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Please note: The articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

This Week in Bitcoin: The IRS Targets Coinbase, Venezuela to Mint Its Own Cryptocurrency
December 8, 2017

Press Release: U.S. Global Investors Continues GROW Dividends

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

bitcoin accepted everywhere

Writing about blockchain and bitcoin right now is a little like buying a new computer in the 1990s. The tech was advancing so fast in those days that as soon as you brought the thing home, it was sorely outdated. Similarly, the cryptocurrency world is changing so rapidly at the moment that even before “the ink dries” on one of my posts, some important new development has already surfaced.

Case in point: When Bloomberg ran a particular story this Monday—Bitcoin Is Now Bigger Than Buffett, Boeing and New Zealand”—bitcoin’s market cap hovered just above $185 billion, making it worth more than the likes of PepsiCo, Boeing and McDonald’s.

Bitcoin is now worth more than some of the worlds biggest companies as of decemeber 4
click to enlarge

Well, here it is only four days later, and this chart is already outdated. As of Friday morning, bitcoin’s market cap topped $265 billion, bringing its total value comfortably above Coca-Cola, Toyota and Verizon (and now Bank of America, Walmart, Procter & Gamble, Pfizer, AT&T and Chevron). Next stop is Alphabet, which had a market cap of $288 billion at the end of the third quarter.

Or consider this: In May 2011, an early bitcoin investor named Greg Schoen tweeted his regret that he sold at $0.30, as the currency had then risen to $8.00 apiece.

I wish I kept my bitcoin tweet

Obviously we’ve seen earth-shattering appreciation since then. As of my writing this, bitcoin has breached the $17,000 level, up nearly 5.6 million percent—yes, you read that right, 5,600,000 percent—from our friend Greg’s exit point in 2011.

Bitcoin, of course, is just the largest fish in the entire universe of cryptocurrencies, which now number somewhere in the vicinity of 1,330, according to CoinMarketCap. If we combine the total market cap of all “altcoins” Friday morning, the amount exceeded $400 billion. That’s larger than the economies of Thailand, Nigeria and Austria. As of my writing this, as many as 15 coins had market caps over $2 billion.

total cryptocurrency universe market cap exceeded 400 billion for first time
click to enlarge

Coinbase Now Has More Accounts Than Charles Schwab

This meteoric growth has attracted not just retail investors but also, inevitably, regulators. San Francisco-based Coinbase, which allows users to trade digital currencies, now boasts more active users than fellow San Francisco-based Charles Schwab, the second biggest brokerage firm following Fidelity. As of December 1, Coinbase had 13 million accounts, Schwab 10.6 million.

opening a coinbase account is as easy as opening a tinder account

Contributing to Coinbase’s attractiveness is the ease with which someone can join. Whereas it can take up to two weeks to create a Schwab account, a Coinbase account can be opened in mere minutes, and as effortlessly as a Tinder account. This is one of the many reasons why both the popular online trading platform and dating service appeal to millennials.

According to Coinbase, as much as $50 billion have been traded on its platform since its inception, but as the number of accounts grows, we’ll likely see this dollar figure surge exponentially. This is the effect of Metcalf’s law, which I featured in an earlier post and discussed with SmallCapPower during the Mines and Money conference in London last month.

 

Frank Holmes speaking at Mines and Money Conference in London

The Rule of Unintended Consequences

If you recall, President Reagan once said: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops, subsidize it.” Surprising no one, then, Coinbase’s success has raised alarm bells for regulators and other government officials.

Ironically, it’s regulators that have unintentionally created the current environment in which cryptocurrencies now thrive. Back in May, I shared with you the fact that the number of listed companies here in the U.S. fell by more than half between 1996 and 2016. The addition of new financial rules and regulations, from Sarbanes-Oxley to Dodd-Frank, has encouraged more and more startups to avoid going public altogether, which is why we’re seeing an explosion right now in both stock prices—fewer listed companies means greater consolidation of fund flows into select stocks—and nontraditional methods of fundraising, from initial coin offerings (ICOs) to angel investing.

mob boss al capones bootlegging business thrived in the era of restrictive government policies

Consider the unintended consequences of Prohibition. Thanks to the 18th Amendment, the U.S. saw a sharp rise in organized crime and the emergence of notorious figures such as Al Capone.

By invoking “Scarface,” I’m not suggesting that all activities involving cryptocurrencies are illegal or malicious. I’m only saying that when rules and regulations become too restrictive, it invites new opportunities in unexpected ways.

And the beat goes on. After a months-long pushback, Coinbase agreed at the end of November to turn over the identities of 14,000 of its users to the Internal Revenue Service (IRS), which asserted that only 800 to 900 taxpayers reported bitcoin earnings between 2013 and 2015.

The tax agency initially requested access to all 13 million of Coinbase’s users, so I would call this an overall win for the exchange

Bad News Is Good News

You might presume the IRS’ crackdown on Coinbase would discourage some potential bitcoin investors from participating. I would argue that the IRS incident is actually constructive for bitcoin because there’s very recent precedent of similar setbacks being turned into a windfall for digital currencies.

