Ethereum Post-Merge Risks Being Seen as a “Proof-of-Security” Asset

After countless delays, the Ethereum “Merge” finally took place this week, switching the blockchain protocol from proof-of-work (PoW) to proof-of-stake (PoS).

What this means, in brief, is that Ethereum’s native coin, Ether (ETH)—the world’s second largest digital asset following Bitcoin (BTC)—can no longer be mined using a graphics processing unit (GPU). Instead, participants can choose to “stake” their ETH on the network. The Ethereum network then selects which of these participants, known as “validators,” get to validate transactions, and if such validations are found to be accurate and legitimate, participants are rewarded with new ETH blocks.

So what’s the catch? Well, there are a couple of big ones: 1) To become a validator, participants must stake at least 32 ETH, the equivalent of $46,400 at today’s prices, and 2) They must stake them for years.

You can see, then, how the Merge has transformed ETH from a decentralized asset, available to any young gamer with access to a decent GPU, to more of a centralized, oligarchic asset, controlled by a relatively few participants who already own tens of thousands of dollars’ worth of ETH.

In fact, as CoinDesk reported this week, two large validators were responsible for over 40% of the new ETH blocks that were added in the hours post-Merge. Those validators are crypto exchange platform Coinbase and crypto staking service Lido Finance.

PoS Puts Ether in Regulators’ Crosshairs

But wait, there’s more. By converting to PoS, Ether risks being seen by U.S. regulators as a proof-of-security asset. On Friday, the White House published its first-ever crypto regulatory framework, just a day after the Merge was completed.

Gary Gensler, head of the Securities and Exchange Commission (SEC), has said on numerous occasions that PoW assets such as BTC are commodities, not securities, and should therefore not be regulated as securities.

That’s not the case with PoS, according to Gensler. This week, the SEC chief commented that digital assets that allow investors to stake their holdings in exchange for new coins may qualify them as securities. The implication, of course, is that oversight of these coins may end up being just as rigorous as that of stocks, bonds, ETFs and other highly regulated assets. Besides ETH, other popular PoS cryptocurrencies include Cardano, Polkadot and Avalanche.

The May crash of Terra’s Luna coin, which triggered the collapse of overleveraged crypto lenders such as Celsius, Voyager and Three Arrows Capital, was a major driver of this year’s crypto winter. Lenders’ promises of high returns on investment have landed them in financial and legal hot water. It’s very important that the Ethereum Foundation not make the same mistakes and invite the same level of scrutiny.

As we like to say at U.S. Global Investors, government policy is a precursor to change. But the change, in this case, may not turn out to be favorable. Regulatory pronouncements could add to volatility within the nascent cryptocurrency industry.

In the table below, you can see that ETH was one of the most volatile assets for the one-day and 10-day trading periods as of August 31—more volatile, in fact, than BTC and shares of Tesla. I can’t help believing that’s due to investors’ apprehension of the Merge and the regulatory uncertainty that surrounds it.

The DNA of Volatility

Energy FUD Contributed to Decision to Transition to PoS

If everything I’ve said up until this point is the case, why did Ethereum decisionmakers choose to switch to PoS in the first place? Simply put, they folded under pressure from misleading charges that crypto mining, particularly BTC mining, consumes too much energy and is bad for the environment.

This is FUD, or fear, uncertainty and doubt. Yes, BTC mining requires electricity, but compared to nearly every other major industry—including finance and insurance, household appliances and gold mining—energy consumption is incredibly negligible, according to the Bitcoin Mining Council (BMC). What’s more, the BMC found that global BTC miners collectively use a higher sustainable energy mix than every major economy on the planet.

Supporters of the ETH Merge say that the move to PoS could cut the network’s energy usage by as much as 99.5%. None other than the World Economic Forum (WEF) praised the success of the Merge this week, writing that crypto “has been waiting for a recalibration towards sustainability… for Web3 climate innovators, the new generation of environmental advocates, as well as U.S. climate efforts more broadly.”

