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Will Commodities Ride the “Blue Wave” Higher in 2021

Summary:
What a way to kick off the new year. If you happened to watch the storming of the Capitol unfold live on TV on Wednesday, you might have mistaken it for a movie adaptation of a Tom Clancy novel. Not since the Burning of Washington in 1814 have antagonistic forces succeeded in breaching the Capitol walls and causing damage. I believe that may be one of the most alarming things about what happened. I’m hardly the first to question how the rioters were able to get inside the building so easily. It’s being reported that lawmakers are planning a “minute-by-minute” investigation into law enforcement failures during the attempted coup that resulted in five deaths, including an officer with the Capitol Police. Despite the turmoil, stocks have incredibly continued to trade up. Today the S&P 500

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Will Commodities Ride the “Blue Wave” Higher in 2021

What a way to kick off the new year.

If you happened to watch the storming of the Capitol unfold live on TV on Wednesday, you might have mistaken it for a movie adaptation of a Tom Clancy novel. Not since the Burning of Washington in 1814 have antagonistic forces succeeded in breaching the Capitol walls and causing damage.

I believe that may be one of the most alarming things about what happened. I’m hardly the first to question how the rioters were able to get inside the building so easily. It’s being reported that lawmakers are planning a “minute-by-minute” investigation into law enforcement failures during the attempted coup that resulted in five deaths, including an officer with the Capitol Police.

Despite the turmoil, stocks have incredibly continued to trade up. Today the S&P 500 opened at a new record high as disappointing jobs numbers sparked hopes of additional fiscal stimulus.

Such spending seems even more likely now that the Democrats have managed to gain control of both chambers of Congress, following Georgia’s special Senate election.

To be fair, the Senate is split right down the middle 50-50, but the Democrats can also count on Vice President-elect Kamala Harris’ vote in the event of a tie. (Today, though, Joe Manchin, the conservative Democratic senator from West Virginia, said he will “absolutely not” support $2,000 relief checks, which puts the legislation at risk if no Republican lawmaker can be persuaded to get on board.)

I’m not sure if this constitutes the “blue wave” we kept hearing about in the months leading up to the November election, but it provides the Democrats with just enough political capital to realize at least some of the policies on their wish list, including green renewable energy. President-elect Joe Biden has an ambitious deadline of 2035 for decarbonizing the U.S. power grid.

If nothing else, this should be positive for gold, given the potential for greater government spending and, therefore, inflation. 

Remember: Government policy is a precursor to change. We liked renewable energy stocks well before the election, and I believe investors would be missing an opportunity if they overlooked them now that the sector may get support from the new Congress and administration.

Silver Was the Top Performing Commodity in 2020. Will Copper Be Next?

That brings me to the main topic: commodities. As I told you in yesterday’s Frank Talk, we’ve updated our perennial popular Periodic Table of Commodities. You can visit the interactive table and download your own pdf by clicking here.

Precious metals did well overall. Silver stood as the top performing commodity, up nearly 48%, its best year since 2010, when it rose over 80%. The white metal benefited not only from haven demand, fueled by unprecedented money-printing, but industrial demand as well. Among other applications, silver is a crucial component of photovoltaic (PV) cells, which are found in solar panels.

Will Commodities Ride the “Blue Wave” Higher in 2021

Copper prices were up in 2020 for very much the same reason. The world’s transition to renewable energy and electric vehicles is driving global demand for the highly conductible metal.

Up 26% for the year, copper is poised to be a top performer in 2021 as well. China has historically been the world’s largest importer of the metal, but now that its economy has largely recovered from the pandemic, the country has been buying it at a record clip. According to research firm Wood Mackenzie, 2021 is expected to be a record-breaker for renewable auctions in Europe.  

Copper and other industrial metals should also get support from the strengthening manufacturing sector in the U.S. The ISM Manufacturing PMI registered 60.7 last month, marking its highest level since September 2018. December was also the eighth straight month that the gauge of manufacturing activity held above 50.0. All six of the biggest manufacturing industries expanded, including fabricated metal products.

