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Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

Summary:
As many of you know, I grew up in Toronto, where winters can be brutally cold. Like most people who live in northern U.S. states, I’m accustomed to driving on snowy, icy roads. But then, roads in the north are plowed, sanded and salted when there’s snowfall. With rare exception, the roads here in sunny San Antonio, Texas, do not see that kind of maintenance. There are no snow plows or salt trucks. Driving, then, can be several times more precarious when we get the kind of extreme weather that hit us this week. Similarly, our electrical power infrastructure was designed to withstand heatwaves, not blizzards. I think a lot of Texans this week learned for the first time that a large share of the Lone Star State’s power grid operates separately from the rest of the U.S. Because of this,

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Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

As many of you know, I grew up in Toronto, where winters can be brutally cold. Like most people who live in northern U.S. states, I’m accustomed to driving on snowy, icy roads.

But then, roads in the north are plowed, sanded and salted when there’s snowfall. With rare exception, the roads here in sunny San Antonio, Texas, do not see that kind of maintenance. There are no snow plows or salt trucks. Driving, then, can be several times more precarious when we get the kind of extreme weather that hit us this week.

Similarly, our electrical power infrastructure was designed to withstand heatwaves, not blizzards. I think a lot of Texans this week learned for the first time that a large share of the Lone Star State’s power grid operates separately from the rest of the U.S. Because of this, much of the infrastructure, including plants and pipelines, has not been winterized, which contributed to the widespread outages that left millions without power and water for days.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

That fact alone, I believe, presents a good investment case for commodities and natural resources.

A joint state and federal investigation into the outages has already been announced. Improvements to (and winterization of) aging infrastructure will likely be recommended, if not required, to prevent this from happening again. Such a massive overhaul would require an incredible amount of metals and other basic materials, which would be positive for miners and producers.

We’re particularly bullish on copper, used extensively in electrical wiring and circuitry. Our favorite explorer-producer is Ivanhoe Mines, which recently announced positive mining results at its Kamoa-Kakula project in the Democratic Republic of Congo (DRC). Ivanhoe is up about 116% over the past 12 months. Our favorite speculation play is CopperBank Resources, which offers investors optionality to higher copper prices. Shares of the company are up more than 200% for the 12-month period, and today they hit a new all-time high of C$0.61.

Texas is the ninth largest economy in the world, ahead of Canada, South Korea and now Brazil. It consumes the most energy of any other U.S. state. Its residents and businesses deserve a world-class power grid that operates reliably in all weather conditions, even those that strike only once every 100 years.

No Energy Source Alone Is to Blame for the Outages

I want to briefly address something that I’ve been hearing and reading this past week. Some have used the outages as an opportunity to point fingers and criticize the reliability of different forms of energy, from fossil fuels to renewables.

Not only is this kind of talk counterproductive, but it’s also simply not rooted in fact. No single energy source was responsible for bringing the whole system down. Texas is well diversified when it comes to electricity generation, as you can see below.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

A little over half of Texas’s power comes from natural gas, which largely went down due to frozen wells and pipelines.

The state’s next biggest source, wind, also had issues, but these issues represented only around 13% of the blackouts. That’s according to Dan Woodfin, senior director for the Electric Reliability Council of Texas (ERCOT), which manages the Texas grid.

As I’ve pointed out before, Texas is the U.S. leader in wind energy, with close to 31,000 megawatts (MW) of installed capacity and 7,620 MW currently under construction.

However, another state’s wind capacity ranks higher in terms of percentage of its total energy. In 2019, wind accounted for 42% of Iowa’s net generation, the largest share of any other state.

We invest heavily in renewable energy, and we will continue to do so because that’s where the trend is headed. Among our largest holdings are Vestas Wind Systems, Canadian Solar and Plug Power. These positions have helped us crush the S&P Global Natural Resources Index over a number of time periods.

JPMorgan: A New Commodities Supercycle Has Begun

It’s not just renewables, though. We believe commodities as a whole look very attractive right now due to a number of factors.

I believe we’ll see demand from China surge in the coming months and years as the country comes out of the pandemic as the only major economy to expand in 2020. Yesterday, February 18, Chinese stocks, as measured by the CSI 300 Index, hit a new all-time high, exceeding the previous record set in October 2007.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

That was near the end of the last commodities supercycle. One highly regarded quant analyst believes we may be on the verge of the next one.

