Why Copper and Gold are Rising While Semiconductors Lag: Deteriorating Employment and Raw Material-Driven Inflation are Moving Market Money

The software sector, which suffered a severe correction from late last year to early this year, so much so that it was called 'SAS Kill Field,' is now rebounding and recording new highs. In contrast, the semiconductor sector, which led the market in the first half, is currently showing sluggish movement. This is a natural cycle of the stock market, and after the current correction period, an upward trend may reappear.

According to recent employment reports, although the unemployment rate has fallen, the quality of employment has worsened. In particular, non-farm payrolls saw a significant shock, decreasing by 23,000, contrary to the consensus (market forecast) of an 80,000 increase. The economic activity participation rate hit a five-year low, and hourly wages recorded their lowest level since May 2021.

Current job growth is concentrated only in blue-collar occupations in healthcare and data centers, while other occupations have seen a decline. The actual perceived employment situation in the US is not good, while high inflation exacerbates the disconnect between what is felt in the stock market and what is experienced in reality. This phenomenon can be understood through an analysis of the employment report.

Separate from the stock market, gold prices surged to $4,300 per ounce, and gold mining stocks also rose. This suggests that capital has expanded its hedging investments. Typically, gold prices rise with expectations of interest rate cuts, but currently, gold is rising despite a high possibility of interest rate hikes. This gold price rebound can be interpreted as capital diversifying into assets that have been suppressed for a long time, or as a hedge against the S&P 500 index rising despite high 10-year interest rates.

Recent inflation is attributable to rising costs rather than increased demand. Firstly, the protracted war in Ukraine, neither escalating nor ceasing but in a state of limited attrition, is keeping oil prices hovering between $75 and $80, with high oil prices driving inflation due to increased costs. Secondly, industrial metal prices have further increased after Congo announced a ban on copper and cobalt ore exports. Thirdly, the instability in crop yields due to this year's record El Niño phenomenon is leading to rising agricultural product prices.

Rising raw material prices primarily increase the prices of oil, metals, and agricultural products themselves, but the bigger problem is the secondary ripple effect. This leads to increased transportation costs, electricity rates, rising grocery prices, and wage increases, triggering overall inflation. If this happens, a simultaneous rise in the price index and worsening employment could lead to fears of stagflation. This situation fuels the rise of gold and Bitcoin as means to defend against a weakening dollar.

The US Federal Reserve is trying to curb inflation, but due to the current market structure, hyperscaler CAPEX investments are continuously causing inflation. Furthermore, the US government is pursuing policies that encourage data center construction, increasing inflationary pressure. This ultimately shows that the US government is taking a one-way stance to overcome national debt through GDP growth that exceeds inflation. Investors need to understand this policy stance of the US and view the market accordingly.

Most stock investors maintain aggressive positions in tech stocks, power, servers, and AI-related stocks. While semiconductor stocks are currently undergoing a correction, their fundamental strength is robust, so it is important to hold them even if they are underwater. The logic is that you cannot exclude offensive players from your portfolio to win in the game.

Defensive positions include consumer goods, defensive stocks, financial stocks, and healthcare. If these companies were partially held in an existing portfolio, they would have played a significant role during the semiconductor correction. However, during a general market correction, these stocks may also decline. Therefore, to build an 'All-Weather Portfolio' that can defend against any risk, it is crucial to utilize short-term bonds, cash equivalents, and commodity ETFs including gold and crude oil.

Congo is a key country where over 90% of its exports are minerals, accounting for 70% of the world's cobalt mining and ranking second in global copper supply. The recent announcement of mineral export restrictions by Congo has led to a surge in cobalt and copper prices. China, the largest refining country, has lowered its operating rates due to a shortage of raw materials. These export restrictions are having a significant impact on the global mineral market.

The background to Congo's mineral export restrictions is the US's intention to use it as a card to counter China at the US-China summit, after mediating between Congo and Rwanda late last year to secure access to critical minerals. Ultimately, this is part of another US policy to contain China, and these policy movements are acting as factors for rising raw material prices. In one sentence, it can be summarized as 'policy-induced supply risk'.

Policy-induced supply risk has persisted since the start of the Trump administration, and another uncertainty may arise with the US midterm elections in November of this year. According to Polymarket, the probability of the House being dominated by the opposition party is in the high 80s, and the Senate is split. While current stock prices reflect specific policies such as tax cuts, deregulation, and energy policies, the election results could lead to radical policies or face opposition, acting as a variable in the stock market. Therefore, it is important to diversify portfolios to prepare for risks rather than concentrating investments in specific sectors.

The most basic commodity ETF is the PDBC ETF, an active ETF that holds 14 commodities including energy, precious metals, industrial metals, and agricultural products as futures. This product is designed to reduce futures rollover losses or costs, but its total expense ratio is high at 0.74%. Most commodity ETFs manage futures, so their management fees are high, and the tax structure is complex. In particular, it is important to choose products marked 'No K1' to avoid withholding tax, so it is crucial to understand the tax structure well when investing directly.

After the semiconductor rally in the first half, the semiconductor sector is currently undergoing a deep correction, and even when conditions are favorable, supply and demand are twisted, leading to weak buying. As the exchange rate falls, newly generated cash is flowing out to the US market. News includes Samsung Electronics' HBM orders and shareholder return news, and that brokerage firms' downward adjustments of target prices are multiple adjustments, not expected earnings adjustments. SK Hynix is also plagued by all sorts of rumors. This correction is an after-effect of excessive concentration, and recovery will take time. Currently, it is an oversold period, but high volatility prevents investors from easily entering. When volatility decreases and a dull period passes, foreign capital will flow in, laying the groundwork for a solid rise in stock prices. Rather than expecting a V-shaped rebound, it is necessary to wait for the market's absorption time with a long-term perspective.

Despite valuation concerns, the US market is showing an overall robust trend. In the optical communication sector, Lumentum and Coherent have rebounded, and Corning, which benefits from polysilicon tariffs, is also gaining attention. A rotation is occurring across the entire software sector, starting with cybersecurity, and software companies that were sluggish from late last year to early this year but are profitable and have good future value are recording new highs. The big tech sector, which was unexciting from last year to the first half of this year, is also showing good stock price reactions. Thus, the semiconductor sector, which performed well in the first half but is now sluggish, is simply following the cyclical principle of the stock market.

Investors who hold many semiconductor stocks may be disappointed in the upcoming market, but this should be viewed as ultimately a matter of time. The domestic market is structurally included in emerging market indices, which depend on foreign supply and demand. Therefore, it is time to set aside some disappointment and expectations and focus on how the market is currently flowing. The sharp decline like in July has passed, and now it is important to understand which sectors money is moving into. The market is constantly changing, and a strategy of riding that wave is needed. By continuing to follow this trend, you will be able to find a good market where your underwater stocks rise and you can make a profit.