Month: May 2021

The non-yielding precious metals continue their upward momentum into multi-month highs driven by a series of bullish fundamentals such as dollar weakness, coupled with supply disruptions, and inflationary fears.

The price of Gold broke through a major psychological level at 1,800 dollars per ounce, hitting a 10-weeks peak, while the price of Silver retested the key resistance of 28 dollars per ounce, marking the highest close since February 2021.

The weaker-than-expected non-farm payrolls for April have sent Treasury yields and the US dollar near a 2-month low, as the Federal Reserve will not start tapering its accommodative monetary policy any time soon. 

Lower yields, support gold’s appeal as an inflation hedge, as they reduce the opportunity cost of holding bullion while the falling greenback makes the dollar-denominated precious metals more attractive for holders of other currencies.

The inflation-hedged precious metals get support from the expected higher inflation due to the massive fiscal stimulus and the elevating sovereign debt.  

Surging above 3,000 dollars per ounce for the first time, the auto-catalyst, Palladium, continues trading at a deep deficit, driven by robust demand from automakers and supply disruptions in Russia.

Mimicking Palladium, Platinum surged to a 7-year high of 1,270 dollars per ounce, on consistent undersupply and strong demand from the growing hydrogen industry and jewellers. 

Bitcoin has lost more than 20% from recent record highs, breaking below $50,000 on Thursday after the electric car maker Tesla suspended vehicle purchases using Bitcoin due to climate change concerns. Tesla shares declined following Thursday’s announcement, falling below $580 per share, down 35% from its February’s records. 

Writing a tweet, Tesla’s CEO, and the world’s wealthier person Elon Musk, justified the decision based on the environmental concern for the rapid usage of fossil fuels such as coal for Bitcoin mining and transactions, which has the worst emissions of any fuel.

Tesla’s U-turn came only a few months after it disclosed the purchase of $1.5b of the world’s biggest digital currency, driving its stock price to hit a fresh all-time high of $900 on January 25, 2021. Yet, the company said that it would not sell any of its Bitcoin, intending to use it for transactions as soon as mining shifts to using more sustainable energy.

Bitcoin’s energy consumption:

Mining Bitcoin and other digital currencies involves using enormous amounts of energy since the computer processing (located in huge warehouses) uses more electricity than the annual consumption of some big countries such as Sweden and Egypt.

Following the unprecedented rally of the crypto market in the first half of 2021, more retail and institutional investors are looking to purchase more digital coins, causing an increase in mining and energy consumption.

Green cryptocurrency mining:

However, crypto supporters insist that mining has already started involving cheap, clean renewable energy produced by wind, hydroelectric and geothermal plans in specific mining locations in Iceland, Canada, Norway, China, and Sweden.

Targeting a net-zero carbon emission crypto industry by 2040, a non-profit coalition launched the Crypto Climate Accord, a global industry-backed initiative urging cryptocurrency enterprises to switch to using renewable energy.

While major indices don’t show it, and most investors don’t see it, many parts of the technology sector are crashing. And by that, I mean that many stocks have been falling for months now, even if this internal technology correction has not affected the major indices (yet). 

Almost all EV stocks are way off their highs, perhaps with TESLA having corrected the least. Even highly covered and talked about stocks like Quantum Scape, that is developing a next generation battery for EV cars has gone from about $130 to $28. AMD had its best quarter ever and has fallen about 15% from its last report. Even Apple has not been able to rally, even if its quarter blew the consensus away. ZM has fallen over 50% from its highs, and DOCU which reached almost $300 a share last year, is trading at around $190.  

In fact, perhaps a better illustration of what has been happening is the ARKK EFT, that has many of the high flying names mentioned above.   

The ARKK ETF has lost about 1/3 of its value from its high, and down about 20% year to date. 

The question is, is this technology correction over and might many of these stocks be a buy? 

My answer is no. Even after a huge correction, most of these names are still not investable. The reason being valuation concerns. In my book, stocks like AMD and ZM would have to fall by an additional 60% or so, before valuations make any sense.  

The next question is, will the correction in technology bring the entire market down? The answer is we don’t know, but so far, the major indices are not showing signs of stress (yet).   

However, if stocks like Apple make a serious correction, then all bets are off. The market will probably correct by a lot. But in order for that to happen, we would have to see a lot of money exiting this market, especially from passive funds.  

And what might be the reason for a rush to the exists from investors? Two things come to mind these days, inflation and an increase in capital gain taxes in the US.  

However, don’t blame the correction on neither of these issues. At its core, the correction we are seeing in the technology space has everything to do with valuations and investors getting carried away than anything else.