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Please note: The Frank Talk 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.

China: Still the World’s Number One Heavy Metal Rock Star
April 26, 2016

I want to begin with a quote from a recent Cornerstone Macro report that succinctly summarizes the research firm’s view on growth prospects in emerging markets and China specifically. Emphasis is my own:

Our most out-of-consensus call this year is the belief that China, and by extension many emerging markets, will see a cyclical recovery in 2016. We understand the bearish case for emerging markets on a multiyear basis quite well, but we also recognize that in a given year, any stock, sector or region can have a cyclical rebound if the conditions are right. In fact, we’ve already seen leading indicators of economic activity and earnings perk up in 2016 as PMIs have rebounded in many areas of the world. That is all it takes for markets, from equities to CDS, to respond more favorably as overly pessimistic views get rerated. And like in most cyclical recoveries that take place in a regime of structural headwinds, we don’t expect it to last beyond a few quarters.

There’s a lot to unpack here, but I’ll say upfront that Cornerstone’s analysis is directly in line with our own, especially where the purchasing managers’ index (PMI) is concerned. China’s March PMI reading, at 49.7, was not only at its highest since February 2015 but it also crossed above its three-month moving average—a clear bullish signal, as I explained in-depth in January.

I spend a lot of time talking about the PMI as a forward-looking indicator of commodity prices and economic activity. As money managers, we find it to be far superior to GDP in forecasting market conditions three and six months out. In the past I’ve likened it to the high beams on your car.

GDP and PMI

We were one of the earliest shops to make the connection between PMIs and future conditions, and we continue to be validated. Just last week, J.P.Morgan admitted in its morning note that “stocks are taking their cues from the monthly PMIs,” the manufacturing surveys in particular, as opposed to GDP.

We eagerly await China’s April PMI reading and are optimistic that this cyclical recovery has legs.

Cornerstone’s outlook is supported by a recent study conducted by CLSA, which found that 73 percent of “Mr. and Mrs. China” expect to be better off three years from now, while only 3 percent expect to be worse off:

Optimism is strongest among those in higher-tier cities, reflecting the disparity in economic vibrancy across tiers: as many as 80 percent of families in first-tier cities have optimistic outlook. The figure is lower, albeit still strong, at 68 percent among families in the third tier.

More than half of those surveyed said they expected to be driving a nicer car and living in a bigger home in the next few years, which is a boon for materials and metals such as platinum and palladium, used in catalytic converters.

As a reflection of growing demand for new homes, house prices in China are climbing right now in first-tier and, to a lesser extent, lower-tier cities, a sign that more and more citizens are seeking the “Chinese dream.”

Housing Prices Rising in China, Year-over-Year Growth
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China’s Insatiable Appetite for Metals

China’s appetite for metals—gold, silver, copper, iron ore and more—is growing, another sign that the Asian giant is in turnaround mode.

China is the world’s largest importer, consumer and producer of gold. Last year, physical delivery from the Shanghai Gold Exchange (SGE) reached a record number of tonnes, more than 90 percent of total global output for 2015. Meanwhile, the People’s Bank of China continues to add to its reserves nearly every month and is now the sixth largest holder of gold—the fifth largest if we don’t include the International Monetary Fund (IMF). As of this month, the bank holds 1,788 tonnes (63 million ounces) of the yellow metal, which amounts to only 2.2 percent of its total foreign reserves, according to calculations by the World Gold Council.

Now, in a move that’s sure to boost China’s financial clout in global financial markets even more, the country just introduced a new fix price for gold, one that is denominated in Chinese renminbi (also known as the yuan).

Gold is currently priced in U.S. dollars. That’s been the case for a century. But since gold demand has been shifting from West to East, China has desired a larger role in pricing the metal. The Shanghai fix price is designed with that goal in mind.

It’s unlikely that Shanghai will usurp New York and London prices any time soon, but over time it will allow China to exert greater control over the price of the commodity it consumes in vaster quantities than any other country.

China’s gold consumption isn’t the only thing turning heads. I shared with you earlier last week that the country imported 39 percent more copper in March than in the same month last year. (Shipments also rose 18.7 percent in renminbi terms in March year-over-year.)

The heightened copper demand has fueled renewed optimism in the red metal. Prices are up 6 percent month-to-date.

