- January 3, 2012
- Case for Sustained $100 Oil
In 2011, oil was one of the top performing commodities among those we track, with Brent rising more than 13 percent. Geopolitical risk and unexpected non-OPEC supply losses caused oil to rise significantly in early 2011. By October, we saw the black gold sink to a low of $96 per barrel before rising to its current level of nearly $108 a barrel.
Last year’s unrest demonstrated how major oil-producing regions can significantly affect oil prices. As I’ve previously stated, according to PIRA, the Middle East accounts for over 70 percent of OPEC oil production and, along with North Africa, more than 95 percent of the cartel’s capacity growth.
A disruption of the supply chain can also influence oil prices. One of the largest chokepoints along the global oil supply chain is the Strait of Hormuz, which roughly 90 percent of all Persian Gulf oil tankers—some 18 million barrels per day—pass through, according to Barclays. With Iran controlling the entire northern border of the strait, there is a significant chance for disruptions should the country fall into conflict or war.
The story will likely continue into the new year, as “sanctions against Iran, including a possible European Union oil embargo, and fear of an Israeli attack on Iran’s nuclear facilities led 2011 to close on a bullish note” for oil, said PIRA Energy Group in their new report today. Additionally, there’s new political uncertainty in Iraq that may keep oil elevated.
The chart below sums it up: With more than 40 percent of the world’s oil controlled under autocratic rule, oil supply in democratic nations likely depends on the state of autocratic nations.
China Rises to Top of Energy Pyramid
Another significant development in 2011 was that China surpassed the U.S. to become the world’s largest energy consumer. BP’s Statistical Review of World Energy report calculated that China’s energy consumption rate grew 11 percent over the previous year, with the country consuming 20 percent of global energy.
While coal accounts for a significant portion of China’s total energy use, the country’s need for oil should continue to rise. Its rising income levels, the government’s social housing plan, and an aggressive transportation effort to link 700 million people across more than 250 cities should continue drive this growth. Bank of America-Merrill Lynch agrees, suggesting that “China’s oil dependency will rise as U.S. imports fall.” In the chart below, it’s projected that China’s imports of crude oil and petroleum products will surpass the U.S. in 2014. BofA-ML thinks that on a volume basis, China oil imports “will grow quite rapidly on the back of rapid per capita income growth.”
China’s demand is what makes today’s oil situation different from the end of 2007. At that time, a lack of supply increased oil prices even though the U.S. was in a recession. What’s different is that “China is likely to re-accelerate” in 2012, according to Goldman Sachs.
China, along with other emerging markets, and the European Central Bank are in the early stages of a global easing cycle, primarily by cutting interest rates to spur growth. Also, the Federal Reserve should remain stimulative. These government actions set the stage for sustained, or perhaps higher, demand for oil. As stated earlier, geopolitical threats remain on the horizon, and could also be a positive catalyst for oil.
As always, our team will closely follow these events, as well as the monetary and fiscal policies, to find global investment opportunities in 2012.
We wish you and your family a very happy and prosperous new year!
John Derrick contributed to this commentary.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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- December 28, 2011
- Reader Favorites: Top 10 Commentaries of 2011
As we celebrate the holiday season after a challenging year, I am reminded that the most important gifts are love, friendship and goodwill. Alexander Green from InvestmentU shared that sentiment in his newsletter last week highlighting the wonderful story of how Charles Dickens overcame adversity to reshape the way many look at Christmas. Read Alex’s piece here.
This week I thought we’d take a moment to reflect on the eventful year it’s been for gold, natural resources and emerging markets by highlighting this year’s most popular commentaries and entries from my Frank Talk blog.
Here’s a list of what mattered most to readers in 2011.
1) BRIC Self Sufficiency Index – February 10
Sometimes a chart can tell the whole story. This interesting chart from Bank of America-Merrill Lynch showing the supply/demand fundamentals of several key industrial metals and basic materials attracted the most attention on my blog this year.
The dotted line in the chart represents a key tipping point. The resources to the left of the line are those the BRIC countries must obtain outside of their own borders to meet domestic demand. The BRICs produce an excess amount of the two metals to the right of the line and export the remaining amount to other countries.