Will Commodities Ride the “Blue Wave” Higher in 2021

Our favorite copper stock remains Ivanhoe Mines. The company is in the process of building three mine development projects in Southern Africa. Among them is the world-class Kamoa-Kakula high-grade copper project, which is only six months away from scheduled initial production, according to a company presentation from last month.

Traditional Energy Under Pressure… A Buying Opportunity?

Energy was the worst performing S&P 500 sector of the year by far. The S&P 500 Energy Index ended the year down more than 37%, followed by the Real Estate Index, down 5%.

The S&P Goldman Sachs Commodity Index (GSCI) couldn’t quite recover its 2020 pandemic losses by the end of the year, falling some 6%. If you take energy out, though, the index of commodities ended up more than 16%. 

Will Commodities Ride the “Blue Wave” Higher in 2021

It’s still early, I think, but we could see a strong buying opportunity in oil and gas stocks. This would require the vaccine to become available to a greater share of the population, allowing for businesses to remain open and travel to return to normal. To speed up the process, Biden said today that he would release nearly all of the stockpiled vaccine doses upon taking office instead of rolling them out in stages.

This week the U.K. locked down its economy for the third time since the pandemic began, due to the emergence of a new, more contagious variant of the virus. The mutated strain has been found in the U.S., including in California, Colorado, Florida, New York and Texas.

Bitcoin at $40,000

Bitcoin continues to hit new record highs. This week it smashed through $40,000, doubling its value in as little as 23 trading days. That was enough to push the combined market cap of the cryptocurrency universe above $1 trillion for the first time, according to CoinMarketCap data.

Will Commodities Ride the “Blue Wave” Higher in 2021

As I said recently, this rally is different from the one in late 2017. This time it’s being driven by high-net worth individuals and institutional investors—hedge funds, pension funds, endowments and more. The same drivers of higher gold prices—money-printing, expectations of stronger inflation—also appear to be supporting Bitcoin.

Early this week, JPMorgan said that Bitcoin could climb to $146,000 over the long term if investors started trading it like digital gold.

Don’t forget about the Periodic Table of Commodity Returns 2020! Download a copy of your own by clicking here. 

Gold Market

This week spot gold closed the week at $1,849.01, down $49.35 per ounce, or 2.60%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 2.18%. The S&P/TSX Venture Index came in up 2.44%. The U.S. Trade-Weighted Dollar rose 0.15%.

Date Event Survey Actual Prior
Jan-3 Caixin China PMI Mfg 54.7 53.0 54.9
Jan-5 ISM Manufacturing 56.8 60.7 57.5
Jan-6 Germany CPI YoY -0.2% -0.3% -0.3%
Jan-6 ADP Employment Change 75k -123k 304k
Jan-6 Durable Goods Orders 0.9% 1.0% 0.9%
Jan-7 Eurozone CPI YoY 0.2% 0.2% 0.2%
Jan-7 Initial Jobless Claims 800k 787k 790k
Jan-8 Change in Nonfarm Payrolls 50k -140k 336k
Jan-13 CPI YoY 1.3% 1.2%
Jan-14 Initial Jobless Claims 785k 787k
Jan-15 PPI Final Demand YoY 0.7% 0.8%

Strengths

  • The best performing precious metal for the week was platinum, down just 0.27%. Gold surged above $1,900 an ounce on the first day of trading in 2021, building on its 2020 advanced due to lower U.S. real yields and a weaker dollar. The precious metal rose to a 2-month high even as stocks are at all-time highs. Investors concerned about inflation are looking to assets that could health protect their wealth.
  • Platinum rose on Tuesday to reach its highest price in more than four years as fears mount about rising virus cases in top producing South Africa. Potential supply disruptions such as a flight ban out of the country also pushed palladium to a 10-month intraday high.
  • Inflows into gold-backed ETFs could be recovering after 11 straight days of positive flows as of Thursday. This marks the longest run of gains since late August after the end of 2020 was marked with big outflows. Gold ETF assets climbed to 3,341.1 metric tons on Wednesday, the highest since November, according to Bloomberg data.

