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The Opportunities Go to Those Who Can See Past the Negative Headlines

Summary:
“Follow the trend lines, not the headlines.” The quote, attributed to former President Bill Clinton, is one of my favorite pieces of advice. Clinton was referring to long-term data that show that conditions have actually been improving for the human race despite popular opinion to the contrary. When applied to investing, it cautions against missing opportunities because you’re too busy reacting to negative news. To be sure, there’s more than enough negative news right now: international trade tensions, volatility in Syria, Brexit, impeachment and much more. As I’ve said before, I happen to be a news junkie. The U.S. Global Investors office has a number of TVs, all of them tuned to financial news networks. I constantly urge everyone on our team to stay informed and raise their awareness of

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“Follow the trend lines, not the headlines.”

The quote, attributed to former President Bill Clinton, is one of my favorite pieces of advice. Clinton was referring to long-term data that show that conditions have actually been improving for the human race despite popular opinion to the contrary. When applied to investing, it cautions against missing opportunities because you’re too busy reacting to negative news.

To be sure, there’s more than enough negative news right now: international trade tensions, volatility in Syria, Brexit, impeachment and much more.

As I’ve said before, I happen to be a news junkie. The U.S. Global Investors office has a number of TVs, all of them tuned to financial news networks. I constantly urge everyone on our team to stay informed and raise their awareness of what’s happening around the world and in their communities.

But this alone doesn’t guide our investment decisions. If we based everything on what the talking heads tell us, we may never have the confidence to invest so much as a dime.

Instead, we focus on fundamentals such as moving averages and standard deviation. We follow leading indicators such as the purchasing manager’s index (PMI) and consumer confidence index. These factors are many times more effective than the headline news at shining a light on the right path.

Mike Matousek, head trader at U.S. Global, has a colorful saying that complements this idea: “It doesn’t matter if they make jelly beans or trash can lids, if a stock’s going up, you want to own it.” And conversely: “If it’s going down, you don’t want to own it.”

Did You Catch These Opportunities?

Let me give you some real-world examples of what I’m talking about. A lot of the news coming out of China right now is negative. Its economy is slowing. Tariffs are hurting trade. The Hong Kong protests are causing geopolitical pressure. It’s enough to make an investor run and hide.

Which would be a mistake. Take a look at the chart below. The First Trust Chindia ETF, which invests in companies in both China and India, is up more than 20 percent for the 12-month period through October 25. That’s enough to beat the S&P 500 over the same period.

The Opportunities Go to Those Who Can See Past the Negative Headlines
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Or consider British stocks. You might think that Brexit uncertainty has made investing in the U.K. a nightmare. And yet the opposite seems to be the case—the iShares MSCI United Kingdom ETF is up close to 10 percent for the 12-month period.

The Opportunities Go to Those Who Can See Past the Negative Headlines
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Another good example are the recent copper strikes in Chile. In this case, bad news is actually good news. With production halted for days at Chuquicamata, the world’s largest open pit copper mine by volume, global supply could be disrupted, which may push up prices. Due in part to the strikes, copper is on track for its second straight month of positive gains and its best month since February.

The Opportunities Go to Those Who Can See Past the Negative Headlines
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Keeping an Eye on the PMI

Again, one of our favorite leading indicators is the manufacturing purchasing manager’s index, or PMI. The gauge compiles data from thousands of factories and manufacturers across the globe, measuring data points such as output, new orders and employment. At the beginning of every month, we get a number that reflects the health of the industry.

The higher the number is above 50.0, the faster factories are expanding their business. The lower the number is under 50.0, the faster they’re shrinking.

September’s PMI was 49.7. That’s in contractionary mode, but because it’s up slightly from August’s 49.5, factories are pulling back at a slower rate.

We won’t know what the PMI is for October until late next week, but if it shows that we’re back to a neutral 50.0 (or better), it could mean good things going forward for energy and commodities.

According to our own research going back 10 years, when the global manufacturing PMI rose above its three-month moving average, commodities and commodity stocks appreciated six months later. Copper, for instance, gained an average of around 10 percent, with a 71 percent probability of occurrence. West Texas Intermediate (WTI) oil returned about 5 percent. And so on.

The Opportunities Go to Those Who Can See Past the Negative Headlines
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Conversely, when the PMI fell below its three-month moving average, materials historically declined—or, in the case of energy, was essentially flat—six months later.

