“Silver and gold
Silver and gold
For silver and gold
How do you measure its worth
Just by the pleasure
It gives here on Earth?” - Burl Ives, Silver and Gold
- The Dollar is sliding as inflation retreats.
- Gold is negatively correlated to the Dollar, so it could rally as the greenback falls.
- A weak Dollar is less of a drag on the technology sector, which generates a lot of revenue overseas.
- Interest in foreign stocks may rise as the Dollar loses its luster.
The Federal Reserve’s hawkish policies to tame inflation appear to be working, given inflation is slowing, causing air to come out of the U.S. Dollar. If that trend continues, investments that did poorly last year because of the U.S. Dollar’s strength could rebound this year, suggesting that gold, technology stocks, and international equities should be on investors’ radar.
Gold bugs delight
Gold was supposed to be an inflation hedge. However, the precious metal didn’t escape last year’s “sell everything” market. As a result, the SPDR Gold Shares ETF (GLD) , negatively correlated with the U.S. Dollar, was down as much as 11% year-to-date in early November.
A lot has changed since November, though. Namely, U.S. inflation data has tempered, providing an opportunity for the Federal Reserve to slow its pace of GDP-busting rate hikes. Make no mistake, the Central Bank’s rate increases have us on the precipice of recession (bullish for gold bugs, by the way). Still, the prospect for fewer and smaller future rate hikes has reined in U.S. Dollar enthusiasm, providing a catalyst for gold to exert itself.
As a result, as the U.S. Dollar has shed about 9% from its September peak, the GLD has risen 15% from its November lows – an incredibly healthy return. Individual gold stocks have performed even better. For example, Hecla Mining (HL) (Real Money Bruce Kamich’s top stock for 2023) has rallied a jaw-dropping 72% since its September low. Agnico Eagle (AEM) and DRDGold (DRD) , the two highest-scoring gold stocks in the ranking system I developed in 2003, have similarly gained an impressive 51% and 83%, respectively, from last fall’s lows.
There could be more running room higher, too. Speculators got incredibly bearish on gold near the bottom, suggesting plenty of investors on the sidelines to support more upside.
This week, Real Money Pro’s Carley Garner wrote that “It's rare to see a speculative position in gold that's anything other than largely bullish, and liquidation events have generally been stepping stones for fresh rallies.” Garner has become bullish on gold “given with the dollar giving back gains, the plow that was holding the metals markets back has been removed.” She notes that “By September of 2022, gold speculators had liquidated nearly all of their futures market holdings for the first time since 2018.” That’s about as close to peak pessimism as it gets, suggesting to her that the next logical move for gold is up rather than down.
Garner isn’t alone in thinking gold may keep glittering. Real Money Pro’s Doug Kass recently selected a gold rally as one of his “surprises” for 2023. At the time, he wrote “There are a number of factors that take (under-owned) gold, currently at $1,800/oz, towards the $3,000 level late in the year,” including a shift away from cryptocurrency (a now disproven inflation hedge), growing demand from foreign governments, and ongoing global tensions.
A technology tailwind?
Technology stocks perform poorly in the recessionary stage of the business cycle, but they’re top performers in the early stage, and an argument can be made that while we aren’t officially in a recession yet, a lot of recessionary pain has been priced into the sector.
Individual stocks peaked in the spring of 2021, but the major indexes continued higher until the year's end because of overweighted exposure to big-cap technology companies. So-called F.A.A.N.G stocks, an acronym for Facebook (now Meta Platforms), Apple, Amazon, Netflix, and Google (now Alphabet), masked broader weakness initially but contributed significantly to 2022’s decline. Overall, the SPDR Technology ETF (XLK) fell about 30% last year as large-capitalization technology stocks lost over $4 trillion in market value.
An unwinding of valuation multiples because of higher interest rates was a big reason why F.A.A.N.G. stocks fell out of favor. However, the group also suffered because technology stocks generate 59% of revenue overseas, according to Goldman Sachs. Converting foreign currency sales into a strong U.S. Dollar was a significant growth headwind.
For example, if we eliminate currency conversion from the discussion, Microsoft’s (MSFT) revenue would have grown 16% year over year rather than 11% last quarter. Meta Platforms (META) sales would have increased by 2% rather than fallen by 4%. Apple's (AAPL) revenue would have grown 14% rather than only 8%.