In a note to clients this week, JPMorgan’s Marko Kolanovic wrote that he thinks commodities have finally turned after a 12-year down cycle. The potential drivers of a secular bull market, says Kolanovic, include the end of the pandemic and reopening of economies, fiscal stimulus, end of the U.S.-China trade war, ultraloose monetary policies and increased and “tolerated” inflation.
He also notes ESG investors, or those who put special emphasis on environmental, social and corporate governance concerns. President Joe Biden seeks to go big on an infrastructure package that’s expected to favor renewables, which is supportive of metals, electric vehicles (EVs) and batteries.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up
click to enlarge

Kolanovic’s outlook is shared by many other analysts and investors, including Goldman Sach’s Jeff Currie, head of commodity research. In a recent interview with S&P Global Platts, Currie (who called the previous supercycle) said he’s bullish on oil and believes copper is likely already in a secular up cycle. “I want to be long oil and hang on for the ride,” he said in the February 5 interview.

HIVE Blockchain Valued Over $2 Billion

One year ago around this time, HIVE Blockchain Technologies had a market cap of about C$120 million. This week it soared past $2 billion. Today it sits at $2.4 billion.

I want to thank all of the investors who believe in HIVE’s potential and who have come along on this incredible journey. We took the company public in 2017 to give investors like you access to the emerging industry of cryptocurrency mining. We were the first to come to market, and today we’re the only one that mines both Bitcoin and Ether using all-green energy sourced in Sweden and Iceland. Today, February 19, shares of HIVE smashed above C$7.00 for the first time ever. With a high of $7.25, the stock is up more than 1,500% over the past 12 months.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

HIVE trades in Canada on the TSX Venture Exchange, over the counter in the U.S. and in Germany.

Many investors have reached out to me to ask when HIVE stock might become available on a bigger exchange, such as the Nasdaq. Such a move would naturally help it get more eyeballs.

I can’t say anything specific right now, but I will say that I hear you loud and clear. Getting listed is a process, and as soon as there’s something specific to share, I’ll let you know.

Speaking of cryptos, we have a webcast coming up on March 10 that I hope you’ll join us for. The topic will be gold and cryptocurrencies and how there’s room in your portfolio for both. Register for this free event by clicking here!

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

Gold Market

Strengths

  • The best performing precious metal for the week was platinum, up 1.53%.
  • Platinum rose above $1,300 an ounce for the first time in six years on bets that a recovery in industrial demand and stricter emissions rules will tighten supply. The precious metal is up 21% so far in 2021. After years of surpluses of platinum, COVID-19 shutdowns in South Africa saw the deficit widen to 400,000 ounces last year.
  • Barrick Gold, the most profitable major gold miner, reported a sixth straight quarter of earnings outperformance after boosting production and reducing costs in the fourth quarter. Barrick met its full-year guidance and achieved a 3.8% drop in costs, with all-in-sustaining costs of $929 an ounce. Newmont, the world’s largest gold producer, also posted strong fourth quarter earnings with revenue up 14% to 3.38 billion. Bullion averaged $1,876 an ounce in the last quarter, reports Bloomberg, helping miners stay profitable.

Weaknesses

  • The worst performing precious metal for the week was gold, down 2.39%. Gold fell to the lowest in more than two months on Tuesday due to a stronger dollar and better-than-expected economic data and fell to a 7-month low later in the week. Bullion has had its worst start to a year in 30 years, down already 6% year-to-date. Gold is also suffering from a rally in Treasury yields.
  • BlackRock Inc.’s $17 billion iShares Silver Trust, which garnered the attention of Reddit investors, saw a near-record outflow of $712 million in the past week, after absorbing $1.5 billion the prior week in its biggest-ever inflow. The prospectus for the physically-backed-by-silver fund has been updated to warn that the fund’s authorized participants may be unable to acquire enough of the metal. As a result, the trust “may suspend or restrict the issuance” of baskets of shares, according to Bloomberg.
  • Six people were killed in a fire at a gold mine in China’s eastern province of Shandong. The province will conduct safety checks of all underground non-coal mines and stop production at facilities until they are inspected reports Bloomberg.

Opportunities

  • The platinum-group metals market could remain “balanced to tight” through 2026, even as battery-powered electric vehicles penetration rates grow at 13% by 2025, Morgan Stanley analysts including Christopher Nicholson say in note. Platinum, palladium and rhodium may swing to a surplus from 2027 to mid-2040s on strong demand for green energy technology. There’s also potential for fuel-cell electric vehicles to obtain “technological dominance” in heavy-duty vehicles and a portion of light commercial vehicles may push platinum demand to 4.5 million to 11.5 million ounces by 2050.
  • AKH Gold, backed by one of Egypt’s richest men Naguib Sawiris, signed four contracts to explore in nine blocks of Egypt’s gold-rich eastern desert. Bloomberg reports the deals were among 10 contracts signed by the oil ministry this week. Last year the country introduced new regulations that boosted investor interest by limiting levies and removing the requirement that miners form joint ventures with the government.
  • Exploration company Midas Gold Corp has been renamed Perpetua Resources Corp and debuted on the Nasdaq Thursday. The Idaho-based company aims to restore an abandoned mine in the state to produce both gold and the only mined source of antimony in the U.S.