Housing Prices Rising in China, Year-over-Year Growth
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Caixin reports that China’s iron ore imports are surging on lower prices. In the first two months of 2016, the country purchased 86 percent more iron than it needs. What’s more, total imports were up 84 percent from the same time last year.

Steel production, which requires iron ore, is likewise ramping up.  Output is currently at 70.65 million tonnes, an increase of nearly 3 percent year-over-year.

Chinese Steel Production is on the rise
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For reasons unknown, China has also been growing its silver inventories pretty substantially for the past six months, according to an article shared on Zero Hedge. This month, as of April 19, the Shanghai Futures Exchange added a massive 1,706 tonnes, which is a 452 percent increase from the amount it added in April 2015. Shanghai silver inventories are now at their highest level ever.

Silver Mountain
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Though unconfirmed, it’s possible this silver will eventually be used in the production of solar panels, every one of which uses between 15 and 20 grams of the white metal. China is already the world’s largest market for solar energy—it surpassed Germany at the end of last year—with 43.2 gigawatts (GW) of capacity. (By comparison, the U.S. currently has 27.8 GW.) But get this: It plans on adding an additional 143 GW by 2020, which will require a biblical amount of silver.

Not to be outdone, India also plans significant expansion to its solar capacity, with a goal of 100 GW by 2022, according to the Indian government.

Metals Still Have Room to Rock

We know that money supply growth can lead to a rise in commodity prices. Note that Chinese money supply peaked in 2010 and has since fallen, along with commodity prices.

New Loans and M2 Money Supply in China
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New bank loans in China have spiked dramatically this year while money supply has grown more than 13 percent year-over-year, which is good for metals and manufacturing.

The increase in metals demand, not to mention the weakening of the U.S. dollar, has allowed silver to become the top performing commodity of 2016 after overtaking gold.

Metals Make Huge Gains
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Despite the rally, gold doesn’t appear to be overbought at this point, based on an oscillator of the last 10 years. We use the 20-day oscillator to gauge an asset’s short-term sentiment. When the reading crosses above two standard deviations, it’s usually considered time to sell. Conversely, when it crosses below negative two standard deviations, it might be a good idea to buy.

Silver is currently sitting at 1.2 standard deviations, suggesting a minor correction at this point would be normal.

Gold Still Has Plenty of Upside Potential, Silver Long in the Tooth?
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Time to Take Profits in Oil?

The same could be said about Brent oil, which has returned 61 percent since hitting a recent low of $27.88 per barrel in January. This has driven up the Russian ruble and energy stocks. (We’ve recently shown the correlation between world currencies and commodities.)

The rally has been so strong over the past three months that it’s signaling an opportunity to take profits or wait for a correction. Based on the 20-day oscillator, Brent’s up 1.3 standard deviations, which suggests a correction over the next three months.

Brent Crude Oil 20-Day Percent Change Oscillator
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Oil has historically bottomed in January/February. The rally this year has not disappointed. Further, it has helped many domestic banks that have been big lenders to the energy sector. High(er) oil prices translate into stronger cash flows for loans.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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 of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. 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.

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.

The 100 Cities Index tracks pricing data for 100 Tier 1, Tier 2, and Tier 3 cities in China.

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If You’re Not Following this Energy Trend, You’re Being Left in the Dust
April 18, 2016

Investor and author Gianni Kovacevic visited USGI office this week. My Electrician Drives a Porsche book

Last week our office was visited by my friend, investor and author Gianni Kovacevic, who is at the halfway point of a cross-country book tour to promote the latest edition of “My Electrician Drives a Porsche?” As part of the tour, he’s driving a Tesla Model S from Boston to Palo Alto, California—Tesla’s hometown—to demonstrate the potential of green energy and spread his message that “the future is now.”

His book features a successful young man—the titular electrician, and an analogue of Gianni himself—who instructs his older family doctor on how to invest in the rise of the new spending class. Not only is “Electrician” a fact-filled, convincing treatise on the importance of following long-term trends in China, copper and other “financial soap operas,” it’s also a real page-turner. I urge you to grab a copy and check it out.

