There are a lot of moving parts in the economy right now. Inflation has become a concern, people are looking at gold more as a hedge, and there’s a shortage in semiconductors. In this piece, we’ll explore some of those dynamics and what some of the investment implications are.
Inflation will most likely increase. Many projections estimate the FED will meet/beat their target of 2%.
I do believe that an increase in goods and services will not affect demand as it would have in the past. Stimulus payments to consumers created enough excess cash that people didn’t mind, or even notice, an increase in prices.
I do realize I’m painting with a broad brush here, and undoubtedly there will be some that will notice the difference. I’m simply stating that demand will not suffer from price creep as it used to, at least while the government continues writing checks.
We could see another uptrend in gold. There’s a certain recipe that makes the case for a bullish perspective on gold – inflation pressures, increased money supply, and low-interest rates.
The FED continues to supply the market with liquidity with its asset-buying program. An increase in the money supply dilutes the value of the dollar (USD). When the USD decreases in value, typically gold does well.
There is a caveat to that, however. Demand for US Treasury securities is weakening, specifically from foreign investors. To double down on that, foreign investors are net sellers of Treasuries. There have to be enough buyers to meet Treasury issuance, otherwise, the FED won’t have enough “reserves” to inject liquidity into the system.
With regard to low rates, that is a good sign for gold, but it’s also a good sign for equities (companies) with a high tendency to borrow. I’m mainly looking at the technology sector. Especially these unicorns that have high valuations, but low (or negative) profits.
There’s also a current market disruption at play here…semiconductor shortage. Demand across many applications are at multi-year, sometimes multi-decade, highs. Personal computers, electric vehicles, autonomous vehicles, AI, and the like all use semiconductors.
A semiconductor shortage has many implications:
- Decrease in production
- Price increase
- Nationalist mentality
- R&D disruption
A decrease in production can hurt the bottom line. It all depends on when the shortage ends. If production reduces enough for a sustained period, adjustments will have to be made by corporations.
A price increase is likely because of supply and demand dynamics. The price of semiconductors will go up, so the price of the products they’re used in will also go up. This could hurt demand for those products and could hurt consumers.
There are a select few companies that supply the majority of the world’s semiconductors. This could have a similar effect as Covid had with regard to supply chain management. Companies relied on global trade and cooperation to sustain their supply chain operations. When countries shut down due to the pandemic, global trade suffered as a result. Countries might shift to manufacturing their own semiconductors instead of relying on supply from trading partners.
Semiconductors are only getting less expensive and more efficient. With a shortage, and possibly less money coming into the manufacturers, it’s possible that this dynamic of cheaper and better plateaus…at least temporarily. It’s also possible that the shortage improves operations and makes the manufacturers more agile. Some countries have a very unique ability to progress, strengthen, and adapt when a roadblock presents itself.
With that said, I believe semiconductors will be a great investment opportunity. Their demand is only going to increase because of the push to provide the world with electric vehicles and clean energy. I would, however, pay attention to the shortage and I might wait until that shortage ends and prices stabilize.
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