Car Sales for September https://bit.ly/3QV2dfE cc: @IN8News #RareEarths #Lithium #ElectricVehicles @CriticalMnlInst #criticalminerals
3. Top 10 Trending on #InvestorNews, in the #3 Position, READ: Harris Administration’s $3.5 Billion Investment in U.S. #Battery Manufacturing and #CleanEnergy Transition https://bit.ly/46hagJe cc: @IN8News #criticalminerals #Biden @CriticalMetals_ @CriticalMnlInst
4. Top 10 Trending on #InvestorNews, in the #4 Position, READ: Update on the #Teck and #Glencore deal: “Never Fear, the Feds are Here” https://bit.ly/4a1fUlR cc: @IN8News #MetallurgicalCoal @TeckResources @Glencore
5. Top 10 Trending on #InvestorNews, in the #5 Position, READ: Exploring the Future of #Battery Technology and #CriticalMinerals https://bit.ly/3G4HSQ1 cc: @IN8News @CriticalMnlInst @FirstPhosphate
6. Top 10 Trending on #InvestorNews, in the #6 Position, WATCH: Progress in #Pathogen Defense, Dr. Carolyn Myers Discusses #FendX’s Collaboration with Dunmore for #REPELWRAP™ https://youtu.be/rLDSZ8KMBqs via @YouTube #Nanotechnology #PathogenRepellent #VirusRepellent #DiseaseControl @FendXTech $FNDX.C $FDXTF
7. Top 10 Trending on #InvestorNews, in the #7 Position, WATCH: Greg Fenton on how #Zentek’s Advancement in #Aptamer Technology is Revolutionizing #Biotech https://youtu.be/LJrNda7ZHRQ via @YouTube #PathogenDetection #ZenGUARD #HVACFilters @ZentekLtd $ZTEK $ZEN.V
8. Top 10 Trending on #InvestorNews, in the #8 Position, WATCH Jack Lifton interviews Mark Chalmers on #EnergyFuels Strategic Path to Dominance in the North American #RareEarths Market https://youtu.be/a1xrRJB5hAw via @YouTube #Uranium #cirticalminerals @Energy_Fuels $UUUU $EFR
9. Top 10 Trending on #InvestorNews, in the #9 Position, WATCH: Terry Lynch on @PowerNickel’s collaboration with #CVMR Corporation for developing Canada’s first #CarbonNeutral #Nickel mine https://youtu.be/xOtY6U7ovRE via @YouTube #CriticalMinerals #BatteryMetals $PNPN.V $PNPNF @terrybali
10. Top 10 Trending on #InvestorNews, in the #10 Position, READ: Who might follow #PatriotBattery Metals #lithium exploration success in Canada in 2024? https://bit.ly/48fFh1P via @YouTube #criticalminerals @BrunswickExplo1 @WinsomeRes

So far this week we’ve seen the U.S. Federal Reserve raise interest rates another 0.25% while commenting that the U.S. banking system is sound and resilient. Seemingly oblivious to the fact that a mere two days ago the Federal Deposit Insurance Corp. (FDIC) took control of First Republic Bank (the third major bank failure in less than two months) and followed up with a fire-sale of substantially all the bank’s assets and deposits to J.P. Morgan (NYSE: JPM).

Then just after Fed Chair Jerome Powell’s press conference on Wednesday, there were more banking fireworks as PacWest Bancorp (NASDAQ: PACW) announced it is exploring strategic options, including a potential sale or capital raise which led to a 40% drop in its share price in after-hours trading. If that’s the definition of “sound and resilient” then I have some relatively good junior mining stock ideas for you.

Apple and Goldman Sachs’ solution for depositors

But fear not, options to put your money in a safe place and earn a decent return are available to you but from an unlikely source, Apple Inc. (NASDAQ: APPL). Apple and Goldman Sachs (NYSE: GS) are coming to the rescue of the American depositor. Apple is offering a new high-interest Savings account (HISA) with a 4.15% annual return to its Apple Card holders. Obviously, this isn’t available to everyone as you have to have an Apple Card account which probably means you participate in the Apple ecosystem in some way, shape, or form (which I don’t). You also need to be able to have a bank account in the U.S., which means citizenship or property ownership or adherence to some other rules that may or may not apply to non-Americans. But if you meet these requirements you can bank with Apple (via Goldman), at least up to a maximum of US$250,000, which is the updated FDIC insurance limit.