But as many PoW proponents have rightfully pointed out, the GPUs that were previously used to mine ETH will likely now be used for other purposes post-Merge, including mining other coins, high-performance computing and gaming. In reality, little to no energy will have been offset.

Almost every GPU miner in the world switched to mining another chain, ETHW, or started playing video games.

No energy saved.

— Jason A. Williams (@GoingParabolic) September 15, 2022

The question is: Who is funding the FUD about PoW and energy usage? It’s a complicated question.

This week, a group of environmental activists, including Greenpeace and the Environment Working Group (EWG), announced that it plans to spend $1 million on a new campaign to encourage Bitcoin to follow ETH’s lead and move to PoS. The campaign, titled “Change the Code, Not the Climate,” falsely claims that BTC “fuels” the climate crisis.

This is the same covert tactic used by Russian president Vladimir Putin, who over the years has funded environmental groups and non-governmental organizations (NGOs) in the West in an effort to discredit and undermine the U.S. fracking industry. 

Surprise! Gold Is Still One of the Best Performing Assets of 2022

Switching gears, I want to say a few words on gold. BTC’s analogue cousin hit its lowest price since 2020 this week even as inflation remains near 40-year highs and recession fears persist. As I write this, the yellow metal is trading at around $1,675 an ounce, approximately 19% off its peak in March this year.

Some investors may read this and jump to the conclusion that gold is no longer a valuable asset during times of economic and financial uncertainty, but they would be mistaken. Although gold is down for the year, it’s nevertheless outperforming most major asset classes including Treasury bonds, U.S. corporate bonds, the S&P 500 and tech stocks. The precious metal has therefore helped investors mitigate losses in other areas of their portfolio.  

The latest report by the World Gold Council (WGC) also makes the case that gold could be a powerful investment in the face of a potential economic recession. The London-based group compared the performance of a number of asset classes during the past seven U.S. recessions going back to 1971, and it found that gold performed the best on average aside from government and corporate bonds.

That said, I still recommend a 10% weighting in gold, with 5% in bullion (bars, coins, jewelry) and 5% in high-quality gold mining stocks and funds. Remember to rebalance on a regular basis.

Our resident gold expert and Metals and Mining “TopGun” manager, Ralph Aldis, attended the Precious Metals Summit this week in Beaver Creek, Colorado, where he participated in a keynote investor panel. To watch a replay of the panel, click here.  

Index Summary

• The major market indices finished down this week. The Dow Jones Industrial Average lost 4.13%. The S&P 500 Stock Index fell 4.77%, while the Nasdaq Composite fell 5.48%. The Russell 2000 small capitalization index lost 4.50% this week.
• The Hang Seng Composite lost 3.29% this week, while Taiwan was down 0.99% and the KOSPI fell 1.33%.
• The 10-year Treasury bond yield fell 14 basis points to 3.45%.

Airlines and Shipping

Strengths

• The best performing airline stock for the week was El Al, up 16.0%. According to Cowen, because airlines have reduced capacity for September through December, on-time performance and completion factors seem to be improving. The group believes that dividends will be reinstated, and expect share repurchases will be reinstated as well. The share repurchases may be just enough to keep the share count flat, offsetting dilution from employee stock options.
• Near-term labor risk at FedEx has benefited United Parcel Service (UPS). The company previously highlighted that new wins in the second quarter were the largest of any quarter over the last five years, suggesting the additional capacity freed up from Amazon is being put to good use. UPS appears to have won share from FedEx.
• Regarding Mexican operations only, total traffic for the three main airlines were up 27% year-over-year and up 16% versus Aug 2019. International traffic posted a stronger recovery compared to 2019 levels, up 24%, while domestic traffic was up 12%. In terms of mix, leisure and metropolitan routes continue to outperform regional destinations, both domestically and internationally.

