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Positive First-Quarter Data Point to a Global, Sustained Economic Boom

Summary:
Millions of Americans, it seems, felt that the time was right to trade in their clunkers for a new set of wheels. Sales of cars and light trucks surged an incredible 58% in March compared to last year, according to Bureau of Labor Statistics data. Some 1.6 million vehicles were driven off car lots during the month, representing over 18 million on a seasonally-adjusted annual rate (SAAR). There could be several reasons why car sales skyrocketed last month, the most obvious being that pandemic restrictions are gradually being lifted. A fresh infusion of stimulus money also didn’t hurt. But then there’s the matter of cost. Due to the global semiconductor chip shortage, which has temporarily halted production at some North American auto plants, the price of used vehicles is up an

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Positive First-Quarter Data Point to a Global, Sustained Economic Boom

Millions of Americans, it seems, felt that the time was right to trade in their clunkers for a new set of wheels.

Sales of cars and light trucks surged an incredible 58% in March compared to last year, according to Bureau of Labor Statistics data. Some 1.6 million vehicles were driven off car lots during the month, representing over 18 million on a seasonally-adjusted annual rate (SAAR).

Positive First-Quarter Data Point to a Global, Sustained Economic Boom

There could be several reasons why car sales skyrocketed last month, the most obvious being that pandemic restrictions are gradually being lifted. A fresh infusion of stimulus money also didn’t hurt.

But then there’s the matter of cost. Due to the global semiconductor chip shortage, which has temporarily halted production at some North American auto plants, the price of used vehicles is up an eye-watering 26% from last year, according to the Manheim Used Vehicle Value Index. Borrowing costs are also on the rise, prompting consumers to act fast.

Last month, I advised readers to buy a new car now if they were in the market for one, and it looks as if many Americans were of the same mind. I expect prices to climb even more before they start to plateau.

Luxury Carmakers Set New Sales Records

Looking globally, I was surprised to see just how well the luxury vehicle market performed in the first quarter. Daimler-owned Mercedes-Benz sold over 78,000 cars and trucks during the period, a 16% increase from last year. Toyota’s Lexus brand took the number two spot in terms of sales, moving 74,000 units for the quarter.

Tesla announced that it delivered a record 185,000 vehicles in the three-month period, well over double the amount in the first quarter of 2020. The electric vehicle (EV) manufacturer, which reported its first profitable year in 2020, is the heaviest weighted stock in the benchmark S&P Global Luxury Index.

Rolls-Royce Motor Cars also reported a new sales record in its 116-year history. The superluxury British carmaker, fully owned by Bayerische Motoren Werke (BMW), delivered 1,380 vehicles, up 62% from the same period in 2020 and exceeding the previous quarterly record set in 2019. Among its bestsellers were the Cullinan, a nearly three-ton SUV that starts at $335,000, and its new Ghost model, which has a similar price tag.

Best Business Conditions of the 21st Century

All of this is positive economic news that tells me we’re more than ready to put the pandemic in the rearview mirror. For the first time since this all started a year ago, more than one million people per day have been flying commercial in the U.S. for 30 straight days. Even more passengers are expected in the coming days and weeks as greater than one in five Americans are now fully vaccinated against COVID-19. Restaurants and diners across America are reportedly struggling to find workers fast enough to meet demand.

Indeed, in a report this week, LPL Financial wrote that we were entering the “best business conditions of the 21st century.” Both the ISM Manufacturing and Services PMIs hit their highest levels in decades on accelerating vaccine distribution and unprecedented fiscal stimulus.

The JPMorgan Global Composite PMI, meanwhile, rose to a 79-month high of 54.8 in March, one of its best readings of the past decade. U.S. leads the expansion, with growth not only at its fastest pace since August 2014 but also running close to an all-time U.S. survey high. Looking just at manufacturing, of the 29 countries that are tracked, only three—Myanmar, Thailand and Malaysia—were below the 50.0 threshold.