The Opportunities Go to Those Who Can See Past the Negative Headlines
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Again, these results are based on 10 years’ worth of data. We’re hoping for a stronger PMI for the month of October, which would help give commodity prices and mining stocks an extra shot of momentum going forward.

Upcoming Conference and Webcast…

If you’re planning on being in the San Francisco Bay Area this weekend, I invite you to stop by the Cambridge House Silver & Gold Summit, held this year at the Hyatt Regency San Francisco. I’m honored to be one of the keynote speakers, but attendees will also get the chance to see and hear from a number of other top experts and business leaders in the gold and precious metal mining industry—people such as Rick Rule, Marin Katusa (who co-founded the summit), David Morgan, Stephen Moore, Gianni Kovacevic and many, many more.

To learn more about the conference and what I’ll be speaking about, click here.

Also, I want to remind you that time is running out to register for our upcoming gold webcast! On October 31, I’ll be joined by mining legend Pierre Lassonde, who shocked CEOs and analysts at this year’s Denver Gold Forum by forecasting $25,000 gold by 2049. I’ve participated in dozens of webcasts over the years, and trust me, this is one you won’t want to miss!

To reserve your seat, email us today at [email protected]!  

Gold Market

This week spot gold closed at $1,504.67, up $14.82 per ounce, or 0.99 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 2.00 percent. The S&P/TSX Venture Index came in up 0.57 percent. The U.S. Trade-Weighted Dollar rose 0.56 percent.

Date Event Survey Actual Prior
Oct-24 Hong Kong Exports YoY -7.00% -7.30%` -6.30%
Oct-24 ECB Main Refinancing Rate 0.00% 0.00% 0.00%
Oct-24 Durable Goods Orders -0.70% -1.10% 0.20%
Oct-24 Initial Jobless Claims 215k 212k 214k
Oct-24 New Home Sales 702k 701k 713k
Oct-29 Conference Board Consumer Confidence 128.0 125.1
Oct-30 ADP Employment Change 125k 135k
Oct-30 GDP Annualized QoQ 1.60% 2.00%
Oct-30 Germany CPI YoY 1.10% 1.20%
Oct-30 FOMC Rate Decision (Upper Bound) 1.75% 2.00%
Oct-31 Eurozone CPI Core YoY 1.00% 1.00%
Oct-31 Initial Jobless Claims 215k 212k
Oct-31 Caixin China PMI Manufacturing 51.0 51.4
Nov-1 Change in Nonfarm Payrolls 90k 136k
Nov-1 ISM Manufacturing 49.0 47.8

Strengths

  • The best performing metal this week was platinum, up 3.96 percent. Gold is back with a weekly gain and its best week in five, trading above $1,500 an ounce on hopes that the Fed will cut borrowing costs next week. The yellow metal also benefitted from haven demand due to geopolitical turmoil from Chile to Lebanon, plus volatility surrounding Brexit negotiations. Holdings in gold-backed ETFs have increased 16 percent so far this year. On Monday alone, ETFs added 82,176 troy ounces of gold to their holdings, according to data compiled by Bloomberg. Silver also had a strong week, up 2.79 percent on an improved industrial demand outlook, reports Kitco News.
  • In a big surprise, Germany’s central bank bought gold for the first time in 31 years. Reserves climbed to 108.34 million ounces in September, up from 108.25 a month earlier, and the first change since 1988. International Monetary Fund data shows that Turkey also increased reserves in September, rising to 17.29 million ounces from 16.49 million ounces a month earlier.
  • Several miners reported strong third quarter results this week. Agnico Eagle Mines beat expectations and reported quarterly net income of $76.7 million, up significantly from the same time last year of $17.1 million in net income. The company said it had record gold production of 476,937 ounces. Hochschild Mining also reported stronger production, with output rising 9 percent in the third quarter to 67,797 ounces. Yamana Gold reported net free cash flow of $99.9 million due to higher gold prices and declared a fourth quarter dividend of $0.01 per share, which is a 100 percent increase.