Apple’s HISA – benevolent or another consumer hook

My personal opinion is that Apple isn’t benevolently doing its part to help restore confidence for depositors.

The top-notch marketing team at Apple has stepped outside the box again and identified another clever way to put more hooks into its zealous disciples. I’m sure they’ve done plenty of research to determine that if there’s a bunch of money in a person’s Apple account, they’ll make a few more purchases in the Apple Store, or perhaps upgrade their iPhone or iPad a little more frequently.

And perhaps that’s why Apple’s HISA has a higher yield than Goldman’s own high-yield savings account which offers a 3.90% return. Whatever the case, their strategy appears to be working as Apple’s new savings account attracted nearly US$1 billion in deposits in just its first four days.

Rising interest rates not reflected in bank saving accounts

Circling back, the Fed’s seemingly myopic approach to dealing with inflation by rapidly and relentlessly raising interest rates appears to have spawned a banking crisis.

Compounding that, at least for many regional banks, the average bank is paying less than 0.5% on savings accounts according to the FDIC’s published National Rates and Rate Caps for Savings deposit products. But Apple is certainly not the first entity out there to offer a HISA to attract deposits away.

No wonder banks are seeing a run on deposits as people try to generate a return on their hard-earned savings. I could see people being less likely to panic and take all their money out of an account if it was just going somewhere else to earn nothing.

But by creating an impetus (the collapse of Signature Bank of New York and Silicon Valley Bank) that caused people to review their banking situation, the ball started rolling. At this point, people realize that without taking on any additional risk they can earn an incremental 3.5% to 4.0% on their money. It’s hard to imagine there wouldn’t be a run on deposits.

Is PacWest just the next ‘domino’ to fall

So where does this leave us, besides in a bit of a mess? That’s a very good question. The recent PacWest seeking “strategic options” news could be a signal that we aren’t out of the woods yet.

Although I’m sure the large banks (JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corporation (NYSE: BAC), Wells Fargo (NYSE: WFC), etc.) that can play the long game might be sitting back and salivating at the chance to pick up another quality financial institution at a huge discount – JPMorgan shares jumped over 3% on the news of the First Republic deal.

With that said, I’m not worried about a complete collapse of the financial system as I’m sure at some point the Federal Reserve will wake up and realize that it’s not solely about inflation.

The regional banking crisis could tighten the credit market and negatively impact the economy

However, some unintended consequences of this strain on the financial system could lead to an overall tightening in the credit market as smaller, regional banks step back from making loans to medium to small businesses that the big banks won’t give the time of day to.

According to the U.S. Small Business Administration, businesses of fewer than 500 employees in the US make up 99.7% of employer firms and over 49% of private-sector employment.

If this credit tightening impairs the grassroots growth of the economy, we finally get the recession that everyone has been forecasting for almost a year. Even worse, if inflation remains sticky we could end up with stagflation.

Perhaps Tim Cook and the rest of the brilliant minds at Apple can figure out something else that helps remedy the situation that the Fed has placed firmly in our laps.

In a surprise move, OPEC+ decided on the weekend to cut its oil output by around 1.16 million barrels per day. On the surface, this seems like a very bullish move for oil prices, and indeed it was as WTI spiked from just over US$75/bbl to just over US$80/bbl on the news. But is this cut as bullish as it appears? On the surface, I would argue that “no, it isn’t”, as a lot of the cuts primarily involved realigning the quotas with the recent actual production. And it is only 8 members of OPEC+ that are making production ‘cuts’. Nevertheless, I think the impact on oil prices could become like the forecast for interest rates – higher for longer, in light of what some of these actions signal to the global political structure.

China’s recent diplomacy

Without trying to become too much of a conspiracy theorist, let’s look at the timeline of recent events. In late March, China’s President Xi Jinping traveled to Moscow to visit President Vladimir Putin. The “good friends” announced they had agreed to cooperate on a range of economic and business areas, but what stands out most to me was the comment on increasing the use of “local” currency. China has been pushing for the internationalization of its currency for years now (to usurp the US Dollar) and during this visit, Russia agreed to support using the Chinese yuan in transactions between itself and its partners in Asia, Africa, and Latin America. And who’s buying most of Russia’s oil these days, which also accounts for the largest component of Russian GDP? According to Bloomberg News, it is China.

