“Uptober” Doesn’t Disappoint as Bitcoin Touches $56,000

October 8, 2021

“Uptober” Doesn’t Disappoint as Bitcoin Touches $56,000

Bitcoin topped $56,000 on Friday for the first time since May as a number of positive crypto developments galvanized investors in the month of “Uptober.”

For one, legendary investor George Soros’s family office fund confirmed this week that it held Bitcoin in its nearly $6 billion portfolio. Speaking at a Bloomberg event, Soros Fund Management CEO and chief investment officer Dawn Fitzpatrick said that Bitcoin was more than an inflation hedge, having “crossed the chasm to mainstream.”

Indeed, there were an estimated 221 million people actively involved in the crypto ecosystem in June, according to Crypto.com. That’s more than twice the number of people who were trading and holding cryptos at the beginning of 2021, suggesting an exceptionally robust growth rate that’s far outpaced stock ownership.

Still in the early innings: Global Crypto Market size over time

Also supporting cryptos this week was an assurance by Gary Gensler, head of the Securities and Exchange Commission (SEC), that his agency does not have the authority or intention to ban cryptocurrencies as China has done in recent weeks.

Gensler, who’s under fire from certain U.S. lawmakers for signaling an interest in regulating the industry, said on Tuesday that a crypto ban would be “up to Congress.” However, I believe this is just as unlikely, given that there are a number of staunch pro-Bitcoin members of Congress, including Sen. Cynthia Lummis (R-WY) and Rep. Warren Davidson (R-OH).

Bank of America Introduces Coverage of Digital Assets

One of the most constructive bits of crypto news, as I see it, is Bank of America’s decision to introduce coverage of digital assets. In its maiden report this week, the second biggest U.S. bank said the $2 trillion crypto space is just “too large to ignore.”

Crypto strategist Alkesh Shah is particularly “bullish on the long-term prospects for the digital asset ecosystem as it enters the mainstream.” (There’s that word again!) “We anticipate significant growth as digital asset use cases move beyond Bitcoin’s store of value thesis to an industry characterized by product innovation, regulatory clarity, increased institutional participation and mainstream adoption.”

Bank of America also spends time discussing non-Bitcoin coins (altcoins), writing that digital assets that can “enable a platform to be built, like the Apple iPhone did for applications, are gaining the most value.”

The biggest altcoin is Ether with a current market cap of $427.7 billion, and it’s up 392% for the year. I’m pleased to share with you that HIVE Blockchain Technologies mines both Bitcoin and Ether, which helped it generate a record $37.24 million in revenue during the quarter ended June 30. That’s the highest revenue of any publicly traded crypto miner, and what’s more, HIVE appears the most attractive on a relative basis when looking at market cap-to-revenue.

HIVE looks most attractive based on market cap-to-revenue

In case you missed HIVE’s earnings webcast for the first fiscal quarter of 2022, I invite you to watch the replay below.

Bitcoin Now the Eighth Largest Asset

After this week’s price surge, Bitcoin’s market cap rose above $1 trillion once again. This put it above Facebook’s market cap, making Bitcoin the world’s eighth largest asset.

Bitcoin surpasses facebook to become the worlds eighth largest asset

Of the assets shown above, Bitcoin was also the best performer for the year as of Friday. The digital currency was up more than 84%, followed by Alphabet (+62%), Microsoft (+36%) and Facebook (+23%).

2021 has been a challenging year for the two precious metals, gold and silver, with the former down 9.5% as of Friday, the latter down around 16.5%.

Much of this price action is due to institutional investors’ evolving preference for Bitcoin, if JPMorgan’s analysis is any indication. In a report this week, the bank said it believes big investors “appear to be returning to Bitcoin, perhaps seeing it as a better inflation hedge than gold.” JPMorgan adds that the success of the Lightning Network, which allows nearly instantaneous crypto transactions, and El Salvador’s adoption of Bitcoin as legal tender have helped convince investors that the digital currency can scale up to meet institutional demand.

Gold Miners Flush with Cash

Speaking of gold miners… A recent chart by “Bear Traps Report” founder Lawrence McDonald shows that the number of companies in an NYSE Arca Gold Miners ETF that are trading above their 200-day moving averages is coming off recent lows. As McDonald points out, “Historically this has led to strong returns in the following six months.”