Copper: Beneficiary of Unprecedented Number of New Consumers

Central to the book’s thesis is a concept that is both simple and yet profound: As the size of the world’s middle class continues to grow, demand for “things that come with an electrical cord” will surge. Below is a brief excerpt:

My point is that once a group of people make the move from rural to urban, from peasant to worker and on to consumer, their way of life changes. Subsistence disappears from their vocabulary and their lives begin to revolve around the three Cs: comfort, convenience and communication. And in order to achieve any of those things, it takes a whole lot more stuff than ever before. We get a dishwasher to free up time and a television to waste it. We get an air conditioner to stay cool and a heater to stay warm. Then later on, we get other luxuries like solar panels on our roofs and newer, more modern cars. When a society achieves its very own consumer revolution, as China and the developing world are undergoing right now, life becomes less about needs and more about wants. With an unprecedented number of new consumers, these luxuries need way more stuff to make them possible.

Back in 2014, Microsoft founder and philanthropist Bill Gates predicted that by 2035, there will be “almost no poor countries left in the world.” You might scoff, but for a moment let’s imagine this turns out to be the case. What effect would that have on energy demand? Millions more people joining what Gianni calls the spending class will increase the demand for millions more things—dishwashers, air conditioners, smartphones, cars—and necessitate the production of thousands more megawatts of electricity than the world currently generates.

All of which is a boon for copper. However energy is produced, the red metal is needed for conductivity. In fact, even more copper wiring is used in new energy technologies than in traditional sources. An electric car such as the Tesla Model S uses three times as much copper wiring than an internal combustion engine vehicle.

Each New Generation of Car Needs More Copper Wiring
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It was reported this week that China imported 39 percent more copper (and 13 percent more crude oil) in March than in the same time last year, a sign that the Asian giant’s appetite for commodities and energy remains strong. Despite a slowdown in GDP growth, China is still the number one importer of metals and number two consumer of oil.

China's Copper Imports Surge in March
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Shipments out of China also rebounded the most in a year, rising 11.5 percent in the first quarter. This suggests its economy fared much better than what analysts were predicting.

China Exports Surge 11.5 Percent in First Quarter
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The country’s manufacturing industry saw very welcome improvement last month as well, with the purchasing managers’ index (PMI) coming in at 49.7—still below the key 50 threshold, but the highest reading since February of last year. The PMI was also above its three-month moving average for the first time since October.

Chinese Manufacturing Edges Close to Expansion
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The Rise of the Chinese Spending Class

Consider the dramatic difference in size between college graduates in older and younger Chinese generations. According to Gianni’s book, there are 160 million people aged 56 to 65, yet this cohort has only one million graduates. Meanwhile, millennials are 415 million strong—100 million more than the entirety of the U.S. population—and of those, 107 million have college degrees. So far. As this number rises, so too will incomes as well as the desire to live a more “Western” lifestyle filled with stuff.

This new generation is not only big in size, but also big in aspirations

You can check out the entire Visual Capitalist infographic on Gianni’s website.

The Asian country’s middle class is already larger than America’s. In October, Credit Suisse reported that there are more than 109 million middle-class consumers in China, compared to 92 million in the U.S.

109 Million. For the first time, the size of China's middle class has overtaken the U.S., 109 million compared to 92 million.

Indeed, domestic consumption in China is following a staggering upward trajectory. In 2015, total retail sales touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.5 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum.

By 2020, Chinese Private Consumption Will Have Grown $2.3 Trillion
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The new Chinese spending class is still very concentrated along the country’s highly-urbanized eastern coast, in megacities such as Shanghai, Beijing, Guangdong and Shenzhen. But this is changing rapidly, with 39 percent of middle-class growth shifting inland toward more rural areas by 2022, according to McKinsey & Company. This will introduce new investment opportunities as these areas will require modern roads, railways and—most important—energy infrastructure.  

Chinese Middle-Class Growth is Shifting Inland

It’s estimated that between 2010 and 2025, 300 million Chinese citizens—a little less than the entire population of the U.S.—will migrate from rural areas to cities. As Gianni points out, lifestyles drastically change when this occurs, shifting from one of subsistence to one that revolves around convenience and comfort.

Tesla Disrupts the Auto Market

Key to this migration is transportation. In 1979, there were only 60 privately-owned automobiles in China. (That’s according to a 2006 report by legendary Canadian investment strategist Don Coxe, and cited in “My Electrician Drives a Porsche?”) Fast forward to today and China is now the world’s largest auto market. More than 21.1 million passenger cars were sold in the country last year, a 7.3 percent increase from 2014. Compare that to the U.S., the number two car buyer, where sales totaled 17.5 million, an all-time record.