Next, we see the announcement that China has brokered a peace deal between long-time rivals Saudi Arabia and Iran. Obviously, it would have been almost impossible for the United States to pull this deal off given its current relationship (or lack thereof) with Iran, but it came as a surprise to many that China was successful in seemingly a short period of time. Where am I going with this? Arguably the only true cut in OPEC oil production in this latest round is going to come from the 0.5 million barrels per day that the Saudis volunteered.

Inflation, interest rates, and the banking crisis

Who stands to see the most pain from tightening the oil supply, which in turn leads to higher oil prices? Mostly, the developed Western nations who are already fighting with inflation and trying to combat that issue with higher interest rates which seem to be pushing a lot of the G7 countries towards a recession. The U.S. is front and center in this battle and has called the OPEC+ production cuts “inadvisable”.

If you really want to go down the rabbit hole with me on this, I’ll pose one more tidbit before I swing back to less nefarious reasons to be bullish oil. There’s one more case to be made for China trying to control the global puppet strings to disrupt the West and its beloved Democracy. As the financial crisis was percolating and Credit Suisse was getting caught up in the panic (although arguably CS was a sinking ship for a long time and this was simply the straw that broke the camel’s back), its largest investor, the Saudi National Bank, said it could not provide the Swiss bank with any further financial assistance. Coincidence? Perhaps, but part of me thinks China is playing a long game here and is selectively calling in favors that cause the most disruption to the West and its hallmark institutions like the banking system.

Oil production cuts or production reality

Whether one believes there is more to the latest OPEC cuts than simply price management or not, there is certainly reason to pay attention to what is happening globally to oil supply and where that might lead. The reality is, as the world spurns fossil fuels and champions renewable energy, it should come as no surprise that OPEC crude oil production has lagged output targets for quite some time because of dwindling capacity, underinvestment, and Western sanctions to certain OPEC+ members.

And this isn’t just true for OPEC, but virtually all crude oil production globally has not seen the investment required to grow production. On top of that, not only are we not at peak oil demand but we might not even be close yet as growing nations like China and developing nations like India see oil consumption that is growing at a faster rate than renewable energy is reducing overall demand. In fact, OPEC is projecting year-on-year growth of 2.3 million barrels-per-day (“bpd”) in 2023 to over 103 million bpd by Q4/2023.

Final thoughts

I’ll be the first to admit, that I may be reading far too much into what I think is Chinese hegemony. That’s fine, but don’t lose sight of what’s really happening to macro oil supply and demand. Demand continues to creep higher and I wouldn’t be surprised to see OPEC reversing its latest cuts before the end of 2023 or possibly even earlier if the U.S. doesn’t slip into a recession. It’s a delicate balancing act between higher prices that kill demand and prices that drop too low and spark demand. The pendulum often swings too far when it comes to the price of oil, but ultimately if there isn’t enough capital being deployed to keep production in line then prices can start moving very quickly.

We’ve recently had a look at the outlook for the prices of some critical materials, namely lithium and graphite. As fears of a recession continue to grow, I thought it might be interesting to have a look at the price of copper. After all, Dr. Copper is often used as an indicator when it comes to the health of the economy. So perhaps we can glean some insights on what lies ahead based on how copper prices have reacted over the last few weeks.

Another reason to have a look is that I pretty much nailed the outlook for copper last October when I suggested the price had put in a bottom at roughly US$3.20/lb and that if it broke back above US$3.70/lb, it had very little overhead resistance until the US$4.10/lb threshold. The chart was really speaking to me that day, so let’s take another look and see if there is a new story unfolding.

Macro fundamentals for copper

But first, we’ll quickly review the macro fundamentals for copper before we dive into what the chart is trying to say. It doesn’t take a lot of searching around the internet to find just about any opinion on the future of copper supply and demand. Generally speaking, as the world electrifies in an effort to decarbonize, the demand for copper could prove difficult to meet and, to that end, there tend to be more bullish than bearish opinions out there.

