Need-to-Know Numbers You Might Have Missed This Week

Another year, another Thanksgiving. I hope all of my American friends and readers had the chance to spend some quality time with family as we begin the busy holiday shopping season. The leading retail trade group expects sales this month and in December to increase as much as 4.2 percent over last year, for a total potential value of $730.7 billion.

Part of this growth is due to the market selloff that happened at the end of 2018. But there’s more to the story than that.

As I told you last week, the U.S. purchasing manager’s index (PMI), a leading indicator of economic activity, turned up for the third straight month in November. This is a good reflection of healthy demand, and a possible signal of further upside. There’s still a month left to 2019, and yet stocks are already up an incredible 28 percent.

Below are some more need-to-know numbers you might have missed from this past week.

$0.01 Increase for a Thanksgiving Dinner

One of the more interesting ways to measure U.S. inflation is by tracking the annual price of a typical Thanksgiving dinner for 10. That’s what the American Farm Bureau Federation (AFBF) has been doing for the past 34 years, and in its most recent survey, the group found that the total cost was effectively flat, rising only $0.01—from $48.90 in 2018 to $48.91 today. That’s as little as $5 per person. As Evercore ISI pointed out in a research note this week, the cost of a Thanksgiving dinner is lower now than it was eight years ago—the first time we’ve seen that since 1947.

“Americans continue to enjoy the most affordable food supply in the world,” commented AFBF Chief Economist John Newton.

55 Million Travelers

If you traveled at all this week, I hope you planned ahead. An estimated 55 million people in the U.S. were expected to hit the road or take to the skies this Thanksgiving season, up 1.6 million people, or nearly 3 percent, from last year, according to the American Automobile Association (AAA). That’s the most people since 2005. Looking at air travel alone, some 4.45 million Americans are expected to fly on domestic airlines, an annual increase of 4.6 percent.

$10 Billion Stake in U.S. Airlines

Speaking of airlines… In this week’s equity and bond report, Murenbeeld & Co. analysts Brian Bosse and Chantelle Schieven bring to our attention a lesson inspired by Warren Buffett—namely, investors must change when the facts change.

As recently as 12 years ago, Buffett was famously warning investors to steer clear of the airline industry, which had been destroying capital at least since deregulation in 1978. After the industry consolidated and restructured a couple of years later, however, airlines have committed themselves to capacity growth discipline and returning value to shareholders.

“When an industry changes from reliably destroying shareholder capital into providing reliable positive returns which create economic value, then astute investors should take notice,” Boose and Schieven write.

Buffett certainly took notice, and today his stake in the “Big Four” carriers stands at just under $10 billion.

Another industry that Murenbeeld & Co. call out for transforming from “money wasters to money spinners”? The mining industry.

$3.7 Billion Deal

Like airlines before it, the gold mining industry is seeking to improve shareholder value through consolidation, among other means. This week, we learned that Kirkland Lake Gold will be buying rival Detour Gold in an all-stock deal valued at C$4.9 billion ($3.7 billion). This is just the latest deal in the current wave of consolidation that began last year with the Barrick-Randgold deal and Newmont-Goldcorp deal.

$12 Trillion in Negative-Yielding Debt

One of the key drivers of the price of gold this year has been the surging mountain of negative-yielding government bonds. According to Murenbeeld, this amount, as of November, is a mind-boggling $12 trillion. That’s down from $17 trillion in August, but if you look below, you’ll see that more than half—and, in some cases, close to 100 percent—of some economies’ outstanding debt is trading at negative yields.

16,700 Percent Return in 50 Years

This week marks 50 years since the debut of the Hang Seng Index, the widely quoted gauge of the 50 largest companies trading in Hong Kong. From its launch in November 1969, the Hang Seng is up some 16,700 percent, making it the world’s best-performing stock index by a wide margin.

Originally intended as a measure of local firms, the Hang Seng has increasingly become a proxy of China’s economy.