In other words, this may be an opportune time to get exposure.

Having come across this, I was curious to see which gold mining companies had the strongest cash positions right now. Specifically, I looked at free cash flow (FCF) yield, which tells you how well a company can meet its financial obligations, pay down debt and potentially raise its dividend. You can calculate the yield by dividing a company’s per-share FCF by its market cap. I like to see a number above 7% or 8%.

The results are below. For comparison’s sake, I also included the FCF yield for the gold mining index as well as the S&P 500.

Most cash flush gold miners in universe of investable companies

As you can see, there are quite a few companies that have very strong cash positions at a time when investor sentiment for gold miners is very low. Again, when sentiment has been this low, returns have historically been attractive six months later. The companies above, I think, would be a good place for investors to start hunting for opportunities in anticipation of the next bull run. We invest in several of the names here at U.S. Global Investors.

Topping the list is Toronto-based Torex Gold, which reported this week that it produced 111,220 ounces of gold in the quarter ended September 30, and that it’s well on track to meet the upper end of its 2021 guided range of 430,000 to 470,000 ounces. Torex sold nearly 119,000 ounces during the quarter, at an average price of $1,785 per ounce.

If you’re familiar with crypto miners, you know that they HODL (“hold on for dear life”) most of the coins they produce. I wish more gold miners did this. Of the miners featured above, the only one I’m aware of that HODLs its gold is Gran Colombia. HODLing their metal would help them appeal to more millennial investors.

Check out my interview today with Stock Talk with Eli, by clicking here. We talk HIVE and go over the recent earnings presentation. Don’t miss it!

 

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 1.22%. The S&P 500 Stock Index rose 0.79%, while the Nasdaq Composite climbed 0.09%. The Russell 2000 small capitalization index lost -0.38% this week.
  • The Hang Seng Composite gained 0.67% this week; while Taiwan was up 0.42% and the KOSPI fell -2.08%.
  • The 10-year Treasury bond yield rose 4 basis points to 9.92%.

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Energy and Natural Resources Market

Strengths

  • The best performing commodity for the week was lumber futures, up 15.31%, on enthusiasm about a renewed housing market. European natural gas futures climbed back toward a record, as the region struggled to build up stockpiles for winter. Prices have almost doubled in the past month as rebounding economies boost demand amid restraints on supply. Europe’s gas inventories are at the lowest level for this time of year in more than a decade.
  • Oil climbed to a seven-year high as traders assessed OPEC+’s decision to keep supplies fairly tight even as the world grapples with a natural gas crisis. At an OPEC+ meeting on Monday, Saudi Arabia and its partners opted for only a modest output increase of 400,000 barrels a day for November, taking many analysts by surprise as a spike in natural gas prices looks set to inflame demand for oil products this winter.

Natural Gas Prices Continue to Have Momentum

  • Western lumber pricing moved higher with Canadian producers leveraging the premium in futures, increasing stumpage charges, and doubling the duty rate in November. Prices ended the week up 7% at $533, up 7% relative to the third quarter, down 39% year-to-year, and up 67% year-to-date.

Weaknesses

  • The worst performing commodity for the week was wheat, down 2.95% on strong expected exports from Russia. In other news, Australia expects the iron ore price to stay at around $150 per ton until late 2021, before falling to $93 per ton by the end of 2022. The figure for 2022 has been revised downward from $109 per ton, as stated in a previous report published in June. Falling domestic demand for steel in China, due to slower construction activity and the implementation of a number of government policies, has resulted in weaker iron ore prices, Australia’s department of industry, science, energy & resources said in its quarterly resources and energy report.
  • The heads of the world’s biggest commodity trading houses said record gas and power prices are starting to weigh on industrial production demand from Europe to Asia, threatening a nascent economic rebound. Russell Hardy, the head of Vitol Group, the world’s biggest independent oil trader, said energy prices are “becoming unaffordable” for consumers and “unaffordable for some industrial processes,” as well. “We are at a fairly critical juncture,” he said.
  • The U.S. energy secretary raised the prospect of releasing crude from the U.S. Strategic Petroleum Reserve, as well as potentially banning U.S. crude oil exports. Such a comment follows the recent rise in U.S. retail gasoline prices to their highest level since late 2014. Such relief would, however, only be transient given the structural deficits that the global oil market will face from 2023 onward. An export ban would significantly disrupt the U.S. oil market, with a likely bullish impact on U.S. retail fuel prices that price off Brent.

