Bitcoin is pointing to commodity disinflation. And, yes, for the billionth time, Bitcoin is a commodity. But first — speaking of the crypto space — let’s go back to one of the hottest names of 2020… 

After much speculation, everyone’s favorite meme stonk, GameStop Corp. (NYSE: GME), finally announced it is launching an NFT marketplace and getting into the crypto space.

From a stock price perspective, that helped break a nasty two-month sell-off of 52% — with shares up as much as 25% Friday morning.

Source: Bloomberg

However, the shine wore off of that announcement quickly, and shares have pulled back to about a 4% gain by the close.

Source: Bloomberg

From the perspective of the broader crypto market, the announcement’s timing wasn’t good at all with Ethereum (ETHE) 37% below its recent highs, and Bitcoin (BTC) down 41%.

Source: Bloomberg

Frankly, it looks like it’s going to get worse… 

The next support line test coming up for Bitcoin is at September’s lows just below the $40,000 mark. And if that fails — which I expect — then look for crypto markets to slide all the way down to test summer 2021’s lows.

Bitcoin and Commodity Disinflation. The Indicator You Didn’t Think Of

Over at least the next two months, the economic backdrop for commodities — I include crypto here — isn’t exactly favorable.

As we’ve been saying for about a month now, commodity inflation has peaked… And each leg has been led by the crypto space.

Although we are starting to see some upward divergence in coking and thermal coal, those are driven more by supply shortages than macroeconomic factors. If Bitcoin’s chart is telling the truth, the market is headed lower.

Source: Bloomberg

And the other primary focus of financial news media Friday — the jobs report — appears to agree with Bitcoin in that it is indicating commodity disinflation.

J-O-Bs by the 1-2-3s

Economic data releases this week have largely had a bearish tint to them.

ISM Prices Paid and auto sales showed serious pullbacks on Monday, mortgage applications fell on Tuesday, and ISM Services disappointed on Thursday.

Source: Bloomberg

And although ADP released a positive jobs report on Tuesday, hopes were crushed by the government’s nonfarm payrolls report Friday morning, which came in more than 50% below expectations.

Source: Bloomberg

To us, that confirms the economy is slowing at the moment. And it’s certainly creating a ton of fear, uncertainty and doubt — or “FUD” — in the market.

That’s one key reason why we put out Thursday’s bonus trade on gold.

Another key reason is disinflation, which we should get a read on next week when December’s Consumer Price Index data is released.

Expectations are for year-on-year comparisons to rise from 6.8% to 7.1%. But we know for a fact that commodities — specifically, energy and food — declined.

Gasoline, crude oil and natural gas were down as much as 10%,13% and 22%, respectively, on a month-on-month basis.

Source: Bloomberg

Similarly, corn, soybeans and wheat were down as much as 1%, 3% and 8%, respectively.

Taken together, food and energy account for about 22% of the CPI. For that reason, my models show a slight decline in monthly CPI, from 6.8% to 6.6%.

We’ll see how the chips fall next week. There are certainly other parts of the index — like shelter — that may see a continued acceleration.

But with retail sales’ seasonal tendency to peak in December, directionality for the consumer is clear.

At least in the short term, the economy is headed lower.

All the best,

Matt Warder

Fortune Research

The Fed governors said they will taper asset purchases… acknowledged inflation was high… and told us they were going to raise interest rates three times this year.

What was new was a date for the first hike… 

March.

The broader market wisely concluded that March is pretty close to January. The response by the stock market to the Fed’s coming tapering was unwise to say the least…

It panicked, resulting in a violent sell-off where the S&P 500, Nasdaq and Russell 2000 all fell nearly a percent in the last 30 minutes of trading.

That sell-off coincided with a rip to nearly 1.73% in interest rates on the 10-year Treasury — higher than the cycle peak almost a year ago.

Source: Bloomberg

We know from backtesting that the 10-year interest rate rises along with inflation. But we also know that inflation is no longer rising anywhere near as fast as it was a year ago.

If you have a pair of functioning eyes, you can look at a chart of all commodity futures and see for yourself…

Source: Bloomberg

Mind you, nothing is collapsing. 

The Fed Tapering and the Stock Market Freakout

But neither food… nor energy… nor base and industrial metals are continuing to move up and to the right.

