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Fundamentals
Russia appointed a new top general to oversee the war against Ukraine amidst setbacks. Russia appears to be planning a major attack, which will affect the prices of metals, crude oil, wheat, and other grains. Russia is the world’s largest exporter of palladium, so its price will be affected. Ukraine is urging civilians to leave the eastern part of the country to get out of the area where the Russian attack is expected.
Interest Rates
The Fed appears to be planning another aggressive interest rate move. They appear to be planning to reduce their balance sheet soon and rapidly. The 10-Year yield rose to a three-year high on the news of faster Fed policy tightening. Inflation is at about 7.5 percent and interest rates are at about 2.5 to 2.75, so we are still negative about 5 basis points. In order for the economy to meet the International Monetary Fund’s criteria to keep rates a point higher than inflation, inflation needs to come down or interest rates need to rise to about 8.5 or 9.5 percent.
Commodities
We have a mixed combination of signals for the markets today, April 11, 2022. We see about 25 to 30 percent of wheat production has disappeared from the world market, because it came from Ukraine and Russia. Ukraine is also a major corn exporter. Grain prices are rising fast and will go up even more.
“We could be looking at $15 wheat real, real soon,” Patrick MontesDeOca, CEO of the Equity Management Academy said.
Corn traded as high as $7.82 and could hit $10 a bushel. Soybeans are also going up fast, hitting $17.59, and could hit $20 a bushel.
Crude oil is in a major area of support and has corrected about 50 percent before what we expect to be a resumption of the uptrend, especially if the Ukraine conflict heats up again–which is expected. Supplies from Russia appear to be threatened and may be cut off from the West due to sanctions. We expect a spike in the near future.
Gold is at $1953, up $7.90. The high today was $1974.60, which is the ceiling we are looking at for gold. We expect an increase up to $2160, which is the upper end of the long-term uptrend channel that gold is building.
The conflict in Ukraine and the reduction in exports from Ukraine and Russia are significantly affecting the prices of a range of commodities from grains and metals to oil and gas.
The London Bullion Metals Exchange has seen a decline of 28 percent in the supply of gold from Russia.
“That is a major shock to the physical market in gold,” MontesDeOca said. “It could put another squeeze on gold.”
The supply shortage has not yet been factored into the price of gold, so it should rise rapidly. The same issue applies to silver, palladium and other metals from the region. In August, we expect the highest levels of inflation we have seen in 50 years, which will force the Fed to change course or come up with some creative idea to deal with high inflation rates and the threat of a deep recession. If the Fed has to raise interest rates sharply, it could tip the economy into a recession. The market has already discounted a full point increase in interest rates, so the Fed is in a tight spot. The Fed raised rates a quarter point at the last meeting, but the market has discounted at least a full point. It looks like the Fed will have to raise rates half a point or even a full point to attempt to deal with increasing inflation.
We have record demand as we come out of the pandemic combined with shortages in food, grains, metals and other commodities, so inflation is the natural result. On top of that, is the massive increase in cash in the economy as governments around the world pumped money into the economy during the pandemic.
The Profitable Response
To deal with the threat of inflation, we are going long gold and silver to hedge against rising inflation. We also are long wheat and grains. We are building positions in the areas that we believe are going to be affected by the conflict in Ukraine and by increasing inflation.
GOLD
Gold is pulling back a little today after hitting $1974, near our target levels. For day trading, it triggered a short trade, but the long-term trend is still to be long. We are waiting to buy corrections to add to our long-term position. The Buy 1 level is at $1937 and the Buy 2 level is at $1923 according to the Variable Changing Price Momentum Indicator (VC PMI) and standard deviation.
SILVER
Silver is down from the high of $25.60. $25.64 was the weekly VC PMI target, which coincided with the daily. We unloaded some positions on the high for short-term trades from last week, while maintaining our long-term long position.
BITCOIN
Bitcoin has come down to the weekly Buy 1 level of $40,950 and activated a weekly Buy trigger. We have come down from the extreme above the daily mean of $44,090 and we are in an area of accumulation of supply. Hold on to your long-term trades as we have reached an extreme level below the mean in Bitcoin.
Hecla Mining Company (HL)
Hecla hit $7.14 today, accomplishing the weekly Sell 1 level of $7.09. It is the largest US silver producer and we are recommending building a position in Hecla.
WEAT ETF
The Teucrium Wheat Fund (WEAT) is breaking out as well at $10.89, so continue to add wheat positions.
Commodities are offering some incredible opportunities right now to go long from metals to grains and the energy markets. With inflation, we are looking for higher highs.
We will see what the Fed will do. If the Fed sees the danger of a deep recession, we may see 2019 again when the Fed reversed their policies and commodities ran way up with interest falling to almost zero. The IMF says interest rates should be about 9 percent, but that could cripple the economy. Amidst all the uncertainty, there are incredible opportunities in commodities.
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