Opportunities

  • The U.S.?steel market is starting to rebalance. Despite the closure of 6-7 million tons of capacity during COVID, the U.S. steel market has started to rebalance. Specifically, remaining mills have pushed production back to pre-COVID levels at around 1.9 million tons per week. In addition, imports have risen rapidly, now at 30 million tons per year. Specifically, imports continue to arrive at $1,500-$1,600 per ton versus $1,950 per ton spot, while there are reports of unlimited volume offers. Adding to that, over 20 million tons of projected North American capacity additions in the coming three years.
  • Spot prices for fertilizers during the second quarter were roughly twice year-ago levels, but reported net realized prices fell well short of these levels due to forward sales. Now the fertilizer price rally is approaching 3X (NOLA urea $550 versus $220, Tampa DAP $670 versus $300, Brazil spot potash $730 versus $220). Further, there are several drivers of more supply disruption that could lead to 4X pricing (EU natural gas at $30/mm BTU, China’s export ban, and Belarus potash sanctions).
  • According to RBC, with copper averaging $4.25/pound in the third quarter, they expect continued strong free cash flow from the copper producers and a focus on capital allocation including shareholder returns, accelerated growth projects, and potential M&A. On the other hand, cost inflation and supply chain issues could negatively impact results and copper remains range bound around $4.25/pound (after reaching $4.86/pound in mid-May). They think copper prices could continue ease into next year and they estimate $3.75/pound for 2022 as demand slows in China amid increased supply; although, low inventories and anticipation of medium-term deficits can keep prices supported.

Threats

  • Chemical production in China continues to face meaningful headwinds on the back of limited power due to sharp increases in coal prices and reduced operating rates due to policies implemented across several provinces to limit energy consumption. According to ICIS, chemical products PVC, acrylic acid, and benzene face the biggest challenges, resulting in relatively “tight” supply/demand balances. ICIS estimates that 36% of China’s total effective capacity in 2021 may be in the regions being most impacted by the recently enacted policies, along with 38% of acrylic acid and 30% of benzene. Of note, there are several products that have more capacity at risk in the affected provinces, including 69% of polystyrene (PS), 63% of expandable polystyrene (EPS), 51% of LDPE, 47% of HDPE, 41% of ethylene, and 40% of polypropylene.
  • LNG spot thermal coal and North American natural gas prices have risen further. LNG spot rose to $33.8/mm btu (up $7) and thermal coal to $203/ton (up $24). A cold winter could push diesel past $120/barrel and Brent past $100 per barrel. Rising crude oil prices benefit trading companies like Mitsui & Co. and Mitsubishi Corp. Conversely, rising prices are negative for chemicals companies as they lead to higher raw material and fuel costs. The impact is especially significant for paint firms, diversified chemical companies, and domestic industrial gas companies. Chemical manufacturers including Exxon Mobil Corp. and LyondellBasell Industries NV warned that a proposed 20% U.S. tax on virgin plastic resin would be “devastating” to the industry.
  • According to Morgan Stanley, there are five reasons the European gas price spike should begin to ease in the coming weeks. 1) Russia’s excess gas production is currently being reinjected into domestic storages. The deadline for completion of this process is late October, meaning excess supply into Europe should free up by November. 2) Gazprom’s maintenance season typically meaningfully eases by November. 3) Gazprom began filling one string of its Nord Stream 2 pipeline – this could boost investor sentiment around the start of rising supply. 4) The gas price spike has triggered some demand destruction with inventories currently building at a normal pace. 5) Storage levels are not as low as the market fears. European gas storage levels are close to historical averages. This implies enough storage to cover the heaviest draw seen in the last decade.

Which Industrial Metal Are You?

