Still Plenty of Gas in the Base Metal Rally Tank

Industrial metals are well on their way to being among the top performers of 2020, supported by red hot demand from China and global supply concerns.

As of today, the MSCI Industrial Metals Index—which tracks the price of copper, nickel, aluminum and more—was up 21.4% year-to-date, just below the index of precious metals, up 21.9%. The broader S&P GSCI, which measures metals as well as agricultural and energy-related commodities, was underwater by nearly 10%.

As I discussed last week, copper prices have been on a tear this year thanks not only to the economic strength of China, the metal’s biggest consumer, but also because of its essential role in nascent technologies such as electric vehicles (EVs) and renewable green energy.

The very hottest major commodity, however, has been iron ore. Used to make steel, the metal has increased nearly 70% in 2020, with iron futures trading on the Singapore Exchange topping $155 per metric ton today for the first time since the contract came online in 2013.

At the very heart of this rally is rapidly strengthening factory activity around the globe. In November, a number of countries’ manufacturing sectors were in expansion mode, according to the monthly purchasing manager’s index (PMI), which is a leading indicator for demand.

But the big standout is China, the only major economy to see a robust recovery following the pullback that was triggered by the coronavirus pandemic.

The U.S., by comparison, is rebounding nicely, but it still has a long way to go before it reaches pre-pandemic levels. As of November, the number of jobs in the country was still below the February peak by nearly 10 million.

Plenty of Gas in the Tank

I believe the rally is only getting started, and we could see ever higher asset prices in 2021, for a couple of significant reasons.

Number one, President-elect Joe Biden plans to make infrastructure one of his top priorities soon after taking office next month. Proposals have the U.S. spending as much as $2 trillion not only to improve roads, bridges and seaports but also beef up the EV sector, add charging stations, convert school buses to zero emissions and more.

Biden’s plans could attract private investment in infrastructure, including from pension and insurance investment funds, according to Reuters. This, in turn, could prop up the base metals market.

The second big reason has to do with inflation driven by additional stimulus packages and money-printing. This week, legendary Bridgewater Associates money manager Ray Dalio held an “Ask Me Anything” event on Reddit, during which he said that the “flood of money and credit” was unlikely to recede next year. As such, “assets will not decline when measured in the depreciating value of money,” the billionaire investor suggested.

All that money will need to go somewhere, in other words, and that includes base metals and other commodities.

Congress is currently considering a $908 billion stimulus bill that’s supported by the White House. According to Barron’s, the International Monetary Fund (IMF) chief economist Gita Gopinath is urging Congress to pass the relief package even at the risk of heating up inflation, which would be supportive of commodities.

Remember, the Federal Reserve seems no longer interested in containing inflation. In August, Fed Chair Jerome Powell unveiled a new policy approach that would allow inflation to average 2% over time, meaning price spikes month-to-month would be tolerated.

Emerging Markets: “The Most Important Chart” as We Head Into 2021

Besides base metals, I’m also bullish on emerging markets. Below is a chart that CLSA calls “the most important chart for global investors to pay attention to as we go into 2021.”

In a report dated December 10, analysts at the Hong Kong-based financial firm write that they see emerging markets (EMs) offering the “greatest opportunity” next year. If you take a look at the chart, you can see that the EM universe, as measured by the MSCI Emerging Markets Index (MXEF), is currently testing resistance that goes back to late 2007.

If a breakout occurs, CLSA says, it would be “similar to the recognition phase in 2004 following the 1994 – 2004 secular bear market pattern.” To give you some idea of the returns EM investors may have seen at the time, the MXEF increased over 200% in the four-year period ended December 31, 2007.

Looking ahead to 2021, I agree with CLSA and others in believing EMs look well-positioned to outperform, particularly now that a few different COVID-19 vaccine candidates are becoming available. In November, close to half of fund managers participating in a Bank of America survey said they believe emerging markets are poised to outperform next year, ahead of the S&P 500, oil and gold.