By the way, 2015 sales of the Toyota Corolla, one of the top-selling sedans in the U.S., were a little over 350,000. That’s slightly more than the number of preorders for the Tesla Model 3, the company’s first mass-produced vehicle, within a single week of its unveiling on March 31. In a blog post, Tesla promptly proclaimed it “the week that electric vehicles went mainstream.”

The future, as Gianni says, is indeed now.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Caixin China Manufacturing PMI, released by Markit Economics, is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.

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 12/31/2015: Microsoft Corp.

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Did Oil Prices Just Find a Bottom?
March 14, 2016

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

As the Middle East’s main business hub, Dubai is the most populous city in the United Arab Emirates (UAE) and home to the world’s tallest manmade structure, the 163-story Burj Khalifa, which climbs to a neck-craning 2,717 feet. Designed by Adrian Smith, who attended Texas A&M University, the Khalifa Tower is an engineering marvel and stands as a symbol not only of the futuristic and forward-thinking look of this oil-rich country but also its emphasis on seeking intellectual capital from all over the world.

Last week I had the pleasure of attending the annual Young Presidents’ Organization (YPO) event, held this year in Dubai, where I learned best practices on leadership as well as how to strike the right balance between business and family life. The YPO has 24,000 peer-to-peer members who together employ 15 million people across 130 countries and generate $6 trillion in revenue every year.

It was an enriching experience, equaled only by my admiration for what the UAE has managed to accomplish with its oil revenues. Tall construction cranes can be seen in every corner of Dubai, signaling urban growth. There are plans to expand its efficient light rail system, which shuttled me from the airport to downtown for only $1. I was happy to see many of the train stations colored gold.

A sleekly designed monorail station in Dubai

Five Guys in Dubai

As is the case in China and elsewhere, spending on infrastructure is key for long-term sustainable growth. Countries and city-states such as Singapore, Hong Kong and now Dubai have spent wisely on new airports, sea ports, subways, light rail and hospitals—all wise fiscal spending that has always given the U.S. a huge advantage. With oil revenues, UAE leadership has paid for citizens to earn degrees in America and military training in the U.S., including San Antonio, Texas. The city of Dubai has a massive U.S. naval base for regional security.

The Dubai Mall, the second-largest in the world, is a wonder to explore. It contains 1,600 stores and restaurants from the U.S. and Europe and also features the Dubai Aquarium, one of the world’s largest. You truly feel as if you are in America, with the most popular restaurants being Five Guys Burgers and Fries, the Cheesecake Factory and U.S. pizza chains. I was surprised to see Tex-Mex food being delivered on motorcycles.

The Palazzo Versace is one of Dubai's leading 5-star fashion hotels.

This is the sort of extravagance and attention to detail travelers have come to expect from the country’s most popular attractions. At the Palazzo Versace hotel in Dubai, for instance, visitors can beat the desert heat by relaxing in air-conditioned sand. In Abu Dhabi, the Shaikh Zayed Grand Mosque is believed to have the world’s largest carpet, capable of accommodating more than 44,000 worshippers. The intricate craftsmanship of the marble and gold along the walls and columns is breathtaking to behold.

The Sheikh Zayed Mosque

The Impact of Electronic Payments

I also want to point out that the digital banking system has made a huge impact on the UAE’s economy. I just read an article in the Khaleej Times newspaper, reporting that electronic payments have boosted the UAE’s GDP by $3.7 billion in five years. This increase is indicative of a trend of rising card usage across many countries, as you can see in the chart below.

In the same edition of the newspaper, I was interested to read that for the third year in a row, Singapore has been listed as the most expensive city in the world, followed by Zurich and Hong Kong.  According to the article, “Falling commodity prices have created deflationary pressures in some countries, but in others, currency weakness caused by these falls has led to spiraling inflation.”

Light at the End of the Tunnel? The IEA Calls a Bottom in Oil Prices

Despite its relatively small size in population and land mass, the UAE is the world’s sixth-largest oil producer, following the U.S., Saudi Arabia, Russia, China and Canada. Among Organization of Petroleum Exporting Countries (OPEC) members, it’s the second-largest, after Saudi Arabia.