That indicates Thursday’s rise in 10-year Treasury yield is over, and it will revert back to its recent range between 1.3% and 1.7%.

When yields fall on a relative basis, there’s one asset class that almost always moves in the opposite direction…

Gold!

Source: Bloomberg

Not surprisingly, gold was on sale Thursday as the rip in yields pushed it down below $1,800-per-ounce level for the first time in a month.

Source: Bloomberg

And that means watchlist member SPDR Gold Shares (NYSEArca: GLD) is also this week’s BONUS TRADE on the heels of the Fed tapering and the stock market panicking.

Updated watchlist below…

Source: Bloomberg

All the best,

Matt Warder

Fortune Research

The first sign is when several themes will be at odds with one another… On CNBC’s front page, bearish titles around the omicron variant and gold sat right next to bullish ones on job quits data and dividend stocks.

Source: CNBC

But as usual, there’s a leading indicator hitting the tape that tells us where we are in the business cycle… One we can use to reorient our Fortune Research weekly watchlist.

And while Tuesday’s indicator was clearly the disinflationary move in ISM prices paid — as we noted — Wednesday’s key data point isn’t the 807,000 jobs we added…

It’s the slowing auto sales number.

Source: Bloomberg

Few people recognize that auto sales are a leading indicator for the broader economy. When people get new jobs, a car is one of the first big-ticket items they aim for.

And with sales still sitting near recent lows as both production and inventories remain slim, the writing may be on the wall for the second and third quarters of this year.

Source: Bloomberg

A Shift in the Fortune Research Weekly Watchlist for Jan. 5, 2022

Not too many asset classes work consistently in that environment, but last week we laid out a bunch for you in our “defense-oriented” watchlist.

There’s only one change to that this week, with Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (BARS: VXX) out and large-cap Industrials — represented by the Industrials Select SPDR Fund (NYSEArca: XLI) — back in… 

Updated values for your Fortune Research Weekly Watchlist below.

Source: Bloomberg

But we also told you last week which one we thought would be strongest, and that was Real Estate.

Here we are just a few days later, with the Real Estate Select Sector SPDR Fund (NYSEArca: XLRE) down big on a choppy day as the risk-on trade resumes.

That’s our FREE TRADE for the week, as real estate stocks haven’t disinflated much at all, and likely won’t through the balance of summer.

There’s just too much momentum left over from the massive bull run in prices from 2020 to present.

We’re also buyers of China — the KraneShares Bosera MSCI China A Share ETF (NYSEArca: KBA) — on weakness here, and would think about shorting oil at current levels… though we aren’t pulling the trigger yet on, either.

I’ll try to unpack some more of what I’m seeing Thursday, so stay tuned.

All the best,

Matt Warder

Fortune Research

But one thing is for sure… The news isn’t the only thing taking a downturn, because everything I’ve seen so far indicates a slowing economy in 2022.

I know what you’re thinking and, no, I’m not a fortune teller — even though I did predict slowing growth before the end of the year.

I just know exactly what to look for.

The only items of any interest to us were CNBC discussing how West Virginia Sen. Joe Manchin will not resurrect President Joe Biden’s “Build Back Better” plan…

Source: CNBC

And Bloomberg touting real estate prices, job quits… and Manchin again.

Source: Bloomberg

But there were a few reports Monday that should grab their attention instead…

For one, the ISM Manufacturing data shows that the 2022 economic slowdown I expected in the second quarter is already beginning.

Source: Bloomberg

The ISM Manufacturing data revolves around a base number of 50. A number above that baseline points to an expansion of the manufacturing segment of our economy, while a reading below represents a contraction.

And while the data we received Monday is still above 50, it’s 1.3 points lower than expected and 2.4 points lower than the previous month…

It’s safe to call that “slowing.”

On top of that, the ISM Prices Paid data fell, which indicated inflation has peaked for the near term.

Sectors for the Slowing Economy in 2022

Need more proof of a slowdown? Just look at the JOLTS job openings data in the above chart, which came in well below expectations. It’s become increasingly clear that labor will be hard to come by for a good long while.

Given the disinflationary pressures we’re already seeing — manufacturing slowing, prices paid falling — we should question Monday’s increase in Financials and Energy sector stocks. Because if we’re no longer pumping money into the market and commodities are disinflating… why would we want to put our money in those sectors?