Meanwhile, JPMorgan points out that EMs are currently under-owned on a relative basis, and that after being largely ignored by investors this year, they could rally as much as 20% in 2021.

Attractive Dividend Yields

The EM investment case is strengthening even more as the U.S. has joined Europe and Japan in offering near-zero or even negative real yields. More than 75% of all debt issued by governments in developed markets (DMs) now trades at a negative real yield, according to JPMorgan.

This phenomenon isn’t reserved just for government debt, though. For the first time ever, investment-grade corporate debt in the U.S. trades with an effective real yield of 0%, the Wall Street Journal reports.

This is forcing yield-starved investors to seek alternatives.

EMs could be such an alternative. Some of the most attractive dividend yields are offered by stocks listed in emerging economies, particularly those in Central and Eastern Europe (CEE). For the year so far, dividend yields for Russian stocks, as measured by the MOEX Russia Index, have averaged 6.5%. That’s nearly 3.5 times greater than the average yield offered by U.S. stocks over the same period. At only 1.9%, the yield for the S&P 500 was only a few basis points above inflation.

Undervalued Compared to U.S. Market

Compared to the U.S. market, EMs also appear to be undervalued, making now an exciting entry point. The chart below shows you the ratio between the MSCI Emerging Markets Index and S&P 500. As you can see, EM stocks are more undervalued on a relative basis now than at any other time since the early 2000s.

HIVE a Crypto Proxy

Many of you listened in to the recent HIVE Blockchain Technologies webcast, where we reported record revenue and cash flow for the second quarter of fiscal 2021. I mentioned that investors are trading HIVE as a proxy for the cryptocurrencies it mines, primarily Ethereum and Bitcoin.

This week, the popular Motley Fool investment advice website recommended HIVE for that very reason.

“You can directly purchase and hold Bitcoin in your portfolio. But for most investors, this may be too technical or too risky,” the site writes. Instead, it says, you could bet on HIVE, the first publicly traded crypto-mining firm.

HIVE “is a convenient proxy for cryptocurrency exposure,” Motley Fool adds.

Shares of the company are up close to 1,270% for the year.

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Gold Market

This week spot gold closed at $1,862.73, up $23.87 per ounce, or 1.30 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher/lower by 2.89 percent. The S&P/TSX Venture Index came in up 2.03 percent. The U.S. Trade-Weighted Dollar rose 0.10 percent.

Date Event Survey Actual Prior
Dec-8 Germany ZEW Survey Expectations 46.0 55.0 39.0
Dec-8 Germany ZEW Survey Current Situation -66.0 -66.5 -64.0
Dec-10 ECB Main Refinancing Rate 0.000% 0.000% 0.000%
Dec-10 Initial Jobless Claims 725k 853k 716k
Dec-10 CPI YoY 1.1% 1.2% 1.2%
Dec-11 Germany CPI YoY -0.3% -0.3%
Dec-11 PPI Final Demand YoY 0.7% 0.8% 0.5%
Dec-14 China Retail Sales YoY 5.0% 4.3%
Dec-16 FOMC Rate Decision (Upper Bound) 0.25% 0.25%
Dec-17 Eurozone CPI Core YoY 0.2% 0.2%
Dec-17 Housing Starts 1530k 1530k
Dec-17 Initial Jobless Claims 780k 853k


  • The best performing precious metal for the week was spot gold, up 1.30%. The State Street SPDR Gold MiniShares fund added a net $163 million on December 7, bringing total assets up by 4.7% to 3.62 billion. Bloomberg notes the fund has attracted net inflows of $2.11 billion in the past 12 months.
  • Zambia’s central bank signed gold purchase deals with a local unit of First Quantum Minerals, which produces gold as a byproduct at its copper mine in the country. The bank also signed a deal with a state-owned mining investment company that buys gold from small-scale producers, reports Bloomberg. The southern African nation plans to hold gold for the first time since 1995 to bolster foreign exchange reserves after defaulting earlier this year.
  • Wheaton Precious Metals announced it will pay Capstone Mining $150 million for 50% of its silver production up to 10 million ounces. The royalty and streaming company will use its $2 billion revolving credit facility to fund the transaction, reports Kitco News. Wheaton is also in talks regarding a potential gold stream from Capstone. In its five-year outlook starting in 2021, the company said attributable silver produce is forecast to average 820,000 ounces per year.


