The “Dodo Trade” is on … and it could be the most important influence on the global financial markets in 2020.
If you get on the right side of this trade, the next 12 months could be very lucrative, even if the U.S. stock market goes nowhere. But if you wind up on the wrong side, you might end the year feeling like … well … a dodo.
What’s the Dodo Trade? The chart below provides a clue:
“Dodo” stands for “dollar down,” which is exactly what has been happening during the last three months. Although this downtrend is just getting underway, I expect it to gain momentum throughout 2020 and help power major rallies in precious metals and most other commodity markets.
Death of the Dollar? Not Yet.
To be clear, I am not predicting any sort of doomsday scenario that causes a major dollar implosion. Instead, I’m simply expecting the greenback to trend downward throughout the year and move toward the lows it hit in early 2018.
The main rationale for this forecast is a simple one: No one really wants a strong dollar. It has become friendless — both in the United States and overseas.
Here at home, Federal Reserve Chairman Jerome Powell says he plans to hold interest rates low throughout 2020.
As recently as one year ago, the members of Powell’s Federal Open Market Committee were planning to raise rates above 3% in 2020. But the revised plan calls for holding rates at 1.75%. Clearly, the Fed is now pursuing an “easier” monetary policy than most investors had been expecting during the last several months.
All else being equal, low interest rates promote dollar weakness … and commodity rallies.
As it happens, President Donald Trump’s administration also favors a weak dollar because that makes our exports more competitive.
In addition to these monetary and political pressures on the dollar, a third factor is also weighing it down: Strengthening commodity prices. Most broad commodity price indexes have jumped double digits since August 2019. Generally speaking, rising commodity prices coincide with periods of dollar weakness, as the chart below shows.
The inverse relationship between the dollar and commodities is easy to see. Whenever the dollar zigs lower, commodity prices tend to zag higher.
During these episodes of simultaneous dollar weakness and commodity strength, you never really know which comes first: the weak-dollar “chicken” or the commodity-strength “egg.” But whatever the exact cause or causes, the inverse relationship between these two assets is indisputable.
In the current cycle, commodity strength seems like the most dominant influence. Investors aren’t panicking to dump the dollar; they are simply tiptoeing away from it. But in the commodity markets, investors are buying with vigor and urgency.
During the last four months, for example, the prices of numerous commodities have jumped 15% to 35% — including gasoline, cotton, coffee, soybean oil, sugar and live hogs. The metals markets are also showing signs of strength, as copper, aluminum, gold and platinum are all trading near three-month highs.
Perhaps these fresh signs of vitality in the commodity markets are a fluke, signifying nothing. But I wouldn’t take that bet. Because the commodity market upswing aligns so closely with the U.S. dollar downswing, it is displaying classic signs of a major rally in the making.
Furthermore, if we crawl around in the weeds of specific commodity markets, we can find solid reasons to expect higher prices. Generally speaking, supplies are constrained relative to demand.
Welcome to Backwardation
Even in the crude oil market, for example, we can find evidence of tight supplies. Although most folks believe the world to be “awash in oil,” the futures markets are telling a different story. The crude market is in “backwardation,” as are the markets for heating oil and natural gas.
Backwardation means simply that near-month futures contracts are more expensive than ones in distant months. The typical pricing in crude futures is called “contango.” That’s when the closest-dated future is the cheapest and the most distant future is the most expensive. But when contango pricing flip-flops, or goes backward, the market is in backwardation. In the current case, the spot price of crude oil is $61.61 a barrel, while the contract for delivery one year from now is only $56.97.
This somewhat rare configuration indicates that crude oil traders want their oil right now, not months from now. Not surprisingly, whenever traders want something right now, the price of that “something” tends to move higher. The crude market moved into backwardation decisively last August, which is also when the price of crude began trending higher.
Interestingly, the energy markets are not the only ones in backwardation. So are the futures markets for thermal coal, palladium, zinc, and aluminum.
These bullish signals from the futures markets are echoing signals from the stock market. Specifically, natural resources stocks are kicking into gear once again.
Strength in Resources
The SPDR S&P Metals and Mining ETF (NYSEARCA:XME) has advanced 20% since August, while several individual stocks in that exchange-traded fund have jumped twice as much. These moves are just the beginning of much larger gains to come.
Now that this bull market has taken fight, there’s plenty of blue sky above it.
Most major mining and resources stocks are still trading 70% below the highs they reached in 2011. In other words, even if these stocks tripled from their current levels, they would not reach their all-time highs! Further, from a valuation standpoint, resource stocks have never been cheaper than they are today.
As the chart above shows, the valuation of the S&P Metals and Mining Index is nearly 70% lower than the valuation of the S&P 500. In raw numbers, the Metals and Mining Index is trading for less than four times gross earnings (EBITDA), while the S&P 500 is trading for more than 11 times EBITDA.
The commodity sector is a coiled spring that could produce shockingly strong results in 2020. The resource-related stocks I’ve recommended to my subscribers have achieved powerful market-beating results during the last few months. For example…
- In June, I told my paid-up members that even if precious metals drift sideways for years, one large gold streaming and royalty company was positioned to make big gains. It’s gone on to climb 21.3%.
- At the same time, I recommended another gold and silver streamer and royalty company. I told them this company is a solid up-and-comer with the potential to quickly double or better. It hasn’t done that — yet — but it has soared 82%.
- Since recommending one mid-tier gold and silver miner, its shares have soared 40.5% in just a few months. Further, those shares just hit their highest levels since 2016 on New Year’s Eve.
- Finally, just over a year ago, I recommended a play on three of the world’s largest and newest mining projects. It’s gone on to soar 59.3%.
But I’m expecting even larger gains over the next few months.
And next week I’ll show you the “Dodo Trade” stock that I think will make more gains than any other in 2020.
P.S. On the Friday morning following the U.S. airstrikes in Iraq, stock prices plummeted 300 points, while oil and gold prices surged. This is a turning point. The markets – and your money – will feel the impact. No matter what happens, every prudent person should be prepared for the worst.
That’s why I recently put together this presentation and wrote the book on market crash preparation: Bear Market 2020: The Survival Blueprint. I was one of the few analysts who predicted the last market crash in 2007-’08. And now you can read all about the critical steps I’m saying every American should be taking by clicking here and viewing this presentation.