Black, white and yellow gold

Ted Dixon
Mon, 03/06/2023 10:45

We are in a market environment where politicians, not central bankers, are setting the agenda. Since the pandemic started, politicians have been writing laws that shower preferred groups with money. One of the more recent examples is the CHIPS and Science Act which allocated US$280 billion to support research and manufacturing of semiconductors in the United States. Perhaps even more importantly, politicians start wars, not central bankers.


The black, white, and yellow gold framework

One of the biggest financial casualties of the pandemic and the Russia-Ukraine War is the 60/40 (stocks/bonds) model portfolio. This asset allocation has been the foundation of the wealth management business for decades. However, if Credit Suisse strategist Zoltan Pozsar is right, that will be replaced by a 20/40/20/20 (cash/stocks/bonds/commodities) mix. What follows below is an explanation of how we are approaching this new environment. It is adapted from two key INK Research reports that were distributed to INK and Canadian Insider Club Ultra members late last month.

In an early January dispatch, Pozsar made the case for an allocation to commodities in an era of heightened geopolitical and inflation risks. Within commodities, he includes yellow, black, and white gold representing bullion, oil, and lithium respectively. This tricolour framework provides a useful way to identify opportunities in the resource-rich Canadian market.

We have adapted Pozsar's framework by broadening his definitions toward different stock market groups. We let yellow stand for precious metals, black for fossil fuels, and white includes not only lithium but also other critical minerals as referenced by the Inflation Reduction Act related to non-fossil fuel energy production.

In contrast to previous decades when central bankers oversaw the planning of economic outcomes, the Federal Reserve and other monetary authorities are now responding to decisions made by politicians. We can use the S&P/TSX Global Gold ETF (XGD) as a proxy for yellow gold stocks, the S&P/TSX Energy Index ETF (XEG) as a proxy for black gold stocks, and the S&P/TSX Global Mining ETF (XBM) for white gold stocks. As shown in the chart below, a hypothetical equally-weighted exposure to them over the past three years would have handily beaten the S&P 500 (VFV), even with the XGD drawdown. The returns are based on ETFs listed in Canada. A similar result is obtained when using US dollar based proxies instead.


Over the 3 years ended Feb. 24, 2023, the average performance of the XBM, XEG, and XGD ETFs was 61.1% versus 25.8% for the S&P 500 ETF (VFV)


We looked at the past three years above because we believe the investing environment changed significantly starting in 2020. While we still hear from central bankers that they are data-driven, we believe this is really code for being politically driven. Sure, they will raise rates if inflation is too hot, but they are unlikely to tighten if it will get in the way of financing debts or endangers the economy. On that front, last week during an On The Margin podcast interview (short clip link) Vincent Deluard of StoneX Group made the case that the Fed will accept a higher level of structural inflation.


Watch Vincent Deluard double down on his secular inflation call here (full interview)


We agree. After all, the US has a war to finance, never mind automatic spending such as social security that is baked in the cake. At some point, more tightening, as Mr. Deluard says, becomes too hard. In Canada, the central bank will not want to raise rates further if it means the mortgage market could be at risk, which would put an incumbent government at risk. The Bank of Canada may already be at that point.

The political constraints on central banks limiting their ability to raise rates much more should be a tailwind for yellow gold. So far, many investors, particularly G7 institutional investors, do not agree with our view that Jerome Powell and his peers are now politically dependent. As they start in numbers to confront the reality that central banks are no longer as independent as previously assumed, gold and gold stocks should shine. Until then, we wait.

Perhaps we will not have to wait long. In February, we had ten yellow gold stocks in our Top 20 Mining Report. They spanned from the top-ranked stock, Fury Gold Mines (Sunny; FURY), to G Mining Ventures (Sunny; GMIN) which just made the cut at #20. Meanwhile, the G7 political consensus is to promote alternative energies via industrial policies as a means to manage climate change. This is a clear tailwind for white gold stocks. In February, we had eight electric metal stocks on the Top 20 including #6 Brunswick Exploration (Sunny; BRW).

Meanwhile for black gold, with seasonal factors becoming a tailwind for crude and natural gas as opposed to a headwind, Canadian Energy insider sentiment has been back on the rise. It is now back to levels last seen in August 2022. It probably has not hurt that the Biden SPR 180-million barrel crude release of 2022 has come to an end, notwithstanding the likelihood that there remain 26 million barrels to be released by September as mandated by Congress years ago according to Energy Intelligence.


The INK Energy Indicator as of February 27, 2023

The INK Energy Indicator moved above 150% earlier this month meaning there were just over 1.5 stocks with key insider buying over the past 60 days for every stock in the sector with key insider selling. Insiders are betting that much of the bad news is in the rearview mirror and that stocks in the sector are generally undervalued compared to the associated risks. The monthly INK Top 30 Energy Report is entirely dedicated to the black gold group.

Typically, we look for insider sentiment peaks to help identify key levels of sector-wide share price support. Last summer, insiders made their move relatively early with the indicator peaking above 300% in early August, but stocks in the sector did not put in their 52-week lows until early fall. That just goes to show how difficult trading this market has become with geopolitical agendas and inflationary tides at play, even for insiders. Last year, insiders as a group clearly struggled to identify the maximum point of fear and undervaluation.

The difficulties of navigating this environment underscore why we find the black, white, and yellow gold framework so helpful. Black gold will be the first to benefit from an acceleration of global activity and the first to feel a slowdown. It is also vulnerable to the whims of key global players in energy markets, notably Russia, the United States, and, of course, OPEC. Meanwhile, white gold provides exposure to future fuel for the global economy, leaving it slightly less vulnerable to current conditions than black gold. Finally, yellow gold may act as a hedge against a potential loss of the dollar's purchasing power. In our view, there is a compelling case for considering exposure to all three types of gold, particularly since insiders are upbeat about all three right now.

If you are not currently a member of the Canadian Insider Club Ultra, join us today to get access to the Top 20 Mining and Top 30 Energy reports. Until March 7th, at checkout use the code Blackgold for $100 off your first year of membership paid by credit card as we let the insiders guide us to opportunity via the black, white, and yellow gold framework.

INK Edge outlook ranking categories (Sunny, Mostly Sunny, Mixed, Cloudy, Rainy) are designed to identify groups of stocks that have the potential to out or underperform the market. However, any individual stock could surprise on the up or downside. As such, outlook categories are not meant to be stock-specific recommendations. For background on our INK Edge outlook, please visit our FAQ#3 at


Comment On!

Upload limit is up to 1mb only
To post messages to your Socail Media account, you must first give authorization from the websites. Select the platform you wish to connect your account to (via Easy Blurb).

No Comments