Today, about half of the Hang Seng is represented by mainland Chinese heavyweights such as Tencent, China Mobile and Geely Automotive. Shares of Chinese e-commerce giant Alibaba began trading in Hong Kong for the first time this week. With a market cap of 4 trillion Hong Kong dollars ($513 billion), Alibaba is already the city’s biggest stock, meaning we’ll likely see it join the Hang Seng, possibly as soon as its next rebalance.

As I wrap up today’s note, I want to wish everyone a blessed holiday weekend! I often say that having gratitude improves your way of looking at the world. It’s important that we take stock not only in our finances but also the people who matter most, from family and friends to coworkers and business associates.

Gold Market

This week spot gold closed at $1,463.91,up $2.31 per ounce, or 0.16 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.18 percent. The S&P/TSX Venture Index came in up just 0.69 percent. The U.S. Trade-Weighted Dollar ended the week unchanged.

Date Event Survey Actual Prior
Nov-26 Hong Kong Exports YoY -8.4% -9.2% -7.3%
Nov-26 New Homes Sales 705k 733k 738k
Nov-26 Conf. Board Consumer Confidence 127.0 125.5 126.1
Nov-27 GDP Annualized QoQ 1.9% 2.1% 1.9%
Nov-27 Durable Goods Orders -0.9% 0.6% -1.4%
Nov-27 Initial Jobless Claims 221k 213k 228k
Nov-28 Germany CPI YoY 1.2% 1.1% 1.1%
Nov-29 Eurozone CPI Core YoY 1.2% 13% 1.1%
Dec-1 China Caxin PMI Mfg 51.5 51.7
Dec-2 ISM Manufacturing 49.5 48.3
Dec-4 ADP Employment Change 145k 125k
Dec-5 Initial Jobless Claims 216k 213k
Dec-5 Durable Goods Orders 0.6%
Dec-6 Change in Nonfarm Payrolls 190k 128k

Strengths

  • The best performing metal for the week was palladium, up 3.66 percent. Palladium reached a fresh record this week, reports Bloomberg, hitting $1,842.76 an ounce and extending this year’s rally to 46 percent. Gold also witnessed safe haven buying following Trump’s signing of a bill supporting Hong Kong protestors. Despite renewed hopes for a U.S.-China trade pact, holdings in gold-backed ETFs also rose the most since mid-October, helping support prices.
  • According to central bank governor Adam Glapinski, Poland repatriated around 100 tons of gold from the Bank of England in a bid to demonstrate the strength of the nation’s $586 billion economy, writes Bloomberg. Poland could generate “multi-billion” profits if it sold its holdings, but has no plans to do so, he said. In Turkey, official gold reserves, including deposits and swaps, increased 2.7 percent to $26.6 billion, compared to September, according to central bank in Ankara.
  • A news release from JP Morgan highlights that Impala Platinum Holdings’ $758 million acquisition of North American Palladium has received key regulatory approvals, with the deal expected to close on December 13. As the research note goes on to explain, the bank expects Impala to return to net cash in 2020, with under $1 billion estimated in 2021 if spot PGM prices hold. This would indicate strong capacity in 2020 to pay its first dividend since 2013. Impala may yet snatch up one of Canada’s long-life precious metals assets at a highly discounted valuation.

Weaknesses

  • The worst performing metal for the week was silver, up just 0.21 percent on little news during the holiday week. For the first time in three weeks, gold bears outnumbered bulls in a weekly poll of traders and analysts carried out by Bloomberg. Adding to that sentiment, gold headed for its biggest monthly drop in three years, as Bloomberg reports, as lingering optimism over a U.S.-China trade deal eased demand.
  • As the national bureau of statistics reported Monday, China’s gold imports fell in the month of October nearly two-thirds from a year prior. As mentioned above, another big contributing factor for gold falling this week was signs of progress in the trade talks sapping haven demand. As China and India gold imports slump as well, Capital Economics says the “gold price rally is now behind us, and that ongoing weakness in consumer demand will be one of the factors weighing on the price of gold over the coming year.”
  • Chinese consumers are grappling with the slowest economic growth since the early 1990s, writes Bloomberg, which could put a dent in gold consumption and the overall gold price in the coming year. Another Bloomberg headline could mean weaker gold prices as well – apparently a growing chorus of strategists and investors is calling for a weaker dollar. However, option traders are reluctant to bet against the greenback, the article continues.