In mid-September, we saw the price of bitcoin dip sharply after China restricted new ICOs and JPMorgan Chase CEO Jamie Dimon knocked the digital currency as a “fraud,” comparing it to the Dutch tulip bubble in the 17th century. The one-two punch purged the market of weak-stomached investors, resulting in an intraday loss of $711 per coin.

Since mid-September, though, bitcoin has rallied close to 380 percent, even after the IRS came for its pound of flesh. On November 29, bitcoin swung wildly from as high as $11,427 to as low as $9,001, a difference of $2,426.

Those who managed to tolerate these swings in the past will likely continue to stay aboard the S.S. Bitcoin—after all, the big banks and IRS’ opposition to digital currencies is precisely why they’re in the game in the first place. Bitcoin enthusiasts value the currency because it’s decentralized, anonymous, finite and cannot be manipulated by “the powers that be,” unlike fiat money.

Put another way, that some world governments, big banks and the IRS seek to quash bitcoin is unequivocal confirmation of its value.

If You Can’t Beat Them, Join Them

That brings us to Venezuela’s recent announcement that it plans to launch its own cryptocurrency, dubbed the “petro,” which will reportedly be backed by oil, gold and diamond reserves.

The revelation comes as the beleaguered South American country’s economy continues to deteriorate since Nicolás Maduro took office in 2013. The country owes around $60 billion to bondholders yet has only $9.6 billion sitting in the bank. An estimated 80 percent of Venezuelans currently live in poverty. Food, medicine and other necessities are dangerously scarce, and inflation right now is among the worst the world has ever seen, comparable to Germany in the 1920s and Zimbabwe in the 80s.


Venezuela expected to face even higher hyperinflation click to enlarge

This is inexcusable for such a resource-rich country. Venezuela, which depends on oil for around 95 percent of its export revenues, sits atop the world’s largest known oilfield. Amazingly, though, its output has been declining for several straight months. In September, production fell below 2 million barrels a day, a three-decade low, according to the Organization of Petroleum Exporting Countries (OPEC).

Conditions aren’t likely to improve for the country since Maduro consolidated power in July, effectively making himself absolute dictator and inviting harsh economic sanctions from the U.S. government.

This is precisely what drives Maduro’s interest in establishing a cryptocurrency—to circumvent U.S.-led sanctions. The petro will serve as a “buffer” between transactions, encrypting all incoming and outgoing money to free up the country’s monetary system from controls imposed by the U.S.

As explained by Bloomberg’s Leonid Bershidsky, foreign investors “will be able to lend money to Venezuela and get repaid in cryptocurrency, which Maduro wants them to spend on oil and other Venezuelan commodities” that are tied up by the U.S.

Russia has similar ambitions with its “CryptoRuble,” unveiled in October. Like Venezuela, Russia grapples with steep U.S. and international sanctions following its annexation of Crimea in 2014 and meddling in the 2016 U.S. election. Below is a flowchart— courtesy of Zura Kakushadze, professor of quantitative finance at Free University of Tbilisi, and Jim Kyung-Soo Liew, assistant professor of finance at John Hopkins University—illustrating how the CryptoRuble is designed to allow the Russian government to maintain full control of money flow into and out of the country’s coffers.


Schematic depiction of the money flow into and from cryptoruble click to enlarge

According to Kakushadze and Kyung-Soo Liew:

With government-issued cryptocurrencies, central banks and sovereign governments will gain even more control, not less, than with the current banking system… This is any government’s dream come true!

To be clear, the way in which Venezuela and Russia plan to use cryptocurrencies is antithetical to their appeal in the eyes of many investors. Unlike bitcoin, Ethereum, Litecoin and other popular digital currencies, the petro and CryptoRuble are centralized—they are conceived and will be controlled exclusively by the Venezuelan and Russian governments.

And unlike bitcoin, they will not be mined, as gold is, but issued by governments, as fiat money is.

Again, Kakushadze and Kyung-Soo Liew:

The world order as we know it is changing, right before our eyes. This disruptive technology—cryptocurrencies—will indeed end up disrupting the status quo. However, at least in the mid-term, forward-thinking sovereign states that embrace and adapt it to their advantage will end up being the disruptors as opposed to disrupted. The U.S. is the sovereign state with the most to lose in their process, with a clear policy implication: adapt to the changing reality, issue CryptoDollars now, or risk being marginalized.

 

This assessment dovetails perfectly into a November report from Deutsche Bank strategists Jim Reid and Craig Nicol, who reflect on what they see as the end of traditional fiat money within the coming decades. Because fiat currencies are “inherently unstable and prone to high inflation,” Reid and Nicol write, “We may need to find an alternative.” Among other solutions, the two suggest cryptocurrencies, which “are as much about blockchain as anything else.”