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Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Nano Dogecoin INTC, rising 50,429,343,990%.
  • According to Bloomberg, Bank of America (BofA) has now launched research coverage of cryptocurrencies due to growing institutional interest in the sector and massive appetite among retail clients. On Bloomberg Surveillance this week, head of global research from BofA Candance Browning said, “This isn’t just Bitcoin anymore, this is digital assets.”
  • US Bancorp, the fifth-biggest retail bank in the nation, is joining rivals State Street and Bank of New York Mellon in offering crypto custody services. The bank is offering crypto custody services to institutional investment managers with funds in the U.S. or the Cayman Islands, according to Bloomberg.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Big Digital Shares BDC, down 81.47%.
  • Central banks are becoming more concerned about cryptocurrencies, but particularly regarding stablecoins. The Bank of International Settlements, the organization that represents most of the world’s central banks, published guidance on how regulators can oversee them, writes CoinDesk.
  • According to CEO of Galaxy Digital Mike Novogratz, “a central bank-issued currency would be a disaster,” reports CoinDesk. “Governments are not good at innovating, and I don’t think anyone in the West wants to give up as much privacy as the Chinese are willing to give up.” The article goes on to highlight the perceived risk if governments start meddling in cryptos.

Opportunities

  • Federal Reserve Chairman Jerome Powell said that he has no intentions of banning cryptocurrencies. While testifying before Congress, Powell was asked by lawmakers if it was the Fed’s intention to ban or limit the use of digital assets, and Powell simply responded “no,” according to Decrypt.

TSA Checkpoint Numbers Are Startingto Roll Over

  • An article published by Bloomberg states that in the eyes of Bank of America
    (BofA) more regulation could be positive for cryptocurrencies. Once rules are established, the uncertainty over how to invest in crypto will be lifted, a strategist at the bank wrote.
  • According to an article published by Decrypt, The U.S Department of Justice has announced a new cryptocurrency enforcement team. Attorney General Lisa Monaco stated that, “We have already made great stride in combating misuse of cryptocurrency platforms, and we’ve shown we won’t hesitate to go after those platforms that help criminals launder or hide their criminal proceeds.”

Threats

  • Stablecoin backer Circle is under investigation by the SEC. In an article published by Bloomberg, Circle received an investigative subpoena from the SEC requesting “documents and information regarding certain of holdings, customers, programs, and operations.”
  • Brian Armstrong, CEO of the largest crypto exchange in the U.S., Coinbase, is concerned that U.S. business leaders will start quitting due to the intense scrutiny that they face. “America could be losing some of its best talent from this, and it has some parallels to what is happening to successful CEOs in China” said Brian Armstrong in article published by Bloomberg.
  • Gary Gensler confirms that the SEC won’t ban crypto, but Congress could. During his hearing at the House Committee on Financial Services, Gensler emphasized that prohibiting cryptocurrency does not fall within the SEC’s mandate, stating “that would be up to Congress,” reports CoinTelegraph.

What Do You Know About Digital Currencies?

Gold Market

This week spot gold closed the week at $1,757.13, down $3.85 per ounce, or 0.22%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 4.40%. The S&P/TSX Venture Index came in up 1.34%. The U.S. Trade-Weighted Dollar ended the week essentially flat.

Date Event Survey Actual Prior
Oct-4 Durable Goods Orders 1.8% 1.8% 1.8%
Oct-6 ADP Employment CHange 430k 568k 340k
Oct-7 Initial Jobless Claims 348k 326k 364k
Oct-8 Change in Nonfarm Payrols 500k 194k 366k
Oct-12 Germany ZEW Survey Expectations 24.0 26.5
Oct-12 Germany ZEW Survey Current Situation 28.5 31.9
Oct-13 Germany CPI YoY 4.1% 4.1%
Oct-13 CPI YoY 5.3% 5.3%
Oct-14 Initial Jobless Claims 328k 326k
Oct-14 PPI Final Demand YoY 8.8% 8.3%

Strengths

  • The best performing precious metal for the week was palladium, up 8.19% despite hedge funds taken their net-short position to record levels. Gold extended gains after a key U.S. jobs report fell well short of expectations in September, complicating a potential decision by the Federal Reserve to begin scaling back monetary support before year end. The U.S. added fewer jobs than forecast for a second month in a row, pointing to weakness in the labor market recovery. Nonfarm payrolls increased 194,000 last month after an upwardly revised 366,000 gain in August, a Labor Department report showed Friday. The unemployment rate fell to 4.8%, partly reflecting fewer Americans looking for work. Meantime, average hourly earnings jumped. The dollar and Treasury yields slumped in response, boosting bullion’s appeal.

