Monthly Letter

Elements202207

01/08/2022

AuAg Monthly Letter

We put the first month of the year's third quarter behind us. A month that was positive for the stock market after several negative months this year. The month has offered several interesting events. The central banks' fight against inflation continues with several interest rate hikes. In addition, we also have an interesting situation on the commodity exchange COMEX, more about this further down in this letter.

The new quarter also means a rebalancing of our exchange-traded fund AuAg Gold Mining ETF. The fund is entirely rules-based and follows the index we created: "Solactive AuAg ESG Gold Mining Index". Every quarter, it is determined which 25 companies qualify to be part of the fund, and all are rebalanced at the same time to an equal weighting of 4%. You can find the current holdings on the fund page. The companies in the fund now have a combined dividend of over 3%!

Since the beginning of the year and during July, we have had continued inflows in the funds. It makes us proud that you, our investors, are well-versed in the investment case and do the right thing by buying when we've had a downturn instead of the opposite. The investment case is getting stronger every day, and we look forward to seeing how the market situation develops.

During the month, we have been active on several media channels. Some of these are Proactive Investors, CISITV, and Finansavisen (links below).

Do not forget to keep an eye out in our Research Centre, where you will find all the new articles, videos and podcasts that we have participated in. Of course, what we have published earlier is also available there if you missed it.

Here are a few media links from the past month:

The Funds

Click on one of the funds below to get to the respective fund page. There you can find more information, such as: how to invest, the updated fund sheets (under "Documents"), and the live ticker price on the holdings.

Highlights

There have been multiple interest rate hikes from central banks during the summer. You get the feeling that they are afraid of losing control over price inflation. The Fed has started to raise in steps of 0.75% instead of the usual 0.25%. The ECB has also begun to raise the interest rate after 11 years without any hikes.
However, we do not see that the price inflation comes from increased wages that have led to increased consumption. Therefore, we are not sure that the interest rate hikes will have the desired effect on the inflation level. In addition, the increased prices will remain as long as price inflation is above zero per cent.
The market now seems to have priced in an end to interest rate hikes by the end of the year and that they will start lowering them again. Despite interest rate hikes, the real interest rate, which is important for asset prices, is still strongly negative (real interest rate = interest rate - inflation).
The situation on the American commodity exchange, COMEX, becomes more interesting by the day. Never have the so-called Commercials been better positioned to exit their last remaining short positions. The fact that retail and trend-following funds have now gone short metals is rocket fuel once the precious metal prices turn up, as they have no other option than to buy back their short positions, which drives the prices even further.

Outlook

As 3-month interest rates are about to increase, it will be costly for households that already have record high debt levels. It will become so noticeable that consumption decreases. Reduced consumption often leads to companies needing to lay off staff, which results in increased unemployment in society, which is usually the case when a recession is imminent.
We expect politicians to step in with various creative support measures to limit the effects of a recession. This will have to be financed through increased indebtedness, which will be inflationary and counteract the central banks' attempts to bring down inflation.
As we mentioned earlier, we are waiting for the currency speculators to change their footing and start going long the euro and let go of the US dollar, which has risen so much in the past year. The US interest rate increases have already been priced in, and now they want to position themselves for more hikes from the ECB. A weak currency is certainly making it easy for exporting countries, but at the same time, you get a lot of imported price inflation, which is worrying.

The Elements

When you have boarded a flight, you might have noticed large, spinning blades that resemble a big fan. This is a jet engine, which makes it possible for an aircraft to fly.

A jet engine wouldn't work without certain elements. The temperature of the air that passes through the engine is higher than 1500°C. To protect the turbine blades from this heat, more than ten elements are used, for example, titanium, nickel, chromium, and rhenium - one of the scarcest substances on earth.

Jet engines also rely on silver bearings. Steel bearings are electroplated with high purity silver to increase their fatigue and strength so they can function optimally in high temperatures. Silver in the bearings also acts as a lubricant, which gives the engine a margin of safety if, for example, an oil pump malfunctions.