Calling All Commodity Bulls

Another week, another cyber-attack. With only 11 days remaining before the election, Iran and Russia were singled out by U.S. officials for stealing voter registration data and sending emails designed to intimidate voters.

This attack is more of the same from foreign adversaries who wish to divide Americans, and to sow discord and mistrust in the democratic process.

Earlier this month, I shared with you a report by Microsoft showing that Russia is by far the number one source of cyber threats, followed by Iran, China and North Korea.

I’m telling this to you now as a reminder not only to stay vigilant and read the news with a critical eye, especially when it pertains to the upcoming election. I also want to remind you of the value you get by being an Investor Alert subscriber.

I believe what our team produces every single week, without fail, can be stacked up against financial newsletters produced by companies and institutions many times our size. We regularly work late on Friday to bring you timely research and insight that can’t be found in a lot of places. The Microsoft report is a good example of that. We were also one of the first firms to talk about the monthly purchasing manager’s index (PMI), and now I see it being reported everywhere.

The Investor Alert—or “IA,” as we call it—is absolutely free to you, but for us, it’s resource-intensive. If I had to guess, I would say we spend at least $1 million a year just on the IA.

We’ve been doing this for a long time, and we’ll continue to do it for as long as there are still readers.
With that said, I’d like to take this opportunity to say thank you for being a subscriber. If you like what you read and find value in it, please consider forwarding the IA to someone you think might also enjoy it. It would be much appreciated!

Liftoff! Delta Jumps Above Its 200-Day Moving Average

A week after reporting earnings, Delta Air Lines jumped more than 7 percent on Thursday after the carrier announced it would continue to block the middle seat until at least January of next year. This jump helped its share price climb above the 200-day moving average for the first time since February, which many traders see as a bullish signal.

Delta and Alaska Airlines will be the only remaining major U.S. carriers that still block the middle seat after Southwest Airlines begins filling the seat on December 1. The low-cost carrier said in a tweet that it would unblock the middle seat after November 30, citing a body of research that supports the notion that masks and ventilation sufficiently protect passengers from the virus.

Among the studies was the one I shared with you last week. The Department of Defense (DoD) found that mask-wearing passengers are at very low risk of being infecting with the coronavirus, even on a packed flight.

“It is a very safe environment with all of the air-filtering technology and wearing masks,” Southwest CEO Gary Kelly told CNBC this week. “The science supports that.”

We continue to see the domestic airline industry recover off the April lows. Last Sunday, the number of people cleared to fly commercial in the U.S. exceeded 1 million for the first time since the pandemic struck.

Goldman: Get Ready for a Commodities Bull Market

Jet regrade—the relative strength of jet fuel prices versus diesel—looks primed for a bull market in 2021 as flight demand continues to increase, according to Goldman Sachs. By next summer, jet fuel demand is expected to be higher by 3.9 million barrels per day than where it stands right now.

Among other commodities that could also surge next year, the investment bank says, are silver, copper, gold, natural gas and Brent crude oil.

In a note to clients this week, Goldman analysts cited a weaker dollar, inflation and additional monetary and fiscal stimulus as reasons for a potential rally in commodity prices. A 12-month return of 30 percent is forecast for the S&P GSCI, which tracks 24 commodities from all commodity sectors. Industrial metals, including copper, could increase 5.5 percent; precious metals, 18 percent; and energy, more than 42 percent.

Goldman sees the price of gold averaging $2,300 an ounce in 2021, while silver is projected to average $30 an ounce.

Here at U.S. Global Investors, we’re very bullish on commodities, particularly industrial and precious metals. The manufacturing PMI in a number of countries shows that factories are expanding capacity on a greater number of new orders. In August, the U.S. manufacturing PMI registered 56.0, the highest reading since November 2018. The PMI in China—the world’s biggest importer of metals and other raw materials—was 51.5 last month, well above the five-year average of 50.6.