Platinum Prices Continue to Fall Due to Weak Auto Production

  • On the back of production from Judd commencing this quarter, increasing operating flexibility and a very low capital cost expansion opportunity, K92 Mining has approved a 25% production increase to 500,000 tonnes per annum, an interim bump ahead of the larger Phase 3 expansion that will commence later in 2023. The company anticipates the low cost ($2.5M) expansion to commence commissioning in Q3 2022.
  • Calibre Mining pre-reported strong third quarter production results, beating consensus expectations for the quarter. The company maintained 2021 guidance (170,000-180,000 ounces) and with the fourth quarter anticipated to be the strongest quarter of the year, the company expects to achieve the top end of the guided range. The company reported a strong quarter-end cash position of $72.9 million (with no debt), up $6.6 million from $66.3 million in the second quarter, and remains well positioned to generate significant free cash flow while progressing with its exploration and development programs.

Weaknesses  

  • The worst performing precious metal for the week was gold, down 0.22%. Gold Road cut its production forecast. As a result of the lower production rates in the June and September quarters, annual guidance has been revised to between 250,000 and 260,000 ounces from original guidance of between 260,000 and 300,000 ounces.
  • The World Gold Council (WGC) provided updated ETF data showing net outflows of 15.2 tons in September, with outflows in North America and Europe only partially offset by inflows in Asia. Global gold ETF holdings at September-end were 3,592 tons, the lowest level since April 2021.
  • As U.S. approaches its debt limit, some analysts have suggested the Treasury Department could simply mint a platinum coin in a value of $1 trillion or more and deposit it at the Fed to give the government greater borrowing authority. “I’m opposed to it and I don’t believe that we should consider it seriously,” Treasury Secretary Janet Yellen said on CNBC about the idea of minting the coin to avoid breaching the debt limit. “It’s really a gimmick,” she says.

Opportunities

  • According to Stifel, Great Bear Resources has upside with its Dixie gold project. They strongly expect this to be a 10-million-ounce deposit. With a four-kilometer strike length, drilling down to 400 meters regularly hitting the expected and predictable mineralization, high-grade and consistent domains within a much larger, lower grade mineralized envelope.
  • The world’s top miners are confident they can eliminate emissions from their own operations by 2050 but aren’t yet sure their customers can do the same. The International Council on Mining and Metals’ 28 members, which include producers like BHP Group and Glencore Plc, on Tuesday pledged to cut so-called Scope 1 and 2 emissions from their own operations and the electricity they use to net-zero by 2050. 
  • If the 2021 production guidance is met, the collective production of the top ten global gold producers is expected to recover by around 13.5% in the second half compared to the first half, according to GlobalData. The company notes that total production is expected to be 14.9 million ounces in the second half, compared to 13.1 million ounces in the first half.

Threats

  • Africa is losing new investments in gold mining to a resurgence in risks such as political instability and resource nationalism, Chris Griffith, chief executive officer of Johannesburg-based Gold Fields says. “The risks are increasing and post Covid, we are seeing some of these risks materially rising and because of that exploration is going to other countries. We could see much exploration in Africa but it’s being harmed by coups, resource nationalism”.
  • Australian Mining reported on Newmont Mining $150 million invested to deliver the gold industry’s first Autonomous Haulage System fleet at Boddington, Western Australia’s largest gold mine. Expectations are that with the transition to a fully autonomous haulage fleet of 36 trucks, the company will improve mine safety and productivity, while extending mine life. Ramping up the truck fleet to full productivity as the site fine-tunes the technology for operation in a deep open pit mine has been a challenge. During commissioning, the project faced several challenges, including unusually severe weather and heavy rainfall, shovel reliability and operational delays associated with managing bench hygiene as mining moves into deeper sections of the pit. As a result, Boddington delivered lower ex-pit tons than expected, with full-year 2021 gold production anticipated to be approximately 140 thousand ounces, below original guidance estimates of 830 thousand ounces.
  • Members of the National Union of Metalworkers of South Africa started a national strike on Tuesday following a deadlock in negotiations for a new wage deal.  Union members didn’t report for duty in five of the country’s nine provinces and will hold pickets and marches during the morning, Numsa spokeswoman Phakamile Hlubi-Majola said by phone. The union has about 155,000 members and the strike is expected to attract more than 300,000 workers, including from allied unions, she added. “The strike is on and nothing has changed,” Hlubi-Majola said. “As of this morning, workers didn’t go to work, so we are on strike.”

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