Weaknesses

• The worst performing airline stock for the week was Sun Country, down 12.4%. According to Flight Master, domestic volume/seat capacity in China further declined to 40%/52% of 2019 levels versus 51%/67% in the prior week. Domestic pax load factor (PLF) edged down to 65% from 67% in the prior week. Daily aircraft utilization for narrow-body aircraft continued to decline to 3.7 hours from 4.9 hours in the prior week. According to Tuniu.com, only 32% of Chinese tourists prefer long distance tourism during the Mid-Autumn Festival holiday.
• For every consecutive week since February 24, container box rates have fallen. According to the World Container Index, during this window, the average global rate for a 40-foot box has declined from $9,477 to $5,379, currently. While the decline is steep, even current prices are more than twice normal levels. Conversely, while the average charter rate on container ships began to decline in early April, average charter rates have only declined from $87,775 per day to $76,255 per day or 13%.
• Michael O’Leary, the CEO of Europe’s largest airline, Ryanair, recently indicated that the era of super cheap air travel is over, with the airline unable to offer 10-euro flights anymore given the significant surge in jet fuel prices. Ryanair indicated its average fare will continue its uptrend, edging towards 50 euros over the next five years (up from 40 euros in 2021).

Opportunities

• Product tanker demand remains firm as the Russia-Ukraine war lengthens global trade routes and the lack of available refining capacity raises seaborne volumes. Supply remains tight as the orderbook-to-fleet ratio is at an all-time low (5% of existing fleet) and vessel age continues to rise (more than half of existing vessels are 15+ years old).
• JPMorgan continues to have high conviction on Qantas, believing: 1) a favorable Australian industry structure should aid market share gains; 2) a rational domestic market, given the financial position of QAN’s main domestic competitor, where profitability is the priority; 3) an impressive Loyalty arm, which they believe is underappreciated by the market; and 4) potential upside to consensus forecasts if fiscal year 2024 targets are hit.

• Seventy-three percent of airline stocks trade below the midpoint of historical ranges (same as last month). United Airlines continues to trade at a 15.7% premium to its historical midpoint while Alaska and Southwest Airlines trade approximately 15-20% below their historical midpoints. Meanwhile, the group trades at an average market cap and enterprise value that are 63% (versus 67% in July) and 82% (versus 84% in July) of 2019 levels, respectively.

Threats

• According to Goldman, Airbus August deliveries (39) reflect one of the lowest prints for August seasonality on record. This is expected given the more back-end loaded ramp-up plans on the A320 which now implies that Airbus will reach the rate of 65 in early 2024. With this August accounting for 5.6% of 2022 estimated Visible Alpha Consensus Data deliveries (versus last-five-year average of 6.3% and last-10-year average of 6.4%), the bank now expects a much more back-end-loaded delivery profile for Airbus in 2022.
• Bank of America believes airfreight rates could fall by 50% over the next two years on deteriorating demand/supply balance as the Covid one-offs boost unwinds. Airlines with high cargo exposure and slow passenger recovery have high earnings risks given the loss in abnormal cargo profits. The air cargo market is shifting from an extreme undersupply to oversupply over the next two years. Freight rates are 80% correlated with demand/supply balance. The 17 points oversupply in 2022-2024 estimate could pressure airfreight rates to plunge by 50%.
• Bank of America has initiated China Airlines as “underperform” with a target of TWD15.3 and 30% downside potential from here. China Airlines is highly exposed to the air cargo downcycle with expanding cargo fleet and has a poor market structure to withstand the macro headwinds. The bank thinks earnings will dive in 2023-24 with the loss of cargo profits and slow passenger recovery, while consensus is too bullish expecting better earnings.

Emerging Markets

Strength

• The best performing country in emerging Europe for the week was Czech Republic, gaining 1.8%. The best performing country in Asia this week was Taiwan, gaining 0.04%.
• The Russian ruble was the best relative performing currency in emerging Europe this week, gaining 0.4%. The Indian rupee was the best performing currency in Asia this week, gaining 0.04%.
• China released stronger economic activity data this week. Industrial production increased 4.2% year-over-year. Economists were calling for an increase of 3.8%. Retail sales increased 5.4% year-over-year vs. consensus of 3.2%. Fixed asset investment increased 5.8% vs. consensus of 5.5%. The unemployment rate declined to 5.3% vs. consensus of 5.4%.