Speaking of blockchain, Australia’s main stock market, the Australian Securities Exchange (ASX), is soon poised to become the first in the world to use blockchain’s superior ledger technology to process transactions, according to Bloomberg. It wouldn’t surprise me if other global stock markets, including the New York Stock Exchange (NYSE), quickly embraced this exciting new technology. 

How to Gain Exposure to Bitcoin Without Owning Any

And finally, both the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) are setting the table to offer bitcoin futures contracts for the first time ever this month—the CBOE this Sunday, the CME a few days later. This will give investors a new way to participate in bitcoin and, in many skeptics’ minds, help “legitimize” the currency as a serious asset.

There are other ways to participate without actually owning bitcoin. In a recent Bloomberg story, Tom Lee of market research firm Fundstrat lists several companies and funds with exposure to the digital currency. Among his favorites is HIVE Blockchain Technologies, a blockchain infrastructure company involved in the mining of fresh new coins, never before traded. The first company of its kind to sell shares to the public, HIVE began trading on the TSX Venture Exchange on September 18.

I’m sure I’ll have more to say on these topics at a later time. In the meantime, I invite you to watch these two short, informative videos that succinctly explain blockchain and bitcoin in plain terms. Enjoy!

 

 

Index Summary

  • The major market indices finished mixed this week.  The Dow Jones Industrial Average gained 0.40 percent. The S&P 500 Stock Index rose 0.35 percent, while the Nasdaq Composite fell 0.11 percent. The Russell 2000 small capitalization index lost 1.00 percent this week.
  • The Hang Seng Composite lost 1.31percent this week; while Taiwan was down 1.90 percent and the KOSPI fell 0.46 percent.
  • The 10-year Treasury bond yield rose 1.7 basis points to 2.38 percent.

Domestic Equity Market

SP 500 Economic Sectors
click to enlarge

Strengths

  • Financials was the best performing sector of the week, increasing by 1.50 percent versus an overall increase of 0.29 percent for the S&P 500.
  • Davita was the best performing stock for the week, increasing 10.80 percent.
  • Lululemon shares rose after the company reported better-than-expected top and bottom line results and raised its guidance. Revenue rose 14 percent versus a year ago while total comparable sales jumped 8 percent year-over-year. The company also raised its full-year 2017 adjusted earnings per share guidance to a range between $2.45 and $2.48, up from its previous guidance of $2.35 to $2.42.

Weaknesses

  • Utilities was the worst performing sector for the week, falling 1.03 percent versus an overall increase of 0.29 percent for the S&P 500.
  • Range Resources was the worst performing stock for the week, falling 13.08 percent.
  • Although retail stocks have had a strong bounce post-Black Friday, Under Armour’s failure to rally is a big warning sign.

Opportunities

  • According to Cowen, the GOP tax plan could add billions to Amazon, Facebook and Google's bottom lines. The firm estimates the tech giants will save a combined $4.5 billion on taxes in 2018 as a result of the GOP tax bill.
  • UnitedHealth Group said it would buy kidney care services provider DaVita’s medical unit for about $4.9 billion cash. The acquisition is a move for the health insurer to expand operations in outpatient care services.
  • Major Wall Street firms, including Goldman Sachs, say to expect more merger and acquisition activity in 2018 thanks to the GOP tax plan and robust cash levels.

Threats

  • Global stock market cap has recently set a record, exceeding $80 trillion, but Goldman Sachs believes the "bull market in everything" is about to come to an end. Goldman says that in the medium-term, we face either "slow pain" or "fast pain" in the equities markets.
  • New reforms could have a big negative impact on global banks. Global investment banks will see their revenue in Europe chopped by $4.4 billion from the MiFID II financial reforms that start to go live in January, according to Coalition, an industry analytics and consulting firm.
  • Chipmaker Broadcom made its first formal move toward a hostile bid to take over Qualcomm on Monday, laying out a slate of 11 nominees it wants to put on the board. Shares of both companies fell as Qualcomm confirmed receiving the list, saying Broadcom's action was a "blatant attempt to seize control of the Qualcomm board in order to advance Broadcom's acquisition agenda." Qualcomm last month rejected Broadcom's $103 billion cash-and-stock bid, saying it dramatically undervalued the company.
In the News
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December 6, 2017
U.S. Global Investors Continues GROW Dividends
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December 6, 2017
The Digital Currency Space Is "Growing Exponentially"
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December 6, 2017
Frank Holmes Explains Bitcoin's Growth Using Metcalfe's Law
www.usfunds.com/in-the-news

The Economy and Bond Market

 

Strengths

  • The U.S. economy added 228,000 jobs in November, more than economists’ forecasts of 195,000. Overall, the report demonstrated that job creation remained strong.
  • The unemployment rate remained near a 17-year low of 4.1 percent.
  • Japan's economy grew faster than initially thought in the third quarter, expanding 0.3 percent quarter-over-quarter. This was double the pace initially reported, according to Japan's Cabinet Office.