Positive First-Quarter Data Point to a Global, Sustained Economic Boom

This boom could run into 2023, Jamie Dimon said this week. In his annual letter to shareholders, the JPMorgan chief wrote that he sees the U.S. economy entering a “Goldilocks moment,” buttressed by “excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic.” With the S&P 500 having returned an unbelievable 54% year-over-year at the end of March, markets “may very well be pricing in not only a booming economy but also the technical factor that lots of the excess liquidity will find its way into stocks,” Dimon said.

In other words, the bulls are solidly in charge for the foreseeable future. I expect to see another quarter of stock outperformance relative to bonds, though the debt selloff may not be as pronounced in this second quarter as it was in the first.

Gold Miner Debt Near Record Low

So where does that leave gold?

The yellow metal is off to its worst start in years, having fallen more than 10% during the first quarter as investors largely shunned safe haven investments in favor of risk assets.

This has created an incredible buying opportunity that other savvy investors have jumped at. The U.S. Mint reported that sales of American Eagle gold coins climbed to 412,000 ounces in the first three months of 2021, its best quarter since 1999. Australia’s Perth Mint also had a remarkable quarter, with sales in February up 441% year-to-year. 

Positive First-Quarter Data Point to a Global, Sustained Economic Boom

At the end of last month, I shared with you that gold producers had their most profitable year ever in 2020, based on the average all-in sustaining cost (AISC) margin. For every ounce of the metal produced last year, miners pocketed a record $828 on average.

Now we know what they’ve been doing with their increased cash flow. According to a recent report by Metals Focus, gold miners have been paying down their debt, which currently stands at a collective $5.5 billion, the lowest level since 2011 and near all-time lows. Two miners in Metals Focus’s peer group are now net cash positive, the precious metals consultancy says.

Positive First-Quarter Data Point to a Global, Sustained Economic Boom

Like physical gold, stock in the producers looks like a buy to me. All of the companies in the peer group are paying regular dividends, and with debt reduction near completion, we could be seeing some mergers and acquisitions (M&As) in the sector soon.

Read the latest on the gold mining industry, including royalty and streaming companies, by clicking here.

Gold Market

Spot gold closed the holiday extended week at $1,743.88, up $14.57 per ounce, or 0.84%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 3.61%. The S&P/TSX Venture Index came in off 0.15%. The U.S. Trade-Weighted Dollar rose/fell 0.81%.

Date Event Survey Actual Prior
Apr-2 Change in Nonfarm Payrolls 660k 916k 468k
Apr-5 Durable Goods Orders -1.1% -1.2% -1.1%
Apr-8 Initial Jobless Claims 680k 744k 728k
Apr-9 PPI Final Demand YoY 3.8% 4.2% 2.8%
Apr-13 ZEW Survey Expectations 79.0 76.6
Apr-13 ZEW Survey Current Situation -55.0 -61.0
Apr-13 CPI YoY 2.5% 1.7%
Apr-15 Germany CPI YoY 1.7% 1.7%
Apr-15 Initial Jobless Claims 700k 744k
Apr-15 China Retail Sales YoY 28%
Apr-16 Eurozone CPI Core YoY 0.9% 0.9%
Apr-16 Housing Starts 1606k 1421k

Strengths

  • The best performing precious metal for the week was silver, up 1.18% as hedge funds boost net-long silver positions to a three-week high. Gold rose on Thursday as the dollar weakened after dovish rhetoric from the Federal Reserve, which gave no indication of imminent tightening of monetary policy, reports Bloomberg.
  • India’s gold imports in March rose 471% from a year earlier to a record 160 tonnes, reports Reuters. Buyers are drawn by a reduction in import taxes for the metal and a correction in prices from record highs last year. The world’s second largest consuming gold country imported a record 321 tonnes in the first quarter, up from 124 tonnes a year ago.
  • Hungary tripled its gold reserves in March in one of the biggest purchases by a central bank in decades. Bloomberg reports that Hungary’s monetary authority raised its bullion holdings to 94.5 tons. The nation’s purchase would be the biggest since June 2019, when Poland bought 94.9 tons, according to World Gold Council (WGC) data.

Weaknesses

  • The worst performing precious metal for the holiday extended week was palladium, down 0.97% on little news. Holdings in the SPDR Gold Shares, the largest ETF backed by gold, have fallen in four of the past five months. Bloomberg data shows holdings are at the lowest in nearly a year, around 33 million troy ounces. This is a sign that many investors are giving up on gold.