Instead, there are other areas we should look to…

Such as Real Estate, Consumer Staples and Utilities.

Source: Bloomberg

On the flip side, however, watchlist member Consol Energy Inc. (NYSE: CEIX) has bounced considerably over the past couple of days. So if you’ve been buying ’em on red…

Source: Bloomberg

It would have been a good day to sell a little on green. If these weather patterns hold, there may be even more green to sell on over the next couple of weeks as well.

In fact, members of my premier service, Fortune Research Pro, get regular alerts for great entry and exit points to help manage a long-term position like CEIX.

Something that could come in handy if these markets turn choppy like I expect.

The playbook this week could add some Real Estate and fixed-income positions… average down on China… and maybe look at the first leg of a brand-new position.

But like any good quarterback, we take what the market gives us… And thus far, I don’t see any open windows.

Keep an eye on that inbox for this week’s watchlist…

I’m still on the fence as to whether we stay the course or shake things up amid the slowing 2022 economy, but I can guarantee there will be some new tickers to put on your radar!

All the best,

Matt Warder

Fortune Research

P.S. Is January the best month for trading?

Joy of the Trade Head Trader Jeff Zananiri sure thinks so!

And Jeff is hosting a LIVE educational class Wednesday, Jan. 5 at 1 p.m. EST to teach everyone why he loves a special strategy in particular…

“There’s no doubt in my mind, this is the top trading strategy for the next 30 days,” Jeff said. 

Last January, this exact strategy pulled a fat 210% winner from the market. 

So be there Wednesday LIVE, when Jeff will reveal his No. 1 trading strategy for January…

The perennially pernicious punditry is shifting coverage from high-flying tech stocks over to an area of the market that has long been left for dead…

Value.

Source: CNBC

After the past decade driven by growth, it almost makes me a little nauseous even typing it.

But after a full week’s worth of articles dedicated to slowing growth in U.S. gross domestic product over the course of 2022, it’s probably a word I should get used to.

And honestly, the market itself has been screaming at us to pump the brakes this entire quarter. Now it’s time for us to shift to the best sector for 2022… It’s not what you think.

Take a look at the best performing sectors over the past month…

Source: Bloomberg

Consumer Staples… Utilities… Health Care…

These are not sectors that outperform when the economy does well. 

Actually, it’s quite the opposite.

But the one that absolutely smoked all of ’em also smoked ’em for the entire quarter.

In fact, outside of Energy, it was the second-best performing sector in the entire market.

Source: Bloomberg

Real Estate.

Now, under normal circumstances, that isn’t a sector that “crushes it” in an inflationary, hyper-growth economic environment. But in this environment, it’s the best sector for 2022.

The statistical outlier that was March of 2020 pushed down on Real Estate so hard it was like pushing a ball underwater…

Whenever you let go, it rockets upward.

We have seen that play out in real time with housing prices. Other than a brief dip at the beginning of 2020’s lockdown, the Case-Schiller U.S. National Home Price Index has risen at the fastest rate in its 34-year history.

Source: Bloomberg

The culprit, of course, was the combination of all-time-low interest rates with all-time low inventories.

Source: Bloomberg

And although we may see this trend slow to some degree in certain markets over the course of 2022, other markets — and other sub-sectors — will likely be picking up.

That “search for equilibrium” becomes clear when we look at 2021’s returns on a more granular basis.

Source: Fortune Research, Bloomberg

Trading the Best Sector for 2022’s Conditions

Self-storage REITs — companies like Public Storage (NYSE: PSA) and Extra Space Storage Inc. (NYSE: EXR) — were by far the biggest gainers in 2021, with residential, industrial, specialty and retail REITs all relatively fairly close behind.

What do all these have in common?

They were all DOWN in 2020… hence the smaller two-year returns.

Similarly, mortgage finance REITs — which were up big in 2020 — is the only subsector to post a negative return for 2021.

So, as we look forward to the best sectors for 2022, we should take a similar, contrarian approach. Or as I often like to say, “buy ’em on red and sell ’em on green.”

In this case, that probably means taking an approach similar to the other “defensive” pieces I wrote this week on volatility/bonds and gold.