These rankings might very well rise in the coming years, however, as the Middle Eastern country plans to expand production between 30 and 40 percent by 2020, even as Brent crude prices have struggled to crack $40 per barrel.

But on a global scale, oil production is finally dropping—and that’s constructive for prices. In a report released on Friday, the International Energy Agency (IEA) writes that “prices might have bottomed out,” citing a February decline in both OPEC and non-OPEC output and hopes of U.S. dollar weakness.

Although I’m cautious, the current recovery is in line with oil’s seasonality trends for the five- and 15-year periods, which show that prices have risen between March and the beginning of the busy summer travel season.

West Texas Crude Oil Historical Patterns
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The PHLX Oil Service Sector Index has gained 4.4 percent since the beginning of the year, while prices have rallied above their 50-day moving average, touching three-month highs.

Oil Responds to Easonality Trend
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As the IEA points out, this rally is being spurred by optimism that OPEC and Russia can agree on a production freeze—not a cut, as some people think. A meeting date has yet to be decided upon, however, presumably because Iran announced it will not agree to an output freeze until it reaches its pre-sanction market share.

Like Iran, Saudi Arabia has resisted capping production. To plug up the deficit, it’s reportedly seeking up to $8 billion from international banks, the first time it has done so in more than a decade. The kingdom is also considering issuing foreign bonds and listing a part of its state oil company, Saudi Arabian Oil, or Aramco.

With WTI up 25 percent in 2016 and 3 percent in March, investor sentiment has improved since October, when it crossed into “panic” territory for the first time since 2011.

Investor Sentiment Improving after October Dip
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U.S. Companies Looking for $50 Per Barrel

To remain profitable, most U.S. producers need oil prices to be above $50 per barrel—a level we haven’t seen in eight months. In such an environment, U.S. oil companies are finally beginning to make meaningful production cuts, with the IEA expecting producers to remove more than half a million barrels per day from the market this year. In December, the monthly year-over-year change in production turned negative for the first time since September 2011.

U.S. Oil Production Dropping Off
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The number of North American rigs in operation fell below 400 for the first time since December 2009, according to Baker Hughes, helping to support prices.

Oil Prices Jump on Further Rig Count Declines
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Until now, per-well productivity has been slow to budge. Years of $100-per-barrel oil incentivized companies to develop new ways to extract crude, including fracking, and these technological advancements have greatly increased efficiency. Today, not only can a new well be drilled in record time, it can also produce four to five times what it could have only five years ago.

What Oil Companies Can Learn from Airlines

Highly-leveraged companies across the globe have had little choice but to trim their workforces, curb expenditures and let go of undeveloped projects. According to consulting firm AlixPartners, overall capital spending fell 20 percent in 2015, with a further decline of at least 30 percent expected this year.

Global Oil Companies Slash Exploration and Production Spending
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These adjustments, the most severe since the oil rout in the 1980s, have saved or raised global exploration and production (E&P) companies $130 billion, says Deloitte Consulting. But this won’t be enough for many companies: Nearly a third of all pure-play E&P companies worldwide are at high-risk of bankruptcy this year.

That’s not necessarily a bad thing. A little over a decade ago, the airline industry also found itself in extreme duress. A large percentage of carriers landed in bankruptcy court, and a wave of consolidation swept through the industry. Today, airlines are positing record quarterly profits.

In the past year, we’ve already seen some huge mergers and acquisitions in the oil industry—think Dutch Royal Shell and BP, as well as the proposed Halliburton and Baker Hughes deal. It’s likely we’ll see many more in the coming months. In the meantime, short of geopolitical turmoil, a coordinated production cap agreement among OPEC and non-OPEC countries might be the only option to firm up prices.

 

Some links above may be directed to 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.

The PHLX Oil Service Sector Index (OSX) is a price weighted index composed of companies involved in the oil services sector.

The Credit Suisse Risk Appetite Index is a sentiment indicator designed by Credit Suisse comparing risk-adjusted returns across a wide spectrum of global assets.

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 12/31/2015: Baker Hughes Inc.

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To Jumpstart Its Economy, China Embraces… Reaganomics?
March 7, 2016

Chinese President Xi JinpingChinese President Xi Jinping is about to tell millions of government workers: “You’re fired.”