Weaknesses

  • The worst performing metal this week was palladium, up 0.60 percent. Pre-Diwali sales of gold and silver in India fell as much as 40 percent as high prices and lower consumer spending hits, reports the Economic Times. The Confederation of All India Traders (CAIT) said “there was a decline of business from 35 to 40 percent which is a cause of major worry for the traders.” Falling demand out of India is a concern, as it is the world’s second largest consumer of gold.
  • Joe Foster, portfolio manager and strategist at VanEck, says that market complacency is to blame for disrupting gold’s rally. In a phone interview with Bloomberg, Foster said “until the market loses that complacency and there’s less risk sentiment, that’s when gold really takes off.” Foster says we’re at the point of a potential full blown recession and that “something’s got to give at some point.” Bloomberg’s Sungwoo Park is bearish on gold in the near-term, writing that “the metal will struggle to find a way back up from here for some time” due to rising real yields, which reduce the appeal of non-interest paying bullion.
  • As some miners reported strong third quarter results, others disappointed. Fresnillo Plc reported a fall in output in the third quarter due to lower grades, saying that silver production fell 14.5 percent and gold production fell almost 7 percent. Glencore reported a 4 percent drop in copper output so far this year and trimmed its full-year guidance as it plans to suspend some operations in the Democratic Republic of Congo.

Opportunities

  • Calibre Mining Corp., which bought two gold mines in Nicaragua from B2Gold Corp., was added to the S&P/Toronto Stock Exchange Composite Index, reports Bloomberg News. Company executives are hoping to build “a profitable, ETF-qualifying gold business that generates significant free cash flow.” B2Gold has a 31 percent equity ownership stake in Calibre.
  • The World Gold Council (WGC) published a report this week highlighting the gold sector’s carbon footprint and steps the industry can take to become net-neutral. Chief Financial Officer Terry Heymann says “it’s not an easy path right now but it’s feasible for mining companies to play their role and operate with net-zero emissions. It’s only going to get easier as technology advances.”  The report highlights the cheaper costs of green energy and that in some cases diesel generation products can be more volatile in price. Several companies have announced green initiatives at mines and often highlight what they’re doing to combat climate change in presentations to investors.
  • Sprott Inc. CEO Peter Grosskopf says this time gold’s rally is different because monetary policy has reached the point of being ineffectual. “Gold’s 2019 performance is quite different than prior rallies in that the gold market is no longer small and gold is no longer seen as a fringe asset.”  Grosskopf added that “the Fed is in checkmate and gold is now a mandatory” portfolio holding. Australia & New Zealand Banking Group is also bullish on the yellow metal, saying that it could hit $1,700 an ounce in the next six months, citing expected changes in U.S. interest rates.

The Opportunities Go to Those Who Can See Past the Negative Headlines
click to enlarge

Threats

  • The House Natural Resources Committee voted on Wednesday giving preliminary approval to update a 147-year-old hardrock mining law that was signed by President Ulysses S. Grant in 1872. The Hardrock Leasing and Reclamation Act would protect national parks and tribal areas from being leased for mining, increase mining royalties and create a fund to clean abandoned mines. Bill proponents say it brings mining into the 21st century, while critics say that it will do major harm to mining companies. Cronkite News reports that the bill would impose a minimum 8 percent royalty on mineral production at already existing mine sites and a 12.5 percent royalty on mines with permits issued after the law takes effect.
  • Bloomberg’s Katherine Doherty reports that it’s beginning to look a lot like 2009 based on a key indicator of credit. According to S&P Global Ratings data, upgrades of U.S. companies in the high-yield market are trailing downgrades by the most since 2009. Plus, the number of risky credits is on the rise and hit a 10-year high in September with 263 companies rated B- or lower.
  • Violent anti-government demonstrations and work strikes in Chile are disrupting the mining industry. Chile, the world’s largest copper producer, is facing delays and supply shortages at many of its mines. Antofagasta Plc, which has four mines in the country, said it could cut its production by 5,000 tonnes. Reuters reports that several of the world’s largest miners, such as BHP Group, Anglo American and Teck Resources, have operations in the nation that also mines gold and silver.

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 0.70 percent. The S&P 500 Stock Index rose 1.24 percent, while the Nasdaq Composite climbed 1.90 percent. The Russell 2000 small capitalization index gained 1.54 percent this week.
  • The Hang Seng Composite lost 0.16 percent this week; while Taiwan was up 1.04 percent and the KOSPI rose 1.32 percent.
  • The 10-year Treasury bond yield rose 4 basis points to 1.799 percent.

Continue reading…

October 25, 2019

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

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