Investing in real estate is similar to investing in bonds, in a sense. Both asset classes have a relatively long duration, from one-year residential to multi-year “triple-net” leases where the lessee assumes expenses like property taxes and insurance.

On the short-term side, residential REITs that have outperformed this year — in regions like the southwest and midwest — will likely take a backseat to major cities as the threat of COVID-19 wanes.

Similarly, long-term triple-net leases that lagged in 2021 — like mall, shopping center and restaurant REIT’s — will begin to catch up on a rate-of-change basis.

Finally, office and hotel REITs, which have been left for dead in this market, should see a comeback as day-to-day life and travel returns to something that resembles “normal.”

The advantages for your portfolio are obvious. These are low-volatility, higher-dividend stocks that won’t draw down substantially.

But in a year that will prove to be a difficult “stock picking” environment, this sector is as close to a sure thing as we’ll get in 2022.

Markets are open on Monday, but it’s a rare holiday for me. As such, our usual publishing schedule will be pushed back a day, so watch out for the weekly outlook in your inbox on Tuesday.

But above all, best wishes to you and yours for a safe and incredibly Happy New Year!

All the best,

Matt Warder

Fortune Research

And that’s a slowdown.

Don’t get me wrong, when fourth-quarter earnings are rolled out, those numbers will be bangin’. 

But like many economic data points, earnings beats or misses are lagging indicators — not leading ones.

They tell us whether or not our thesis was right last quarter, not whether it will be correct going forward.

So where does that leave market growth for 2022?

In order to determine what lies ahead, we have to instead understand the factors that make economies grow.

The equation is actually pretty simple… It’s the equation for Gross Domestic Product (GDP).

Source: Fortune Research

GDP, Gold and Market Growth in 2022

The first variable there — consumer spending — is the largest by a wide margin at 70%.

Government spending and business investment are roughly equal at 17% and 18%, respectively.

And because we’re an importing nation, exports minus imports will always be negative. Usually, this figure comes in down roughly 5% (with imports comprising around 13% of total GDP minus 18% exports). 

So that inevitable post-holiday slowdown in retail sales is really a proxy for consumer spending, which has huge negative implications on GDP.

But let’s think about those other components too.

My home state senator, Joe Manchin, recently dealt a big blow to the “G” in that equation by saying “no” to the Biden administration’s Build Back Better spending plan.

So although I do believe we will pass a portion of it in some form, it will be smaller. Additionally, we won’t be issuing checks to anyone to stay home after the Child Care Tax Credit expires in January.

That means that “G” will be lower, too.

And while the “I” — business investment — will likely continue to climb upward, disinflationary pressures on commodities and other raw materials/input costs will likely slow relative to the past few quarters.

Source: Bloomberg

In fact, business investment is already starting to flatten out as of Q3, shown in the chart above.

Balance of trade (“M”) isn’t likely to change much — if anything, it will move sideways. However, it will be moving sideways at the largest imbalance in history.

So, with each component of the GDP equation likely to face headwinds in 2022, it’s impossible to project the same breakneck pace of robust market growth.

Instead, the market grinding sideways to lower beginning in late Q1/early Q2 is a much more probable outcome.

And in general, over the past several decades, one of the best asset classes to hold during periods of slowing market growth is that favorite holding of fiat-hating anarcho-capitalists and Peter Schiff disciples everywhere… 

Gold.

Source: Bloomberg

It’s pretty obvious in that chart there’s a clear inverse relationship. When one goes up, the other goes down, and vice versa.

Moreover, the correlation has gotten stronger in recent years… as it should have with all the bazooka money JPOW recently blasted into the market.

Now, I’m a mining analyst, so I’m inherently partial to stuff we dig out of the ground.

But I’m not a gold bug; I’m a realist.

In fact, as recently as a month or so ago, I was actively short the yellow metal!

When the facts change, however, I change my mind. And slowing market growth in 2022 means we need to pay attention here.

Source: Bloomberg

From a price perspective, there is strong support at both $1,750 and $1,685 per troy ounce, the former represented by the thick blue line in the chart above.

Looking more recently, we tested that level three times over the past two months.

Source: Bloomberg

I’m not sure we’ll get another chance to buy quite that low, but we do want to begin  some at or below the $1,800 level, if possible.

