Why gold's surge isn't a warning - it's a signal

Key Concepts

Commodity Futures: Standardized contracts for buying or selling a commodity at a set price on a future date, used for hedging and speculation.
GLD/SLV: Exchange-Traded Funds (ETFs) that track the price of gold and silver, respectively, providing easier access for mainstream investors.
Bearish Engulfing Candlestick: A bearish technical chart pattern indicating a potential price reversal downwards.
MAG 7: A group of seven large-cap technology companies (likely referring to Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) that significantly influence market performance.
Capex (Capital Expenditures): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, and equipment.
Modern Family Market Analysis: A framework developed by Michelle Schneider, using different ETFs to represent family members (e.g., Russell 2000 as Grandpa, XRT as Grandma) to analyze market relationships and trends.
Vanity Trade: Investments focused on health, beauty, wellness, weight loss, and self-care spending.
AI Glam: Investments related to Artificial Intelligence, including data, chips, and AI-driven technologies.
GLP-1 Drugs: Glucagon-like peptide-1 receptor agonists, a class of drugs used for weight loss and diabetes management, impacting consumer spending patterns.
Rare Earths: A group of 17 chemical elements with unique properties crucial for many modern technologies, often subject to geopolitical trade relations.

Market Overview and Resilience

The market is currently in the "late stage innings" of a bull market, but not necessarily nearing its end. Despite challenges like rising debt, government shutdowns, tariff news, and potential credit market issues, the market has demonstrated significant resilience, bouncing back quickly from downturns. This resilience suggests that investors should remain bullish, as attempts to pick a top have been unsuccessful. Down days have been short-lived, indicating underlying strength.

Commodity Futures and Gold

Phrase of the Day: Commodity Futures Commodity futures are defined as standardized contracts allowing the buying or selling of a commodity (like gold, oil, or coffee) at a predetermined price on a future date. Producers and end-users utilize these markets to hedge against price volatility, while traders use them for speculation, thereby enhancing market liquidity. While futures can be highly leveraged and risky, ETFs have made them more accessible to everyday investors.

Gold's Performance: Despite the advent of ETFs like GLD, gold has historically been overlooked by mainstream investors. However, its performance has been spectacular, with prices doubling over the past three years. Michelle Schneider, a veteran trader, noted a bearish engulfing candlestick pattern in GLD, which typically signals a downturn. However, gold has shrugged off this technical signal and continued its upward trajectory, setting its 49th record high of 2025.

Factors Supporting Gold: The market's disregard for bearish signals in gold suggests underlying fundamental reasons for its strength. These include:

Rising Debt: Continued increases in global debt levels contribute to a demand for gold as a safe-haven asset.
Geopolitical Instability: Hints of peace have not materialized into widespread global stability, maintaining a level of crisis that supports gold.
Stressed Trade Relations: Strained trade relations, particularly with China (a major gold buyer), contribute to uncertainty.
Central Bank Purchases: Central banks globally are actively buying gold, further propping up its price.

Potential Derailers for Gold: A significant shift would be required to derail gold's record run. This would include a substantial reduction in global debt, widespread peace breaking out globally, and a significant improvement in international trade relations.

Crude Oil Market Analysis

Crude oil is currently flirting with four-year lows, trading around $55 per barrel. The primary drivers for commodities like oil are supply and demand.

Factors Affecting Crude Oil Prices:

Oversupply: There is significant talk of an oversupply of oil in the market.
Political Influence: The current administration's desire to drive oil prices lower may have influenced deals that impact oil availability.
Supply-Demand Dynamics: Similar to the housing market, extremely low prices can disincentivize production. Refiners may stop refining, and drillers may stop drilling if operations are no longer profitable.
Demand for Energy: The increasing energy needs of AI data centers, along with natural gas, could potentially shift the supply-demand balance.

Outlook for Crude Oil: While a shift in supply-demand dynamics is anticipated, it is not expected to occur until possibly 2026 for crude oil.

Market Show and Tell: The Modern Family Market Analysis

Michelle Schneider presented her "Modern Family Market Analysis," a framework using ETFs to represent different family members and their market roles.

Grandpa (Russell 2000 - IWM): Represents the broader US economy, indicating the health of small-cap companies.
Grandma (XRT - Retail ETF): Represents retail spending, which constitutes 70% of GDP. Grandma is happy when shopping, signifying consumer confidence and spending.
Transportation (Dow Theory): Represents the movement of goods and services, a fundamental indicator.
Wonder Woman Sister (Semiconductors - SOXX): Represents the technology sector, particularly semiconductors, which have been a driving force.
Big Brother (Biotechnology - XBI): Represents the biotechnology sector, which is showing signs of waking up and could be cyclical or non-cyclical.
Regional Banks (KRE): Crucial to the family, as their failure can signal broader economic distress, as seen previously.
Bitcoin Bro (Cryptocurrency): Represents the cryptocurrency market.

Current Family Dynamics and Insights:

Small Caps (Grandpa): Showing a nice pop and have not fallen apart like regional banks.
Retail (Grandma - XRT): A key indicator to watch. While XRT is trading significantly below its 2021 high of around $104 (currently around $85-86), it represents a potential "lagger trade." The question is when a weak link becomes an anchor.
Consumer Spending: The consumer market is niche. While some are focusing on staples, the wealthiest are still spending significantly.
Concentration Risk: The economy appears levered to AI, with significant capital expenditures by major tech companies. Smaller companies like OpenAI rely on consumer adoption of their products (e.g., paid versions of ChatGPT). A failure to engage consumers could hurt these companies.
AI Adoption: Consumer adoption of AI is still developing. While many use AI daily (e.g., ChatGPT), the willingness to pay for new AI software is a key factor. Biotech is seen as a sector where AI is making a tangible difference in diagnosis and patient care.
Cautionary Signals: A potential trend change would be indicated by a major reversal in semiconductors and XRT failing to recover after testing its 50-day moving average. Currently, the market is not at that point.