McKinsey recently forecasted that by 2031, annual copper demand will be 36.6 million metric tons, while current supply projections (including recycled production) are roughly 30.1 million metric tons, meaning another 6.5 million metric tons of capacity (an additional 20 percent) need to be found. Contrast that with the International Copper Association (a leading advocate for the copper industry) which states:

“Despite an ever-increasing demand for copper, there is more of the metal available today than at any other time in history. This, together with the ability to infinitely recycle copper, means that society is extremely unlikely to deplete the copper supply, and copper will continue to contribute to global initiatives…”.

However, these views look well out into the future, whereas I’m contemplating the next 3-6 months. Looking more near term we see China emerging from its strict zero-COVID policy leading to a rebound in copper demand from Chinese consumers. Additionally, the Chinese Government is introducing new policies to revive the private and public sectors including numerous stimulus measures to support the domestic construction sector. There is also the issue of increasingly challenged supply streams in South America, particularly in Peru, but Chile is also facing some issues of its own such as labor strikes and community opposition to mining activities.

US dollar impact

Then there’s the real wild card – the US dollar. A weaker US dollar typically boosts investor sentiment towards industrial metals and increases demand from emerging markets. Has the US Federal Reserve raised interest rates too far and broken the system? Silicon Valley Bank would say yes. But the question remains as to whether the Fed has ended its rate hiking cycle or does the fear of inflation still poses the greatest threat in their opinion. I’m leaning towards the Fed not hiking rates any further but have the least conviction on this being bullish near-term support for copper prices.

Overall, I would say the fundamentals appear to be positive for copper pricing in the near term despite Tesla et al reducing their EV prices. Near-term supply and demand seem to be headed in opposite (bullish for price) directions and we all know, new production doesn’t come on overnight. And even though over the last decade more than 30 percent of global copper demand was met with recycled copper, I still think 2023 could be a good year for copper pricing for the reasons noted above.

What does the copper chart say?

But what does the chart say? After all, that was what guided my forecast last October.

Price of Copper – 1-Year – Price Per Pound

Unfortunately, this chart isn’t as decisive for me as it was last October. The longer-term trend (green lines) is intact, which is encouraging. Additionally, the price has broken through the 200-day moving average (MA) and isn’t all that close to retesting that level. As well the 50-day MA has moved above the 200-day MA which also tends to be a bullish signal.

However, after decisively breaking through the 50-day MA in early November, and holding this support threshold at the beginning of 2023 and again in late February, copper prices fell below again and over the last couple of weeks the 50-day MA is now proving to be more of a resistance level. Additionally, since mid-January, we are seeing a bit of a down channel (blue lines) with lower highs and lower lows, albeit the longer-term (green line) support level has held.

Technically, it appears we are at a bit of a critical juncture for copper prices at present. A few things need to happen over the next couple of weeks to move me from the indecisive camp and back into the bullish camp. First, prices need to move back above the 50-day MA, which in turn should break copper out of the current down channel (blue lines). The next thing I’d like to see is a close above US$4.35/lb to give us a new higher high in the longer-term uptrend (green lines). Satisfying those two criteria would place me firmly back in the bull camp.

Better to understand the question

The question becomes, are you wanting to trade copper or invest in copper? The technical analysis of current prices is more geared toward traders. If you are more of a long-term investor then the fundamentals suggest there could be a pretty good opportunity to be long copper over the next several years, regardless of what the price is today or two weeks from now. To thyself be true…I know what I’m doing when it comes to copper.

Every so often, I like to take a step back from the day-to-day gyrations of the market and have a look at what might be the overall market trend. It can be hard to swim against the current, so if the market is trending lower, then perhaps now isn’t the time to be stepping into a longer-term story. However, if the market is trending higher, then you might be able to load up on a basket of more speculative names and not have to worry as much about whether they pan out right away or not.

At present, it appears there are four key focus points for investors – inflation, employment, interest rates, and earnings. It might be a little more complicated than that but you’ll note I didn’t include a recession. My observation is that a recession is somewhat irrelevant to the overall market performance right now. I suspect that could be due to continued strong employment numbers on both sides of the border, the market doesn’t perceive that there will be a meaningful or severe recession in light of that. I’m sure the press will be happy to push the panic button if or when the economy slides into a recession but as I’ve discussed previously, by the time you can actually declare there is a recession, a forward-looking market could be starting a bull run and perhaps we already have.

