Macro Rules the Markets

Gold and Metals
What are the drivers for the big move in Gold in the recent months and is it sustainable? I believe it is, though my conviction is waning a little bit every day as the Gold chart keeps moving towards all-time highs. But that's the trader in me and doesn't reflect the fundamental case for Gold as a long-term investment. There are many catalysts at work here. Other countries, especially China, have been buying gold at unprecedented levels, though the pace is slowing. China for example, wants to diversify away from the US dollar and dollar denominated treasury holdings. China has built huge dollar reserves due to their trade imbalance (surplus) with many developed and emerging nations. Interestingly, this move away from dollar-based assets is exactly what the new regime in the US would seem to want, as de-dollarizing the world economy to some extent can create less marginal demand for US dollars and treasuries. If successful, this can weaken the dollar and enable 'made in USA' to be more palatable for global corporations. The ever-widening wealth gap and the K-shaped economy are a huge concern for the current US administration (and should be for future administrations) and they have decided that bringing manufacturing jobs back to the US is one way to address this issue. Weakening the dollar is easier said than done (as countries are slow actors), but a weaker dollar is necessary to implement this 'back to basics' strategy. This is positive for Gold.

As experts such as Lyn Alden have pointed out, the US continuing its role as a powerful, influential empire with the 'world's reserve currency' status and building a manufacturing-based economy with a competitive currency are mutually exclusive, in purely economic terms. So, the US has to decide which path it should follow, you can't have the cake and eat it too. 

There is also the much talked about 'currency debasement' trade in relation to Gold (though it is hard to quantify its impact). The fiat currency systems across the world have been getting diluted and losing purchasing power due to decades of mismanagement by the governments and central banks. In theory, Gold is the ideal alternative to fiat currencies due to a variety of reasons, including supply constraints (stock to flow ratio) and how well entrenched it is with various central banks as an inflation and currency hedge. It is interesting to note that most global currencies started their major devaluation cycles after the two world wars, and we are currently in the middle of multiple conflicts that could turn into global wars. However, gold has one disadvantage over crypto assets like Bitcoin, in that it's not easily divisible. But Gold has vastly outperformed Bitcoin and Crypto recently, and I expect this trend to continue because sovereigns find Bitcoin and crypto more threatening to their currency ledgers and financial systems than gold. In China, citizens are still barred from mining or transacting in Crypto assets. 

There is a case to be made for industrial metals such as Copper, Silver, Platinum, and Palladium, not to mention Uranium and energy related commodities. As money has come out of the high-tech stocks and software names, these asset classes have done exceedingly well, even though inflation has been largely under control. As inflation fears rise, expect more money to flow into hard assets and energy-based commodities. The war in the middle east will eventually boost demand for industrial metals, though I expect increased volatility in the short-term. Capital in the US has traditionally gravitated towards financial markets and not to the real economy and this trend is starting to reverse boosting the industrial metals, but it is possible that this trade is now a bit overstretched.  

AI and Datacenter buildout

"Throughout human history, we have been dependent on machines to survive. Fate, it seems, is not without a sense of irony" - The Matrix

There is a lot of uncertainty in the markets about the future of software and SaaS as well as overall AI disruptions of industries. The Citrini article on AI's future impacts on society may seem outlandish, but I believe it is one version of a possible reality. But as a trader/investor, it is important not to overreact and miss short term opportunities. Until mid-2025, investors assumed that there would be many winners in the AI applications race, but they are less convinced now and are taking a wait and see approach, hence the multiple compression in many of these software names, though they all claim to be AI companies. When you have 7 companies that make up 35% of your stock market index, such circumspect behavior can lead to a market top in the US, though I am not betting big on it yet, but finger is on the trigger. 

But the AI Data center business continues to thrive, which is one part of the real economy that is benefitting from the capital flows out of financial markets into the real economy. Such offsets are another reason, it's probably too early to be bearish on the overall US markets. The picks and shovels part of the power-hungry data center business continues to perform well. These companies largely benefit from the huge capex spend on AI and power infrastructure; GE Vernova is a perfect example of a company that is firing on all cylinders on the power infrastructure side. The hyper scalers on the other hand are less and less attractive to investors due to the high capex spend, and the convoluted business models that have emerged with OpenAI at the center of many of these deals.

International Markets and War in the Middle East
Emerging markets have underperformed the red-hot US market over the past decade, that was changing in a dramatic fashion before the onset of Iran war. There are larger forces at play here, such as global liquidity cycles and the extreme concentration in the US market indices; The top-10 companies in the US make up ~45% of the market index and a larger percentage of the market gains in recent years. The war in the middle east may stop the momentum of this trade temporarily, especially with the energy-dependent APAC markets, but these are typically multi-year moves. I expect this trend to continue once the war in the Middle East is concluded.  If the war is protracted with no end in sight, energy dependent countries such as China, Japan, Korea, Taiwan, India etc. will have to pay the price. Korea and Taiwan in particular have benefitted heavily from the AI Data Center build out, and sustained increase in input costs (energy) can damage these markets.  I believe another reason on the margins for this rotation into international markets is that the US government is now seen as extremely populist and interfering with the markets willy-nilly and favoring and disfavoring companies and sectors on a daily basis. 

Historically, geopolitical events have been buying opportunities for US stocks, I believe it will be different this time. But there will be buying opportunities globally, especially industrial commodities, countries that dig stuff out of the ground and those that benefit from the AI datacenter build out. So, I will be watching developments in the middle east very closely as well as the dollar, as the impact on earnings across the globe is real. 

The war in the middle east has provided a short-term bounce opportunity in the software names, though I would not overstay my welcome in such names as the next rotation out of these names is likely just around the corner. Why bother with software and SaaS names which are technically broken, when you have secular themes that are working and in buyable pullbacks. Secular growth themes can often overcome the winds of economic cycles, if you give it enough time and space. 

Note: I promise there are charts and data coming in future posts, for now, I want to lay out the higher-level narrative in this post.