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Don’t Fall for FUD: Fear, Uncertainty and Doubt

Summary:
So many headlines right now are instilling FUD in investors’ minds, which stands for Fear, Uncertainty and Doubt—from the Taliban takeover in Afghanistan, to fears over cryptocurrency, and the delta variant disrupting travel plans across the globe. Don’t let yourself fall for FUD. There’s no reason to be fearful of cryptocurrency, for example. Many like to say “only bad guys” use these digital assets, but if that’s true, then why are over 100 million people using it today? These people aren’t criminals, they’re consumers and investors, using it on PayPal and Venmo. Afghanistan’s Poppy Production Could Be Good for Gold After 20 years, the longest war in U.S. history is finally coming to a (clumsily handled) close. The war on Afghanistan’s opium poppy production, on the other hand, looks

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Don’t Fall for FUD: Fear, Uncertainty and Doubt

So many headlines right now are instilling FUD in investors’ minds, which stands for Fear, Uncertainty and Doubt—from the Taliban takeover in Afghanistan, to fears over cryptocurrency, and the delta variant disrupting travel plans across the globe.

Don’t let yourself fall for FUD.

There’s no reason to be fearful of cryptocurrency, for example. Many like to say “only bad guys” use these digital assets, but if that’s true, then why are over 100 million people using it today? These people aren’t criminals, they’re consumers and investors, using it on PayPal and Venmo.

Afghanistan’s Poppy Production Could Be Good for Gold

After 20 years, the longest war in U.S. history is finally coming to a (clumsily handled) close. The war on Afghanistan’s opium poppy production, on the other hand, looks set to escalate, at a potentially great expense to taxpayers.

In case you don’t know, Afghanistan produces a lot of stuff. The United Nations Office on Drugs and Crime (UNODC) estimates that the country is responsible for a whopping 85% of global poppy supply, much of which is used to make morphine, codeine and heroin.

The Taliban “officially” banned poppy cultivation in 2000—but soon realized it couldn’t do without the crop. Poppy is “an attractive insurance policy,” a recent inspector general report says. It’s “lightweight, easy to transport, lucrative and it can be stockpiled to await more favorable market or security conditions.”

Since 2002, the U.S. has spent some $9 billion fighting the Taliban’s narcotics trafficking. Nevertheless, cultivation has continued to ramp up. Last year, the area used to grow opium poppy in Afghanistan increased 37% from 2019—even after U.S. air strikes destroyed a quarter of Taliban-run poppy fields in 2018.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

Now that the U.S. military is on its way out, do you think things will improve? I’m guessing no. Billions more will likely need to be spent to combat poppy cultivation and exporting, the Taliban’s number one source of financing.

Gold and Bitcoin Have No Counterparty Risk

This is yet another reminder that U.S. taxpayers and investors need their own “attractive insurance policy” against freewheeling government spending and currency debasement.

For my money, gold is such an asset, as it has no counterparty risk. The more money that’s printed to cover government spending, the more valuable I believe gold becomes.

The same is true of Bitcoin, which many perceive as “digital gold.” But as I told Michael Saylor during this week’s webcast, I don’t think Bitcoin should represent more than 2% to 5% of your portfolio right now. The crypto has incredible upside potential, but as it’s only been around since 2009, it lacks gold’s centuries-long track record as a store of value.

Risk is precisely the reason why Palantir Technologies decided to make an investment in gold. The data analytics firm, founded in part by billionaire Peter Thiel, announced this week that it had stockpiled as much as $50 million worth of gold bars in preparation for “a future with more black swan events.” What’s more, Palantir—named for the all-seeing crystal balls in Lord of the Rings—is also allowing customers to pay for its software in gold.

Palantir’s decision “is only the beginning of what will soon be many major corporations diversifying their U.S. dollar cash into gold,” the National Inflation Association (NIA) wrote in a note to subscribers. 

Is Gold Being Manipulated?