Turning back to the key points I started with, they are all somewhat interrelated. Starting with inflation, it appears to be cooling marginally but not as much as I think the market, or more importantly the U.S. Federal Reserve, was expecting. Additionally, employment numbers continue to surprise to the strong side. This sticky inflation and strong employment lead to the potential for interest rates to stay where they are (or possibly even see another small increase or two) for a longer period of time, or until inflation gets back down closer to 3% (I know the Fed target is 2% but I think they’ll blink before then). Higher interest rates for a longer period of time flow through to the cost of debt, and discount rates that are used to value companies, especially high-growth tech names which led the market for so long. The one piece of good news, about the four points, is that this latest earnings season was OK. Not great but also not terrible.

1-Year Chart – $SPX – S&P 500 Large Cap Index

So where does this leave us? I think it means we see a market that is floundering without direction. January saw a nice little rally, February saw us give up most of those gains and the lack of conviction continues. The market is reacting here and there on specific news items but it doesn’t necessarily lead to a broad-based move. For example, early in the week, there was some positive economic news out of China and the copper stocks all caught a pretty good bid. But that was short-lived as everyone waits for the next data point. Yesterday, one of the more hawkish members of the U.S. Federal Reserve made comments that the market interpreted very differently than I did, and we saw a mid-day rally. But again, it has little to no sustainable influence on the overall market trend.

Looking at the one-year chart for the S&P 500, the market has entered a bit of a sideways pattern. We might be in a slight uptrend that started last October with higher highs and higher lows. However, the current dip has to bottom out at the 3,850 level or higher. If it dips to 3,800 or lower then I would say we are likely rangebound between 3,650 and 4,150. Yesterday we bounced off one key support level and that’s the 200-day moving average (3,940). This could signal a continuation of the uptrend but we won’t know that until it goes back to test the 4,200 mark.

What lies ahead is anyone’s guess at this point. If I had to make a call, I would guess we’ll see stocks trade in a sideways pattern or range until something “gives”. What do I mean by “gives”? Either inflation starts to noticeably move lower, sentiment towards “higher for longer” interest rates get ingrained and the market decides to get on with life instead of overanalyzing every data point that comes out, or other macro events occur that attract the attention of investors. Unfortunately, that doesn’t help us determine if the next move for the market is up or down. But the next few days and the 3,940 level on the S&P 500 may go a long way toward helping us decide.

Gold prices have recently been rising as the market anticipates the end of the U.S. Federal Reserve interest rate increases at some point around mid-2023. This combined with an inverted yield curve signaling a 2023 U.S. recession gives hope for gold investors, as gold performs best when rates are falling and in recessionary times as investors seek safe havens.

All of this begs the question will 2023 be the year gold makes a comeback?

The long-term gold price chart below shows gold prices surged higher during the Global Financial Crisis of 2008-09 and subsequent years with interest rates falling during that period and again in the 2018 to 2020 period as interest rates fell again heavily as we entered the 2020 Covid-19 recession.

25-year gold price chart. Red arrows show the gold price often surges higher when recessions occur or when interest rates fall

Source: Trading Economics

Starting from H2, 2023 looks set to a good environment for gold

To be clear we are not yet in an environment of interest rates falling, but U.S. interest rates have recently hit a 15 year high.

U.S. Federal interest rates are forecast to peak at 5.1% potentially by ~mid 2023, rising from 4.5% now. Assuming the U.S. is then in a recession by mid-2023, then the Fed may reverse course and start to reduce interest rates later in 2023 or into 2024. This will also depend upon inflation coming back down to 3% or less, from its elevated level of 7.1% as of November 2022.

A December 2022 Bloomberg report stated: “Economists Place 70% Chance for US Recession in 2023. Bloomberg monthly survey shows 0.3% average GDP growth in 2023.”

Certainly, a 2023 recession is now the base case for the majority of analysts. Given that the equity market looks forward about 6 months, it is probably no surprise that we are seeing a rotation into gold in the last month resulting in the gold price moving 4% higher. Whether this is the very early stage of the next gold market bull run it is too early to say. What we can say is that interest in gold is returning and the worse 2023 is for the economy the better it helps the fundamentals for gold.