Weaknesses

  • Wage growth was weaker than expected. Average hourly earnings rose 0.2 percent from October and increased 2.5 percent compared with the year-ago period. Some structural forces, including changes in the labor-force makeup between high-income and low-income earners and lower labor-market turnover, are likely keeping wage growth slow.
  • Republicans received two new alarming reviews of their tax plan. A Gallup poll showed only 29 percent of Americans approve of the bill, while 56 percent disapprove. Meanwhile, a Quinnipiac poll showed 29 percent approval and 53 percent disapproval.
  • Consumer sentiment in the U.S. dropped for a second straight month. The University of Michigan Index of Consumer Sentiment fell to 96.8, the lowest since September, after 98.5 in November.

Opportunities

  • Bank of America Merrill Lynch's David Woo says he's more optimistic than the consensus view on the GOP's ability to pass tax cuts and on their market impact. He said the "ultimate tax reform trade" is a bet on a steeper yield curve. Tax reform should increase the deficit and strengthen the dollar, both of which would steepen the spread between two and 10-year Treasuries, he forecasts.
  • The Federal Reserve is widely expected to hike rates 25 basis points next Wednesday. Investors will be looking to the updated economic forecasts and the "dot" plot for signals on future policy moves.
  • With strong Black Friday sales, the retail sales report next Thursday should continue the momentum into the Christmas season.

Threats

  • The flattening of the Treasury yield curve, a persistent theme over the past several weeks, is showing no slowdown in momentum. On Tuesday, the spread between five and 30-year U.S. yields fell below 60 basis points to the lowest since November 2007. The market is beginning to price in more rate hikes from the Fed next year, which is causing short-end yields to climb, while long bonds rally from demand for duration and low inflation.

Treasury yield spread plunges below 60 basis points for the first time since 2007
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  • The Republicans' tax bill is set to disproportionately affect homeowners in affluent parts of the U.S. Wealthier households are more likely to take advantage of key tax breaks that could be cut back or eliminated, including the mortgage interest deduction and the state and local tax, or SALT, deduction. The most affected states include New York, California, Connecticut and Hawaii.
  • The International Monetary Fund (IMF) warned that China’s credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25 percent above the long-term trend—very high by international standards and consistent with a high probability of financial distress, according to the organization.

Gold Market

This week spot gold closed at $1,248.50 down $32.00 per ounce, or  negative 2.50 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by  negative 3.67 percent. Junior-tiered stocks outperformed seniors for the week, as the S&P/TSX Venture Index came in off just 0.50 percent. The U.S. Trade-Weighted Dollar surged 1.10 percent this week.

Date Event Survey Actual Prior
Dec-4 Durable Goods Orders -1.1% -0.8% -1.2%
Dec-6 ADP Employment Change 190k 190k 235k
Dec-7 Initial Jobless Claims 240k 236k 238k
Dec-8 Change in Nonfarm Payrolls 195k 228k 244k
Dec-12 ZEW Survey Current Situation 88.5 -- 88.8
Dec-12 ZEW Survey Expectations 18.0 -- 18.7
Dec-12 PPI Final Demand YoY 3.0% -- 2.8%
Dec-13 Germany CPI YoY 1.8% -- 1.8%
Dec-13 CPI YoY 2.2% -- 2.0%
Dec-13 FOMC Rate Decision (Upper Bound) 1.5% -- 1.25%
Dec-14 China Retail Sales YoY 10.3% -- 10.0%
Dec-14 ECB Main Refinancing Rate 0.00% -- 0.00%
Dec-14 Initial Jobless Claims 239k -- 236k

Strengths

  • The best performing precious metal for the week was palladium, but it clocked in with a price decline of 1.41 percent. In an interview with Sharps Pixley’s Lawrie Williams, precious metals specialist Ted Butler said his analysis shows that, for at least the past nine months or longer, Goldman Sachs and JPMorgan Chase are taking 80 percent of all COMEX physical deliveries of gold and silver.  Butler believes that someone would only take delivery if you thought the price was going to go up in value.
  • A Shariah-compliant gold ETF targeting Malaysian institutional investors will be made available by Affin Hwang Asset Management. The ETF was listed on the Kuala Lumpur stock exchange on Wednesday.
  • Traders are still reluctant to bet against gold even with impending tax cuts and rate hikes, thought to be negative for the yellow metal. Bearish positions on bullion futures and options were at a five-year low last week.

Weaknesses

  • The worst performing precious metal for the week was platinum, down 5.53 percent. Traders surveyed were overwhelmingly bearish ahead of next week’s Federal Reserve rate hike expectation. The world’s second biggest market for gold, India, reported a third consecutive month of decreased imports. Additionally, Australia’s Perth Mint reported gold sales of 23,901 ounces last month, about half of the prior month’s volume
  • David Govett, head of precious metals trading at Marex Spectron in London, said, “The rate hike is now looming and people are suddenly realizing that gold may not be the most attractive long position at the moment.” Although bullion is heading for the first back-to-back annual advances since 2012, traders have recently dented those gains, writes Eddie van der Walt of Bloomberg.
  • Online searches for “buy bitcoin” continue to far outstrip searches for “buy gold.” More and more investors are viewing bitcoin as the new gold—a new way to store money outside the control of any government or company.