These materials are the necessary elements needed for emerging nations to take the next steps in their development. You can see that the BRICs must rely on imports in order to meet demand for metallurgical coal, copper concentrate, thermal coal, iron ore, refined copper and uranium—implying higher prices for several years to come.
2) Understanding the Rise of China – February 3
Jacques says China is going to change the world in two fundamental respects. First, never before in the modern era has the largest economy in the world been that of a developing country. Second, for the first time in the modern era, the dominant country in the world will not be from the West.
3) Which Gold Miners Have Largest Upside – October 13
For much of the year, a prominent story in the gold sector was the performance gap between gold miners and climbing prices of the yellow metal (see #6), leading us to ask our readers which miners had the largest upside? My investment case for exploration and development miners, or juniors, was the subset’s near-record low price-to-NAV level.
4) Is Gold About to Have Its Status Upgraded? – June 17
With the global banking system set to approve the Basel III banking provisions, I explored the possible ramifications if the Basel Committee on Banking Supervision (BCBS) decided to upgrade gold to a Tier 1 asset.
5) Don’t Fear a Pullback in Prices – April 25
The last week of April we received our first glimpse of the volatility that would grip markets and investors throughout 2011. After S&P warned of a downgrade to U.S. debt, gold and oil rocketed higher. I cautioned you to be aware of the inevitable snapback that comes with these types of moves but said investors could use these pullbacks as an opportunity to “back up the truck.”
Sure enough, gold prices pulled back before beginning their climb toward $1,900 an ounce. However, it proved to be the high for oil prices, which fell below $80 a barrel in early October and currently sit just below $100 per barrel.
6) Will Gold Equity Investors Strike Gold? – June 20
As I referenced before, the story of the year for gold investors has been the underperformance of gold mining stocks compared with bullion. However, this wasn’t the case for all of 2011. The NYSE Arca Gold BUGS Index (HUI) had outperformed gold bullion through April, but the relative performance quickly reversed and the HUI trailed bullion by nearly 30 percent by mid-August.
This isn’t the first time gold bullion and gold equity prices have diverged. Gold equities underperformed gold bullion in 2000 and 2008 during times of extreme market negativity and uncertainty. These previous instances have been merely temporary setbacks and markets generally reverted back to their long-term trends.
7) How to Find Opportunities from Blood, Debt & Fears – September 6
This piece from September is one of my favorites of the year because it pops the notion the gold is in a bubble. Despite gold’s dramatic bull run over the last 10 years, the yellow metal is only twice as high as its 1980 price. In comparison to other economic yardsticks since 1980, this is miniscule. Ian McAvity, editor of Deliberations on World Markets, says that federal debt, the S&P 500 Index and even GDP has grown much faster than gold over that same timeframe.
The gross U.S. federal debt of $14.3 trillion is 17 times its 1980 level. In 1980, the S&P 500 was at 105; today, it trades around 1,100. A gold price of $1,808 seems paltry as it is only 2.5 times the 1980 high of $738.
McAvity extrapolates the relative growth rate of the yellow metal, indicating that if gold doubled from its current high, it “would nearly ‘catch up’ to GDP, while it might take a quadruple to match the S&P, or even a six-fold gain from here to catch the growth of debt.” Multiplying the largest of these figures by the current price of gold means prices could theoretically go to $10,800. By these standards, gold is hardly a bubble.
8) The 2011 Gold Season is Just Around the Corner – August 1
The gold season kicked off a month earlier this year as shenanigans on Capitol Hill and cultural buying pushed gold prices up a staggering 12 percent during the month of August.
September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewelers are the busiest. The season for gold began with the Muslim holy month of Ramadan in August. Then came Diwali, known as “the festival of lights” in India, and we’re in the midst of Christmas here in the U.S.. Next will come Chinese New Year.
When word got out the deposed dictator had a large pot of gold, many wondered whether that gold would be used to finance Gaddafi’s troops in a civil war. Our director of research John Derrick spoke with then CNBC host Erin Burnett about the unlikelihood of that happening.
10) The Bedrock of the Gold Bull Rally – April 4
Naysayers started calling gold a bubble back when prices hit $250 an ounce and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder as prices broke through $1,000, $1,200, $1,500 and even hit $1,900 an ounce.
