Fed chair nominee, Iran triggers profit-taking

@THEMARKET

Kevin Warsh, formerly of the Federal Reserve, was chosen to lead the U.S. central bank in May.

Around the same time, U.S. forces gathered in the Middle East, as the president again threatened Iran. Together, these developments triggered traders to adopt a risk-off stance.

At first glance, it appears that market participants believe Warsh is less willing to ease monetary policy if it would raise inflation. Consequently, currency traders bought the dollar and sold precious metals. Meanwhile, increased tensions in the Middle East also pushed the dollar higher and boosted oil prices.

Amid these market shifts, the Fed met this week, but the event was largely a nothingburger. The Fed is on pause, as the market expected, and will likely remain so until Warsh is appointed in mid-May. Now that the Federal Open Market Committee meeting is over, investors' attention will be focused on the fourth quarter 2025 earnings results. Thus far, more than 78 percent of companies have beaten earnings estimates as usual.

By now, readers know the game Wall Street plays.

Analysts deliberately lower their earnings estimates, allowing the companies they follow to beat expectations.

This week, however, the big guys reported. Meta skyrocketed on their results, while Microsoft and Tesla cratered on theirs. Apple, despite stellar earnings, was dumped as well.

The AI fears that companies are spending way too much and getting little in the way of returns for their effort was underscored by Microsoft's disappointing earnings announcement.

Once again, that event, along with news of a widening U.S. trade deficit, has cast a pall over the AI trade.

The U.S. Commerce Department announced that the nation's trade deficit for November 2025 was the largest in almost 34 years. The trade gap increased by 94.6 percent to $56.8 billion, well above expectations of below $30 billion. The culprit was a surge in capital goods imports driven by investments in artificial intelligence. That is not what the administration wants to see.

And speaking of the administration, this week the president rattled his saber once again, threatening military action unless Iran renounced its nuclear development. He also said the declining U.S. dollar was "doing great" and did not think the dollar had declined too much.

The prices of most commodities and oil spiked higher on his comments, as traders realized that not only was he comfortable with the decline, but that further downside was highly probable. As a result, the dollar fell 1.3 percent on Tuesday, while gold and other precious metals spiked higher. Since then, that trade has reversed on the news of the Walsh appointment.

From a global perspective, the current parabolic surge in commodity prices was driven by a systemic external drain on U.S. dollar-denominated assets. Foreign nations are aggressively liquidating U.S. Treasuries and moving away from the dollar toward gold, silver and other commodities. It is one of the main reasons I remain bullish on precious metals, oil and other commodities as the year progresses.

As the dollar weakens, we can expect to see global investors seek out a replacement, a store of value that will protect their wealth.

Gold, silver, platinum, palladium and now copper have fulfilled that role thus far. But wait, you might ask, didn't I just advise readers to sell some of those metals last week?

Yes, I did. It is a timing thing. Most precious metals have risen too rapidly; one might describe the move as parabolic, so I recommended taking profits on some investments. At the same time, hold some positions in case prices rise further.

They did until Friday.

Since there is no way to tell when or even if this parabolic move has peaked, I booked some gains. The declines on Friday show the wisdom of my advice. In just a matter of hours, gold dropped by over 7 percent, silver fell by 21 percent, platinum dropped by 16 percent and palladium declined by more than 13 percent.

In the blink of an eye, we could easily see a 30 percent decline in this space, and it could happen, as it did on Thursday night, while you are sleeping in bed. That is the nature of the beast. At some point, when I think the metals have fallen enough, I will advise you to reinvest those profits back into precious metals. In the meantime, I suggested readers accumulate copper (through an exchange- traded fund) and copper mining stocks. At one point this week, Chinese investors (while you were sleeping) bid up the price of copper to $14,500 ton, an 11 percent increase, the highest price ever recorded.

On Thursday morning, prices in the U.S. rose by more than $1,400/ton, only to slide by $1,000 in less than half an hour. By Friday, copper had joined the metals rout, falling 4.28 percent. The moral of this tale is that you do not bet the farm when investing in commodities, or you won't have any farm left to bet.

As for equity markets, the last week of January saw profit-taking, though the month was positive overall as measured by the S&P 500 Index. The Russell 2000 small-cap index outperformed, while the tech-heavy NASDAQ also rose.

But not all is what it seems. If one had been invested in commodities, metals and mining, capital goods, aerospace and defense, energy, basic materials, and/or retail, one did far better even with the end-of-the month sell-off.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. His website is schmicksretiredinvestor.com. He can be reached at 413-347-2401, or email him at [email protected].