Positive First-Quarter Data Point to a Global, Sustained Economic Boom

  • Greenland Minerals announced a trading halt on the Australian Stock Exchange. Reuters reported that Greenland’s newly elected government will freeze the company’s rare earth mining project, which has over 1 billion tonnes of mineral resources.
  • Indian firms that lend against gold and cutting tenors are asking for more collateral to protect against falling bullion prices, reports Bloomberg. Gold loans have surged in the last 12 months as small businesses seek help to rebuild after lockdowns and are using family jewelry as collateral. “People are sentimental about their jewelry,” said George Muthoot Alexander, managing director at Muthoot Finance. “They will never want to default despite a fall in gold prices as they intend to get back their pledged ornaments.” Muthoot Finance saw lending rise over 25% and the company holds 146 tons of gold, higher than the official reserves of Singapore and Sweden.

Opportunities

  • Giovanni Staunovo, strategist at UBS Group, expects shortages in the platinum and palladium markets this year due to supply disruptions at top producer Nornickel’s mines in Russia. UBS cut its platinum mine supply estimate for 2021 by 140,000 ounces, which would lead to a deficit of around 185,000 ounces. This would be the third straight year of undersupply. The bank also cut its forecast for palladium mine supply by 545,000 ounces, translating into a deficit of around 1 million ounces and a 10th straight year of market shortfall.
  • Demand for physical gold has grown even as ETF holdings decline. The Perth Mint reported gold coin and minted bar sales of 130,000 ounces in March, surpassing the record 124,104 ounces sold in February. American Eagle gold coin sales had the best start to the year since 1999, with nearly 400,000 ounces sold in the first quarter.
  • Russian tycoon Andrey Komarov is in talks to purchase the Kumroch gold deposit in Russia’s Far East from Zoloto Kamchatki, reports Bloomberg. The deposit holds 34.4 tons of gold reserves and is set to begin production in 2025, with expected annual output of as much as 5 tons. He is also interested in investing in the Fedorova Tundra platinum and palladium project.

Threats

  • Bitcoin and other cryptocurrencies continue to steal the spotlight away from gold. Robinhood said that 9.5 million users traded cryptos on its platform during the first quarter of 2021, compared with 1.7 million in the previous quarter, reports Kitco News. Bitcoin currently accounts for 10% of that anti-fiat market, notes Bloomberg. “As this share doubles or trebles, it arithmetically requires a doubling or trebling of cryptocurrency prices,” says Dhaval Joshi, chief strategist for BCA Research’s Counterpoint product.
  • Pure Gold warned that ramp up issues have affected initial ore grades being run through the mill leading to reduced gold output.  In addition, Pure Gold expanded its credit line with Sprott Resource Lending for up to $20 million. The share price has fallen about 30% over the last four weeks.
  • Strong economic growth as the world recovers from the pandemic remains a threat to precious metal prices. Gold and silver were lower on Friday morning after U.S. producer prices for March boosted the dollar and pushed up Treasury yields. The PPI data was up 1% versus expectations for a rise of just 0.4%, reports Kitco News.

 

Index Summary

  • The major market indices finished mostly up this week. The Dow Jones Industrial Average gained 1.95%. The S&P 500 Stock Index rose 2.71%, while the Nasdaq Composite climbed 3.12%. The Russell 2000 small capitalization index lost 0.46% this week.
  • The Hang Seng Composite lost 1.13% this week; while Taiwan was up 1.71% and the KOSPI rose 1.44%.
  • The 10-year Treasury bond yield fell 2 basis points to 1.654%.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Bitcoin Gold, rising 142.57%. Ether hit a new record high as it continues to rally alongside Bitcoin.

