We've been predicting a meltup in the price of gold since early last year. It has turned into a meltup in the prices of all precious metals, many base metals, and rare earth minerals. The metals meltup is driving up the stock prices of several emerging markets ETFs that have heavy weightings in metal industries. This is all happening because rising geopolitical tensions are driving a military arms race, and defense companies need metals to increase their output; their stock prices are soaring as well. Also boosting metals prices is the geopolitical AI arms race, which is escalating capital spending on technology.
Metal prices got another shot in the arm at the start of this year, when President Donald Trump proposed setting military spending at $1.5 trillion in 2027, up from $906 billion this year, citing "troubled and dangerous times." He did so in a January 7 Truth Social post: "This will allow us to build the 'Dream Military' that we have long been entitled to and, more importantly, that will keep us SAFE and SECURE, regardless of foe." In the same thread, he claimed that tariff revenue would be sufficient to fund the military boost, pay down the national debt, and provide a "substantial Dividend to moderate income Patriots." (We doubt that, especially if the Supreme Court soon declares that Trump’s tariffs are unconstitutional!)
Trump called for the massive surge in spending days after a US military operation successfully captured Venezuela's leader, Nicolás Maduro. This past week, the President negotiated a framework deal that would grant US sovereignty for American military bases in Greenland, deemed necessary for national security and the construction of the Golden Dome, an anti-missile defense system. The President recently said that an "armada" would arrive close to Iran in the waters of the Persian Gulf or the Strait of Hormuz. It will probably get there by the end of this month.
The Committee for a Responsible Federal Budget has warned that Trump's proposal could add nearly $6 trillion to the national debt over the next decade. No wonder that the 10-year US Treasury bond yield has been edging higher this month. (We are on alert for an attack on the US by the Bond Vigilantes, who have been busy in Japan in recent months.)
Also, no wonder that precious metals prices have continued to soar so far this year (chart). The price of gold is at a record high just below $5,000 per ounce. We are still targeting $6,000 by the end of this year and $10,000 by the end of 2029.
The rally in precious metals prices has been joined in recent months by those of base metals and rare earth minerals. We track these with ETFs (chart).
Not surprisingly, the ETF we follow for base metals (DBB) closely tracks the CRB raw industrials metals spot price index, which includes the prices of copper scrap, lead scrap, steel scrap, tin, and lead (chart).
So far this year, several of the metals have outperformed the S&P GSCI commodity spot index, including tin, silver, platinum, palladium, and gold prices (chart).
One of the emerging markets ETFs that we track is highly correlated with the CRB raw industrials spot price index (chart). The former tends to lead the latter. Last year on December 7, we began recommending overweighting emerging markets. They seem to be signaling that commodity prices will continue to rise.
As we’ve discussed previously, we prefer taking a position in emerging markets with an ETF excluding China (EMXC) (chart). The ETF including China (EEM) has been essentially flat with a lot of volatility since 2006. It’s one of the reasons why our “Stay Home” investment strategy worked out so well from 2010 through 2024. At the end of last year, we changed our tune to “Go Global,” partly because we expect EMXC to continue making new highs.
On a ytd basis, the emerging-market ETFs that have performed best are plays on the booming demand for either semiconductors or metals (chart). This could be important to remember when deciding how much to overweight emerging markets in your portfolio—i.e., consider how weighted it already is in semiconductors and metals.
As we observed above, rising geopolitical tensions are driving up the stock prices of defense companies, which need more metals to increase their production (chart).
The AI arms race is also boosting the demand for technology hardware such as semiconductors (chart). In turn, this is increasing the worldwide demand for the metals that are needed to produce them.
In summary, the S&P 500/400/600 Materials stock price indexes have had a good run since late last year (chart). Even so, overweighting them still makes sense. But in deciding how much to overweight them, recognize that the commodity and stock ETFs mentioned above all are highly correlated because all are part of the current geopolitical risk-on trade. Gold is just one of many assets that can serve as a hedge against rising geopolitical tensions.
|
|