These are significant haircuts, given those companies generate tens of billions of dollars in quarterly sales. For example, Apple’s revenue last quarter was over $90 billion (yes, billion!). The dollar's impact on the sector is clearly not chump change.
The greenback's recent slide should provide some quarter-over-quarter relief for technology companies this quarter. However, suppose it weakens further or remains near current levels. In that case, it will become a growth tailwind as soon as the second quarter, given the U.S. Dollar Index is currently trading at levels similar to last May.
An “emerging” opportunity
Last year, a strong dollar made foreign stocks far less attractive to U.S. investors. A weaker Dollar this year could prompt investors to rediscover stocks in Asia, Europe, and elsewhere.
In “Reign of 'King Dollar' to End in 2023,” Real Money’s Alex Frew McMillan writes:
“2023 looks set to see "King Dollar" deposed from the throne. It has been an extremely strong 18-month spell for the greenback, but it's likely to end as the U.S. Federal Reserve nears the end of its hiking cycle and the U.S. economy enters a potential recession.
This makes a strong case for holding unhedged positions in Japanese stocks since the Japanese yen has suffered some of the greatest weakness against the U.S. dollar. But the same trend of dollar weakening will play out in other markets, too. Many Asian equity markets will therefore provide a passive benefit for U.S. investors in 2023 if the local currency advances against the dollar. Any gains then translated back into the weaker greenback look greater after that transaction.”
McMillan previously wrote that the Bank of Japan’s surprise decision to tweak policy to increase rates on 10-year bonds slightly was particularly bullish for Japanese banks and life insurers.
That outlook is supported by others, including hedge fund manager Dan Niles, who selected Japanese bank Mitsubishi UFJ ADR (MUFG) as one of his top five picks for 2023.
In picking MUFG as a target, Niles wrote: “Mitsubishi UFJ Financial Group is down 27% while the Nikkei is up 102% & the S&P is up 235%. However, this December saw JGB 2Y yields turn positive for the first time since 2015. Therefore, Japanese Banks should now be finally able to make decent money lending. To position our own fund for this opportunity, we own a basket of names, including Mitsubishi UFJ Financial Group ($MUFG), which is the ADR of Japan’s largest bank.”
In addition to Japan, investors can consider other markets, including China and Europe. China’s plan to walk back strict COVID lockdowns that have impaired its economy, beginning on January 8, could be a catalyst for Chinese stocks. Meanwhile, a stronger Euro could boost interest in European stocks.
The Smart Play
Exchange-traded funds are a simple way to play a weak Dollar trend because they provide quick and liquid intraday trading while removing the risk of picking the wrong individual stock.
For example, those looking to own gold could buy the GLD if they’re uncomfortable with the single-stock risk associated with the names I mentioned above.
Similarly, while technology stocks may struggle this year because of economic woes, a broad ETF like the SPDR Technology ETF XLK provides quick exposure to the sector that’s easier to track and manage risk than individual stocks. But, of course, if you prefer individual stocks, big-cap plays, including the FAANG stocks, could be worthy targets for buyers too.
Investors who want overseas exposure could also use ETFs.
For instance, investors interested in Japan could buy the IShares MSCI Japan ETF, which owns 237 Japanese stocks, including MUFG, its third-largest holding. That ETF is up 14% from October’s low. Or Franklin’s FTSE China ETF (FLCH) owns 971 Chinese companies, including top holdings in Tencent and Alibaba. It’s up 45% since the end of October. Another option? Vanguard’s FTSE Emerging Markets ETF (VWO) owns over 5,500 foreign companies across emerging countries like China and Brazil. Its expense ratio is only 0.08% per year, and it’s gained 17% since late October. Finally, if you’re interested in Europe exposure, consider iShares Europe ETF (IEV) if you don’t want to buy individual ADRs that trade on U.S. exchanges.
As for currencies, I avoid trading them directly in the volatile futures markets. Instead, you could sell the U.S. Dollar Index (UUP) short or buy an ETF that mimics the relationship between a foreign currency and the U.S. Dollar. For instance, the Invesco CurrencyShares Euro Trust (FXE) approximates the Euro’s movement relative to the U.S. Dollar. However, consult your tax advisor before trading them because they may pose unique tax considerations, such as being taxed as ordinary income.