Weaknesses

• The worst performing country in Asia this week was China, losing 4.2%.
• The Pakistani rupee was the worst performing currency in Asia this week, losing 3.6%.
• Expectations of economic growth in Europe weakened. The ZEW Survey Expectations was released at -60.7 for September, below -54.9 reading in July. Spiking energy prices in Europe put pressure on economic growth and overall consumer sentiment in the region.

Opportunities

• Ukraine launched a counterattack a few weeks back and has been successful pushing Russia out of the occupied territory. The country was able to take back only small portions of the territory, but the past few weeks have been an important gamechanger for Ukraine and Russia. We do not know how the war will end and how soon the fighting will stop, but if Ukraine wins this war, the Eastern European region will continue its transformation that started in 1991, after the Soviet Union collapsed. In the short term, energy prices will come down and equites will bounce, especially those listed on stock exchanges in Central Emerging Europe.
• Countries are looking for ways to support straggling energy companies. Germany pledged 67 billion euros in funding to assist utility companies. The money will be deployed from a COVID-19 bailout fund established to help companies avoid insolvency. The European Union (EU) energy minister will hold an emergency meeting on September 30 to discuss ways to ease surging gas and power prices throughout the region.
• Bloomberg reported the People’s Bank of China (PBOC) will make available CNY200B ($428.7 billion) in special relending funds to commercial banks to boost loans to corporates. Banks will be able to lend the money to companies upgrading their equipment in the fourth quarter, while the central government will subsidize companies’ interest payments to ensure the actual interest rate is no higher than 0.7%.

Threat

• On Tuesday, the U.S. announced that August’s inflation rate was 8.3%, above the expected 8.1%, but below July’s 8.5%. With stronger than expected inflation, the U.S. dollar gained, and emerging market currencies declined. This trend could continue for longer, as higher than expected increases in prices will prompt the Fed to hike rates further, boosting the dollar strength.

• This week, the Czech government announced support mechanisms for retail customers (households, hospitals, schools). It plans to freeze power and gas tariffs as of November. The cost for the scheme is assumed to be at CZK130 billion, which will be funded by higher taxes on profitable energy companies and CEZ’s (power generator, operator of nuclear plan in Czech Republic) dividends. Poland is preparing a similar plan to help struggling energy customers. The European Commission is working on limiting electricity usage during peak hours.
• Year-to-date, Turkey is the best performing global market, gaining about 50% (in dollar terms). The recent outperformance of Turkish equites will most likely revert to July levels in the coming months, as the latest rally is not supported by improving economic conditions or a strengthening lira. We do not know if stocks have already peaked and/or how quickly the correction will unfold, but we think that the recent outperformance will revert to its mid-July level. Most banks have gained more than 100% since mid-July, and this week we have seen the correction starting to unfold, declining 4.09%.

Energy and Natural Resources

Strengths

• Indian tycoon Gautam Adani, the world’s third-richest person, offered new details on his $70 billion push to tap the global shift to clean energy, reports Bloomberg, outlining plans for three giant factories to produce renewable power equipment. Adani’s coal-to-ports conglomerate, which still relies heavily on profits from fossil fuels, will build major facilities to manufacture electrolyzers for making green hydrogen, wind power turbines and solar panels, he told a meeting of the U.S.-India Business Council. The factories will be completed by 2030, he said.
• The U.K.’s new Prime Minister Liz Truss announced a new “Energy Price Guarantee” according to which the energy bills of everyone would be capped at GBP2,500 a year for the next two years. Based on current prices, households will save at least GBP1,000 a year and this amount is in addition to GBP400 energy bill discounts for all households.
• The Department of Energy announced a $425 million funding initiative, made available by the State Energy Program, so that states may “turbocharge” their clean energy programs, such as expanding and modernizing the grid, upgrading transmission and distribution, clean energy program financing, and workforce development. The funding pot is nearly 10 times the usual amount, boosted by the Infrastructure Law.