That said, Bitcoin is trending up—today it briefly jumped above $49,000 for the first time since May—while gold has continued to trade in a very narrow range since last Monday’s flash crash, which saw the yellow metal plunge below $1,700 an ounce.

The stronger dollar bears a lot of responsibility for gold’s woes. But something doesn’t add up when inflation is running at 5.4% year-over-year and real rates remain deeply negative. By one measure, rates are lower now than they’ve been since 1980, the same year gold hit its all-time high when adjusted for inflation. 

Don’t Fall for FUD: Fear, Uncertainty and Doubt

Are investors betting that inflation will be “transitory,” as Federal Reserve Chair Jerome Powell insists?

Or is gold being manipulated?

If you talk to Chris Powell (no relation to Jay), secretary and treasurer at the Gold Anti-Trust Action Committee (GATA), the answer to the latter question is an emphatic yes.

Back in 2019, Chris told me that gold manipulation is largely done through the futures markets and the London over-the-counter (OTC) market. “The mechanisms are gold swaps and leases between central banks and bullion banks, and through the sale of futures contracts,” he said.

When I asked him where he thought gold would be were it not for the kind of institutional manipulation he’s observed, Chris wisely said that the “true value of gold is whatever our free market wants it to be.”

If gold is being suppressed, as Chris and others believe, with G7 countries and central bankers continuing their modern monetary theory (MMT) experiment, the spring effect has the potential to be even greater. We could see gold at $2,000 to $2,400 an ounce.

Gold Miners Could Be a Buy

No surprise, but gold miners are also down, as much as 20% for the year so far. Based on the 14-day relative strength index (RSI), the NYSE Arca Gold BUGS Index shows that producers are oversold right now, meaning they could be a buy in anticipation of higher metal prices.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

If I were investing, I would focus on the royalty and streaming companies such as Franco-Nevada, Wheaton Precious Metals and Royal Gold. As I’ve explained several times before, these companies provide many of the benefits of the gold mining industry without a lot of the risks.

Recent earnings are evidence of that. Take Franco-Nevada. Despite lower gold prices, the Toronto-based company reported record sales of $347 million during the second quarter, an increase of 78% from the same quarter a year earlier. Adjusted net income came in at $182 million, almost double the income from a year ago.

This sets Franco up for a record year, says Paul Brink, president and CEO, adding that the company’s royalty business model “is particularly attractive during periods of industry cost inflation.”

Missed the webcast this week with Michael Saylor? Read my top 10 takeaways by clicking here!

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 1.11%. The S&P 500 Stock Index fell 0.59%, while the Nasdaq Composite fell 0.73%. The Russell 2000 small capitalization index lost 2.50% this week.
  • The Hang Seng Composite lost 6.24% this week; while Taiwan was down 3.77% and the KOSPI fell 3.49%.
  • The 10-year Treasury bond yield fell 2 basis points to 1.254%.

Emerging Markets

Strengths

  • The best performing country in emerging Europe for the week was Hungary, gaining 2.6%. The best performing country in Asia this week was the Philippines, gaining 5.8%.
  • The Turkish lira was the best performing currency in emerging Europe this week, gaining 0.25%. The Philippines peso was the best performing currency in Asia this week, gaining 0.58%.
  • Hungary’s economy expanded 17.9% in the second quarter from a year earlier, the most since records began in 1996. Analysts expected the figure to read at 16%, (the highest in the European Union after France and Spain), according to a Bloomberg survey.

Weaknesses

  • The worst performing country in emerging Europe for the week was Poland, losing 1.9%. The worst performing country in Asia this week was Hong Kong, losing 6%.
  • The Czech koruna was the worst performing currency in emerging Europe this week, losing 1.4%. The South Korean won was the worst performing currency in Asia, losing 1.5%.
  • Eurozone inflation rose to 2.2% in July, its highest rate in almost three years and above the European Central Bank’s target of 2%. The higher rate in July was largely due to a spike in energy prices, which Eurostat said Wednesday rose 14.3% on an annual basis. Inflation, excluding alcohol and tobacco prices, eased to 0.7% from 0.9% in June.