In pricing terms of SPDR Gold Shares (NYSEArca: GLD), that would correspond to picking up some shares at or below the $168 level.

Source: Bloomberg

That’s not today, of course… we’ll need an up day in equities to get a chance.

But I have a sneaky suspicion we’ll get one next week or soon thereafter.

Updated watchlist below…

Source: Bloomberg

In the meantime, stay frosty, folks, and take some profits!

All the best,

Matt Warder

Fortune Research

For the past year, we’ve been screaming “buy” every time there’s a dip we like.

These dips have often coincided with monthly options expiry, where speculators and market makers alike are forced to rapidly adjust positions.

Those were all calls we could make with confidence, though… 

Economic conditions were improving, company revenues were accelerating and government policies were still accommodative.

And the CBOE VIX Volatility Index — the “fear index,” in parlance — reflected as much. That may not be the case, however, when trading volatility in 2022… 

Source: Bloomberg

The measure of market uncertainty plummeted from its COVID-19 peaks just about as quickly as it ascended. 

And although it spiked periodically thereafter — usually near monthly options expiry dates — those bouts of volatility would resolve, and the index would inevitably head lower.

Trading Volatility in 2022

Over the past month or so, however, that dynamic has changed…

Source: Bloomberg

During that time, the VIX spiked to its highest level since the GameStop Corp. (NYSE: GME) short-squeeze mania back in January and February.

Although levels have pulled back below 20 — where the market tends to be calmer — as of this writing, they have not fallen to prior levels around 14.

For the uninitiated, a reading of 20 means we can expect average market moves of 1% up or down each day over the next month. The higher above 20, the more volatile the market. The lower under 20, the less volatile.

Simple enough…

Currently, our models indicate this the beginning of a new cycle of volatility in 2022. One that should see the VIX return to sustained levels between 20 and 35… like we saw in the latter half of 2020.

The associated choppiness will make stock picking a much more challenging game going forward.

When the data tells us to start thinking about getting defensive… we don’t ask questions — we make adjustments.

To counteract that rise in volatility, and as the first step in trading volatility in 2022, we introduced SPDR Gold Shares (NYSEArca: GLD) to the watchlist.

And for this week’s FREE TRADE, we’re going to introduce another: The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT).

Source: Bloomberg

Bonds aren’t a sexy investment, but they won’t go down if interest rates have peaked here as our data indicates.

And we even get to pick some up on sale.

That’s sexy enough for me.

All the best,

Matt Warder

Fortune Research

For starters, I track commodity prices every day. So when they stop going up, it’s easy to take notice.

In fact, anyone with a working pair of eyes could see it!

Source: Bloomberg

This trend is going to play a huge role in market outcomes over the course of next year. 

Companies whose margins were squeezed over that time — those unable to pass all input cost inflation on to customers — are going to benefit greatly as prices relax.

Even though we said Tuesday that overall retail sales are likely to slow as we head into 2022, margin growth has the potential to offset any declines in top-line earnings. 

So the question remains… Exactly how much are commodities going to pull back?

The answer, unfortunately, can’t be determined from tracking U.S. activity.

Instead, we have to watch China.

China’s Impact on Our Fortune Research Weekly Watchlist

Now, I talked a week ago about China’s “Credit Impulse” beginning to tick up, and how that’s a great leading indicator for a turnaround in China’s stock market. 

Source: Bloomberg

Last week’s free trade on KBA, in fact, is already up around 2% this past week.

But credit impulse is also a great leading indicator for commodity prices on a six- to 12-month-lag basis — like iron ore, shown below…

Source: Bloomberg

Crude oil…

Source: Bloomberg

And gold prices also track it closely…

Source: Bloomberg

The reason is that China is the biggest buyer of commodities in the world. So when Beijing enters the market, it moves it.

In general, after about six to 12 months following an inflection point in Credit Impulse, commodities will flip directionality.

In this case, the China Credit cycle peaked in March. Meanwhile the commodity price cycle peaked about eight months later and turned over.

As such, we want to look for opportunities to short the commodity space now while we wait to see inflationary trends begin to reemerge around the end of Q2 next year.

So for the watchlist this week, we’re keeping Consol Energy Inc. (NYSE: CEIX), the Materials Select SPDR Fund (NYSEArca: XLB), the Real Estate Select SPDR Fund (NYSEArca: XLRE) and the KraneShares Bosera MSCI China A Share ETF (NYSEArca: KBA) as each has fundamental reasons to rise.