Weaknesses

• Chilean copper production was down 9% in July and has been on a structural downtrend since 2018, against a structural uptrend of China refined production (i.e., China demand for copper continues to rise). Chile produces 30% of the world’s copper, of which a material amount goes to China for smelting/refining and in-China usage.
• According to JPMorgan, Henry Hub 2022 futures decreased by 13% this week to $8.05 per MMBtu. Looking ahead to next year, Henry Hub 2023 futures decreased by 10% to $6.02 per MMBtu.
• Concerns around the global economy and weaker oil demand continue to bring crude prices lower. Brent has made seven-month lows recently. The stronger U.S. dollar is another headwind this week. API data shows an increase in U.S. crude inventories.

Opportunities

• Iran is not able to boost oil production to its advertised capacity of 3.85 million barrels per day due to aging infrastructure. However, Iran has maintained its shut-in wells in good condition compared to other sanctioned countries, keeping the country’s actual production capacity at 3.7 million barrels per day. This means that if a deal comes, Iran can raise its production from 2.5 million barrels per day currently up to 3.4 million barrels per day (within three to six months), and to max capacity of 3.7 million barrels per day in nine months.

• According to Raymond James, energy sentiment has started to recover with an increasing number of generalists starting to look again at the sector. Refining debate topics remain both macro and company specific: (why are gasoline cracks so weak, does demand stay seasonally 2-3% lower, at what pace can buybacks be sustained, political uncertainty, unknowns over European energy availability, and valuation/positioning). The group sees the overall macro environment supporting still-strong earnings within refining, with its base case that high margins persist.
• According to ISI, nuclear energy has the lowest levelized carbon intensity among clean energy technologies. The study conducted on nuclear energy at the University of Texas at Austin highlights that nuclear energy generates 12gCO2eq, followed by wind (14gCO2eq), CSP. Despite being the ideal energy source to phase out coal-fired power plants, countries continue to refrain from investing in nuclear energy, owing primarily to historical incidents. It will take some time to digest the negative sentiment of the public, but ISI views nuclear deployment as essential and a must to accelerate to ensure energy security, affordable energy pricing, and most importantly, achieve net-zero emissions by 2050.

Threats

• In July, there was a total polyethylene inventory build of 388 million pounds as domestic demand was flat, but production exceeded expectations. Accordingly, inventory days increased to 55.2 days (up 4.4 days versus June), the highest level since late 2008. CMA does not expect days of inventory to decline meaningfully by year-end unless there is “severe reductions in domestic production.” Specifically, for days of inventory to fall to 45 days by December, CMA estimates operating rates in the low 70s would be required for the remainder of the year.
• A combination of sharply rising input costs (mostly electricity and natural gas), falling steel prices, and poor visibility on demand, have prompted European steel mills to announce aggressive output cuts. Based on various industry reports and articles, a total of 16 million tons of crude steel equivalent or 7% of Europe’s capacity has been idled to-date. 
• According to Bank of America, urea prices have moved from the $500 per ton to near $800 per ton in the last two months, but still nowhere near breakeven for EU producers. Even with natural gas at $47 per MMBtu, marginal costs are near $1200 per ton. With risks of gas costs of $65 per MMBtu, and associated urea cash costs of $1600 per ton, capacity may remain idled.