A January 3 CNBC report also commented: “Gold surges to 6-month high, and analysts expect records in 2023.” The report cites the following causes for the recent rise in gold: “Gold prices have been on a general incline since the beginning of November as market turbulence, rising recession expectations, and more gold purchases from central banks underpinned demand.”

The U.S dollar trades inversely to the gold price

The other key factor to consider is the U.S. dollar. If it rises then gold tends to fall in relative terms and vice versa. This is simply because gold is priced in U.S. dollars.

As shown below the U.S. dollar Index generally fell from 2002 to 2008, a period when the gold price rose.

The U.S. dollar Index 25-year chart

Source: Trading Economics

Closing remarks

Gold behaves differently to most other metals due to its safe haven status. While gold demand versus supply is a factor (including sovereign buying), the bigger factor is the economy and interest rates.

When the U.S. economy is booming interest rates and the U.S. dollar tend to rise, which is a negative for gold. Why invest in gold when equities are doing well or when cash and bonds are paying a nice dividend, compared to zero dividends from gold.

When times are bad gold becomes a safe haven, benefiting from a weaker U.S. dollar and lower interest rates.

To answer the question will 2023 be a good year for gold, you must first decide how you view 2023.

If you are positive about the U.S. and global economy and think U.S. interest rates will keep on going higher, then gold is not for you in 2023. However, if you are negative on the economy and think rates will start to fall, then gold looks like a sound bet for 2023, or perhaps 2024.

Either way, it never hurts to diversify and build a little safety of gold into your long-term portfolio. And with inverted yield curves everywhere and 70% of analysts forecasting a 2023 recession, now looks to be as good a time as any to top up your gold holdings.

Recession, bear market rally, China zero covid policy, short covering, tax loss selling, Santa Claus rally, crypto nuclear winter, the markets have all the makings of a Netflix series at present. How do we dig through the weeds and figure out what is ahead for investors and will we like it or not? I certainly don’t have all the answers (if any of the answers) but I will make a few comments that may or may not provide some clarity.  Generally speaking, it looks like Central Banks (Canada & U.S.) are starting to taper their interest rate hikes. It feels like there is maybe 0.75% to 1.00% left to go, likely spread out over two or three more hikes, and then everyone will wait and see what happens next. The markets have been anxiously awaiting this signal for quite some time, with a few head fakes along the way. This should be good but only if it’s not too late and the actions to date haven’t already taken too much momentum out of the market.

Rising interest rates along with sky-high food inflation already has plenty of news agencies and market “experts” ringing the recession alarm bells. However, all recessions are not created equal. If it’s short and shallow, then the second the statistics give the press all they need to go invoke fear into the hearts and minds of all who will listen, it probably means it’s time to buy. Why would I say that? I’m hearing – moron, nut case, and perhaps a few other comments being muttered under people’s breath (or possibly out loud), but hear me out. The actual data required to call a recession (generally identified as a fall in GDP in two successive quarters) is backward looking and arguably we will have been in a recession for 6+ months by the time it’s official. The market is forward looking, generally considered to be pricing equities based on the coming 6 months (give or take). That suggests at least an entire year between when the recession has officially started and where the market is looking. If inflation is truly coming off the boil and interest rates are close to hitting their near term peak, and may even start moving back down if the Central Banks panic about recession, then it could be the start of the next bull market.

Of course, it’s not that simple. A very important factor on where equities go is earnings. Thus far earnings haven’t been too bad overall, although there have been a few big companies that got soundly thrashed by the markets for misses and disappointments. As long as it is a sound business, with revenue and/or income growth, and modest levels of debt, then as the markets regain confidence, we could see multiple expansion (P/E, EV/EBITDA or whatever metric is most applicable) and all is good again. Another key item that the Central Banks watch is employment, which continues to be quite strong in Canada, albeit slightly weaker in the U.S. but still pretty solid. It’s very difficult to foresee a deep and problematic recession when most key economic stats are progressing relatively smoothly.

