Will he or won’t he? That seems to be the question on a lot of traders and investors’ minds today with regard to Federal Reserve chair Jay Powell. An October rate cut appeared back on the table after disappointing economic news was released mid-week. But Friday’s mostly-positive employment report may have dashed those chances. First, the “bad” news. The Institute for Supply Management (ISM) reported this week that both the U.S. manufacturing and non-manufacturing sectors weakened in September. The non-manufacturing, or services, purchasing manager’s index (PMI) fell to 52.6, down from August’s 56.4, representing the lowest reading since August 2016. The manufacturing PMI, meanwhile, contracted for the second straight month in September, as I mentioned in this week’s Frank Talk. The gauge
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Will he or won’t he?
That seems to be the question on a lot of traders and investors’ minds today with regard to Federal Reserve chair Jay Powell. An October rate cut appeared back on the table after disappointing economic news was released mid-week. But Friday’s mostly-positive employment report may have dashed those chances.
First, the “bad” news. The Institute for Supply Management (ISM) reported this week that both the U.S. manufacturing and non-manufacturing sectors weakened in September. The non-manufacturing, or services, purchasing manager’s index (PMI) fell to 52.6, down from August’s 56.4, representing the lowest reading since August 2016.
The manufacturing PMI, meanwhile, contracted for the second straight month in September, as I mentioned in this week’s Frank Talk. The gauge came in at 47.8, a 10-year low.
According to one company that makes electrical equipment, appliances and components, the U.S. economy “seems to be softening. The tariffs have caused much confusion in the industry.”
The weakness in manufacturing turned up also in ADP’s employment report, which showed that the sector added only 2,000 net new jobs last month. This made manufacturing the second weakest area of the U.S. economy in September, following only natural resources and mining, which lost 3,000 jobs on net.
Economists and market-watchers were bracing for the worst leading up to Friday’s “official” employment report. And while the actual number of jobs added in September—136,000—wasn’t particularly inspiring, markets seemed to like the fact that the unemployment rate fell to 3.5 percent, an incredible 50-year low.
So the economic expansion, already the longest in U.S. history, continues unabated. But the question still stands: Will he or won’t he? The poor manufacturing data certainly gives Powell license to cut rates another 25 basis points (bps) this month. At the same time, does it really make sense for him to do so with unemployment at its lowest level since the beginning of the Nixon administration?
Powell & Co. have some time yet to decide, as the next Federal Open Market Committee (FOMC) meeting is scheduled for October 30.
Conventional Oil and Gas Discoveries at a 70-Year Low
It wasn’t just stocks that responded favorably to the jobs report. Oil prices traded up on Friday after being knocked down for eight straight days, a losing streak we haven’t seen in more than two years. Concerns about a slowing global economy, falling demand and signs of excess supply despite recent production cuts by the Organization of Petroleum Exporting Countries (OPEC) weighed on oil prices before Friday’s turnaround.
Also putting pressure on oil is Norway’s massive divestiture of fossil fuel equities. The country’s pension fund, the world’s largest at $1.1 trillion, just got the go-ahead from the Norwegian government to sell as much as $5.9 billion worth of oil and gas stocks. As I shared with you before, oil and gas stocks are what made the wealth fund what it is today. In fact, it was set up specifically to invest in the country’s lucrative North Sea oilfields.
In any case, the $5.9 billion doesn’t represent the fund’s entire oil and gas position, but the plan is for it to exit all stocks categorized as “crude producers” over time, according to Norway’s finance minister.
In other oil-related news, IHS Markit released an eye-opening report this week suggesting that conventional drilling and exploration may be at death’s door. In the past three years, oil and gas discoveries made by conventional means have fallen to a seven-decade low. What’s more, “a significant rebound is not expected,” the report’s authors write.
The decline in conventional discoveries, IHS Markit writes, comes as a result not just of lower oil prices—which has discouraged some investors from backing costly “wildcat,” or unproven, drilling projects. Competition from short-term, less costly “unconventional” drilling (shale and fracking) has also made a sizeable impact, especially here in the U.S.
I’ve written many times before on the American success story that is fracking. It’s instrumental in making the U.S. the world’s largest oil producer. The country just produced 12.4 million barrels per day (bpd) in the week ended September 27, according to the Energy Information Administration (EIA). That’s just a hair below the record U.S. high of 12.5 million bpd, reached in August.
The biggest downside to having fewer conventional discoveries, according to IHS Markit, is that it could limit future global reserves and, in effect, drive up fuel costs.