Reuters reported last week that China plans to lay off between five and six million state workers over the next two to three years, in an effort to curb overcapacity in what’s being described as “zombie companies”: those that are being kept alive on bank loans despite bleeding revenue. Close to two million of these layoffs will come from the coal industry alone.

The layoffs are part of a series of sweeping reforms that were announced ahead of the National People’s Congress (NPC) meeting. Every year, close to 3,000 Chinese officials and executives from all over the country convene in Beijing to develop and assess the status of the country’s Five-Year Plan. In response to worldwide demands that China manage its slowing economy better, President Xi Jinping this year has proposed what he calls “supply-side structural reform.”

And if that sounds a little like Reaganomics, that’s kind of the point.

Besides layoffs, Xi’s plan includes tax cuts, deregulation and reductions in state spending—economic policies you might expect to come from the desk of Reagan or Thatcher. We might also expect the results of these policies to be the same in China as in the U.S. and United Kingdom in the 1980s: a boom in entrepreneurship and innovation.

These reforms come at a crucial time for China, whose manufacturing sector has been in contraction mode for a year now as the country’s economy shifts toward domestic consumption. In February, China’s purchasing manager’s index (PMI) fell to 48.0 from 48.4 in January.

Chinese Manufacturing in Contraction Mode for 12 Straight Months
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We closely follow government policy changes in China for a number of reasons. For one, its economy is the second largest in the world, and when based on purchasing power parity (PPP), its GDP is actually the largest, followed by the U.S., India and Japan. China’s economy, then, has a huge effect on the rest of the world, touching everything from commodities demand to consumption.

In 2015, total retail sales in China touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.4 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum (WEF).

One of the main reasons for this surge in consumption is the staggering expansion of the country’s middle class. In October, Credit Suisse reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durable and luxury goods, vehicles, air travel, energy and more.

109 Million - For the first time, the size of China's middle class has overtaken the U.S., 109 million compared to 92 million.

But middle-income families aren’t the only ones growing in number. The WEF estimates that by 2020, upper-middle-income and affluent households will account for 30 percent of China’s urban households, up from only 7 percent in 2010.

Gold’s Back in a Bull Market at the BMO 25th Metals and Mining Conference

Last week I returned from sunny Florida, where I had been attending the BMO Metals and Mining Conference, widely regarded as the best in the business. Sentiment toward gold was very optimistic, as I told Kitco News’ Daniela Cambone in last week’s edition of Gold Game Film. As always, Daniela did a fabulous job covering the event, interviewing all of the CEOs and other mining executives.

Frank Holmes: This Rally Has Room to Grow - Kitco News - 25th Global Metals & Mining Conference

The yellow metal is 2016’s best-performing asset class so far, having climbed more than 19 percent. It just had its strongest February since 1975.

What’s more, gold appears as though it’s back in a bull market, often defined as a 20 percent gain from a recent trough. Short-term, though, it’s way overbought, so a correction at this point would be healthy.

Follow the Money, Follow the Gold Flows

At the BMO Conference, I had the pleasure of meeting and speaking with my friend Pierre Lassonde, cofounder of Franco-Nevada, and company CEO David Harquail. Pierre told me that for every $1 billion that flows into the SPDR Gold Trust (GLD), the price of gold rises approximately $30 per ounce. Since the beginning of the year, we’ve seen about $9.3 billion flow into the GLD. During the same period, gold has risen 20 percent from its six-year low of $1,049.60 per ounce on December 17 to end Friday trading at $1,259.25.

The first breakout signal occurred on December 31, 2015, when money started to flow into gold, and the second important signal was when gold flows surpassed the 200-day, or 10-month, average, on February 1, 2016. Since the beginning of the year, gold has surged.

Outstanding Shares in the SPDR Gold Trust
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Like bullion, gold miners had a particularly gainful February, its best since 1998. The NYSE Arca Gold Miners Index rose an impressive 38.7 percent, compared to the 0.4 percent the S&P 500 Index lost in February. Year-to-date, production leaders Goldcorp, Newmont Mining and Barrick—which has recently lowered its debt-to-equity ratio—are thriving with prices pushing higher.

Gold Rush for Miners
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Gold is surging right now for a number of reasons, many of which I’ve covered in the last few weeks, including stronger inflation, negative interest rates and other components of the Fear Trade.