However, there is one bogeyman out there and that is the spread between the US 2 year bond yield and the US 10 year bond yield, which when inverted can be a harbinger of tough times. A negative 10-2 yield spread has historically been viewed as a precursor to a recessionary period and is said to have predicted every recession from 1955 to 2018. I’ve also heard that this metric has predicted 12 of the last 5 recessions, so one has to be careful with buying into the doom and gloom that a recession is inevitable. With that said, this measure continues setting new 5 year low (or high) negative spreads.

Despite my cautious optimism, there is still likely to be some volatility ahead. It’s entirely possible for the market to retest recent lows before my “buy the recession” theory is plausible. Especially given we aren’t actually in a recession yet. However, if there is another test to the downside I’m looking at the 3,600-3,650 level on the S&P 500 as the key technical support level to signal a bottom might be in. If that doesn’t hold, next support is 3,400 or possibly even down to 3,200 (which UBS analysts called for in early November). Wherever the S&P 500 finds its bottom, if the media is shouting from the rooftops that we are now truly in a recession, it could well be time to buy.

Like many people (perhaps like you, dear reader), I’m a creature of habit.

For example, when I buy something in a store I always ask for a receipt. Or I hit the button for a receipt if it’s one of those self-serve dispensers, like with fuel pumps at a gas station. Then I fold the receipt and drop it into the left pocket of my trousers. See? Habit.

Later, I empty my pockets, take the receipts, and stuff them into an envelope on my desk. The idea is that I’ll sort them later for taxes. Except I hardly ever do that last part. Staying organized for taxes is not a habit, I guess.

At any rate, this short, personal confession is my way of introducing a quick discussion about inflation, currently over 8.5% per no less than the U.S. Government. And it’s likely even more than that number because I believe that government bureaucrats badly misperceive and understate reality.

So, here’s what happened. The other day I was cleaning my desk and found a stash of gasoline receipts from about a year ago. Back then it cost about $35 to $40 to fill the fuel tank of my car.

Lately, though, it costs me about $70 to $75 to fill my gas tank. That’s about 80% more than a year ago.

Same car. Same fuel tank. My driving habits are about the same. Same roads. Same trips to the store, errands, etc. Same everything, except that it costs me much more to fill the tank.

There’s a reason for this, of course. A year ago, the price of oil was nestled in the range of $65 per barrel. Today it’s north of $110. Do the math, right? The price of oil controls the price of motor fuel. Oil up, gasoline up; cause and effect.

Meanwhile, rising prices for energy – oil, gasoline, diesel – explain a big whack of why the rate of inflation is high and increasing, not just at the fuel pumps but at the grocery store and pretty much everywhere else.

Inflation is up because the global supply of energy is tight, which is certainly the case for oil, and also the scenario for much else in the arena of fuels.

And energy demand is up due to a global recovery from Covid. More people want more and more energy. And due to the massive levels of government spending over the past couple years, there’s money out there to chase it.

In other words, demand/people/money are chasing – or more precisely, “cornering” – a relatively static supply of oil, hence higher prices to clear the market.

All this, while higher costs for energy flow through to everything.

Higher energy costs affect what you pay to drive your car, and what it costs farmers and processors to produce food and other goods, and what it costs manufacturers and shippers to create and move everything, and eventually deliver it to stores where people buy it all.

In this regard, inflation is now truly structural. That is, inflation is built into the entire economic system. It’s deeply rooted in the fundamentals of energy availability, and how much energy costs its end-users.

Now, consider a follow-on point to what we just discussed. That is, absent a lot of additional energy miraculously showing up and hitting the system (hint: very unlikely) the whole situation will remain bad, if not get worse.

However bad you think it is now – high prices at the gas pump or supermarket – it’s about to hurt even more. There’s no relief in sight, unless you’re one of those well-insulated people who want to see a major global recession to, as the saying goes, “destroy demand.”

The takeaway here is that inflation is structural. So stand by for more of it. Stand by for higher prices. Stand by for your dollars to buy less and less, while your quality of living declines.

And okay, one more takeaway, with an upbeat angle. Looking ahead, hard assets – real things like metals and energy resources – will not only hold their value through the coming storm, but preserve and create wealth for the holders.

On that last point, invest accordingly.

That’s all for now…  Thank you for subscribing and reading.