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The Optimist’s Guide to Airlines, Crypto Mining and Gold

Summary:
“Travel,” Mahatma Gandhi once said, “is the language of peace.” If that’s the case—and I happen to believe that it is—then I’m extremely bullish about the future, especially with respect to U.S.-China relations. This week I was in Lower Manhattan, and the number of Chinese tourists I observed visiting the New York Stock Exchange (NYSE) and Federal Hall National Memorial—the epicenter of American capitalism and birthplace of the U.S. government—was encouraging. Everyone wanted their picture taken with the statue of George Washington, the father of the country with which their own government has been locked in a trade war for more than 18 months now. The trade war’s days may be numbered, however. It’s being reported that both sides of the skirmish reached a partial agreement today, laying

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“Travel,” Mahatma Gandhi once said, “is the language of peace.”

If that’s the case—and I happen to believe that it is—then I’m extremely bullish about the future, especially with respect to U.S.-China relations. This week I was in Lower Manhattan, and the number of Chinese tourists I observed visiting the New York Stock Exchange (NYSE) and Federal Hall National Memorial—the epicenter of American capitalism and birthplace of the U.S. government—was encouraging. Everyone wanted their picture taken with the statue of George Washington, the father of the country with which their own government has been locked in a trade war for more than 18 months now.

The trade war’s days may be numbered, however. It’s being reported that both sides of the skirmish reached a partial agreement today, laying the groundwork for Presidents Donald Trump and Xi Jinping to sign a trade deal later this year.

The Optimist’s Guide to Airlines, Crypto Mining and Gold

Tourism has traditionally helped peace and understanding spread across borders, and I’m hopeful that it will do the same today. It’s also good for commerce, especially for airlines and the travel industry in general, as I told CNBC Asia on Thursday.

It’s Airline Earnings Season. Are You Participating?

Delta Air Lines, in particular, had a phenomenal third quarter as we head into the fourth, and historically most profitable, quarter. The carrier reported the best sales in company history as well as impressive earnings per share of $2.32, a 29 percent increase over the same period last year. CNBC reports that Delta is hiring as many as 12,000 new employees—including pilots, flight attendants and ground staff—through 2020 to meet surging demand.

Supporting this growth are rising ancillary fees. Those are the non-ticket fees and upgrades you may end up having to pay when you fly, for everything from meals to preferred seating to credit cards. Delta recently inked a new deal with American Express, which is forecast to generate a mind-boggling $7 billion in revenue for the carrier by 2023, up from $3 billion today.

But Delta’s not the only one that’s joined the party. In the chart below, you can see a comparison of the amount of ancillary fees select U.S. airlines collected in 2018, on a per-passenger basis, with what they collected a decade earlier. Low-cost carrier Frontier saw an unbelievable 1,187 percent jump in such fees, while Spirit topped the list with an average $50.94 per passenger.

The Optimist’s Guide to Airlines, Crypto Mining and Gold

If you’re not participating, now might be a good entry point. The busy Thanksgiving and Christmas travel seasons are fast approaching, and according to recent analysis by the Wall Street Journal, the fourth quarter has typically seen the highest returns, with shares rising 8 percent on average every period going back to 1990.

HIVE Blockchain: $5.6 Million in Net Income

Another company that reported a spectacular quarter was HIVE Blockchain Technologies, which is back to generating positive net income and cash flow. In case you’re unaware, I’ve been serving as HIVE’s interim executive officer. After having to defend ourselves against a proxy battle in the spring, we’re now benefiting from improved transparency and financial controls. What’s more, we expect continued improvements throughout the fiscal year.

HIVE reported $5.6 million in net income in the first quarter of fiscal year 2020, having mined some 1,331 newly minted bitcoin during the period, as well as 35,000 Ethereum Classic and 3,200 newly minted Ethereum. You can read the full press release here.

Since HIVE’s debut a little over two years ago, investors have used it as a proxy to trade cryptocurrencies. That’s precisely why we took it public. I wasn’t able to open a bitcoin ETF for regulatory reasons—indeed, this is unlikely to change any time soon, as the SEC just rejected the latest attempt at creating such an ETF—so the next best thing was to create a world-class crypto miner and bring it to market.

I’m proud of how far HIVE has come these past two years, and even prouder that we managed to make money in what could have been a disastrous quarter. I’m very excited to see what’s in store.

Time to Buy the Gold Dip?

The same goes with gold, which is headed back to its mean after hitting nearly three standard deviations in August. As CLSA analysts said recently, these price dips look like attractive buying opportunities “in anticipating of a resumption of the initial base breakout.”

The Optimist’s Guide to Airlines, Crypto Mining and Gold

This week our office was visited by the legendary economist Nancy Lazar, co-founder of Cornerstone Macro, who commented that the growing mountain of global debt, not to mention the proliferation of low to negative-yielding debt, makes the yellow metal very attractive right now.

I agree. During my interview with Kitco News’ Daniela Cambone, I reiterated my call for $10,000 gold. Some critics believe only a major event, such as a war or famine, would be enough to push the metal up that high, but really all it takes is monetary and fiscal mismanagement. That’s exactly what we’re seeing right now in Europe, where growth is slowing because of business-killing regulations. But instead of getting rid of these rules, interest rates have been allowed to dip below zero. In Denmark, banks are actually paying borrowers to take out a mortgage, which is contributing to what Nancy sees as a European housing bubble.

Conditions aren’t much better in the U.S.—or at least they weren’t, until President Trump began rolling back unnecessary regulations.

According to Steve Forbes, there are 773,000 words in the Bible, which sounds like a lot until you learn that there are around 10 million words in the federal income tax code. Similarly, there are more than 185,000 pages in the Federal Register of rules and regulations. That’s up 17 percent from 158,000 pages in 2008. But in 2018, the number of pages actually fell almost 1,000 pages, or 0.5 percent, meaning Trump is keeping his word.

Mark your calendars! Pierre Lassonde, co-founder of Franco-Nevada, agreed to participate on our upcoming webcast scheduled for October 31. We’ll be discussing opportunities in gold mining, as well as our outlook for the gold price. (If you recall, Pierre says it could hit $25,000 by 2049!) It’s sure to be an interesting conversation—I look forward to you joining us!

October Volatility Got You Spooked? Keep Calm and Don't Jinx Yourself

Gold Market

This week spot gold closed at $1,489.10, down $15.65 per ounce, or 1.04 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 2.54 percent. The S&P/TSX Venture Index came in off 3.22 percent. The U.S. Trade-Weighted Dollar fell 0.46 percent.

Date Event Survey Actual Prior
Oct-8 PPI Final Demand YoY 1.8% 1.4% 1.8%
Oct-10 CPI YoY 1.8% 1.7% 1.7%
Oct-10 Initial Jobless Claims 220k 210k 220k
Oct-11 Germany CPI YoY 1.2% 1.2% 1.2%
Oct-15 Germany ZEW Survey Current Situation -23.0 -19.9
Oct-15 Germany ZEW Survey Expectations -26.8 -22.5
Oct-16 Eurozone CPI Core YoY 1.0% 1.0%
Oct-17 Housing Starts 1320k 1364k
Oct-17 Initial Jobless Claims 215k 210k
Oct-17 China Retail Sales 7.8% 7.5%

Strengths

  • The best performing metal this week was palladium, up 1.98 percent. Even after a weekly loss, gold traders and analysts stayed bullish on their outlook for prices in the weekly Bloomberg survey. Stocks continue to swing and currencies fluctuate ahead of continued U.S.-China trade talks. Just like last week, palladium hit a fresh all-time high this week of $1,707.51 an ounce, according to Bloomberg data. September marked the 10th straight month of gold buying for the People’s Bank of China, adding 5.9 tons and bringing total holdings to 62.64 million ounces. China has added over 100 tons to its reserves in the last 10 months, demonstrating that it sees value in the metal.
  • President Trump announced on Friday that the U.S. is deploying around 3,000 troops to the Middle East to enhance the defense of Saudi Arabia from Iran. The announcement came just after news broke that an Iranian tanker was hit by two missiles near the Saudi Arabia coast. The deployment of more troops sends a conflicting message as earlier in the week Trump announced pulling back U.S. forces in northern Syria in order to bring troops home. Increased geopolitical tension has historically been good for gold as it can raise its appeal as a perceived safe haven asset.
  • In a sign of good shareholder activism and a push for better corporate governance, Marlin Sams Fund, a long-term Torex Gold Resources shareholder, sent a letter to the company’s board. Marlin wrote that it is concerned with the interlocking relationship between Torex and TMAC Resources. Torex is reportedly considering an acquisition of TMAC. However, three of the directors of Torex also serve on the TMAC board. The letter says Marlin “calls into question the ability of the current Board to evaluate any important strategic matter.”