Then, to capitalize on commodity disinflation, I want to bring in the ProShares UltraShort Bloomberg Crude Oil ETF (NYSEArca: SCO).

And as a hedge on equity markets, I want to bring in both a volatility instrument, iPath Series B S&P 500 VIX Short-Term Futures (NYSEArca: VXX), and SPDR Gold Shares (NYSEArca: GLD).

Updated Fortune Research weekly watchlist below…

Source: Fortune Research

Markets aren’t turning yet, but we want to be prepared if the cycle rolls over.

All the best,

Matt Warder

Fortune Research

P.S. I don’t want to scare anyone, but traders who don’t have a financial plan of action for 2022 might be in some hot water…

Luckily, WealthPress Senior Strategist Roger Scott is hosting his “Turning Point 2022” event, where he will share three huge predictions and his favorite play for the new year.

The timing of this is absolutely crucial because we’re cutting it close with only a few days to spare in 2021. 

And with world health getting more complex, it should come as no surprise that we might be in for another bumpy year ahead… 

But the good news is we’ll be in this together!

Primarily because there are way fewer distractions… no client calls… no meetings… softer deadlines.

Just me, alone with my thoughts and a huge amount of data… uninterrupted.

For hours.

And while normally, our first piece of the week gives you a quick glimpse ahead of the remaining four days… I thought we’d look past that and into our 2022 economic outlook.

This year, I’m putting the finishing touches on my new Hyper Frequency U.S. Economic Data Tracker. And I can already tell it’s going to pay huge dividends.

The models I built years ago to project inflationary pressures — Purchasing Managers Index, Producer Price Index and Consumer Price Index — and gross domestic product components such as retail sales and payroll data have proven decent.

After all, there’s a reason we’ve been so vocal about buying recent dips… The data has shown us we weren’t done growing yet.

But I’ve never had a tool with everything all in one place, organized into components before.

And now that I do, trends that took a fair amount of work to spot before are jumping out immediately.

My 2022 Economic Outlook

What popped upon completion Monday was that the economy clearly headed into a slowdown that will manifest sometime in the first half of 2022.

In the same way I knew that the economy was going to slow down in Q3 2021…

In the same way I knew that low inventories of coal and natural gas could cause an energy crisis all the way back in July…

In the same way I knew to keep reiterating to buy dips, because markets were going back to all-time highs…

I know that 2022 is going to be a heck of a lot harder to be profitable.

How do I know?

Monday’s holiday retail sales data release from MasterCard was massive…

Source: MasterCard

So much spending was pulled forward into the holiday season — presumably as a result of over-ordering due to supply chain worries — that these annual comparisons look cartoonish.

Total retail up 8.5%… e-commerce up 11% — a staggering 64.1% versus 2019.

And the biggest benefactors were apparel and jewelry retailers, with sales up 47% and 32%, respectively, over last year’s pandemic low.

Society is DONE with cowering in our homes, waiting on this pandemic to end. Instead, we’re being society again… Folks will get dressed up and go to their holiday parties, gosh darn it!

The country is over 70% vaccinated with at least a first dose — including children. And in comparison to the first few waves, this is what society has thought of the omicron variant. 

Source: https://twitter.com/RaisingTheBAR47/status/1473419386425851905/photo/1

If you’re on Twitter, give that RTB guy a follow, by the way… The dude spits straight fire, and is a fantastic analyst to boot.

But now let’s move one step further down the rabbit hole of our 2022 economic outlook.

If retail sales are rocking now, what happens after the New Year?

Answer…

Source: Back to the Future, Yahoo!

Q1 is notoriously slow for retailers, who almost universally have sales clumped into two huge quarters (Q2 and Q4) which are immediately followed by two awful quarters (Q1 and Q3).

How long it will take for the market to realize this is hard to say…

But we’ve already seen a slowdown in personal consumption expenditures this year following the elimination of pandemic benefits.

Source: Fortune Research

And with the post-delta variant, pre-holiday reacceleration in spending now squarely in the rearview mirror, there’s only one direction for things to go from that peak…

Down.