In this extensive piece, we dove into gold’s relatively small role in global asset allocation. In 1968, gold represented nearly 5 percent of financial assets. In 1980, the level had fallen below 3 percent. That figure had shrunk to less than 1 percent by 1990 and has remained there since. Eric Sprott wrote that “it is surprising to note how trivial gold ownership is when compared to the size of global financial assets.”
Don’t Forget About the Interactive Ways We Help You Explore the World
Some of our most popular pieces this year haven’t been commentaries at all. From slideshows, to interactive maps, to videos, to games and quizzes, we’ve rewarded your curiosity to learn and explore in dozens of ways.
Each year, bigger, taller and more technologically advanced projects dot the skylines, country sides and coast lines of cities across the globe. Cities around the world take turns owning the title for the tallest skyscraper, the longest bridge or the deepest mine. Covering nearly every continent of the world, explore our current list of the grandest of all things infrastructure in the world.
Coal, hydroelectric and oil are increasingly in high demand to meet the world’s growing appetite for power. In fact, global energy consumption grew 5.6 percent in 2010, the highest rate since 1973. In addition, rising emerging markets are changing the landscape of global energy. Tour our list of ten reasons why global energy will never be the same.
Where Does the Gold Come From? Gold-producing countries are found on nearly all continents, and represent the gamut of economies from developed super-powers to small, emerging market countries. With gold’s spectacular rise in price and related demand, it’s worth your time to know a little bit about where all the gold comes from.
As long as there have been people, there’s been an attraction to gold. From pharaohs to hedge funds, gold has been an important tool of building and protecting wealth. This interactive gold timeline carries you through gold's enduring path as a universal symbol of wealth.
Paper money was first used by the Chinese during the Tang Dynasty in 806 AD–500 years before Europe began printing money in the 17th century. It would be another 100 years before America started circulating a national paper currency. And few Americans were more involved in the national paper money history than Benjamin Franklin, who wrote about, designed and printed paper money prior to the national currency. His face on the $100 bill today is our reminder of his contributions as a printer, scientist, scholar, writer and politician.
You know it’s shiny, it’s rare and it’s the standard against which all good things are measured. But how much do you really know about gold? Take the 2.0 edition of our interactive quiz to test your knowledge of gold history, geography and politics. We’ve also dug up some obscure trivia just to make it a little bit more challenging.
I’d like to thank all of our content partners that help thousands of additional investors take advantage of our weekly insights. Most importantly, I want to thank you for tuning in each week. Our investment team works diligently each week to illuminate the most important drivers of different markets around the world and we hope the information has helped guide you during this year's tumultuous market.
I’m sure many of you have family members, friends and colleagues who are searching for answers to today’s puzzling markets. Please be sure to share these free weekly alerts with them, or they cansign up here.
In his story on Charles Dickens, Alex Green says the author's "goal was not just to entertain but enlighten." We at U.S. Global couldn't agree more. One of the greatest gifts you can give is the gift of knowledge and it’s free.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
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- December 22, 2011
- Chart of the Week - Struggling Copper Supply
As China’s appetite for commodities slowed this year, much of the world’s copper demand went with it. Despite this softening in demand, Macquarie Research thinks the red metal could see a rebound in 2012 because copper mines are struggling to supply the marketplace with adequate reserves.
Macquarie says, “Global copper mine output has continually disappointed forecasts and, more importantly, market needs over a number of years now, despite the strong financial incentive not only from high copper prices but also high by-product prices.”
Chile, the world’s largest copper-producing country, has had a series of struggles that has curtailed production gains. Macquarie says the country’s output has fallen by 730,000 tons over the last decade and a lack of new mining investment has been insufficient to offset fledgling production. Furthermore, a three-month strike at the world’s second-largest copper mine, Freeport MacMoRan’s Grasberg mine in Indonesia, has also limited copper production.
The first chart illustrates how correlated copper mine production has been with the operational cash flows of mining companies over the past 10 years. Escalating costs to develop and operate new mines are one of the main constraints to copper supply. HSBC estimates investing in new copper mines is 50 percent more expensive today than it was in 1985 due to higher energy costs, better wages and equipment shortages.
To reach untapped deposits, companies must finance new technologies and equipment to develop deeper mines with often lower ore deposits in sometimes politically unstable parts of the world, research firm Credit Agricole says. This is why copper supply has remained relatively flat despite companies’ willingness to spend near record amounts of money to find additional ore deposits.
