There were plenty of fireworks in the markets last week. Gold melted down in dramatic fashion, some poor data out of China weighed on the market and of course some big-name earnings continued to roll out.
Things have been a bit more stable this week, with gold prices up above $1,400 again after hitting a low of $1,322. The markets also have firmed up, thanks in part to strong earnings from companies like Netflix (NASDAQ:NFLX), Overstock.com (NASDAQ:OSTK) and Chipotle (NYSE:CMG), to name a few.
But one stock market guru says the headlines thus far have been ignoring a very important factor that’s moving commodities — and many related materials stocks as well.
Namely, the strong dollar.
Louis Navellier, editor of Blue Chip Growth and Emerging Growth, said the blame game about gold has confused many investors.
“I don’t believe you can blame a statistically insignificant slowdown in China for the selloff in gold,” Navellier said. “That sounds more like an excuse to sell rather than a logical reason.
“First off, China’s numbers are not that exact to begin with, and any decline of such a small percentage is essentially meaningless, but I guess the world had to blame the decline of gold on something, so the pundits decided to blame China.”
It’s true that China’s state-run bureau of statistics is not exactly impartial. But if weakness in the region isn’t the culprit, what is?
“Commodities are falling mostly due to a strong dollar and low inflation,” Navellier said. “Due to Europe’s continuing financial crises and the rapid inflation of the Japanese yen, the U.S. dollar is temporarily the strongest of the ‘big three’ currencies. A surging U.S. dollar puts downward pressure on most commodity prices. That’s why the Labor Department announced on Tuesday that the Consumer Price Index fell 0.2% in March. Excluding food and energy, the ‘core’ CPI rose just 0.1%.”
Navellier might be on to something. There is an inverse relationship between the U.S. dollar and dollar-denominated commodity prices; when the dollar goes up, the price of crude oil and gold and grains goes down, and vice versa.
The dollar index — that is, a measure of the U.S. currency vs. a basket of other currencies around the world — just hit an eight-month high a few weeks back and continues to rally. So it’s no surprise that commodities have been held back and pushed even lower.
How does this matter to investors? Well, for starters, materials stocks are getting hammered since they can’t command a decent price for their goods. Take a look at these returns across about six months:
- Barrick Gold (NYSE:ABX): -50% since Nov. 1, 2012, vs 10% gains for the S&P 500.
- U.S. Steel (NYSE:X): -20%
- Southern Copper (NYSE:SCCO): -15%
- Alcoa (NYSE:AA): -7%
So as you can see, it’s not just gold that’s getting hammered — it’s all commodity stocks that trade in dollar-backed materials.
The good news is that a strong dollar holding back prices can result in decent margins for end-users even if it brutalizes miners or metal producers.
But clearly there are losers in this equation. And Louis Navellier cautions not to ignore the influence a strong dollar has over commodities right now.
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- The consequences of a strong dollar. (Caixin)
- As I wrote last week, investors have a host of problems but inflation certainly ain’t one of them thanks to a strong dollar holding back commodity prices. (The Slant)
- Options traders are banking on a big gold rebound, and in the past few days, they’ve been right. (WSJ)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.