Don’t Fall for FUD: Fear, Uncertainty and Doubt
click to enlarge

Oppurtunities

  • Bloomberg reported that Indian firms have already raised $8.8 billion year-to-date, more than in the past three years and could exceed 2017’s record of $11.8 billion. Some emerging market investors are favoring India as a regulatory safety bet, after China increased the speed of issuing new regulatory policies. This week China said 43 apps violated data transfer rules; they have been given until August 25 to make amendments, otherwise they will be punished in accordance with relevant laws and regulations. 
  • Reports say that China is willing to help troubled Huarong Asset Management Co., providing the corporation a $7.7 billion cash injection. This bailout will end months of uncertainty over whether Beijing would deem the financial institution too big to fail. This bailout may boost short-term confidence in China’s credit market.
  • Europe is pushing forward with its digital COVID certificate, that should simplify travel among European countries. Turkey, the Ukraine and North Macedonia will join the Eurozone’s COVID Certificate Getaway program. Turkish citizens with a vaccine certificate issued by Turkey will no longer be subject to extra pandemic-related measures while traveling to or within Europe. Similarly, Turkey will accept the digital certificate for travel into the country.

Threats

  • President Xi of China called for a stronger regulation on high incomes and ask for deeper wealth distribution in the country. A meeting of the Chinese Communist party’s Central Financial and Economic Affair Commission, chaired by President Xi, encouraged high income groups to return more to the society, promoting common prosperity for all.
  • According to the Bank of America European fund manager survey for August, less than half of fund managers expect the European economy to improve over the next 12 months, down sharply from 80% in the previous month. Most fund managers are concerned about accelerating inflation in the Eurozone and the spread of the Delta variant of COVID.
  • Germany, the largest economy in Europe, will face increased political noise in the next few weeks. Postal voting for Germany’s federal elections began on Monday, six weeks ahead of the September 26 election. Chancellor Angela Merkel will step down following 16 years in power, leaving behind a fractured political landscape in which no party has a comfortable lead.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

Energy and Natural Resources Market

Strengths

  • Leading indicators continue to signal a year-to-year improvement in U.S. steel demand. Non-residential construction represents the largest consumer of steel, where project starts lead steel demand by 6-12 months. On a national basis, U.S. non-residential building construction starts were up 39% year-to-year in the trailing three months through June.
  • European natural gas prices again set records, reports Natural Gas Intelligence, as Russian pipeline imports were poised to fall further next month. This exacerbates fears that the continent would be short of supplies this winter as storage inventories remain low. “European gas fundamentals remain tight, with the persistent weakness of Russian supply as the main source of concern,” Engie Energy Scan analysts said in a note Monday.
  • Aluminum in Shanghai surged to the highest close since 2008 after China’s pledge to cut energy intensity exacerbated supply concerns. China, which accounts for more than half of the world’s supply, is urging local governments to adopt strong measures to meet this year’s goal to reduce energy intensity, the National Development and Reform Commission said. The pledge came after 19 provinces including Qinghai, Ningxia and Guangxi missed their targets in the first half.

Weaknesses

  • Vine Energy Inc. reported negative revenue of $64.5 million in the second quarter, leading to a $360 million loss for the period, according to a filing with the U.S. Securities and Exchange Commission. The main culprit for the negative revenue was $274 million in unrealized derivative losses in the quarter, along with $24 million in realized losses.
  • According to Random Lengths, the Framing Lumber Composite fell by $31 this week to $432, which marks the lowest level since May 2020. Distributors showed little interest in orders as they continue to work down higher-priced inventories, causing weakness across most framing lumber species. In OSB markets, the Composite fell $69 this week to $517.
  • China’s crude steel production data showed a decline of 7% year-to-year to the lowest daily rate in 15 months. In addition, prices have fallen 62% and pellet premiums have fallen 40%, while freight rates have increased 20-30%.