Global growth concerns have also spooked many investors, driving them into gold’s arms. Last week we learned that the global PMI fell pretty dramatically to a neutral 50.0 reading in February, down from 50.9 in January. Anything below 50.0 indicates manufacturing deterioration, and while I hope we don’t cross into that territory, the PMI has been trending downward over the last two years. We haven’t seen sub-50 readings since 2012.

Manufacturing Activity Stumbles in February
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As I’ve discussed many times before, we use PMIs to help forecast global manufacturing conditions three to six months out. (I’ve likened the economic indicator to the high beams on your car, with GDP serving as your rearview mirror.) That the PMI remains below its three-month moving average doesn’t bode well for commodities or energy in the short-term. The weakness underscores the need for global economies to reform their tax systems and relax regulations, as China is attempting to do.

Comparing Countries’ Compliance Complexity

South America, which represents 10% of world GDP, has some of the most difficult economies for navigating red tape.The TMF Group, a professional services firm, just released its annual Global Benchmark Complexity Index, which ranks countries according to the complexity of their business compliance standards. As you might expect, dominating the top 10 most complex governments are those found in South America, including Brazil, Bolivia, Colombia and, at number one, Argentina.

Colombia climbed—or fell, depending on your perspective—18 spots, from 21 to three, mainly due to the tax changes its government rolled out last year courtesy of its socialist finance minister, Mauricio Cárdenas Santa Maria. The South American country is now in the process of raising its income tax incrementally, from 40 percent this year to 43 percent in 2018, and with the agreement of other countries, it may now also tax the wealth its citizens hold in other jurisdictions (very similar to FATCA, or the Foreign Account Tax Compliance Act, here in the U.S.).

For the third consecutive year, Argentina ranks as the world’s most complex country in terms of business compliance. Back in November I wrote about the election of free-market advocate Mauricio Macri, expressing my hopes that the new president can bring significant reforms to the country’s business infrastructure and eliminate corruption. I’m still encouraged, but as we all know, political change is fraught with challenges and can take some time.

Champagne socialist: Colombian Finance Minister Mauricio Cardenas Santa Maria

It’s a shame that Argentina, Colombia, Brazil and many other resource-rich countries in South America can’t move more quickly to eliminate the roadblocks that stand in the way of growth and prosperity. Brazil, which is on course for its worst recession in over a century, shrank 3.8 percent in 2015, the largest decline since 1990, and its central bank expects it to shrink a further 3.45 percent this year.

Reform would benefit not just their own capital markets but the world economy as a whole. South America represents about 10 percent of the global economy, meaning a 1 or 2 percent rise or fall in GDP could have a significant effect on world GDP.

As a reminder, I will be in Carlsbad, California, April 13-16, speaking at the Oxford Club’s 18th Annual Investment U Conference. I’m honored to be joined by other respected minds in the world of investing, including Alexander Green, Marin Katusa and Keith Fitz-Gerald. Reserve your seats today by clicking the link above. I hope to see you there!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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 index benchmark value was 500.0 at the close of trading on December 20, 2002.

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 Global Benchmark Complexity Index ranks 95 jurisdictions in order of business compliance complexity.

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 12/31/2015: Newmont Mining Corp.

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10 Numbers to Know for the Chinese New Year
February 8, 2016

Happy Chinese New Year! 2016: Year of the Fire Monkey

For decades now, China has been the leading driver of global growth, consuming unfathomable amounts of raw materials and commodities.

Today, the Asian giant is undergoing dramatic changes, as its government deepens reforms and opens the country’s economy up to foreign investment. The size of its middle class is rapidly expanding in size, giving a huge boost to domestic consumption. And with the creation of the Asian Infrastructure Investment Bank (AIIB) and the renminbi’s inclusion in the International Monetary Fund’s (IMF) reserve currency, China’s role in global financial markets is growing in importance.

No one can deny that challenges lie ahead, but opportunities are still abundant.

With this in mind, I’ve put together 10 figures to know as China enters a new year.

9th

As the ninth animal in China’s 12-zodiac cycle, the monkey is considered confident, curious and a great problem-solver. But 2016 is also the year of the Fire Monkey, which adds a layer of strength and resilience.