  • The worst performing precious metal for the week was platinum, down 3.38% after a stellar 9.59% jump the previous week. Anglo American Platinum also announced its production level would return back to normal levels in 2021 following repairs at their refinery. Gold dropped from a two-week high on Wednesday as investors assessed renewed concerns over the progress of stimulus negotiations among U.S. lawmakers, reports Bloomberg. Spot gold fell to $1,840, while silver fell 2% and platinum and palladium also fell.

  • ETFs backed by gold cut 45,912 troy ounces from holdings on December 7, marking the 11th straight day of declines, and bringing 2020 net purchases to 23.8 million ounces. According to Bloomberg data, total gold held by ETFs has still risen 29% so far this year to 106.7 million ounces.
  • Morgan Stanley said in a note this week that it expects gold and other precious metals to come under pressure in 2021 as markets normalize and the yield curve steepens. The eventual tapering of U.S. monetary stimulus could weigh on gold and analysts see it trading in the $1,800s range for much of the year before moving lower in 2022.


  • HSBC Securities says there’s still support from accommodative monetary and fiscal policies, as well as geopolitical risks, for gold’s rally next year. “The financial, economic, and health uncertainties generated by the Covid-19 pandemic and its aftermath are still likely to continue to support gold in 2021 and even 2022, albeit at a reduced level,” James Steel, chief precious metals analyst, said in a note this week.
  • Although commodities could enter a “period of pause” this winter, Citigroup says the outlook across the complex looks robust in 2021 due to tightening market conditions across industrial metals. The bank predicts a gold rebound next year and says silver, palladium and platinum may end the year higher than current prices. Citigroup’s three-month gold price target is $1,850 an ounce and expects strong buying support on dips below $1,800.
  • Morgan Stanley is bearish on gold in 2021, but it is bullish on silver. The bank expects silver to continue to outperform gold in the coming year due to strong growth in electronics and solar power.


  • JPMorgan says the rise of cryptocurrencies into mainstream finance is coming at the expense of gold. Eddie Spence of Bloomberg writes that money has poured into Bitcoin funds and out of gold funds since October and believes the trend will only continue in the long run as more institutional investors take positions in cryptocurrencies. The Grayscale Bitcoin Trust has seen inflows of almost $2 billion since October, compared with outflows of $7 billion for exchange-traded funds backed by gold, according to JPMorgan.
  • South Africa’s mining production in October fell 6.3% from a year ago and comes after a 3.4% drop in September. The median estimate in a Bloomberg survey was for a 4.7% contraction. Gold production dropped 3.9% and 1.1% in September. Production in what was once the world’s top producer has declined steadily for years. Platinum-group metals production did rise 2.4% in October after a 0.4% decline in September.
  • Bloomberg reports that foreigners are using a gold ETF to pull cash out of Nigeria amid a dollar shortage. Portfolio managers buy the Newgold Issuer Ltd. ETF listed in Lagos, then transfer holdings to the fund’s primary listing in South Africa to sell for rands. According to Jolomi Odongharo, head of research at Cordros Capital, fear of devaluation and the opportunity cost of keeping money in Nigeria means investors are willing to take the loss when selling out.

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Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.57%. The S&P 500 Stock Index fell 1.01%, while the Nasdaq Composite fell 0.69%. The Russell 2000 small capitalization index gained 1.01% this week.
  • The Hang Seng Composite lost 1.23% this week; while Taiwan was up 0.91% and the KOSPI rose 1.41%.
  • The 10-year Treasury bond yield fell 7 basis points to 0.891%.

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December 11, 2020

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