Opportunities

  • Commodities remain in an uptrend, despite headwinds from the delta variant. This week’s petroleum inventories update was bullish relative to consensus. “Big Three” petroleum inventories (crude, gasoline, and distillates) fell by 5.2 million barrels, versus consensus estimates for a draw of 3.3 million barrels. Turning to crude, total inventories fell by 3.2 million barrels, versus consensus calling for a draw of 1.3 million barrels and a normal seasonal draw of 1.7 million barrels. Refinery utilization rose to 92.2% from 91.8% last week.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

  • BHP Group’s deal to merge its oil and gas business with Woodside Petroleum Ltd. will potentially create one of the world’s top-five LNG producers, according to Credit Suisse Group AG. Demand for the gas is expected to grow faster than any other fossil fuel over the next decade, as Asian nations accelerate a shift away from coal to reduce greenhouse gas emissions. BHP’s unit could be valued at more than $15 billion, a person familiar with the details said last month. BHP also approved $5.7 billion (C$7.5 billion) in capital expenditure for the Jansen Stage 1 potash project in the province of Saskatchewan, Canada.
  • Sugar prices extended their gains, with recent extreme weather in Brazil continuing to impact supply. Sugar prices have increased after extreme drought and frost damaged crop supply in Center-South Brazil, where most of the world’s supply is produced. The weather conditions, the worst in more than two decades, means the country’s sugarcane crop will be reduced for a second straight year.

Threats

  • This week’s drop for iron ore accelerated, with futures sliding as much as 14% to the lowest since December in Singapore. The drop comes on the back of expectations that Chinese steel output and consumption will weaken over the rest of the year, partly as authorities curb pollution. Prices are more than 40% below a record high reached just three months ago.     
  • Oil sank again as Chinese economic data disappointed, and the spread of the delta variant hurt prospects for global demand. West Texas Intermediate (WTI) also slumped as fresh outbreaks in Asia have started weighing on China’s economy, with retail sales growth and industrial output slowing. Cases are also at or near records in nations including Thailand, Vietnam, and the Philippines.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

  • Copper declined to near a one-month low in London, as the spread of COVID-19 in China weighs on the demand outlook. Base metals have come under pressure in recent weeks as authorities in China race to contain an outbreak of the virus and investors across global markets weigh the risks that localized lockdowns could disrupt both demand and supply in key industrial areas and logistics hubs.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Bitcoin Networks, down 97.59%.
  • According to a statement distributed to Australian investors by the Australian Securities and Investments Commission (ASIC), many investors have experienced significant losses after trading cryptocurrency financial products such as options, futures, and leveraged tokens. Many of these can be attributed to “excessive leverage, platform outages, or unfair liquidations.” Due to this information, the regulator is now issuing warnings about unlicensed entities that offer these financial products as they gain in popularity.
  • Poly Network, the China-based blockchain protocol exploited earlier this month for more than $600 million, said on Thursday that it sent a bounty worth nearly $500,000 to the attacker, reports CoinDesk, and that most of the looted cryptocurrency has now been fully recovered. Unfortunately, the attacker has yet to provide the key needed to unlock the remaining $141 million.