Despite bullish sentiment heading into 2011, copper’s price has largely underperformed this year as China scaled back on large purchases. However, recent trade data suggests the world’s largest consumer of natural resources is restocking its depleted inventories.
Chinese copper imports totaled nearly 452,000 tons in November, the highest monthly total in nearly 20 months, according to data from Macquarie. By 2012, Bank of America-Merrill Lynch analysts suggest China will continue its copper shopping spree. BofA-ML is predicting a 6 percent year-over-year increase in Chinese copper imports next year.
Sluggish copper mine production and increasing demand from China should help boost copper’s price moving forward. BofA-ML says, “Supply problems will remain a constituent part of the copper market” before additional copper supplies become available in 2013.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of 09/3011: Freeport-McMoRan Copper & Gold Inc.
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- December 12, 2011
- You Can’t Print More Gold
What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks?
An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade.
Negative real interest rates occur when the inflationary rate, or CPI, is greater than the current interest rate. A quick account of the G-7 and E-7 countries shows that the majority have negative real interest rates.
Across the developed G-7 countries, British citizens are the worst off with real interest rates in the U.K. sitting at negative 4.5 percent. U.S investors aren’t doing much better with rates at negative 3.25 percent and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero.
Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping’s grandest economic powerhouses, China and India, have negative real interest rates sitting around negative 2 percent.
Simply put, investors in those countries who have parked their savings in cash and low-yielding investments, such as Treasury bills and money market accounts in the U.S., are actually losing money due to inflation.
That can be tough for any investor, but when you’re the central bank of a country with millions of dollars in reserves, it can be catastrophic. This is why central banks around the globe have sought protection by diversifying their foreign-exchange reserves into gold bullion this year.
VTB Capital’s Andrey Kryuchenkov told The Wall Street Journal this week that, “Central banks are diversifying, and it has intensified to a rate that nobody had expected.” Latest estimates predict global central banks will purchase between 475-500 tons of gold in 2011.
This amount of capital flowing into gold has the potential to push prices up a level in 2012. John Mendelson from ISI Group sees gold prices reaching $2,200 an ounce during the first six months of 2012.
While real interest rates look to remain in the red for the foreseeable future, many of these same countries are printing record amounts of “green” with accommodative monetary policies.
U.S. Global’s director of research John Derrick says central banks around the world have focused their attention on stimulating growth. Beginning with Brazil’s interest rate cut in late August through the European Central Banks (ECB) cut early December, there have been 40 easing moves by global central banks, according to ISI Group.
John says this also means we will likely see more quantitative easing in 2012. The Bank of England has already started its quantitative easing, and many experts believe the ECB and the Federal Reserve will follow in its footsteps.
Bloomberg reports that global money supply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money supply has been gradually moving higher and higher since mid-2010.
The reason global central banks have shifted the printing presses into overdrive is simple: they need the money. My long-time friend Frank Giustra reminded us of this new reality in an op-ed piece for the Vancouver Sun last week. Frank writes:
The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.
As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities.
Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.
However, this image doesn’t tell the whole story. While the price of gold has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Precious Metal Mining Team.
In fact, if the global money supply were backed by gold, gold prices would be much higher, according to Bloomberg. The yellow line below shows how gold would be greater than $5,000 per troy ounce if just half of global money supply were backed by gold. If all of the money supply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000.
It’s unlikely, of course, that this will happen, but it serves as a useful illustration for the disappearing value of the world’s fiat currencies.
Frank reminded readers that we have been down this path before. Frank says, “When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.”
The beneficiary of this type of event has historically been gold.
By clicking the links above, you will be directed to a third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
M1 Money Supply includes funds that are readily accessible for spending. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
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- December 9, 2011
- Building Wisdom with Our Boots on the Ground
Analysts at U.S. Global Investors scrutinize research reports and study Bloomberg data to help our investment team gain first-mover advantage. Today, I asked research analyst and Shanghai-native Xian Liang to share how he combines analyses from third-party reports with boots-on-the-ground observations to find the best opportunities Asian markets have to offer.
Q: You recently returned to China for a short research trip. How do these on-site visits differ from what we hear on the news about the country?