Luxury Goods

Strengths

• The average price for a London hotel room this weekend is 30% higher than it was for the same weekend in 2019, and 39.5% higher than it was last year when travel was still depressed because of the Covid-19 pandemic, according to data from the travel website Trivago. Some of the most luxurious hotels have been fully booked ahead of the Monday’s funeral at Westminster Abbey of Queen Elizabeth II.
• Canadian based company Moon World Resorts Inc. proposed building a moon resort costing $5 billion. The resort is envisioned as a luxury accommodation with out of space experience not requiting rocket ship travel. It is planned to be a 735-foot-tall mixed-use building in the shape of earth.
• Royal Caribbean Cruises was the best performing equity in the S&P Global Luxury Index this week, gaining 20.58%. Company sales have been strong. Barclays adjusted its price target this week to $61 from $55 with an overweight rating.

Weaknesses

• August inflation in the United States was reported at 8.3% year-over-year above the expected reading of 8.1%, but down from July’s 8.5%.
• The S&P 500 corrected more than 3% in the last week again. Several headwinds were in focus this week, the biggest risk-off was driven by the higher August CPI print. There is a growing expectation in the market that the Federal Reserve will aggressively hike rates. Spiking mortgage rates added to market’s volatility as well. The 30-year mortgage rate is above 6% now.
• Salvatore Ferragamo, an apparel, footwear and accessories design company, was the worst performing equity in the S&P Global Luxury Index, losing 6.5%. There was no major news on the company this week; most luxury names corrected in the past five days.

Opportunities

• Bank of America reported that mainland China luxury demand saw a strong pick-up through the summer months of July-August. Hong Kong saw local demand improve in July as well. Retail sales were up 4% in July vs. a drop of 1% in June. Watches and jewelry sales increased 28% vs June +2%. Bank of America believes Hong Kong is one step closer to reopening its economy, which should spur travel and luxury consumption.
• Global luxury goods revenue will increase from $309.6 billion last year to $349.1 billion in 2022, according to market-research firm Statista, and may reach $419 billion in 2027. According to Bloomberg, luxury brands are benefiting from pandemic-era growth in the net worth of the wealthiest consumers, along with the emergence of millennial millionaires.
• Ferrari unveiled its long-awaited 390,000 euro ($390,195) Purosangue crossover. It is going to be a four-door car with four seats and a 473-liter (125 gallon) trunk. Pre-orders have likely exceeded 2,000 units already, Bloomberg reported. The car should hit showrooms next year.

Threats

• Versace followed other luxury brands like Chanel, Louis Vuitton, Rolex and Bottega Veneta by increasing prices. Currently most Versace bags are within the $1,000 to $3,000 range. Dior and Gucci, in contrast, are in the $3,000 to $5,000 tier. Some Chanel handbag styles have reached $10,000, something that previously only Hermes was able to do. Spiking inflation may push luxury maker to further increase product prices.
• Mainland China’s September ex-auto retail sales will likely rise less than 1% year-over-year, Bloomberg calculated, after a 4% rebound in August, to end a four-month consumption recovery streak in the country. Bloomberg Intelligence believes there’s a risk of more cuts to China’s 2022 retail sales growth expectations, which dropped to 2.9% from hopes of a 3.4% year-over-year gain four weeks earlier.
• The S&P Global US Manufacturing and Service PMIs may end up weaker next week, pointing to a slowdown in economic activities. Services activity is already below the 50 mark that separates growth from contraction. Data will be released on September 23.

Blockchain and Digital Currencies

Strengths

• Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Celsius, rising 22.51%.
• Bitcoin extended a rally amid a brighter mood in global markets and as traders await U.S. inflation data and monitor a seminal upgrade of the Ethereum blockchain. Bitcoin jumped about 10% on September 9 and 3.9% on Monday, trading above $22,000. The move was encouraged by a weaker dollar and as investors awaited U.S. inflation numbers, writes Bloomberg.

• Ethereum has completed a key revamp of its blockchain network, marking the crypto world’s most ambitious software upgrade to date. The change replaced power-hungry computers that were used to order transactions on the network with a more energy-efficient setup using piles of the network’s native token, Ether. As a result, Ethereum’s energy consumption will decline by an estimated 99%, writes Bloomberg.

