Monday, 3 July 2023

By Brian Chu Editor, Fat Tail Commodities

[7 min read]

Dear Reader,

Let me start by wishing you a happy financial year! May this year be rewarding for you in more ways than one.

Many of you would’ve ridden the financial rollercoaster during the last financial year. It started amid what might’ve been the most aggressive rate rise cycle in the last 50 years — at least in Australia, the Eurozone, and the US.

While most stock market indices rose over the past year, looking at individual company performance, that wasn’t the case. For a few months this year, the indices only rose because the biggest companies dragged them up. The vast majority of the constituents fell by the wayside.

Those invested in commodity stocks had it tough as they were all over the place. Almost every commodity went through some turbulence — gold, copper, coal, iron ore, crude oil, uranium, etc. Even lithium and rare earth elements (REE), promoted as hot commodities for the Green Agenda, didn’t escape this.

I’m sure over the course of the year, you’d wonder why the Green Agenda — which, ironically, will cause mining activity to ramp up — didn’t result in a mining boom and deliver easy profits to those who participated.

Let me try to shed some light on this puzzle.

Unprecedented challenges for mining operations in the past year

The past year saw many mining companies slowly emerge from what may have been the most challenging operating environment for many decades, thanks to government restrictions in light of the lockdowns implemented worldwide. As that happened, the price of oil surged off the back of sanctions by many of the G7 nations against Russia in the wake of the Russia-Ukraine conflict that started last February.

It was like having a rough night, only to get out of bed and smash your face into the bedside cabinet as you try to nurse your stubbed toe.

That’s what many mining companies experienced. I read many quarterly reports where management spoke of how production levels fell as costs rose, caused by mining disruptions, various delays in achieving planned output, or budget blowouts in light of inflation and labour shortages.

It was a case of whoever faced the least disruptions were the winners.

Weak stock performance and sentiment spells opportunities

I hope this has placated any doubts you may’ve had about your investment ability if your investment returns last year were disappointing.

Let me focus on gold stocks, in particular, as they had a rough ride.

On the bright side, the ASX Gold Index [ASX:XGD] delivered 37% and completely shot the lights out relative to the US counterparts, VanEck Vectors Gold Miners Index [NYSE:GDX], which rose 8.6% over the same period, while the VanEck Vectors Junior Gold Miners Index [NYSE:GDXJ] rose just 7.9%.

Unfortunately, however, those invested in the more speculative end of town — such as explorers and early-stage developers — endured losses as market sentiment dried up in May 2023.

Let me show you how the relative performance of gold, the larger gold producers (represented by the ASX Gold Index) and the smaller gold explorers (represented by my own Speculative Gold Stocks Index) have performed since 2021:

The bull market for gold producers that started in late September 2022 is still in play — make no mistake about that.

But the correction we’ve experienced since mid-April has taken the wind out of the sails and may have left a sour note for many.

And those who decided to go full contrarian buying the smaller explorers are currently likely to be in a state of despair.

However, this is just the type of market that is the author of the biggest winners. That’s if one chooses to take the risk.

If history is any indicator…

In fact, I woke up last Friday morning to find that the price of gold dipped from US$1,910 to US$1,892 an ounce as the market opened over in the US and quickly jumped back to around US$1,910 within an hour. Let me show you the figure below:

In trader’s terms, this was a doji pattern, implying a market capitulation. What could follow from this is a solid rally.

When I first embarked on my journey with investing in gold stocks in mid-2013, I did so during one of the most brutal bear markets.

I remember the final week of June 2013 saw some heavy selling of gold stocks. The setup for the price of gold looked horrendous.

But on the final trading day of June, there was a similar doji pattern with the price of gold. One of my friends, who is well-versed in technical analysis, told me gold was likely primed for a bounce after this.

Let me show you what happened with the price of gold and the ASX Gold Index in the next two months:

The price of gold recovered by 15% in two months, and the ASX Gold Index rose by 50%.

Sure, that recovery didn’t last long, and the bear market dragged on until December 2014.

It was different then because the Federal Reserve had more headroom to control the economy and inflation, thereby holding gold down. This time, the world is weighed down by more debt, so it’s harder to repeat this feat.

Could this provide us with another period of gold rising and the price of crude oil falling due to a global recession?

Should that happen, the tide will float all the boats in this space, especially the gold explorers that have been unloved for so long.

If you share this sentiment with me, then it’s time to act.

Should you be interested in the more established gold producers and buying bullion to protect your wealth, let me help you via my investment service, The Australian Gold Report.