Investors should always be aware of global economic or political risks but also guard against excessive pessimism. Our investment team balances this awareness by combining our explicit knowledge—what we understand about the country’s fundamentals and what the media reports—with a hands-on, tacit perspective.
Take the regulation of China’s banking system, for instance. I traveled to Zhejiang Province in China to join an investigative tour led by research firm China International Capital Corporation (CICC) to discuss micro and small enterprise lending with local executives. Along with a small group of analysts from around the world, I heard firsthand from local banks, private lenders and local government agencies on their lending practices.
I found that many of the representatives were knowledgeable and shrewd and had stringent risk management practices in place. For example, one commercial bank that lends primarily to smaller companies checks the electric and water meters of the businesses and delves into the personal habits of the private entrepreneurs to gauge if they are creditworthy and sound. This lender believes that character has a lot to do with one’s willingness and ability to repay. Overall, systemic credit risks in the banking system appear to be manageable at this point.
Q. Can you give us some background about your hometown of Shanghai?
Shanghai is representative of China’s tremendous growth. When I left the city in 2002, there were only three subway lines. In 2008, there were almost 10 and there will soon be 13. This gives you an idea of how the city’s infrastructure has grown, facilitating logistics, extending market reach and providing convenience for the average citizen. People in one city can take the high speed train to another city to do shopping or business, which really shrinks the geography of the country.
Shanghai has an interesting history. Back in the 1930s, Shanghai was known as the “Paris of the East” because of its tremendous European influence. When you walk the streets along the waterfront, the architecture makes you think you’re in Europe. It was also known as a major financial center within China, and the country wants to continue this legacy. Today, it’s one of the most prosperous cities in China; people in Shanghai seem more entrepreneurial and global.
Q: The China Region Fund (USCOX) has the ability to hold stocks all around Asia, including Indonesia. What opportunities do you see in that country?
We think Indonesia is a growth story largely because of its sizeable domestic economy. Unlike its Asian counterparts, which are mostly export dependent, two-thirds of Indonesia's GDP is consumption, driven largely by demographics. It's a very young country. According to research from CLSA, 45 percent of the population is under 24 years old. The workforce is expected to grow by about 2 million every year in the next decade. The country is not short of spenders and the demand will be sustainable.
Indonesia is also undergoing an urbanization process similar to what’s happened in China over the past 20 years. As people move from villages to cities, new demand is created. People will want to fulfill all kinds of basic demands, including housing, consumer staples and durable goods.
Very much like China, Indonesia has a high savings rate of about 32 percent. Households are underleveraged and consumer credit is in its infancy in Indonesia, with total household mortgage debt outstanding estimated to be only 3 percent of GDP. By comparison, China is 15 percent.
Finally, according to CLSA research, 72 percent of Indonesia’s middle class spends only $2 to $4 U.S. dollars per person per day. There seems to be tremendous room for growth.
Q: How will Thailand's economy recover from the recent flooding?
The flooding presents an interesting opportunity for Thailand because of the reconstruction, rehabilitation and recovery demand. We think the government will step in with some favorable policies to relieve the post-flood recovery process. What will also help businesses is the fact that Thailand's corporate tax will be cut from 30 percent to 23 percent in 2012 and then to 20 percent in 2013.
Q. What should China Region Fund (USCOX) shareholders look forward to in 2012?
Part of our investment process is to watch for policy changes, as we believe government policies are a precursor to change. In China, we may be seeing the start of another easing cycle beginning with the cut in required reserve ratio for the banks officially announced in December. I think this policy confirms our view that the government may have moved from fighting inflation to supporting growth. You can count on the government to be ready to reflate the economy if it sees a threat to employment, which there may be, given the systemic risks from the eurozone.
Job creation represents a bottom line for Chinese policymakers. They are keenly aware of the role small businesses play in hiring workers. When I was in China, an Alibaba.com executive indicated that, according to its proprietary survey of small and medium size enterprises, if the government does not introduce pro-growth policies, there is a possibility of rising unemployment in the private sector in the next two years that would be precipitated by higher labor cost and shrinking overseas demand.
Q: What can you tell me about the upcoming Year of the Dragon?
Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well. Hopefully going into 2012, the Chinese dragon will bring some new strength to the markets.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.
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