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January Market Minute

Happy New Year, we hope your 2023 has started off strong!

Upcoming Events

The Association for Mineral Exploration (AME) & the Vancouver Resource Investment Conference (VRIC) are only a couple of weeks away. It would be great to connect at the conferences.

Where you can find us:

At the AME conference you can find us at booth #207. Be sure to catch Dr. Tom Brady’s presentation in the Commodities & Financial Markets section on Tuesday, January 24, 2023, at 9:00 am PST.

At the VRIC conference you can find us at booth #324. And Brian Bosse from our Team will be presenting in Workshop 4 on Monday, January 30, at 2:20 pm PST.

January Market Minute - 2022 Review and 2023 Outlook

2022 was a tough year for investors with both stocks and bonds declining for the year.

With few exceptions, the best and brightest in stock and bond markets failed to appreciate how the inflation outbreak would upend the investing world in 2022. They failed to anticipate how the Fed would react — the rate increases came at a torrid, not measured, pace — and failed to foresee how that, in turn, would trigger the worst simultaneous rout in stocks and bonds since at least the 1970s. There are 865 actively managed stock mutual funds domiciled in the US with at least $1 billion in assets. On average, they lost 19% in 2022. Equity-loving hedge funds got hammered, too. On the bond side — a universe of 200 funds of a similar size — the average decline was 12%. Most of them fared worse than the indexes they use as benchmarks to gauge their performance (Bloomberg, 12/28).

Surging inflation was visible at the start of 2022, however the magnitude of the ‘pivot’ by central banks from the ultra-loose policy that had prevailed for more than a decade to very hawkish was not anticipated, even by central bankers at the start of the year. The rapid increase in interest rates, along with the supply chain issues related to the Russia/ Ukraine war and China’s zero covid policy added to market uncertainty. Although inflation appears to have rolled over by most measures the Fed and other central banks have continued their hawkish stance.

The Summary of Economic Projections released after the Fed’s December 13-14 meeting showed that the committee members’ projections for the fed funds rate at the end of 2023 increased from its previous meeting. The median projection is for 75 basis points of further increases to 5.1% this year. However, our view is that the Fed has reached peak hawkishness and these projections are likely to start declining as 2023 progresses. Economic signs are increasingly showing a recession on the horizon and the Fed will need to back off its hawkishness if it is to engineer its hoped-for soft landing. If the Fed’s last error was staying too loose for too long, its next error will almost certainly be staying too tight for too long. When markets decline financial conditions tighten, and the Fed pays close attention to financial conditions. Although it is currently not clear where the cracks will widen significantly there are definite signs that financial conditions are also deteriorating. The problem the Fed faces is that any hawkishness has a double impact on financial conditions – in terms of both higher interest rates and weak equity markets; ditto, any dovishness will send markets higher, and ease financial conditions more than the Fed might have intended. This suggests to us that equity market volatility will remain extremely high well into 2023.

Canada – Monetary Policy

The Bank of Canada (BoC) hiked the target

rate a further 50 basis points on December

7. This increase raised the BoC’s target rate to 4.25%. Central banks continue to hike rates to try to stifle demand to bring inflation down. Our baseline forecast has penciled in one further 25 basis point interest rate increase in January 2023 before the BoC holds rates. In a speech on December 12, BoC Governor Tiff Macklem stated that the BoC has taken three lessons from 2022 to heart: 1. Increasing the supply of goods and services is harder to do than influencing demand. The steps we took to keep the economy running during the pandemic helped support demand, but we underestimated how long it would take to restore supply. 2. The average imbalance between supply and demand doesn’t tell the whole story. During lockdowns, the increased demand for goods did more to push prices up than the decrease in demand for services did to pull them down. 3. Supply chain problems had a bigger and faster effect on inflation than usual because so much pent-up demand was already in the Canadian economy. Macklem went on to say that: Our top priority is getting inflation back to the 2% target. By raising interest rates, we are trying to dampen demand so supply can catch up. That will bring the overheated economy back into balance, and inflation will come down. Interest rate increases have begun to work, but they will take time to feed through the economy. We will see if the BoC does indeed pause and let the effects of the rapid interest rate increases of 2022 take full effect before hiking rates further and risk sending the Canadian economy into a deeper recession than already expected.

Canadian Housing Market

House prices, on average rose more than 50% from March 2020 (the start of Covid lockdowns and government emergency income programs) to the peak in February 2022 (CREA’s Benchmark composite index increased from $550,700 in March 2020 to a peak of $840,600 in February 2022). The BoC squashed the house buying mania in March 2022 when it started rapidly increasing interest rates. The rising cost of mortgages has slowed the number of market transactions and pushed house prices down. The Canadian Real Estate Association reported that the number of home sales across Canada were down in November; declining 3.3% from the previous month and a significant decline of 38.9% compared to a year ago.

House prices declined from February to November by 11.5% (national average). Further declines in housing prices are expected in 2023 with forecasters speculating that prices could decline a further 25-35%, which would bring prices close to pre-Covid levels.

However, the decline in house prices has only partially offset the higher rates. Remember that mortgage rates were at historic lows in 2020. This means that housing affordability continues to deteriorate further in Canada, which makes it increasingly difficult for households to qualify for mortgages (see our December Market Minute - Housing Affordability Continues to Deteriorate).

In order to help alleviate some of the upward pressure on house prices the Canadian government passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act in June 2022, which took affect on January 1, 2023. This act prohibits the purchase of residential property by non-Canadians for a period of two years. And although this act will have a marginal effect on house prices in cities such as Vancouver, many housing experts believe this will not have as great of an impact on house prices as the government has estimated.

Gold Review & Outlook

Gold rose to a peak of $2039.05 on March 8 on geopolitical uncertainty over Russia’s invasion of Ukraine. But then the combination of a rising dollar and rising TIPS (Treasury Inflation-Protected Securities) yields pulled gold consistently lower as the year progressed. The low for the year was set on October 19 with a pm fix of $1631.70 – which amounted to about $400 decline from March to October. The tide turned in golds favor at the end of October as central banks talk about slowing the rate of interest rate increases and news broke that central banks where significant buyers of gold in 2022. The gold price rose to end the year virtually where it started. Gold fared much better than most asset classes in 2022, simply because it did not decline.

The outlook for the gold market continues to be buffeted by market expectations for Fed policy in early 2023, and the factors driving those expectations. Simplistically, stronger US economic and inflation data will point to more Fed hawkishness, while weaker US economic and inflation data will point to more dovishness and a potential Fed pivot in 2023. Gold will be pressured lower in the first instance and higher in the second. There are other forces of course, but the Fed & US dollar are the dominant forces in the gold market currently.

The recent upswing in the gold price follows a strong bullish trend that began in early November, when the precious metal bounced off its third bottom in 2022. On January 6, 2023, gold traded above $1870 which might have marked the end of the 2022 downtrend paving the way for a bull market in 2023. From a trader’s perspective the recent price declines have been much shallower and short lived each time indicating further price increases and support at higher levels.

Bonus Tip:

Gold exposure is a great way to help diversify your portfolio!

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