Near-Record Inflows Into Precious Metals
Economic conditions still look strong in the U.S., and according to Larry Kudlow, President Donald Trump’s chief economic advisor, there could be some “positive surprises” next week when U.S. and Chinese trade negotiators meet next week.
Nevertheless, many investors are seeking safety from a potential pullback by piling into Treasuries as well as funds that invest in gold and precious metals. Such funds took in a total of $2.8 billion in the week ended September 25, the second biggest weekly amount on record, according to the Bank of America Merrill Lynch.
It’s not just gold that’s seeing inflows. Holdings in global silver exchange-traded products (ETPs) hit a new record high in mid-August when precious metal prices were heading higher. According to Metals Focus data, investments in ETPs rose to 706.2 million ounces, or $11.5 billion.
Although gold ended the month of September down some 3.7 percent, it was up almost as much in the third quarter, helping improve risk-adjusted returns. Throughout much of the quarter, stocks traded sideways, a trend that CLSA forecasts will “remain intact into year-end with immediate downside risk through October for the majority of markets.”
To manage risk, CLSA recommends investors buy the dips in gold, writing that they’re attractive buying opportunities “in anticipation of a resumption of the initial base breakout.”
REMINDER: Upcoming Gold Webcast
Speaking of gold… Remember to mark your calendars for October 31 at 2:00pm Eastern time (ET)!
I’ll be taking part in a gold opportunity webcast hosted by Tom Lydon of ETF Trends. I’ve done countless webcasts in the past, but I’m particularly excited for this one because we’ll be joined by my longtime friend, mining legend Pierre Lassonde.
Pierre, as many of you know, is co-founder of the pioneering gold royalty company Franco-Nevada. Pierre likes to call Franco “the GOLD investment that WORKS.” He’s not joking! Since debuting in December 2007, Franco has outperformed both gold bullion and gold miners by a significant margin.
It should be an interesting discussion! If you’d like to listen in, shoot us an email at [email protected].
This week spot gold closed at $1,504.75, up $7.70 per ounce, or 0.51 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 0.95 percent. The S&P/TSX Venture Index came in off 1.90 percent. The U.S. Trade-Weighted Dollar fell 0.27 percent.
|Sep-29||Caixin China PMI Mfg||50.2||51.4||50.4|
|Sep-30||Germany CPI YoY||1.3%||1.2%||1.4%|
|Oct-1||Eurozone CPI Core YoY||1.0%||1.0%||0.9%|
|Oct-2||ADP Employment Change||140k||135k||157k|
|Oct-3||Initial Jobless Claims||215k||219k||215k|
|Oct-3||Durable Goods Orders||—||0.2%||0.2%|
|Oct-4||Change in Nonfarm Payrolls||145k||136k||168k|
|Oct-8||PPI Final Demand YoY||1.8%||—||1.8%|
|Oct-10||Initial Jobless Claims||218k||—||219k|
|Oct-11||Germany CPI YoY||1.2%||—||1.2%|
- The best performing metal this week was gold, up 0.51 percent. Gold traders and investors are positive on future gold prices in this weeks’ Bloomberg survey. For the first time in a month the gold bulls outnumbered the combined bearish and neutral responses. ETFs added 39,919 troy ounces of gold to their holdings on Thursday, marking the 14th straight day of inflows, according to Bloomberg data. This year’s net purchases now total 10.3 million ounces. As seen in the chart below, holdings in gold-backed ETFs are near 2012 records, while the price of gold is taking longer to catch up. The yellow metal rallied the most in a month on Wednesday after U.S. private companies’ payrolls rose less than forecast, reports Bloomberg. This builds the case for the Fed cutting rates again this year.
- For the quarter ended September 30, gold beat stocks. The yellow metal returned 3.8 percent while the S&P 500 returned just 1.7 percent. Plus, gold outperformed bonds with the Bloomberg U.S. Treasury Bond Index seeing a 2.4 percent gain. Gold had its fourth straight quarter of positive gains, which is the longest run in eight years. Palladium also shone, hitting a new record of $1,701.93 an ounce on Monday and returning almost 10 percent in the third quarter. Turkey continues to be a big buyer of the metal. The central bank’s gold holdings rose $196 million from the prior week, and are up 47 percent year-over-year.
- In mining company news, Gold Fields Ltd. exercised its option to buy a larger stake in Cardinal Resources Ltd. Previously Gold Fields owned approximately 11.1 percent of outstanding Cardinal shares and now owns 16.4 percent, according to a company statement. Gold Fields operates mines in Ghana, where Cardinals’ shovel ready assets are.