All the best,

Matt Warder

Fortune Research

I walked into Whole Foods in early November, and I heard something that stopped me dead in my tracks…

The moon is right…

The spirits up…

We’re here tonight…

And that’s enough…

Simply having a wonderful Christmastime

Christmas music. A full 3 1/2 weeks before Thanksgiving… Are you kidding me, Whole Foods?

In any normal year, that would drive me up a wall. But with 2020 to 2021 potentially being the worst years on record for many, I kind of get it… People just want something to look forward to. So I put it out of my mind and went about my business.

It got me thinking, however…

Although most people I know think it’s almost sacrilegious to make any reference to Christmas before Thanksgiving — much less start in on the carols — there was always one exception when we were kids…

Making our Christmas lists.

And though I’m no longer a kid, what if I put together my own list of the top 5 gold stocks for Christmas 2021?

Unbridled Avarice Versus Bargain Shopping

When I was growing up in the 1980s, the centerpiece of any solid list for Santa was always sourced from one of a handful of holiday retail catalogs.

Despite the complaining we hear these days about Christmas marketing creeping further into November, these suckers showed up in our mailboxes by late August.

For me, it offset the humdrum of back-to-school season by offering a glimpse of something to which I could look forward.

The Sears Wish Book, JCPenney Christmas Catalog, Montgomery Ward’s — many of which have been scanned and compiled on this website — any one of them could provide an endless stream of dreams and schemes, all fueled by hopes of a successful sales pitch to mom and dad.

Much like Ralphie and his brother in the movie “A Christmas Story,” my brother and I would dive into the catalog filled with “desire and the ecstasy of unbridled avarice” only to put together a list resembling a small novel.

And although time marches on, some things don’t change… My 6-year-old daughter is doing the same thing to me with the newest “American Girl” catalog.

If any of you have young daughters, then you know I’m in trouble… because that stuff is expensive.

So much so that I have been scrolling through their website, looking for anything on the Christmas list that has a coupon or is otherwise being discontinued — as those are generally sold as less expensive closeouts.

And that reminded me of a presentation I gave a long time ago with legendary resource speculator Rick Rule. In it, as per our usual arrangement, I talked mostly about markets and he talked mostly about investing philosophy.

And one comment he made — which always gets a big laugh — is that men always need to ask their wives for investing advice. Why, you ask?

Because they know that the best time to buy things… 

Is when they’re on sale.

So let’s clip some coupons.

Gold Correction Puts Mining Companies on the Sale Rack

As investors have flocked to risk assets in the wake of vaccine pump after vaccine pump, they have mostly rotated out of one of the best performing asset classes of last year — gold.

However, that trend has been reversing of late, and the yellow metal has been making higher highs and higher lows for a couple of months.

Wednesday, it once again broke through resistance at $1,800 an ounce. And if successful, could knock on the door of its November high around $1,870.

Source: Bloomberg

While testing that recent high would still represent a negative return for the year, there are some reasons to be optimistic about gold’s prospects in 2022. 

First off, this cycle of inflation has peaked, and commodities are beginning to dis-inflate off of their highs.

Source: Bloomberg

As those prices continue to correct, those producers make less money.

And unless there’s a last-minute deal before New Year’s, the Child Care Tax Credit will come to an end, which will reduce government spending.

Combining those means two key components of the GDP equation — Consumer + Investment + Government + (Exports-Imports) — will decline in early 2022.

Under those circumstances — declining inflation and GDP growth — gold tends to work well as an asset class, with an average expected return of 2.77% versus commodities at minus 1.6%, or tech at minus 1.29%.

Source: Fortune Research

Because tech is affected, the broader market won’t fare well during this period, and government actors will be forced to be accommodative.

Given the Fed’s double-barreled monetary response in 2020, and that President Joe Biden’s Treasury Secretary is former Federal Reserve Chair Janet Yellen, I suppose such accommodation will likely come in the form of good, old-fashioned money printing.

Whether they respond as strongly or not, gold is set to benefit.

And that is music to the ears of gold miners, as they have been beaten down over the course of the year.

This provides us an opportunity to look through the sector… to see what’s going on sale.

And just like I used to do when I was a kid, I’m going to make a Christmas list of my top 5 gold stocks…

Top 5 Gold Stocks for My 2021 Christmas List

One way to approach the market would simply be to look at the largest producers first. The data from the list below — although not exhaustive — I quickly pulled from Bloomberg.