Opportunities

  • Gold could trend higher in 2018 as real borrowing costs continue to be low in historical terms and fears of equity and bond correction encourage investors, reports Bloomberg. The yellow metal is set to rise marginally as real interest rates stay low and the dollar weakens, says Bart Melek, global head of commodity strategy at TD Securities. China’s gold consumption will continue to rise in 2018 following this year’s demand of over 1,000 tonnes, up from 975 tonnes in 2016. Zijin Mining is bullish on gold as the dollar is seen in a downward cycle. Central banks may add to gold reserves amid uncertainty in global currency system, reports Bloomberg. Commerzbank forecasts gold to average $1,325 in 2018 on the back of low or even negative interest rates and ongoing political uncertainty.

Golds average price in 2018 seen higher than this year
click to enlarge

  • The next “Big Short” is coming as hedge funds prepare to bet against bitcoin. The introduction of bitcoin futures contracts at major hedge funds will make it easier to bet on a decline in the popular digital currency. And as bitcoin surges, nobody cares that about $90 million was hacked from coins Tether and NiceHash. Meanwhile, validating a transaction can cost as much as $20, and the market is currently illiquid with more buyers than sellers.
  • Contributing to the speculative nature of bitcoin is the fact that Coinbase now has 13.3 million users, more than Charles Schwab’s 11.7 users built up over decades, implying that digital currency investors lack understanding of the processes involved. Last month, someone moved 25,000 bitcoins worth around $159 million to an online exchange in preparation for selling. This demonstrates the potential volatility of about 40 percent of bitcoin being held by around 1,000 users. Since bitcoin is a currency and not a security, there are no rules against a trade where one group agrees to buy enough to push the price up then cash out in minutes, reports Bloomberg’s Olga Kharif. Lastly in bad bitcoin news, A new company, BIG Blockchain Intelligence Group, will be collecting users’ bitcoin data to try and address anti-money laundering (AML) statutes and selling your data to law enforcement.

Threats

  • One of the biggest companies in the S&P 500 Index, General Electric (GE), will be cutting 12,000 jobs as demand for gas turbines is down with customers turning toward renewable energy sources. Share prices fell to the lowest in six years on Wednesday, with the stock falling 44 percent in this year alone. A company this large having big troubles might indicate the economy is not as strong as thought. U.S. and European banks potentially face billions in loan losses with the unraveling of Steinhoff International this week when its share price fell 84 percent in three days as it was revealed it’s engulfed in an accounting scandal.
  • New tax reform will sharply reduce interest deductibility on tax returns, which will raise the effective cost of debt relative to cash flow and ultimately stifle companies to raise debt for buybacks. A sharp fall in buybacks will lower net U.S. stock purchases and lower bank lending and credit issuance, which will tighten liquidity. This comes at a time when U.S. corporate investment is at its lowest in history, according to a Macro Strategy Partnership report released this week.
  • Among the groups most negatively impacted by the latest tax reform bill include upper-middle class families in high-tax areas, graduate students, government workers and public school teachers. Many members of these groups lean Democrat, which Republicans are well aware of, writes Sahil Kapur of Bloomberg. This poses the question of what will happen to high-tax states such as New York and California, where taxes could no longer be deductible from federal tax returns. When Kansas implemented similar tax cuts in 2012, the economy slowed, saw lower than expected revenues and was forced to make huge cuts to government programs—a priority of the current administration. Economic policy analyst Stephen Moore, who advised Donald Trump’s campaign on tax policy, said, “It’s death to Democrats.” But not so fast: Democrats, after calculating their new tax burden, could easily decide it is no longer affordable to stay in high-tax burden states as California, New York and New Jersey, and move elsewhere. Unexpectedly, then, “red states” might see an influx of many new Democrat-leaning residents, which would disrupt electoral precinct maps.

How do different countries celebrate christmas

Energy and Natural Resources Market

 

Strengths

  • Steel was the best performing major commodity this week rising 1.9 percent. The commodity rallied as investors await the official approval of the U.S. tax plan that should allow the administration to introduce its much anticipated infrastructure plan.
  • The best performing sector this week was the S&P 1500 Steel Index. The index rose 5.6 percent after President Trump is said to ready his infrastructure plan for release next month. The announcement suggests the passage of the tax plan may open the door for legislation on the much anticipated infrastructure buildout plan Trump aggressively campaigned on.
  • Freeport McMoRan Inc. was the best performing stock in the broader resource market this week. The stock rallied 7.6 percent after the Indonesian government announced plans to buy Rio Tinto’s 40 percent interest in the Grasberg mine, a move that appears to kickstart the resolution of Freeport’s required divestment of a fraction of its ownership in Grasberg. The overall message was welcomed well by investors in a sign that a near resolution of the ownership in Grasberg may remove uncertainty and allow Freeport stock prices to re-rate.