2.9 Billion

It’s been called the world’s largest annual human migration. “Chunyun,” or the Spring Festival, refers to the period around the Chinese New Year when people travel by plane, train and automobile to visit friends and family. Between January 21 and March 3, nearly 3 billion trips will be made, exceeding the number of Chinese citizens. Close to 55 million of these trips are expected to be made by air.

Chinese Tourists will take 2.9 billion domestic trips during this year's spring festival - U.S. Global Investors

For the third straight year in 2015, China topped the list of international outbound travelers, with 120 million people heading abroad. Collectively, they spent $194 billion across the world.

6 Million

Not all destinations are within China’s borders, however. According to CTrip, a Chinese online travel service, Spring Festival tourists have booked a record 6 million outbound trips. As many as 100 different countries will be visited, with the farthest region being Antarctica.   

180 Tonnes

A shaky stock market, depreciating renminbi and low global prices have spurred many Chinese consumers to turn to gold. Imports of the yellow metal are way up. Last month I wrote that 2015 was a blowout year, with China consuming more than 90 percent of the total annual global output of gold. In December, the country imported 180 tonnes from Switzerland alone, representing an 86 percent increase over December 2014. This news supports the trend we’ve been seeing of gold moving West to East.

The Great Tectonic Shift of Physical Gold From West to East

The precious metal is currently trading at a three-month high.

49.4

For the month of January, the Chinese government purchasing managers’ index (PMI) eased down from 49.7 in December to 49.4 in January, indicating further contraction in the country’s manufacturing sector. The reading remains below its three-month moving average. More easing from China’s central bank, not to mention liberalization of capital controls, could be forthcoming this year to stimulate growth and prop up commodities demand.

Chinese Manufacturing Sector Continues to Shrink
click to enlarge

$6.5 Trillion

Although manufacturing has cooled, domestic consumption in China is following a staggering upward trajectory. In 2015, total retail sales touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.5 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum.

By 2020, Chinese Private Consumption Will have Grown $2.3 Trillion
click to enlarge

109 Million

One of the main reasons for this surge in consumption is the staggering expansion of the country’s middle class. In October, Credit Suisse reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durable and luxury goods, vehicles, air travel, energy and more.

109 Million for the first time, the size of China's middle class has overtake the U.S., 109 million compared to 92 million.

But middle-income families aren’t the only ones growing in number. The World Economic Forum estimates that by 2020, upper-middle-income and affluent households will account for 30 percent of China’s urban households, up from only 7 percent in 2010.  

$1.6 Trillion

China's e-commerce consumption Set to Grow Over 160% Between 2015 and 2020

Consumption has also benefited from the emergence of e-commerce. Not only are younger Chinese citizens spending more than ever before, they’re doing it more frequently, as e-commerce allows for convenient around-the-clock spending. Such sales could grow from $0.6 trillion today to a massive $1.6 trillion by 2020.

Mobile payments will continue to play a larger role as well. Purchases made on a smartphone or tablet are expected to make up three quarters of all e-commerce sales by 2020.

24.6 Million

With a population of more than 1.3 billion, China is the world’s largest automobile market. The country certainly retained the title last year, selling 24.6 million vehicles, an increase of 4.7 percent over 2014. The U.S., by comparison, sold 17.2 million. According to China’s Ministry of Public Security, the Asian country added a staggering 33.74 million new drivers last year, which is good news for auto sales going forward.  

6.5 Percent to 7 Percent

Many China bears point out that GDP growth in the Asian country has hit a snag. There’s no denying that its economy is in transition, evidenced by the government’s 2016 growth range of between 6.5 and 7 percent, a demotion from 2015’s target of 7 percent. But it’s important to acknowledge that China is still growing at an enviable rate.

Here’s one way to look at it, courtesy of Jim O’Neil, the commercial secretary to the British Treasury and the man who coined the acronym BRIC (Brazil, Russia, India, China). O’Neil calculates that even if China grows “only” 6.5 percent this year, the value is still equivalent to India growing 35 percent or the United Kingdom growing 22 percent.

For this reason and more, China remains a long-term growth story, and “there are many reasons to expect that in 10 or 15 years, China will be a greater, not a lesser, power than it is today,” says Stratfor Global Intelligence.

To all of my friends and readers both here and abroad, I wish you copious amounts of happiness, health and prosperity this Chinese New Year!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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.

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Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change