Opportunities

  • Walmart Inc. is looking to hire a cryptocurrency expert to develop a blockchain strategy, writes Bloomberg, joining a growing number of major corporations exploring the feasibility of digital currencies like Bitcoin or Ethereum. According to the posted job description, the position will be responsible for “developing digital currency strategy and product roadmap,” and identifying “crypto-related investments and partnerships.”
  • HIVE Blockchain Technologies, a public mining company listed on the Nasdaq (HVBT) and Toronto Venture (HIVE) exchanges, announced the appointment of Aydin Kilic as President and Chief Operating Officer of the company this week. Mr. Kilic, who founded Fortress Blockchain Corp. in 2017, will now oversee all of HIVE’s operational activities across its facilities in Canada, Iceland, and Sweden. In the U.S., a top regulator signaled a path towards approval for Bitcoin ETFs. ProShares, Investco, VanEck, Valkyrie Digital Assets, and Galaxy Digital have all filed plans for Bitcoin futures ETFs. Last month, the SEC approved the first U.S. Bitcoin-futures-based mutual fund, which is currently up and trading.
  • Jack Dorsey, CEO of Square Inc., and Facebook’s Mark Zuckerberg may be making big plans in the cryptocurrency space, writes Bloomberg, but Ethereum inventor Vitalik Buterin is skeptical if they can gain traction. Buterin casts doubt on Dorsey’s plan for the company to create a new business focused on decentralized financial services that use Bitcoin. As seen in the chart below, Ethereum currently outperforms both Square and Facebook. Time will tell if the opportunity still exists for these names.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

Threats

  • The Chinese central bank’s branch of Shenzhen ordered almost a dozen companies operating in the technology hub to remedy illegal activities related to cryptocurrencies, according to Bloomberg, signaling an intensifying crackdown on digital assets. The People’s Bank of China (PBOC) “cleaned up” 11 firms allegedly involved in illegal activities. China has launched a new campaign against cryptos this year, the article continues, acting against miners and imposing curbs on crypto banking services and trading.
  • Japan’s Liquid Global exchange tweeted on Thursday that it has been hacked, reports CoinDesk, and has suspended both deposits and withdrawals. The exchange said that its warm wallets were compromised and that it was moving digital assets offline. Senior researcher at OKLink, Eddie Lang, told CoinDesk that the value of coins stolen could be upward of $90 million.
  • Binance, the world’s largest crypto exchange, is still on the quest for legitimacy in the United States, writes the New York Times, pursuing an IPO of its American unit. Unfortunately, after only three months on the job, CEO of Binance Brian Brooks left the company due to “strategic differences.” Brooks, a former regulator, was tasked with helping the company gain a U.S. footing, the article continues. He left following a venture capital investment he was putting together for Bianance.US that fell through.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

Gold Market

This week spot gold closed the week at $1,781.11, up $1.37 per ounce, or 0.08%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 5.96%. The S&P/TSX Venture Index was off 6.34%. The U.S. Trade-Weighted Dollar rose 1.02%.

Date Event Survey Actual Prior
Aug-15 China Retail Sales YoY 10.9% 8.5% 12.1%
Aug-18 Eurozone CPI Core YoY 0.7% 0.7% 0.7%
Aug-18 Housing Starts 1,600k 1,534k 1,650k
Aug-19 Initial Jobless Claims 364k 348k 377k
Aug-24 New Homes Sales 700k 676k
Aug-25 Durable Goods Orders -0.2% 0.9%
Aug-26 Hong Kong Exports YoY 26.3% 33.0%
Aug-26 Initial Jobless Claims 352k 348k
Aug-26 GDP Annualized QoQ 6.6% 6.5%

 

Strengths

  • The best performing precious metal for the week was gold, up just 0.08%. Gold headed for a weekly gain as investors turned to the haven asset amid concerns over the delta coronavirus variant and weaker economic data. A gauge of New York State manufacturing moderated in August after expanding at an unprecedented pace a month earlier, while a measure of selling prices advanced to a fresh record. Chinese retail sales and industrial output data showed activity slowed due to fresh lockdowns to contain the Covid-19 outbreak there. The data underscored broader concerns over threats to the global recovery from rising prices and virus cases, boosting bullion as a haven asset. Treasury yields and inflation-adjusted real yields also fell, increasing the metal’s appeal.
  • Newcrest Mining Ltd., Australia’s largest gold producer, said annual profit rose 55% from a year earlier, with earnings driven by increased production and higher prices. Underlying profit rose to $1.16 billion in the year to June 30 from $750 million a year earlier. This was higher than the consensus of $1.1 billion.
  • Aluminum in Shanghai surged to the highest close since 2008 after China’s pledge to cut energy intensity exacerbated supply concerns. China, which accounts for more than half of the world’s supply, is urging local governments to adopt strong measures to meet this year’s goal to reduce energy intensity, the National Development and Reform Commission said. The pledge came after 19 provinces including Qinghai, Ningxia and Guangxi missed their targets in the first half.