Weaknesses

  • Natural gas prices dropped 8.9 percent this week; the most among major commodities. The commodity dropped after weather models forecast a less intense wave of cold weather than initially anticipated. In addition, U.S. gas production continued to rise, this time to a new all-time high.
  • The worst performing sector this week was the NYSE Arca Gold Miners Index. The index of major gold producers dropped 3.7 percent tracking gold price weakness. Gold prices posted the worst weekly decline since May.
  • The worst performing stock for the week was Daqo New Energy Corp. The producer of photovoltaic cells used in solar panels dropped 13.4 percent. There were no major announcements that justified the negative move in the stock price. The price corrected after numerous weeks of outperformance. 

Opportunities

  • The Global Manufacturing PMI rose to its highest since 2011 in November, with output, new orders and employment growth all strengthening, according to JP Morgan. Further to that, for the first time in over a decade, no country reported a deterioration in manufacturing conditions. The headline JP Morgan PMI hit 54.0 this past month, and now has gained momentum for five consecutive months, a strong positive sign for global commodity demand.

Global manufacturing growth accelerated to highest reading since march 2011
click to enlarge

  • China’s exports and imports in November both showed surprising strength – up 12.3 percent and 17.7 percent, respectively – underpinned by a recovering global economy and resilient domestic demand. Raw materials imports surged, with purchases of natural gas, copper and iron ore signaling robust domestic demand in the world’s biggest commodity consumer.
  • Oil prices edged higher on near-record Chinese orders. China’s crude imports rebounded from a one-year low, defusing some of the pessimism among investors resulting from refined product inventory builds and growing U.S. production.

Threats

  • Gold prices were beaten down this week as investors anticipate higher U.S. interest rates and as progress on tax reform buoys the dollar. Bullion dropped over 2 percent this week, nearing July lows, marking a third consecutive weekly decline.
  • China’s commodity exchanges have hiked transaction fees and margin requirements for a range of commodity futures contracts in their latest effort to curb speculative trading. The move is the latest in a series of regulatory amendments that the Asian nation has introduced this year to mitigate the volatility and speculative investments in the sector. These actions may have a positive long-term effect in commodity markets, and may result in weaker demand in the short term.
  • Metals prices had their biggest weekly slump in more than a year and a half as investors fear demand will slow in China, despite imports data suggesting the opposite. The London Metals Exchange Index fell 3.7 percent for the week, the most since May 2016. Copper had its worst week n 17 months, while zinc declined the most in almost a year, reports Bloomberg. China’s leaders have indicated they will step up their fight against excessive leverage in 2018, a move that may result in sluggish growth in the world’s biggest buyer of commodities.

China Region

 

Strengths

  • The Philippines’ Stock Exchange Index climbed 1.97 percent for the week, handily surpassing its regional peers over the last five trading days.
  • Information technology was the only sector of the Hang Seng Composite Index to finish in the green for the week, regaining a bit of ground after its pummeling last week.  Technology finished up 1.06 percent.
  • This week we got the finals in last month’s China PMI readings, as the Caixin China Services PMI came in at a 51.9 reading, up from October’s 51.2.  The Composite Caixin China PMI thus came in at a 51.6, higher than last month’s 51.0.

Chinas november purchasing managers index data
click to enlarge

Weaknesses

  • Taiwan’s TWSE Index declined 1.90 percent for the week, while Hong Kong’s Hang Seng Composite dropped 1.31 percent for the week.  Vietnam’s Ho Chi Minh Stock Index fell 2.08 percent.
  • The materials sector declined most heavily in the HSCI this week, falling just under 4 percent in that time.
  • Canadian Prime Minister Justin Trudeau came up short this week in his trip through China, after hopes for some sort of concrete progress in a trade agreement with China failed to come to fruition.  A Bloomberg News report notes how “abruptly” a scheduled joint press conference for Monday was canceled after the Canadian and Chinese sides were “unable to set a framework to launch formal trade negotiations.”

Opportunities

  • China is reportedly planning on extending tax rebates for the purchase of new-energy vehicles (NEVs) through at least 2020.  The rebates, which exempt a 10 percent purchase tax, were otherwise set to expire this year.
  • China’s trade data came in better than expected.  Year-over-year imports rose 17.7 percent, better than analysts’ expectations for a 13.0 percent gain, while exports climbed 12.3 percent, also higher than estimates for a 5.3 percent gain.  With a steady showing in foreign reserves this week as well (coming in at a solid $3.119 trillion), China’s growth may well be set to keep humming along in the near term.
  • Media reports this week suggest that the Tencent-backed online doctor startup WeDoctor may seek a Hong-Kong IPO.