As I’ve noted before, commodities continue to look remarkably cheap relative to stocks. Below is a chart showing the ratio between the S&P GSCI and S&P 500. At no other time going back to 1972 have commodities been as undervalued as they are today. If Goldman’s projections turn out to be accurate, now could be a phenomenal buying opportunity.

Doctor Copper Briefly Crosses Above $7,000 a Tonne, Thanks in Large Part to China

“Doctor copper” is so named because its price is seen as a good indicator of economic health. If that’s the case, then the economy isn’t nearly as bad as we thought it was.

In intraday trading on Wednesday, copper briefly crossed above $7,000 a tonne, its highest level since June 2018. From its low in late March, the red metal has risen close to 50 percent on hopes of further government stimulus and increased demand, particularly from the renewable energy industry and China.  
In July, China’s copper imports hit an all-time high of 762,210 tonnes as the government unleashed stimulus aimed at building bridges, roads, railroads, broadband and more.

That includes renewable energy projects such as wind and solar. According to a report this month by the Global Wind Energy Council (GWEC), China led the world in adding new offshore wind capacity in 2019, with 2.4 gigawatts (GW) installed, representing nearly 40 percent of total new wind power across the globe.

The market cap of China’s LONGi Green Energy Technology, the world’s largest solar power company, recently climbed higher than that of oil major China National Offshore Oil Corporation (CNOOC), the country’s largest oil and gas producer. This not only represents a significant shift in energy trends, but it’s also highly supportive of copper prices.

I expect China’s appetite for metals and other raw materials to keep pace as it continues to stimulate its economy—which managed to grow, I should add, an historically low and yet impressive 4.9 percent in the third quarter compared to the same period last year.

We’ll receive third-quarter economic data for the U.S. on Thursday of next week. I hope to see a huge improvement over the second quarter, when real GDP fell at an annual rate of 31.4 percent, according to Bureau of Economic Analysis (BEA).

Virtual Junior Mining Expo

I’m very excited to share with you that I’ll be participating in the first-ever Virtual Junior Mining Expo, featuring 10 top junior mining companies. This virtual event is co-hosted by my friends at Streetwise Reports, and it will take place Thursday, November 12, at 1:00 pm Eastern. What’s more, it’s absolutely free.

To register for the event, please click here. I hope you’ll join us!  

 

Gold Market

This week spot gold closed at $1,902.05, up $2.76 per ounce, or 0.15 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 2.94 percent. The S&P/TSX Venture Index came in off 0.99 percent. The U.S. Trade-Weighted Dollar fell 1.02 percent.

Date Event Survey Actual Prior
Oct-18 China Retail Sales YoY 1.6% 3.3% 0.5%
Cct-20 Housing Starts 1465k 1415k 1388k
Oct-22 Initial Jobless Claims 870k 787k 842k
Oct-26 New Home Sales 1025k 1011k
Oct-27 Hong Kong Exports YoY -0.4% -2.3%
Oct-27 Durable Goods Orders 0.6% 0.5%
Oct-27 Conf. Board Consumer Confidence 101.8 101.8
Oct-29 Initial Jobless Claims 788k 787k
Oct-29 GDP Annualized QoQ 31.9% -31.4%
Oct-29 ECB Main Refinancing Rate 0.000% 0.000%
Oct-29 Germany CPI YoY -0.3% -0.2%
Oct-30 Eurozone CPI Core YoY 0.2% 0.2%

Strengths

  • The best performing precious metal for the week was platinum, up 4.64 percent on perhaps sentiment that demand should pick up with more hydrogen research and production. Gold edged up on Friday as the U.S. dollar weakened on German data showing factories recovering solidly. The yellow metal finished the week positive after a steep drop last week.