Weaknesses  

  • The worst performing precious metal for the week was palladium, down 14.09%. Palladium headed for its biggest weekly decline since March 2020 as a shortage of automotive chips weighed on demand from carmakers. The metal, 85% of which goes into catalytic converters, was down about 13% this week.

Don’t Fall for FUD: Fear, Uncertainty and Doubt

  • Gold shipments from Europe’s key refining hub fell to 94.1 tons last month from 125.9 tons in June, according to the Swiss Federal Customs. Swiss gold imports fell 16% to 141.2 tons. Exchange-traded funds continue to sell, bringing this year’s net sales to 6.79 million ounces, according to data compiled by Bloomberg. The sales were equivalent to $177.2 million at the previous spot price. Total gold held by ETFs fell 6.3 percent this year to 100.3 million ounces.
  • India’s new purity standards for gold could hurt demand from the second-biggest consumer just as demand is expected to rebound. Jewelers may find it difficult to fulfill orders during the peak festival season starting next month, as they are facing delays in getting their goods certified under the country’s new hallmarking standards.

Opportunities

  • Palantir Technologies said it’s preparing for another “black swan event” by stockpiling gold bars and inviting customers to pay for its data analysis software in gold. The company spent $50.7 million this month on gold, part of an unusual investment strategy that also includes startups, blank-check companies and possibly Bitcoin. Palantir had previously said it would accept Bitcoin as a form of payment before adding precious metals more recently. This could set a trend where CIOs of companies may consider some excess cash in bullion as a way to hedge against broad risks in the economy and inflation gains relative to no real returns on cash or the volatility of cryptocurrencies.
  • Gold Fields Ltd. is looking at acquiring assets to replace depleting mines as the company’s new chief executive officer seeks to ensure that output doesn’t decline from a projected peak in three years. A new Chilean operation starting in 2023 plus increasing production from its last South African mine will help the Johannesburg-based producer lift output to 2.7 million ounces by 2024. Gold Field’s dilemma is how to find an asset that the market has not priced correctly. Gold Fields has operations in Africa, South America and Australia and may consider these jurisdictions first.
  • Rio2 Limited and Sixth Wave Innovations Inc. entered a contract for further testing of Sixth Wave’s patented IXOS purification polymer to replace carbon in a traditional Carbon-In-Leach (CIL) circuit for recovering the gold. These engineered polymer beads can be reused multiple times whereas the carbon has a shorter recycling life. This IXOS polymer beads can potentially works better by faster absorption efficiency, quicker elution times, and overall absorption kinetics.

Threats

  • Teck Resources is suspending its Highland Valley mine in south-central British Columbia due to the wildfire evacuation order. National Bank’s Shane Nagle said the mine contributes 9% to the company’s net-asset-value estimates and the news is a “modest negative” for the stock.
  • American Gold & Silver continues to be beset by delays. Relief Canyon continues to struggle with carboniferous ore on the pad, producing only 1,200 ounces in the quarter. To conserve capital, the company is suspending operations until a new path forward can be determined. The Cosalá operation remains under a blockade, and there may not be a restart of operations until 2022.
  • Dominic Schnider, head of commodities at UBS Wealth Management, thinks gold and silver could drop closer to $1,600 and $22 an ounce, respectively, in an improving global outlook. Schnider cited the precious metal platinum as a better investment due to industrial demand. In contrast, Goldman Sachs forecasts $2,000 and $30 per ounce for gold and silver, respectively, by year-end.

Read the full article at https://www.usfunds.com/investor-library/investor-alert/dont-fall-for-fud-fear-uncertainty-and-doubt/

August 20, 2021

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

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