Source: Bloomberg

You might find it interesting that when I pull a few of those top producers into a single chart, they’re all pretty much shaped the same.

Source: Bloomberg

In short, the larger companies tend to move alongside gold prices, usually making larger movements on a percentage basis than gold itself. That volatility in relation to the underlying commodity means major miners have a larger beta than that of a gold ETF, for example.

Honestly, any of these gold stocks would serve just fine, as they’re all set to make fantastic margins even if gold pulls back as discussed. But a quick look at their costs can tell us which is making the biggest margins.

Source: Bloomberg

Now the first one is a data aggregation error of some sort, as I know for a fact that Harmony Gold Mining Co. (NYSE: HMY)’s costs exceed $1,000 per ounce. But the others look correct at a glance.

The rest of these companies down through Golden Star Resources Ltd. (NYSEAmerican: GSS) are making money hand over fist, even in the event of a gold price correction down to $1,650.

The risk that remains in these operations comes down to where the operations are. In an uncertain economic environment, I stick mostly to size, and to predictable jurisdictions like the Americas and Australia.

For example, although Alacer’s mine is one of the lower-cost operations on this list, it is located in Turkey. If I have a choice, I’d prefer not to have much exposure there simply because of the country’s financial instability, which I wrote about more than a year ago. 

Similarly, Centerra’s operations are located in Kyrgyzstan and Mongolia, which are a little too close to China for my liking.

But the two largest producers, Newmont Corp. (NYSE: NEM) and Barrick Gold Corp. (NYSE: GOLD), are still crushing it despite increasing costs and decreasing prices. 

In both Q3 and Q4 of 2020, the mining behemoths generated over $1 billion apiece in cash flow.

Source: Bloomberg, Fortune Research

And even after a difficult Q2, they bounced back to post Q3 revenues around $400 million.

In other words, these mining companies should now be going way up… not down.

Even better, other than Barrick Gold’s Porgera mine in Papua New Guinea and Newmont’s assets in Ghana, almost all of their operations are in countries with little jurisdictional risk. 

As such, they’re a good couple of names to start our Christmas list with.

I’m interested in both, right around the halfway points of their most recent runs… That means Barrick below $18 and Newmont below $58.

Source: Bloomberg

Source: Bloomberg

In the next tier of cash-flow machines, Kinross has some jurisdictional risk, as a significant part of its production comes from two mines in Russia — Kupol and Dvoinoye.

But Agnico Eagle Mines Ltd. (NYSE: AEM) and Kirkland Lake Gold Ltd. (NYSE: KL) both operate in friendly areas and have no debt to speak of.

Similar to Barrick and Newmont, I like each of them below the halfway point of this year’s run… That means below $52 and $41 per share, respectively. 

Source: Bloomberg

Source: Bloomberg

And finally, for those interested in taking on a little bit of jurisdictional risk, there’s Mali-based B2Gold Corp. (NYSEAmerican: BTG). Its Fekola mine is a fantastic operation. Even better, it expanded capacity by 25% last year.

Cash flow has been rising from that mine for years, and with 2021 production now expected to come in at over a million ounces at an all-in cost of under $800, it’s hard to pass up here below the $3.85 per share mark.

Source: Bloomberg

That should at least bring it back to pre-virus highs around $4.50, which is still a solid value considering most analyst price targets are in the $5 to $9 per share range.

Source: Bloomberg

There are others on the Christmas 2021 list worthy of consideration, too… 

I thought Yamana Gold Inc. (NYSE: AUY) was under-loved during last year’s rally. 

Endeavor Mining completed its merger with Teranga Gold earlier this year, creating a new senior producer. 

And Equinox Gold Corp. (NYSEAmerican: EQX) — chaired by no less a legend than the great Ross Beaty — acquired Leagold last year and doubled its production profile. Ross himself just picked up shares in August at around the $6 mark (on U.S. exchanges), which was an absolute steal.

But I’ll leave adding to this list of my top 5 gold stocks for another day. 

In the meantime, I have to check and see if my daughter is behaving… If she’s not, I’m not adding to her list either!

All the best,

Matt Warder

Fortune Research