Weaknesses

• Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Terra Luna, down 53.30%.
• Bitcoin tumbled more than 10%, the biggest decline since cryptocurrencies plunged in June, as the broad-based selloff in financial markets spilled over into the digital-asset sector. Ether fell almost 9%, even as its underlying Ethereum network was poised for a long-anticipated energy saving software upgrade, writes Bloomberg. 
• BitGo is suing Mike Novogratz’s Galaxy Digital Holdings for more than $100 million in damages after Galaxy abandoned its planned $1.2 billion acquisition of the crypto custodian. The lawsuit cited Galaxy’s “wrongful repudiations and willful and international breach” of the merger agreement, according to public filing tied to the case and reported by Bloomberg.

Opportunities

• The Blockchain Association, a prominent crypto trade group with members that include stable coin issuer Circle and exchanges Crypto.com and Kraken, is launching its own political action committee (PAC). The move represents another attempt from an industry under pressure to push U.S. politics in a more crypto-friendly direction, writes Bloomberg.
• U.S. trading titans and brokerage firms are building a crypto exchange that brings investing in digital assets further into the domain of traditional finance, by mimicking the structure of how other asset classes trade. EDX Markets will start trading a limited number of spot crypto tokens starting with a November trail period with the official launch in January, according to a Bloomberg report.
• A pair of former Citadel Securities employees are making public a market-making firm for cryptocurrencies they founded with the backing of $50 million from venture capitalists. Portofino provides crypto liquidity to financial institutions and high-net worth individuals (HNWIs), trading on both centralized and decentralized exchanges and over the counter (OTC). It also gives advice and technical support for Web3 startups seeking to list their assets on exchanges, writes Bloomberg. 

Threats

• Customers with their life savings frozen on the insolvent crypto platform Voyager Digital are looking to a bankruptcy auction Tuesday for clues on whether or not they’ll finally get their assets back. Voyager users have been unable to access their cryptocurrencies since July 1, when the meltdown in digital assets forced the company to suspend trading, deposits and withdrawals, according to an article published by Bloomberg. 
• Ethermine, the largest Ethereum mining services provider by computing power, will shut down its servers for miners after the blockchain completes its historic technical upgrade. The news comes on the eve of Ethereum’s highly anticipated software revamp, dubbed the Merge, which will shift the most used blockchain from a proof of work (PoW) consensus mechanism to proof of stake (PoS). 
• Ether led digital assets lower after the groundbreaking software upgrade of the token’s underlying network turned into what some market observers labeled a “sell the news” event. The second-largest cryptocurrency by market capitalization after Bitcoin dropped as much as 8.9% to $1,460.

Gold Market

This week gold futures closed at $1675. 25, down $41.83 per ounce, or -2.44%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 5.13%. The S&P/TSX Venture Index came in off 2.40%. The U.S. Trade-Weighted Dollar rose .93%.

Strengths

• The best performing precious metal for the week was Silver, up 4.11%. Deal flow for the royalty sector remains strong, with increased complexity in deal investment structures, partly due to intense competition between royalty companies for quality assets, and $1.2 billion of transactions announced since June 2022. Year-to-date, $2.9 billion has been deployed (one of the highest years on record), driven by sector consolidation. The current deal pipeline remains focused on precious metals streams and development projects. 
• RBC expects a positive reaction from Artemis shares following the finalization of the mill contract with Sedgman for C$318 million. The final cost is in line with the initial budgeted amount of C$312 million announced in May, and together with the power line contract (C$80 million) represents fixed contracts covering 55-60% of the Phase 1 capital spending estimate for Blackwater.
• Analysts expect a positive reaction from Equinox shares following the announced resumption of operations at Los Filos on September 10. The restart of operations represents a relatively short two-day blockade at the mine and allows for previously revised guidance (155-170,000 ounces) to remain achievable for 2022. Overall, the resumption of operations is positive given the short turnaround time.