  • Gold exports to the U.K. from Switzerland hit a one-year high in September, according to data from the Swiss customs authority. Bloomberg reports bullion bars are being sent to London vaults to meet requirements for physically backed ETFs.
  • Russia’s largest gold producer, Polyus PJSC, announced its Skuhoi Log deposit in Siberia holds the world’s biggest gold reserves, according to a new audit. Data shows the deposit has 40 million ounces of proven reserves with an average gold content of 2.3 grams per ton. 

Weaknesses

  • The worst performing precious metal for the week was gold, but still up 0.15 percent. Gold fell more than 1 percent on Thursday after hopes disappeared for a pre-election stimulus package. Gold ETF investors have been selling, with funds poised for the first back-to-back weekly outflow this year. Ole Hansen of Saxo Bank says investors might be selling because they view a Biden election win as largely priced in, limiting gold’s upside potential.
  • The Perth Mint is being investigated for links to global organized crime syndicates and for failing to conduct identity checks required to prevent money laundering, reports The Financial Review. The refinery’s failure to conduct background checks on Euro-Pacific customers raises the possibility that it sold and is storing precious metal holdings of tax cheats and foreign criminals.
  • Lundin Gold’s large-scale Fruta del Norte gold mine in Ecuador could soon face production shutdown due to protests. Local protesters blocked access to the mine to push for the reconstruction of a bridge over the Zamora River that collapsed on Saturday, along with other demands, reports Bloomberg. Lundin had pledged $2.6 million to finance the bridge.

Opportunities

  • Citigroup estimates silver could surge to $40 an ounce in the next 12 months due to a recovery in industrial demand and strong investor appetite for precious metals. Analysts including Max Layton wrote in a note that silver will outperform gold because it is “more levered than gold to inflation overshoots, rebounding manufacturing activity.”
  • Billionaire hedge fund manager John Paulson said that gold “is going to gain relevance in the near future” and that it is not a “get-rich-quick investment,” but a long-term store of value to protect against inflation. Bloomberg notes Paulson made the comments at Grant’s 2020 Fall Conference on Tuesday. The investor expects a strong economic recovery after the pandemic, with expanding credit and inflation.
  • Petra Diamonds made a deal with its creditors to save the business with almost $700 million of debt maturing in two years. Bloomberg reports the deal will see bondholders swap debt for equity and own 91 percent of shares and will have a partial reinstatement of existing bonds. Petra was once worth $1.5 billion but had suffered from debt and falling diamond prices before the pandemic hit. CEO Richard Duffy said the deal “provides the business with a stable, deleveraged capital structure that will ensure the short and long-term viability of the company.”

Threats

  • Echelon Capital Markets sales desk wrote in a note to clients this week that reports of Kinross considering selling its Americas assets and moving its primary listing to London is likely to do the miner more harm than good. The firm added that Kinross’ potential move could leave investors concerned the stock’s share price performance has run its course, up more than 90 percent this year.
  • Centamin Plc, an Egyptian-focused miner, fell as much as 19 percent in London trading on Wednesday after announcing it will produce less gold than expected in 2021. Centamin operates the Sukari gold mine in Egypt, seen as one of the best gold deposits in the world not owned by a major producer, but the company has long faced operational and political challenges. The company said 2021 output will be between 400,000 and 430,000 ounces, which is below analyst consensus of around 500,000 ounces, reports Bloomberg.
  • Sibanye Stillwater is no longer actively pursuing buying assets from companies they were previously in talks with due to higher metal prices that are pushing valuations higher. Bloomberg notes Sibanye is famous for its deal-making and wants to buy gold mines in North America, but assets are now considered too expensive and might not add value to investors.

 

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.95 percent. The S&P 500 Stock Index fell 0.53 percent, while the Nasdaq Composite fell 1.06 percent. The Russell 2000 small capitalization index gained 0.41 percent this week.
  • The Hang Seng Composite rose 1.14 percent this week; while Taiwan was up 1.16 and the KOSPI rose 0.82 percent.
  • The 10-year Treasury bond yield rose 9 basis points to 0.839 percent.

 

October 23, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors