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New Beginnings With the Year of the Rat

Summary:
It’s been a whirlwind couple of weeks! From Switzerland to Vancouver to Boston, I went from being student to teacher. I’m grateful for the opportunity to learn from others and to share my own story. As I told you in last week’s Investor Alert, I attended the Crypto Finance Conference in St. Moritz, Switzerland, where I got to hear from not just the Winklevoss twins but also Arthur Hayes, cofounder and CEO of cryptocurrency exchange BitMEX. Arthur has such an inspirational story. A graduate of Wharton School of Business, he moved to Hong Kong to work as an equity derivatives trader and market-maker. After losing his job in 2013, the 33-year-old decided he was done with banking and turned his sites toward bitcoin—which had just crossed above ,000 for the first time, ending the year up a

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It’s been a whirlwind couple of weeks! From Switzerland to Vancouver to Boston, I went from being student to teacher. I’m grateful for the opportunity to learn from others and to share my own story.

As I told you in last week’s Investor Alert, I attended the Crypto Finance Conference in St. Moritz, Switzerland, where I got to hear from not just the Winklevoss twins but also Arthur Hayes, cofounder and CEO of cryptocurrency exchange BitMEX.

Arthur has such an inspirational story. A graduate of Wharton School of Business, he moved to Hong Kong to work as an equity derivatives trader and market-maker. After losing his job in 2013, the 33-year-old decided he was done with banking and turned his sites toward bitcoin—which had just crossed above $1,000 for the first time, ending the year up a remarkable 5,870 percent.

Like any new idea, BitMEX was a longshot. Today it’s one of the biggest crypto exchanges in the world. In the past 12 months, the platform has seen a mindboggling $1.13 trillion in trading volume.

Bullish on Copper and Gold

The next leg of my trip took me to Vancouver, where I was the keynote speaker at the Vancouver Resource Investment Conference (VRIC), attended by more than 4,000 investors. This was the conference’s 25th anniversary.

Sentiment for gold and other key metals was high, with the yellow metal starting the year above $1,500 an ounce for the first time since 2013. As I told Commodity-TV’s Jochen Staiger on the sidelines of VRIC, I’m especially bullish on copper. Like gold, copper is facing significant supply shortages as there aren’t any new large mine projects being developed or going into production. Meanwhile, the red metal will continue to be in hot demand as we move to electrify everything.

Speaking of copper, one of the more eye-opening presentations was conducted by the Lundin Group of Companies, including Filo Mining and Lundin Gold. In a press release dated January 22, Lundin Mining announced that the company successfully achieved its 2019 guidance for all metals at all operations, with copper production at its Candelaria project increasing 9 percent year-over-year.

Thanks to strategic acquisitions and excellent corporate governance, Lundin has managed to generate an astounding $15.8 billion for shareholders over the years.

New Beginnings With the Year of the Rat

Chinese Gold Purchases Muted

As for gold, the normally reliable Love Trade during China’s Lunar New Year has been impacted by the deadly coronavirus, which was first reported in the central Chinese city of Wuhan—population 11 million—but has since spread to other areas of the country, not to mention the U.S. Travel and spending in general have largely been restricted, with the Chinese government’s recent travel ban affecting as many as 35 million people. Today we even learned that Shanghai Disneyland has temporarily closed its doors in an effort to curb the outbreak.

Gold consumption in China, the world’s largest consumer of the yellow metal, fell 13 percent year-over-year in 2019, the China Gold Association announced this week, with sales of jewelry, gold bars and coins falling sharply on higher prices.

I’ll have more to say on China later.

What’s missing in the gold market today, as I told Kitco News’ Daniela Cambone at VRIC, is the generalist investor. Holdings in gold-backed ETFs hit a new record high at the end of last year, but according to a Murenbeeld presentation, generalists are increasingly not participating—a reverse scenario of what we’re seeing in cryptocurrencies.

New Beginnings With the Year of the Rat

Happy Year of the Metal Rat!

Tomorrow marks the Chinese Lunar New Year, a time when as many as 400 million people ordinarily travel to visit family and go on vacation. Before the coronavirus struck, 3 billion trips were estimated to take place during the 16-day celebration, while some 79 million passengers were expected to take flights, up more than 8 percent from 73 million a year earlier. The new Daxing International Airport in Beijing was to handle nearly 2 million flights.      

New Beginnings With the Year of the Rat

When I flew through Zurich to attend the crypto conference, I happened to see multiple kiosks and signs proclaiming “Happy Year of the Rat,” an indication of just how broad and far-reaching China’s influence is—as well as how quickly viruses can spread in today’s uber-connected world.

Chinese New Year... In Zurch

If investors are seeking a precedent to compare to the recent coronavirus, they need only look bad 10 years, when the H1N1 Swine flu made it the U.S. via Mexico. An estimated half a million people died as a result of the virus, 12,000 in the U.S. alone. Major U.S. carriers were impacted, with Delta Air Lines reporting between $125 million and $150 million in lost revenue, according to a note this week from Credit Suisse. But the virus was relatively short-lived, and the industry promptly recovered.

Before that, in 2003, was the SARS epidemic. Air traffic to China fell by nearly half year-over-year in the second quarter of that year, which may have had a negative impact on airline earnings. Credit Suisse points out it’s hard to estimate SARS’ impact on airlines since there was also the Iraq War, not mention a weak macro environment at the time. Again, airlines were quick to recover once the threat of the virus dissipated, and carriers were citing normalization of trends, including capacity growth, in the second half of 2003.

New Beginnings With the Year of the Rat

Our own airlines ETF has very little exposure to Asia. The only Asian carrier in the ETF, in fact, is Japan Airlines. It does not own Airports of Thailand, down 4 percent year-to-date through January 24, or Beijing Capital International Airport, down more than 15 percent.

Again, it’s the Year of the Rat, the first sign of the Chinese Zodiac, following 2019’s pig. Speaking of which, pork price inflation in China fell in December, to 97 percent from November’s 110 percent year-over-year, as the African swine fever has wiped out some 40 million pigs. But according to Chinese officials, the fever has come into control, and the number of new pigs jumped the most in a decade last month.

Because it’s the first of the 12 zodiacs, the Year of the Rat is seen as a time of beginnings and renewals. That brings me hope, especially paired with the recent positive development in the U.S.-China trade war.  To all of my friends and family, readers and shareholders, I want to wish you a Happy New Year!

To watch my interview with Daniela Cambone at VRIC, click here!

Gold Market

This week spot gold closed at $1,571.53, up $14.29 per ounce, or 0.92 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 2.49 percent. The S&P/TSX Venture Index came in off 0.47 percent. The U.S. Trade-Weighted Dollar rose 0.29 percent.

Date Event Survey Actual Prior
Jan-21 Germany ZEW Survey Current Situation -13.5 -9.5 -19.9
Jan-21 Germany Survey Expectations 15.0 26.7 10.7
Jan-23 ECB Main Refinancing Rate 0.000% 0.000% 0.000%
Jan-23 Initial Jobless Claims 214k 211k 205k
Jan-27 New Home Sales 730k 719k
Jan-28 Durable Goods Orders 1.0% -2.1%
Jan-28 Conf. Board Consumer Confidence 128.0 126.5
Jan-29 FOMC Rate Decision (Upper Bound) 1.75% 1.75%
Jan-30 Hong Kong Exports YoY 4.0% -1.4%
Jan-30 Germany CPI YoY 1.7% 1.5%
Jan-30 GDP Annualized QoQ 2.2% 2.1%
Jan-30 Initial Jobless Claims 213k 211k
Jan-31 Eurozone CPI Core YoY 1.2% 1.3%

Strengths

  • The best performing metal this week was gold, up 0.92 percent. Gold traders and analysts were split between bullish and neutral outlooks on gold ahead of next week’s Federal Reserve meeting, according to the weekly Bloomberg survey. Commodity ETF inflows topped $2 billion last week, expanding more than fourfold for a fifth straight week of inflows. Bloomberg reports that precious metals ETFs led the inflows.
  • Turkey’s gold reserves rose $159 million from the previous week. The country’s holdings are now worth $28.1 billion as of January 17 – a 38 percent increase year-over-year.
  • The number of worker deaths at mines in South Africa fell to the lowest on record in 2019 – a sign that safety is improving in some of the world’s deepest and least-mechanized mines. The Department of Mineral Resources and Energy said in a statement that there were 51 fatalities last year, down from 81 the year prior. Barrick Gold and the government of Tanzania signed an accord to a long-running dispute where confiscated resources will be released to Barrick’s subsidiary, now called Twiga Minerals Corp., for export.

Weaknesses

  • The worst performing metal this week was palladium, down 2.88 percent. According to the China Gold Association, gold output in China fell 5.2 percent year-over-year to 380 tons in 2019. Gold consumption also fell 12.9 percent to 1,003 tons. China is the top producer and consumer of the yellow metal globally. Lower demand could be attributed to the number of births falling to the lowest since 1961 and the number of marriages falling to the lowest since 2007.
  • Ghana is delaying the initial public offering and sale of $750 million of shares in a gold mining fund/royalty company as the government reviews the rules and processes related to mineral royalty payments, reports Bloomberg. The IPO will be delayed until March, according to sources, and the fund will be structured to receive royalties and pay dividends.
  • Power cuts by South African energy producer Eskom cost Anglo American Platinum 38,000 ounces in lost output in 2019. Power outages forced mines to shut down and impacted production throughout the year. Despite the challenges, total platinum-group metal production grew 9 percent year-over-year to 1.15 million ounces. Australia’s Resolute Mining announced it will be raising AUD196 million to repay a loan. The company’s shares slipped on the news. Resolute said it will place 22.7 million new shares at the same price to raise AUD25million. This reinforces the trend that when investors see gold companies with debt, the right share price valuation adjustment step is for investors is to repay debt with common at the current share price to arrive at diluted price targets.

Opportunities

  • David Rosenberg, well-known economist, expressed his bullishness on gold in an interview with Bloomberg this week: “Gold is a place you want to be. I think that it’s partly because it’s inversely correlated with interest rates. But it’s also an insurance policy when things go wrong. There’s no such thing as a no-brainer, but this is close.” Jeff Currie, head of global commodities research at Goldman Sachs, gave three reasons to hold gold in a Bloomberg interview: 1) it’s a good hedge against political risk, 2) de-dollarization and 3) a drop in investment, which leads to a savings glut.
  • Palladium saw a weekly decline after rallying for four weeks, but it could present a buying opportunity. Citigroup says that any substantive pullback from current levels would represent a buying opportunity since “our baseline is that 2020 will be a year of very strong palladium pricing.” Metals Focus estimates that global palladium inventories equal about 14 months of demand and stockpiles have fallen by half in the past decade – this should support high prices.

New Beginnings With the Year of the Rat

  • Morgan Stanley research from Ridham Desai and Sheela Rathi shows that gold was India’s best performing asset class in 2019. They found that a portfolio that equal weights gold and equities has delivered reasonably strong returns with lower average annual drawdown than gold or equities standing alone over the past 25 years. According to the All India Gem & Jewellery Domestic Council, gold imports by India may rebound in 2020 after hitting a three-year low. Gold imports to the world’s second largest consumer fell last year largely due to prices rising by nearly 25 percent. The group forecasts imports of 750 tons, compared to an estimated 690 tons last year.

Threats

  • Bloomberg reports that U.S. prosecutors are starting to build cases against traders suspected of manipulating markets as long as a decade ago. Cases involving conduct older than five years are already under way, after an obscure legal ruling extended the statute of limitations for spoofing cases. Spoofing is when someone places and then cancels large numbers of buy or sell orders with the aim of fooling others about supply and demand.
  • Scott Minerd, chief investment officer of Guggenheim Partners, said in an interview that the Federal Reserve is “inflating a bubble” in credit, reports Bloomberg. “Asset prices go up on an escalator and they go down in an elevator.” Head of Dutch bank ABN Amro Bank NV said at the World Economic Forum in Davos this week that negative rates are “not a good place to be.” The head of Deutsche Bank AG said the European Central Bank “missed the exit” from negative rates when growth was stronger.
  • Gold producers were hit with a surprise new fee. The Department of Energy issued a mercury fee rule where producers must pay a fee of $37,000 per metric ton of mercury stored. The rule was issued without documents to support its calculations. Gold producers are fighting this new rule, led by Nevada Gold Mines LLC.

Understamdimg The Chinese Zodiac - Explore the Slideshow

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 1.22 percent. The S&P 500 Stock Index fell 1.03 percent, while the Nasdaq Composite fell 0.79 percent. The Russell 2000 small capitalization index lost 2.18 percent this week.
  • The Hang Seng Composite lost 4.04 percent this week; while Taiwan was up 0.24 percent and the KOSPI fell 0.20 percent.
  • The 10-year Treasury bond yield fell 13 basis points to 1.69 percent.

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January 24, 2020

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