Will Commodities Ride the “Blue Wave” Higher in 2021

Weaknesses

  • The worst performing precious metal for the week was silver, down 3.71%, typically being the most volatile precious metal. Gold’s early week rally faded on Wednesday, falling 2.2% for the day, as U.S. Treasury yields broke above 1% for the first time since March, reports Bloomberg. Bullion fell back below $1,900 an ounce on Friday.
  • India’s gold imports in 2020 fell to the lowest since 2009 of just 275.5 tons as higher prices along with coronavirus disruptions kept buyers away. However, imports in December rose 18% from a year earlier to 55.4 tons, reports Bloomberg.
  • South African authorities arrested three suspected smugglers after discovering 162 pounds of gold bars worth $4.5 million in their hand luggage at the airport in Johannesburg, reports Bloomberg. Investigations are underway to determine the origin of the bars and the legitimacy of certification papers, as well as the destination of the gold.

Opportunities

  • Bloomberg Intelligence’s Mike McGlone says gold will be the asset to beat in 2021. McGlone predicts bullion will outperform stocks and views the 2020 rally as sustainable. “Our bias is that the greater potential for quantitative easing (QE) and debt-to-GDP levels to keep rising should keep metals prices — notably gold and silver — going up,” McGlone said.
  • Agnico Eagle Mines acquired TMAC Resources in an all-cash offer. The deal is a premium of 26% to the offer price Shandong Gold previously bid and a 66% premium to TMAC’s 20-day volume-weighted average price on January 4. TMAC’s takeover by Shandong was rejected by Canada two weeks ago. Jason Neal, TMAC President and CEO, said “Agnico Eagle is one of the strongest gold producers internationally, a Canadian champion and has been operating in Nunavut for more than a decade with a great track record with communities, employees and the environment.”
  • Mike Novogratz, billionaire and Galaxy Investment Partners CEO said on Bloomberg TV this week he believes both bitcoin and gold are going higher, with gold “easily” going up 30% in 2021. Many view bitcoin’s surge as a headwind to gold by taking away its demand. The popular crypto topped $40,000 this week. Novogratz believes both assets could rise due to fears of fiat currency debasement.

Threats

  •  The U.S. reported 4,000 COVID-related deaths on Thursday – the most in a single day. The country also reported 274,703 new cases the same day as labs catch up on processing test results and the post-Christmas surge is realized. The pandemic shows no signs of slowing even as vaccines roll out globally. The U.K. imposed a strict lockdown after Prime Minister Boris Johnson announced 1 in 50 Britons have the virus.
  • Despite the political turmoil that rolled into the capital mid-week, the broader equity markets still remained rather buoyant while gold sagged. Perhaps some volatility premium for gold has been lowered for the future with the expected departure of President Trump. However, with the recent mass hack of government/ business computer networks across America, and laptop computers missing from the White House, this week it’s difficult to grasp the scale of the data breach and what are the consequences in the future.
  • The price of bitcoin topped $40,000 for the first time this week. Many investors believe bitcoin is taking investors away from gold as a hedge against risk in portfolios. JPMorgan says the popular crypto could surge to $146,000 in the long term. Bullion fell back below $1,900 an ounce this week after rising above.

 

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 1.61%. The S&P 500 Stock Index rose 1.83%, while the Nasdaq Composite climbed 2.43%. The Russell 2000 small capitalization index gained 5.91% this week.
  • The Hang Seng Composite gained 3.05% this week; while Taiwan was up 4.96% and the KOSPI rose 9.70%.
  • The 10-year Treasury bond yield rose 20 basis points to1.118%.

Read the remainder of the article at http://www.usfunds.com/investor-library/investor-alert/will-commodities-ride-the-blue-wave-higher-in-2021/

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

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