Those who want to try their luck speculating in gold explorers, head over to my premium service Gold Stock Pro for a chance to make life-changing gains in the coming gold bull market.

Alternatively, if you’re willing to broaden your investments beyond the commodities sector — for it’s always good to diversify — read on below for Fat Tail’s latest take on steady-income stocks. Enjoy!

God bless,

Brian Chu,
Editor, Fat Tail Commodities

By Ryan Clarkson-Ledward Editor, Fat Tail Commodities

Dear Reader,

Things just got trickier for Philip Lowe and the RBA...

Earlier last week, we saw data suggesting inflation was cooling, but yesterday’s retail data is running hot! A 0.7% jump in monthly retail spending was well above the 0.1% expectation.

Year-on-year sales are up 4.2% too, showcasing just how much more money is flowing. Granted, these stats are still well below the pandemic splurging we saw from households.

The question on everyone’s mind now, though, will be whether this will force the RBA’s hand.

Our chances of seeing another rate rise next week appear to be growing...

However, I believe investors shouldn’t get caught up in this game.

You can understand and work around a high-interest market environment.

For example, I’m sure many advisors would probably tell clients to give up on stocks entirely.

With rates this high, it isn’t hard to secure low-risk yields from other investment instruments. Even a simple term deposit is a pretty secure worry-free investment right now.

But as any seasoned investor will tell you, that’s not really growing your wealth.

You’re just keeping up to speed with inflation at best with this strategy.

Of course, that’s better than potentially going backwards with bad stocks. And considering how volatile the market is right now, that’s not hard to do.

It is possible to prosper in tougher conditions though.

You just need to know where to look...

Be a picky investor

Like I’ve said before, I’m a believer in going long right now.

We’re seeing a lot of exciting and promising stocks being hit hard by macro uncertainty. If you’re able to stomach that risk, buying and holding for a couple of years could be a big money-making move.

But obviously, that’s not going to be the ideal strategy for everyone.

It is a risky approach.

Not to mention the fact that you still need to be picking the right long-term plays.

We’re in the midst of some pretty big shifts, both societally and economically. That is going to result in a lot of winners and losers in terms of stock returns.

But I digress...

Instead, what I suspect is the ideal strategy for most retail investors right now is a bit of a balanced approach. Obviously, everyone’s situation is different, but by being somewhat defensive you can stay ahead of inflation without going all-in in terms of risk.

How do you do that, you may ask?

Well, rather than limit yourself to income from fixed interest solutions, you should take it one step further...

Dividends are where you can potentially make some serious coin right now.

Because while they are certainly riskier than a term deposit, they also have far better yields.

That’s why our own investment director, Greg Canavan, is going all-in on dividends.

Double-digit payouts are up for grabs

See, while many people are familiar with dividends, few truly appreciate how lucrative they can be.

Most people usually associate dividends with large-cap household name companies. The big four banks, for instance, are often covered by the mainstream for their dividend potential.

They get excited about yields in the 3%, 4%, and 5% range.

And if it were 2019, that might be worth getting excited about.

But it’s 2023 and inflation is idling above that range already.

These small yields aren’t worth the risk of owning the stock.

Fortunately, despite what many may think, there are dividend stocks beyond the banks and big miners. A lot more actually...

You just won’t find as much coverage on them, or their potential yields.

If you go looking though, you can find yields even in the double digits:

These yields, where N represents FY23 and N+1 represents FY24, showcase what’s out there on the ASX. Income that will net you a far bigger return than you’ll ever see from a bank dividend.

But I’ve kept the names of these stocks hidden for two reasons.

First and foremost, we’re not in the business of charity. I can’t, in good conscience, reveal these stocks for free, although I’m sure you could find them if you tried.

More importantly, these aren’t necessarily the best dividend stocks to buy now. You’d want to have secured your investment in these particular stocks months ago.

Which is precisely why, the best dividend stocks in 6, 12, or 24 months’ time will probably be completely different. You must look forward as best you can, and not just at the present.

Of course, that is easier said than done.

But that is what people like Greg do...

He has been digging through dividend stock after dividend stock to find the best of the best.

A task that has led him to five ‘royal’ picks, as he puts it.

Five stocks that just might be the best investment you could make right now.

And if you want those five names, then you need to check out Greg’s full research right here. Because as I hope I’ve made clear, his dividend strategy may be the best game in town right now.

Regards,

Ryan Clarkson-Ledward,
For Fat Tail Commodities