Threats

  • DoubleLine Capital chief Jeffrey Gundlach has changed his mind on gold and considers Bitcoin a better trade after the crypto crossed above $52,000 this week. Gundlach tweeted he’d been a long-term gold bull and U.S. dollar bear but has turned neutral on both. Bitcoin may well be “the stimulus asset,” he said, a reference to the cryptocurrency’s rally amid pandemic-induced stimulus. As seen in the chart below, Bitcoin continues to rise while gold loses steam.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

  • Gold’s recent decline could post challenges for miners to keep investor interest. Despite just reporting strong earnings, Newmont is down 5.5% this year while Barrick is down 10%.  Lower gold prices create pressure for miners to keep up profits and dividend payments.
  • Warren Buffett’s Berkshire Hathaway has exited gold entirely, less than a year after moving into the space. According to the latest filings, Berkshire sold its Barrick Gold shares entirely in the fourth quarter after purchasing 21 million shares in the second quarter of 2020.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

Index Summary

  • The major market indices finished mostly down this week. The Dow Jones Industrial Average gained just 0.11%. The S&P 500 Stock Index fell 0.64%, while the Nasdaq Composite fell 1.57%. The Russell 2000 small capitalization index lost 1.15% this week.
  • The Hang Seng Composite gained 1.23% this week; while Taiwan was up 3.41% and the KOSPI fell 0.42%.
  • The 10-year Treasury bond yield rose 13 basis points to 1.34%.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Yield Panda, rising 865%. The Bloomberg Galaxy Crypto Index is putting other stocks and commodities in the shade, writes Bloomberg. Bitcoin’s market value reached $1 trillion for the first time, a surge that’s helping cryptocurrency returns far outstrip the performance of more traditional assets like stocks and gold, the article continues.

Texas Freezes, but a New Commodities Supercycle Could Be Heating Up

  • Tesla indicated recently that it is investing $1.5 billion into Bitcoin and says that it will also accept this as a form of payment in the future. Elon Musk defended this decision on Twitter this week: “Having some Bitcoin, which is simply a less dumb form of liquidity than cash, is adventurous enough for an S&P500 company.”
  • Bitcoin has hit a $1 trillion value. The value of the digital token surged to almost $56,000 and has increased over 100 percent in 2021. Some buyers are seeing this an alternative to protect against inflation, while others see it as a vehicle for liquidity induced speculation.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was 3X Short BNB Token, down 96%.
  • Riot Blockchain stock plunged 20% this week following a parabolic rally. The stock is still up over 200% for the month, however, based on several announcements about higher capacity rates.
  • Hackers continue to be active with blockchain technology. There may have been an attack on the cryptocurrency that wiped 5,600 blocks on the trade list. This was due to a double-spend where two tokens are used simultaneously for separate transactions.

Opportunities

  • Mark Cuban indicated that he thinks that Bitcoin may be the currency of the future and compared its development like the early days of the internet. He prefers Ethereum currently, however, and said “ETH has an advantage over BTC as a store of value,” writes Yahoo! Finance.
  • Companies are being more involved in the bitcoin market. Geeley announced that it is starting a blockchain venture in China while MicroStrategy increased the size of its corporate bond offering to $900 million so it could invest in bitcoin. They want to buy $690 million more in Bitcoin, to add to the $3.5 billion holding it has currently.
  • ETFs and passive investments are entering the bitcoin market one after another. Purpose Investments has introduced the first regulated crypto ETF. NYDIG has filed an application with the SEC for a Bitcoin ETF.

Threats

  • The value of cryptocurrency is driven by the faith in the network, as the currency is not a company, nor does it have assets. In fact, speculation may be driving the price of Bitcoin higher. There is the risk of a plunge should investors move to the next new idea.
  • Volatility is very high in the current crypto market. The options market is pricing in the downside near $40,000, which is far below the $50,000 price. There is significant downside risk.
  • Hong Kong has proposed limiting trading in Bitcoin to professional investors only, which might move retail trading to the underground in unregulated peer to peer markets.

Read the remainder of the article at https://www.usfunds.com/investor-library/investor-alert/texas-freezes-but-a-new-commodities-supercycle-could-be-heating-up/

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

February 19, 2021

 

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