Weaknesses

  • The worst performing metal this week was gold, down 1.01 percent. Gold sales in India, the world’s second largest consumer of the metal, continue to weaken. Around the Dhanteras holiday, gold buying usually increases for jewelry. However, weak demand due to higher prices might decrease sales by 50 percent this year, according to the national secretary of the India Bullion and Jewellers Association. Gold imports fell 68.18 percent in September compared to a year earlier. Jewelers are struggling to find buyers because of the higher prices and companies are giving big discounts. On the other hand, imports of silver, the poor man’s gold, jumped 72 percent in India from a year earlier to 543.21 tons in August, reports Bloomberg. Increased silver buying could make up for the decreases in gold.
  • Ecuadorian President Linin Moreno accused his opponents of attempting a coup as the government moved outside of the capital city Quito. Violence and protesting erupted last week when Moreno announced an ending of long-standing fuel subsidies. Instability in the country could be negative for miners by disrupting operations and higher fuel prices could hurt margins. Bloomberg reports that indigenous communities have blocked off some main roads and that demonstrators caused the shutdown of production at an oilfield.
  • Bloomberg reports that the sale of Iamgold Corp. has stalled after the miner failed to reach an agreement with several Chinese suitors. Resolute Mining’s Syama Gold mine is facing a production stall after a crack in the roaster, a key component in sulfide processing, was found and is being evaluated.

Opportunities

  • UBS continues to support gold and forecasts prices to reach $1,650 over the next 12 months. Dominic Schnider, head of commodities and APAC macro, rates and foreign exchange at UBS, told Bloomberg TV in an interview that “we expect the Fed to cut several times, and so real rates are in negative territory: why would you not own gold?” Schnider added that gold can help balance a portfolio.
  • Even as the gold price appears to have stalled, money is still flowing into ETFs backed by the metal. Inflows have increased for 18 sessions in a row, the longest run since 2009. Citigroup says that inflows are “likely to persist” and sticks with its forecast for a rally to $1,700 an ounce over six to 12 months, writes Bloomberg.

The Optimist’s Guide to Airlines, Crypto Mining and Gold

  • Impala Platinum Holdings agreed to acquire 100 percent of the outstanding shares in North American Palladium Ltd. for $758 million in cash, reports Bloomberg. The deal highlights the attractiveness of palladium, which is seeing higher prices due to growing demand for its use in catalytic converters. For valuing the assets of North American Palladium, a base price of $1,100 per ounce of palladium was used. With spot palladium prices around $1,700 an ounce, there is certainly room for an interloper to make a higher bid.

Threats

  • The Federal Reserve announced on Friday that it will begin buying $60 billion of Treasury bills per month to improve its control over the benchmark interest rate it uses to guide monetary policy, reports Bloomberg. Turmoil rocked money markets in September when the rate on overnight general collateral repo jumped to 10 percent, which is four times the usual level. Concerns are growing on whether or not the Fed can serve as a conduit for liquidity in times of stress and growing debt levels.
  • Federal Reserve Bank of Dallas President Robert Kaplan said in a Bloomberg TV interview this week that rate cuts “should be limited, restrained and modest” and that right now we are “in a fragile period.” The comments could dampen investor enthusiasm that has sent inflows into gold-backed ETFs soaring. UBS also sent a warning this week that U.S. households are struggling financially. According to a quarterly UBS survey, 44 percent of consumers reported that incomes do not cover expenses, or barely cover them. Additionally, just 17 percent of households reported in the survey that their financial condition had improved in the last six months, which is 3 percentage points down from a year earlier.
  • Although mining stocks are up in the region, output of platinum-group metals in South Africa, the world’s largest producer, shrank the most in 18 months in August, reports Bloomberg. Production contracted 12.5 percent from a year earlier, according to Statistics South Africa. As supply tightens, holdings in palladium ETFs have expanded almost every day in the past two weeks.

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 0.91 percent. The S&P 500 Stock Index rose 0.62 percent, while the Nasdaq Composite climbed 0.93 percent. The Russell 2000 small capitalization index gained 0.75 percent this week.
  • The Hang Seng Composite gained 1.99 percent this week; while Taiwan was down 0.04 percent and the KOSPI rose 1.18 percent.
  • The 10-year Treasury bond yield rose 20 basis points to 1.736 percent.

……………………

October 11, 2019

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

You can read the remaining of the article at http://www.usfunds.com/investor-library/investor-alert/the-optimists-guide-to-airlines-crypto-mining-and-gold/

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