Big Tech Earnings and AI's Influence

Tech Earnings Growth: Wall Street expects tech earnings to grow by 20.5% in the third quarter compared to the previous year, making it the fastest-growing sector. Tech plus communication services are projected to drive approximately 64% of the S&P 500's total earnings growth this year.

MAG 7 vs. Other Companies: The MAG 7 group is expected to see earnings growth of over 17%, while the remaining 493 companies in the S&P 500 are projected to grow earnings by about 6-7%. This highlights a significant divergence in growth drivers.

Key Considerations for Future Earnings:

Capex: Monitoring the capital expenditures of companies, especially those without the financial resources of the MAG 7, is crucial.
New Opportunities: Identifying areas where AI is becoming a factor in previously non-AI-centric industries is important.

The Vanity Trade vs. AI Glam

This section explores two distinct investment themes: the "Vanity Trade" and "AI Glam."

Vanity Trade: This encompasses health and beauty names, including wellness, weight loss, medications, and self-care spending.

GLP-1 Drugs: The rise of GLP-1 drugs (e.g., Novo Nordisk, Eli Lilly, Viking Therapeutics) is significantly impacting the population due to a high obesity rate (38% in the US). Even a small fraction of those with affordability and availability are using these drugs, leading to noticeable weight loss.
Consumer Impact: This "thinner consumer" is expected to spend money as they feel better. This trend is supported by AI applications that allow consumers to visualize themselves thinner, try on different makeup, or change hair color.
Cultural Shift: This represents a cultural shift for individuals who have struggled with yo-yo dieting and now have a sustainable way to lose weight.
Fast Food vs. Healthy Options: Fast food stocks are declining, while healthier options are seeing increased demand.

AI Glam: This refers to investments in AI superstars, driven by data, chips, and technological advancements.

AI's Role in Vanity: AI is playing a role in the vanity trade by enabling personalized visualization and virtual try-ons.
MAG 7 and AI: The MAG 7 companies are heavily invested in AI, driving significant earnings growth.
Apple's Lag: Apple has been a laggard in the AI story partly because its business is so tied to the consumer, and clear consumer-facing AI use cases are still emerging.

The Runway Showdown: Vanity vs. AI Glam

Argument for Vanity (Tortoise): Michelle Schneider favors the "tortoise" (vanity trade) over the "hare" (AI glam). She believes the vanity trade has a more profound societal impact by changing people's lives in tangible ways beyond screen time. It also encourages more social interaction.
Argument for AI Glam (Hair): AI superstars are currently dominating the spotlight with their technological advancements and market influence.

Conclusion on Vanity vs. AI: While AI is a powerful force, the vanity trade, driven by fundamental human desires and enhanced by AI, is seen as a compelling long-term investment.

AI Derivative Trades and Infrastructure

Infrastructure Needs for AI: The growth of AI necessitates significant investment in infrastructure, including energy and utilities.

Natural Gas: Despite oil's pressure, natural gas prices have been attempting to rise, with a target of over $3.50. The US has an excess of natural gas, particularly in regions like New Mexico.
Other Energy Sources: Nuclear energy (e.g., Constellation) and uranium are also considered important. Projections indicate a massive increase in demand for AI data centers within four years.
Energy Transmission: Infrastructure that conducts energy to AI centers is also a key area to watch.

Rare Earths: Rare earths are critical for AI and other technologies and are central to US-China trade relations.

Supply and Demand: Currently, the US has limited domestic supply of rare earths.
Domestic Production: Companies like MP Materials are working to increase US production, with potential for new mining in Nevada.
Geopolitical Considerations: The reliance on foreign supply chains for rare earths presents a challenge.
Outlook: While stocks may be rising faster than production capabilities, the need for rare earths is undeniable. Investors should watch for the balance between market enthusiasm and actual production capacity.

Synthesis and Conclusion

The market is characterized by resilience and a strong bull run, despite various economic headwinds. Commodity futures, particularly gold, are showing remarkable strength, defying bearish technical signals due to underlying fundamental factors like rising debt and geopolitical uncertainty. Crude oil, conversely, is facing pressure from oversupply and political influences, with a potential shift in dynamics not expected until 2026.

Michelle Schneider's "Modern Family Market Analysis" provides a unique lens to view market interdependencies, highlighting the importance of small caps (Grandpa) and retail spending (Grandma) as key indicators. The concentration of growth in MAG 7 companies, driven by AI, presents both opportunities and risks, with a critical need to monitor capital expenditures and consumer adoption of new technologies.

The "Vanity Trade," fueled by advancements in weight loss drugs and enhanced by AI visualization tools, is presented as a compelling long-term investment theme, potentially outperforming the more speculative "AI Glam" trade. The infrastructure required to power AI, including energy sources like natural gas and nuclear power, along with critical materials like rare earths, are also identified as significant investment areas.

Overall, the market is navigating a complex landscape where technological innovation, consumer behavior, and geopolitical factors are intertwined, demanding a nuanced approach to investment strategy. The key takeaway is to remain vigilant, monitor key economic indicators represented by the "modern family," and understand the evolving drivers of growth, from fundamental commodities to cutting-edge AI applications and societal shifts.