Opportunities

  • The gold options market saw $1.75 million in block trades betting the precious metal could almost triple in more than a year (and surpass the record), reports Bloomberg. Mid-week in New York, 5,000 lots for a gold option giving the holder the right to buy the precious metal at $4,000 an ounce in June 2021 changed hands, the article reads. On a semi-related note, Goldman Sachs is looking positive at gold too. The group believes that late-cycle concerns, heightened political uncertainty, coupled with only modest growth acceleration, should support demand for the yellow metal moving into 2020, Bloomberg reports. Silver could also get a rally in the New Year, according to HSBC Global Research analysts, based on firm gold prices and rising investor demand.

  • An M&A spree is sweeping the gold mining industry, reports Bloomberg. Canada’s Kirkland Lake Gold has agreed to buy Detour Gold Corp. for C$4.9 billion ($3.7 billion). Kirkland CEO Tony Makuch is facing an uphill battle to convince both investors and analysts that he made the right decision. “We have to do work to create that value but we see opportunity to create value not recognized yet,” Makuch said in a Bloomberg Television interview. In a similar piece of news, Evolution Mining has agreed to buy Newmont Goldcorp’s Red Lake complex (Newmont’s highest-cost project). According to a statement by the company on Monday, Newmont will get $375 million in cash for the sale of the complex in Ontario, Canada, and as much as $100 million in additional payments tied to new resource discoveries.
  • Toronto-based Triple Flag Precious Metals Corp. announced plans to raise $360 million through an initial public offering (IPO) next year, reports the Financial Post. With gold prices rising and equity financings still slow for mining companies, Triple Flag said it plans to open up a 17 percent stake to public investment, by issuing 20 million shares, priced between $15 and $18. In other company news, AngloGold Ashanti has narrowed its list of bidders for its remaining South African assets, reports Bloomberg. The company is now evaluating offers from Sibanye Gold and Harmony Gold Mining.

Threats

  • Gold is the new obsession for East Europe’s nationalist leaders, reads one Bloomberg headline this week. Slovakia joined a host of countries seeking to repatriate gold while Serbia, Poland and Hungary all boosted their bullion reserves, the article explains. According to Slovakia’s former premier Robert Fico, parliament should force the central bank to bring back the nation’s gold stored in the U.K. But why? According to Fico, the gold isn’t safe in the U.K. because of Brexit and a possible global economic crisis.
  • Global central banks, including policy makers from the European Central Bank and the Federal Reserve, are approaching the end of 2019 with a collective shudder at the risky behavior their low interest-rate policies are encouraging, writes Bloomberg. “Stock indexes from the U.S. to India are at records, and low sovereign bond yields have pushed funds into property seeking better returns,” the article reads.
  • In a roundup of “Risks in 2020,” Bloomberg asked several experts what they have their eye on. Anne Richards, CEO of Fidelity International, had the following to say: “Negative bond yields are now of systemic concern. With central bank rates at their lowest levels and U.S. Treasuries at their richest valuations in 100 years, we appear to be close to bubble territory, but we don’t know how or when this bubble will burst.” Richards goes on to explain that another area of concern is with liquidity. She says that as capital becomes less free-flowing, it will weaken the ability of the financial system to respond dynamically to unforeseen liquidity events, such as an unexpected counterparty failure.

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Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 0.63 percent. The S&P 500 Stock Index rose 0.99 percent, while the Nasdaq Composite climbed 1.71 percent. The Russell 2000 small capitalization index gained 2.24 percent this week.
  • The Hang Seng Composite lost 0.80 percent this week; while Taiwan was down 0.67 and the KOSPI fell 0.67 percent.
  • The 10-year Treasury bond yield remained essentially unchanged at 1.772 percent.

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November 29, 2019

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