Positive First-Quarter Data Point to a Global, Sustained Economic Boom

  • The Bank of Japan (BOJ) kicked off the first phase of experimenting with a central bank digital currency (CBDC) this week. According to a survey conducted by the Bank for International Settlements, 86% of central banks are actively researching the potential for CBDCs, 60% are experimenting with the technology, and 14% are deploying pilot projects.
  • Paxos, a U.S.-based stablecoin operator, is planning to apply for a formal clearing agency license with the Securities and Exchange Commission (SEC). This announcement comes right after Paxos used blockchain technology to achieve same-day settlement for a selection of U.S. equity trades, with the help of Credit Suisse and Instinet, the trading arm of Nomura Holdings Inc. Additionally, Paxos is also seeking approval to become a fully regulated crypto bank.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Klaytn, down 21.42%.
  • iCE3, a South African cryptocurrency exchange, has reportedly gone into liquidation after announcing last month that it had found discrepancies in its balances. The exchange told customers that withdrawals from the platform have been disabled based on the advice of its legal and auditing team.
  • Bitcoin mining operations in China, the country that accounts for more than 75% of the blockchain’s operations globally as of April 2020, are projected to hit peak energy consumption in 2024 at around 297 terawatt-hours, generating 130 million metric tons of carbon emissions. China’s energy consumption from Bitcoin mining in 2024 will exceed total energy consumption of countries like Italy and Saudi Arabia, and the carbon emissions will exceed annual greenhouse emissions of countries including the Netherlands, Spain, and Czech Republic.

Opportunities

  • State Street, the second-oldest bank in the U.S., announced that its Currenex trading technology arm is working with Pure Digital, a London-based infrastructure provider to foreign exchange trading world, to create an institution-focused digital currency trading platform. Pure Digital’s CEO, Lauren Kiley, confirmed that in addition to State Street, other banks have signed up to use the platform which is set to launch midway through 2021. The platform is an over-the-counter offering with bilateral credit lines and full transparency, so that the clients can see exactly who they are dealing with and can turn on and off counterparties as they see fit.
  • BOJ said this week that there is an opportunity to lay out common rules around central bank digital currencies with the world’s seven major central banks. BOJ’s head of payments and settlement department stressed that a set of common rules will lay the groundwork for efficient cross-border payments and that CBDCs play differing roles for advanced nations with a robust banking system and emerging economies that can use digital currencies to make up for the shortfalls in their financial infrastructure.
  • Fidelity Investments’ head of crypto division, Tom Jessop, said that he believes that the crypto-economy has opened a new chapter in traditional finance circles and things have reached a tipping point for the industry. He added that the maturation and adoption of digital assets as an investment class will continue in the coming years and one of the reasons for that is extremely low interest rates in traditional finance. Fidelity filed paperwork with the U.S. Securities and Exchange Commission (SEC) to list a new Bitcoin exchange traded fund (ETF) in March.

Threats

  • Venture Capitalist Peter Thiel is urging the U.S. government to consider tighter regulations on cryptocurrencies. Thiel, who is pro-cryptocurrencies, said that he thinks Bitcoin should be thought of as a Chinese financial weapon against the U.S. and that it threatens fiat money, especially the U.S. dollar’s reserve currency status. Additionally, the CEO of JPMorgan, Jamie Dimon, listed the legal and regulatory status of cryptocurrencies as one of the serious emerging issues that need to be dealt with and added that digital assets are not his “cup of tea.”
  • The Central Bank of Sri Lanka published a public notice this week flagging three types of crypto activities: cryptocurrency mining, investment in initial coin offerings and trading via cryptocurrency exchanges. The bank warned that these expose investors to significant risks and identified four main areas of concern for retail investors like the lack of any specific legal or regulatory recourse in case of disputes, a distrust of the high volatility of cryptocurrency value, the likelihood of cryptocurrencies being used for illicit activities and that buying cryptocurrencies from a foreign exchange is a direct violation of the country’s Foreign Exchange Act.
  • Mati Greenspan, founder of Quantum Economics, warned that the U.S. Securities and Exchange Commission’s (SEC) latest action against decentralized content platform LBRY could threaten the future of all cryptocurrencies. The SEC filed a complaint on March 29 alleging that LBRY offered and sold millions worth of unregistered securities through LBRY Credit tokens since 2016. The company responded to those allegations by stating that its tokens are utility-focused and not for speculation.

Read the remainder of the article at https://www.usfunds.com/investor-library/investor-alert/positive-first-quarter-data-point-to-a-global-sustained-economic-boom/

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

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