Threats

  • An intriguing article in The Wall Street Journal this week notes that smartphones are increasingly—and perhaps surprisingly—seen in North Korea.  However, these smartphones are for monitoring people, subject to random searches, and lead users to North Korea’s intranet.  The article quotes Priscilla Moriuchi, of intelligence firm Recorded Future, who observed fascinatingly that, “In an Orwellian sense, North Korea is innovating on surveillance.”  But look at the bright side: at least users have quicker access to Kim Jong Un speeches and North Korean recipes.
  • The road to a cleaner China may be bumpy.  Bloomberg News reports this week that natural gas shortages in some of China’s frigid Northern provinces led to suspensions of heat to some households as apparent collateral damage in the drive to shift away from coal.  The authorities have reportedly instructed local officials to prioritize keeping people warm at this point. 
  • Indonesia’s central bank announced that it will ban financial technology companies from using cryptocurrencies on their platforms, Bloomberg reports.  The curbs will be effective at the start of 2018.

Emerging Europe

 

Strengths

  • Turkey was the best performing country this week, gaining 4.2 percent. Turkish stocks recorded the biggest weekly gain in the past five months, led by banks. An index of Turkish banks is trading around 5.1 times estimated earnings over next year, compared with a multiple of nine for the MSCI Emerging Market Financials Index, according to Bloomberg.
  • The Turkish lira was the best performing currency this week, gaining 1.9 percent against the U.S. dollar. The lira rebounded from a record low, but the gains could fade if the central bank of Turkey continues to fail at support its currency. The ongoing court trail in New York involving a Turkish banker, accused of helping Iran evade sanctions, has attracted investors’ attention.
  • Real estate was the best performing sector among eastern European markets this week.

Weaknesses

  • Romania was the worst performing country this week, losing 1.3 percent. Third-quarter preliminary GDP results showed the country growing 8.8 percent year-over-year. Retail sales are strong, growing close to 13 percent year-over-year. Over the past five days the Bucharest stock market was pulled down by utilities.
  • The euro was the worst performing currency this week, losing 1.2 percent against the U.S. dollar. A weaker euro is a reflection of a stronger dollar. Stronger-than-anticipated U.S. jobs growth supported the currency. The Federal Reserve is expected to deliver a 25 basis points rate hike on Wednesday.
  • Health care was the worst performing sector among eastern European markets this week.

Opportunities

  • As global central banks and the neighboring Czech central bank have started tightening, Hungary’s central bank will start buying mortgage bonds in order to push yields lower on longer-dated government bonds. Loose monetary conditions will encourage borrowers to take more loans and help inflation to reach the central bank’s target of 3 percent. The country’s inflation slowed to 2.2 percent in October. According to the median forecast in the Reuters poll, the central bank’s base rate should stay unchanged at 0.9 percent this year and next, and rise to 0.97 percent by the end of 2019.
  • Prime Minister of Poland, Beata Szydlo, was dismissed halfway through the government’s four-year term. Deputy Prime Minister, Mateusz Morawiecki, who has been in charge of economic policy, was nominated to become premier. As Finance’s Minister, Morawiecki helped to implement a welfare spending program, while curbing tax loopholes to increase the country’s revenue and lower its budget deficit. He will keep the budget shortfall under control as he is counting on foreign investors to help finance state borrowing.
  • Andrei Babis, the leader of the euroskeptic ANO party, was named as the Czech Prime Minister this week. He is expected to streamline overly-complicated procedures required for projects like building highways, railroads and sports facilities. Babis is a businessman and is ranked as the second-richest person in the Czech Republic. He is expected to run the state like a business, focusing on increased state spending on infrastructure projects and cutting the bureaucracy.

Threats

  • The price gap between Brent crude oil and Russian equites has widened in the past three months. The oil price was lifted by OPEC’s decision to extend oil production cuts until the end of next year, but Russian equites, which usually follow the price of oil, did not appreciate with the uptrend in oil. The ongoing Mueller investigation along with the prospect of more sanctions, are limiting gains on the Moscow stock exchange. 

Brent crude oil vs moex russia index
click to enlarge

  • The European Union will start a legal procedure against Poland, the Czech Republic and Hungary for failing to accept refuges under a plan agreed to by the 28-country bloc two years ago. Under the plan, Hungary, Poland and the Czech Republic were supposed to take in a combined 10,000 people. However, Hungary and Poland have taken none at all, while the Czech Republic has accepted 12. There is a deep division among Europeans on how to handle the migrant problem.
  • Poland took another step toward overhauling its courts, while the European Union is saying it undermines the country’s democratic order. The lower house approved legislation on Friday to reshape the Supreme Court by forcing two-fifths of the court’s justices into retirement and overhauling a panel that appoints judges. The bill’s approval came shortly after the ruling party announced its new Prime Minister, Mateusz Marowiecki. He is seen as a positive figure among foreign investors, but he is also a loud supporter of the court overhaul. The political clashes between the ruling parties in Poland and Brussels will most likely continue.