- The worst performing metal this week was platinum, down 5.46 percent, with the majority of those losses coming in on the last day of the third quarter. India imported just 13.5 metric tons of gold in September, down from 93.8 tons a year earlier. This 86 percent year-over-year slump is significant, as India is the world’s second largest consumer of the metal. Higher gold prices have impacted buying, with gold futures in Mumbai rising 22 percent this year. However, demand is expected to rise in the 15 days before the Diwali festival, where Hindus consider it an auspicious time to buy gold for gift-giving. U.S. Mint data shows that American Eagle gold coin sales fell 8.3 percent in September from a month earlier, declining to 5,500 ounces.
- Gold’s volatility hit highs this week as traders struggle to read conflicting market signals. A measure of 90-day volatility rose to the highest since February on Tuesday, trading within a range of $77.80, which is the widest five-day scope since late June, reports Bloomberg. Ever-changing updates in U.S.-China trade negotiations have been a big contributor to the metal’s price swings.
- In a new sign of potential economic downturn, U.S. hiring missed projections and wage gains cooled in September even as the jobless rate fell to a half-century low. Bloomberg’s Katia Dmitrieva writes that “the jobs report caps a week of U.S. economic data that whipsawed stocks and sent already-low Treasury yields tumbling, led by a key manufacturing gauge that sank deep into contractions with the worst reading in a decade.”
- According to Wood Mackenzie, peak gold supply is coming if miners do not increase their spending on exploration and find new resources. Analysts wrote in a note that “exploration budgets were slashed following the fall in gold price from the highs in 2011 and 2012 and they have since failed to recover.” Tighter supply supports forecasts of gold bulls such as David Roche, president and global strategist of Independent Strategy, who said that gold could hit $2,000 an ounce by year end.
- Palladium has been the precious metal winner for almost four years and could have further to run. Spot prices are up 33 percent in 2019 and look poised to keep going as forecasts show the world will remain in deficit for the ninth year in 2020. Top miner MMC Norilsk Nickel PJSC sees the deficit continuing to widen due to a lack of mine investment. Sister metal platinum is finally starting to see prices rise, which should be positive for top miners Impala Platinum Holdings and Sibanye Gold Ltd. With metal prices rising, companies are luckily being cautious about spending. Miners are focusing on being more efficient and practicing smart capital discipline as they are aware that prices can easily take a turn.
- Southeast Asia’s largest bank DBS Group is bullish on gold. Bloomberg reports that in the bank’s fourth quarter asset allocation report it recommends dividend shares and gold, in addition to stocks, which look attractive in the world of negative-yielding bonds. CEO Hou Wey Fook writes that “against the backdrop of an unpredictable tug-of-war between easy monetary policies and geopolitics, gold will be favored as an effective portfolio diversified and to enhance risk-adjusted returns.”
- A Dutch pension fund is a growing example of conservative investors moving away from traditional assets to get a return. The Netherlands’ biggest pension fund is moving away from government bonds and into riskier assets in hopes of getting better returns as bonds are yielding less and less. Bloomberg writes that there is a boom in alternative assets such as private equity, property and infrastructure. Elliot Hentov, head of policy research at State Street Global Advisors, says “it’s a low-yield environment, everyone is piling in.” Perhaps more investors will pile into gold?
- Last week news broke that the Trump administration was discussing ways to limit U.S. investors’ portfolio flows in China and potentially delist Chinese companies from U.S. stock exchanges. The threat here is that this kind of talk demonstrates the U.S. is not trying to actually make a deal with China to end the trade war. In an essay about the topic, Ray Dalio writes that the International Emergency Economic Powers Act of 1977 could empower the president to unilaterally impose capital and FX controls to deal with a threat from outside the U.S.
- De Beers reported a 39 percent drop in its latest diamond sale and demonstrates why this is one of the worst years for the diamond industry in a long time, writes Bloomberg’s Thomas Biesheuval. The industry is suffering from an oversupply of polished gems. De Beers holds 10 sales events each year and sold just $295 million in its eighth sale of the year, according to the company on Thursday. RBC Capital Markets expects the company’s profit will drop by around 40 percent in 2019.
- The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.92 percent. The S&P 500 Stock Index lost 0.33 percent, while the Nasdaq Composite climbed 0.54 percent. The Russell 2000 small capitalization index lost 1.30 percent this week.
- The Hang Seng Composite lost 0.18 percent this week; while Taiwan was up 0.60 percent, and the KOSPI fell 1.43 percent.
- The 10-year Treasury bond yield fell 15 basis points to 1.52 percent.
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
October 4, 2019