Crescat Capital Portfolio Manager Tavi Costa began the "Crescat Gets Activist on Gold & Silver" broadcast by showing how the U.S. Federal Reserve is currently "boxed in," in that it cannot act to improve one current problem in the country's economy without worsening another.
For instance, according to the Dallas Fed Manufacturing Index, business activity is declining whereas prices are rising, a divergence that occurred before the global financial crisis. If the Fed tries to improve one, it will worsen the other.
The same divergence is seen with Fed purchases of Treasury Inflation-Protected Securities (TIPS), which are decreasing, and the U.S. 10-year break even rates, which are increasing. The former affects the latter because the Fed owns about a quarter of outstanding TIPS. However, as the Fed has been reducing purchases, the inflation expectation numbers have been rising.
Kevin Smith, Crescat Capital's Chief Investment Officer, addressed inflationary pressures around the world. He reiterated that the Top 5 market cap stocks in the U.S. are about 40% more overvalued than they were at the peak of the tech bubble and this is concerning because those valuations are unsustainable.
At the same time, he noted, the Standard & Poor's (S&P) 500 appears as though it reached the top, given it broke the 50-day moving average support.
"It looks to us like there continues to be further weakness ahead in the stagflationary environment that we see, with growth slowing at the same time as we have inflationary pressures rising," Smith said. The U.S. Personal Consumption Expenditures Price Index indicated that inflation again rose during October.
The likely impending stagflation is a global problem, Smith added. Recently Eurozone inflation hit 3.4%, its highest level in 13 years. In Germany, real yields on 10-year bunds are -4.31, near the all-time low.
Along with inflation rising globally and U.S. stocks at record-high valuations, the Federal Reserve is tapering and China is in a type of credit collapse. Given all of these macroeconomic factors, Smith said that a market crash is possible though unlikely.
"There are serious risks in the marketplace today for that type of action," he said, adding that Crescat Capital is well positioned to not only endure such an event but, also, perhaps make money during it.
Precious metals, during periods like this, of "stagflationary, interest rate-repressive environment," do well, Smith said. "What a great opportunity to be putting money to work today in the precious metals space."
Costa noted that the intrinsic value of precious metals today "is incredible" relative to the U.S. monetary system and related policies.
Given the attractiveness of precious metals in a macroenvironment like the one we are in now, Smith noted, Crescat Capital continues to use them as a primary hedge against inflation and deep valuations. Costa added that, in his opinion, his firm should be bolstering its precious metals positions because gold and silver are currently so oversold.
The two experts purported, and presented data that suggest, a turnaround and significant rally of precious metals prices are imminent. For one, gold sentiment, according to the Hulbert Financial Digest, is incredibly negative, and periods of extreme sentiment tend to mark a gold bottom.
"We've had a pullback in the last couple months that I frankly believe is coming to an end because this whole inflationist transitory narrative is really starting to shift and people are starting to realize that inflation really is a problem here. Gold can do well in a deflationary environment, too," Smith said.
As for silver, it seems to be on the verge of a breakout, as indicated by its current position and moves historically relative to the S&P 500's commodities and to real rates. Also, asset outflows in two silver miner exchange-traded funds are three times what they were at the pandemic lows.
"I do think [silver] is an incredible valuable asset and a macro asset that fits exactly in in this narrative of the issues that we're seeing in the monetary system along with this green revolution that could potentially drive the demand for silver as well," Costa said.
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