Can you guess which moves feature gold

Leaders and Laggards

Weekly Performance
Index Close Weekly
Change($)
Weekly
Change(%)
Russell 2000 1,521.72 -15.30 -1.00%
S&P Basic Materials 371.16 +1.89 +0.51%
Nasdaq 6,840.08 -7.51 -0.11%
Hang Seng Composite Index 3,958.90 -52.69 -1.31%
S&P 500 2,651.50 +9.28 +0.35%
Gold Futures 1,249.90 -32.40 -2.53%
Korean KOSPI Index 2,464.00 -11.41 -0.46%
DJIA 24,329.16 +97.57 +0.40%
S&P/TSX Global Gold Index 185.92 -5.39 -2.82%
SS&P/TSX Venture Index 792.96 +3.96 +0.50%
XAU 76.93 -2.73 -3.43%
S&P Energy 509.77 -3.56 -0.69%
Oil Futures 57.32 -1.04 -1.78%
10-Yr Treasury Bond 2.38 +0.02 +0.72%
Natural Gas Futures 2.78 -0.28 -9.15%
 
Monthly Performance
Index Close Monthly
Change($)
Monthly
Change(%)
Korean KOSPI Index 2,464.00 -88.40 -3.46%
Hang Seng Composite Index 3,958.90 -62.46 -1.55%
Nasdaq 6,840.08 +50.96 +0.75%
XAU 76.93 -5.48 -6.65%
S&P/TSX Global Gold Index 185.92 -9.58 -4.90%
Gold Futures 1,249.90 -38.10 -2.96%
S&P 500 2,651.50 +57.12 +2.20%
S&P Basic Materials 371.16 +3.44 +0.94%
DJIA 24,329.16 +765.80 +3.25%
Russell 2000 1,521.72 +39.99 +2.70%
SS&P/TSX Venture Index 792.96 -1.83 -0.23%
Oil Futures 57.32 +0.51 +0.90%
S&P Energy 509.77 -6.58 -1.27%
Natural Gas Futures 2.78 -0.39 -12.41%
10-Yr Treasury Bond 2.38 +0.04 +1.88%
 
Quarterly Performance
Index Close Quarterly
Change($)
Quarterly
Change(%)
Korean KOSPI Index 2,464.00 +120.28 +5.13%
Hang Seng Composite Index 3,958.90 +155.35 +4.08%
Nasdaq 6,840.08 +479.89 +7.55%
Natural Gas Futures 2.78 -0.11 -3.77%
Gold Futures 1,249.90 -105.40 -7.78%
S&P 500 2,651.50 +190.07 +7.72%
S&P Basic Materials 371.16 +28.13 +8.20%
S&P/TSX Global Gold Index 185.92 -22.77 -10.91%
XAU 76.93 -14.72 -16.06%
DJIA 24,329.16 +2,531.37 +11.61%
Russell 2000 1,521.72 +122.30 +8.74%
SS&P/TSX Venture Index 792.96 +20.97 +2.72%
S&P Energy 509.77 +38.34 +8.13%
Oil Futures 57.32 +9.84 +20.72%
10-Yr Treasury Bond 2.38 +0.33 +15.94%
 

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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (09/30/2017):

The Boeing Co.
Chevron Corp.
Tencent Holdings Ltd.
Freeport-McMoRan Inc.

 

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.

The MOEX Russia Index is a cap-weighted composite index calculated based on prices of the 50 most liquid Russian stocks of the largest and dynamically developing Russian issuers presented on the Moscow Exchange. The MSCI Emerging Markets Financials Index is a free float-adjusted, market capitalization-weighted index designed to measure the combined equity market performance of the financials sector of emerging markets countries. The Philippine Stock Exchange PSEi Index is composed of stocks representative of the industrial, properties, services, holding firms, financial and mining & oil sectors of the Philippines Stock Exchange. The TWSE, or TAIEX, Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange. The index was based in 1966. The index is also known as the TSEC Index. The Vietnam Stock Index or VN-Index is a capitalization-weighted index of all the companies listed on the Ho Chi Minh City Stock Exchange. Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly. A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001). The Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. It uses telephone surveys to gather information on consumer expectations regarding the overall economy. The S&P 1500 Steel Index is an unmanaged market capitalization weighted index of companies whose primary business involves the manufacture and processing of steel. The London Metals Exchange Index (LMEX) is an index on the six designated LME primary metals contracts denominated in US dollars. Weightings of the six metals are derived from global production volume and trade liquidity averaged over the preceding five-year period. The index value is calculated as the sum of the prices for the three qualifying months multiplies by the corresponding weights, multiplied by a constant.

 

 

 

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Net Asset Value
as of 10/18/2019

Global Resources Fund PSPFX $4.29 -0.02 Gold and Precious Metals Fund USERX $8.63 -0.02 World Precious Minerals Fund UNWPX $3.03 0.01 China Region Fund USCOX $8.82 -0.03 Emerging Europe Fund EUROX $7.05 0.02 All American Equity Fund GBTFX $24.69 -0.05 Holmes Macro Trends Fund MEGAX $16.64 -0.21 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change