Weaknesses

• The worst performing precious metal for the week was HRC Steel, down 3.55%. Amplats announced a revision of its 2022 refined production guidance to 3.7-3.9 million ounces (down 8-11% versus the previous range of 4.0-4.4 million ounces). The group cites quality assurance processes after detecting the delivery of sub-standard materials for the Polokwane smelter rebuild, with a new consignment of materials to be delivered by the end of October.
• Harmony Gold’s all-in sustaining costs (AISC) have grown at a 15% rate, in rand terms, over the past three financial years, despite acquiring lower cost assets such as Mponeng and the closure of higher-cost assets such as Unisel. As a result, Harmony has been unable to expand margins over the period, despite the average rand gold price increasing 55% over the period.
• Gold fell the most in a month this week after U.S. inflation data came in hotter than expected, reports Bloomberg, maintaining pressure on the Federal Reserve to keep aggressively raising rates. The consumer price index (CPI) rose 0.1% in August from the month prior, surprising the market after the median economist forecast pointed to a small decline, the article continues.

Opportunities

• Central bank demand remained robust in July. Global gold reserves increased by 37 tons (net), below June’s 64 tons increase. Added to the 270 of net purchases over the first half of the year, this pushes year-to-date central bank demand toward the 300-ton mark.
• UBS upgraded Newmont Corporation to “buy” as the group’s estimates now reflect 20% upside to the shares on top of a 5.4% dividend yield. Even with costs/ounce forecasts 5% above the high end of long-term guidance, UBS expects the company can continue to pay an annual dividend of $2.20 per share within its commitment to return 40-60% of excess free cash flow. Following recent management conversations, they are confident the dividend is based on a multi-year framework with visibility to falling capex in 2025.
• According to RBC, prior to Centerra Gold’s successful close of the Kumtor transaction, the group believes investors had become frustrated with other operational problems, most notably the suspension of gold production at Oksut. RBC thinks the change at the CEO level (following the retirement of the previous COO in May 2022) should be taken positively by the market, with an opportunity for a change in direction and clarification of strategy.

Threats

• Equinox management maintains its $1.225 billion capital budget at this time, with 55% of total cost contracted (25% on a fixed cost basis). Sixty-eight percent of the overall contingency has been consumed. It is possible that the entire contingency will be consumed and that the project will come in above budget.
• Silver has continued to struggle, underperforming gold year-to-date with the silver/gold ratio creeping higher toward 100:1. The market continues to focus on the U.S. Federal Reserve and other central banks for near-term price direction, and expects volatility to prevail until there is more certainty on inflation, real rates, and recession risks.
• Calibre Mining has reported an equipment failure at its Libertad Mill (Nicaragua) which is expected to have a temporary impact on the company’s ability to pour gold (expected decrease of 15,000 ounces gold sold in the third quarter). However, currently, Calibre does not anticipate changing fiscal year 2022 guidance (220-235,000 ounces gold).

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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 (06/30/22): 

FedEx Corp

UPS

Ryanair Holdings PLC

Qantas Airways Ltd

Southwest Airlines

United Airlines

Alaska Airlines

Airbus SE

Harmony Gold Mining

Newmont Corporation

Calibre Mining

Tesla Inc.

Royal Caribbean Cruises Ltd.

Ferrari NV

LVMH Moet Hennessy Louis Vuitton

Hermes International

CEZ AS

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

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 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 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 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 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. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

The S&P Global Luxury Index is comprised of 80 of the largest publicly traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investibility requirements.

The World Container Index (WCI) is the premium resource for frequent, independent container market data. 

The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

The NASDAQ-100 Index is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ.

The MSCI Japan Index is a free-float weighted equity JPY index. It was developed with a base value of 100 as of December 31, 1969.

The MSCI Europe Index in EUR is a free-float weighted equity index measuring the performance of Europe Developed Markets. It was developed with a base value of 100 as of December 31, 1998.

The MSCI USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1969.

Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.

Standard deviation is a quantity calculated to indicate the extent of deviation r a group as a whole.