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The Malleable Market for Global Aluminum
Last week?s Investor Alert highlighted a Macquarie Research chart showing a recent notable upswing in aluminum production around the world. Following a huge dip in output in China and worldwide throughout 2009, China once again surpassed the rest of the world in producing the most aluminum. China?s massive production makes sense considering the country consumes the most aluminum. According to Jeremy Grantham of GMO, China uses 40 percent of the world?s aluminum as it rapidly develops its railway transportation, increasingly purchases automobiles and demands more energy.
What?s Driving Platinum?
Following a substantial 90 percent increase since the financial crisis, platinum prices have been sluggish. During the first six months of 2011, the metal gained only a few basis points. Platinum has significantly lagged silver (up 15.72 percent) and gold (up 7.72 percent), but has outpaced palladium, its closest relative. In recent days, the market has discounted the metal because of weaker car sales in the U.S. According to the WSJ, Japan?s earthquake shut down car production, and higher vehicle prices and continued bad news about the U.S. economy prevented consumers from purchasing cars.
Will Gold Equity Investors Strike Gold?
While the party continues for gold bullion prices, stocks of gold companies have been a no-show. The NYSE Arca Gold Bugs Index (HUI) has fallen more than 13 percent year-to-date and the Philadelphia Gold & Silver Index (XAU) has toppled more than 16 percent. Companies such as High River Gold Mines, Jaguar Mining and NovaGold Resources are off 45 percent from 2007-2008 highs. This has been exacerbated in recent weeks making it a hot topic of discussion among investors. This chart shows gold equities of all market capitalization sizes were holding up quite well until late April.
Is Gold About to Have Its Status Upgraded?
Central banks have been on a gold buying spree. Mexico, Russia and Thailand, were adding to their gold reserves. And in 2010, central banks became a net buyer of gold for the first time in 21 years. Central bank gold buying could soon be matched with other global banks if gold?s quality as an asset gets upgraded to Tier 1 status by the Basel Committee on Banking Supervision. The BCBS is an international banking supervisory committee that provides a forum for determining global standards to ensure that banks all around the world have adequate capital.
China is World's Largest Energy Consumer
World consumption of energy has increased 5.6 percent in 2010, according to BP?s Statistical Review of World Energy. This is the largest increase since 1973, which happened to be a memorable year in energy history. At the time, the U.S. was by far the largest consumer of energy, devouring 1,812 million tons of oil equivalent (mtoe)?more than 30 percent of the world?s total?as the country faced an energy crisis, oil embargo and record high oil prices. In 2010, another pivotal moment occurred in energy history: The country consuming most of the world?s energy was no longer the U.S., but China.
Is Peru's Humala Jekyll or Hyde for Mining?
The Peruvian stock market has had a very strong reaction to the recent outcome of the country?s presidential election. With Keiko Fujimori?s surprise loss to Ollanta Humala, many Peruvian stocks saw share prices sink before quickly recovering the following day. Grana y Montero, a large engineering company in Lima, reached a three-month high shortly before the election, and then plummeted 20 percent just after. We digest the outcome and discuss the implications a shift in Peru?s government policies would have on the country?s economy and largest industries.
Active Hurricane Season May Threaten Offshore Oil
It?s hurricane season in the Atlantic, and another year of above-normal activity is expected. If the prediction comes to fruition, the potential disruption of offshore oil production may add to already turbulent oil prices. The National Oceanic and Atmospheric Administration says due to a continuing high activity conditions, warmer water, and La Nia?s wind sheers, this season may produce 12 to 18 named storms, six to 10 of which could become hurricanes. Two or three of these hurricanes may be major. Seasonal averages are 11 named storms, six hurricanes, and two major.
Natural Resources Q&A with the Global Resources Fund Team
This week Frank Holmes and the co-managers of the U.S. Global Investors Global Resources Fund (PSPFX), Evan Smith and Brian Hicks, participated in a special webcast for the Peak Advisor Alliance. Here are some candid portions of the Q&A: Q. How are interest rates currently affecting commodity prices? A. The magic number for real interest rates is 2 percent. That?s when you can earn more than 2 percent on a U.S. Treasury bill after discounting for inflation. Our research has shown that commodities tend to perform well when rates fall below 2 percent.
Global Infrastructure a $6 Trillion Opportunity
Each week, more than one million people are either born in or migrate to cities. Much of this rapid urbanization comes from the emerging world, putting tremendous pressure on that country?s feeble infrastructure. Merrill Lynch estimates that $6 trillion will need to be spent by selected emerging market countries over the next three years to meet the basic needs of these citizens. Water, transportation and energy investments will consume the bulk of these funds, 82 percent of total projected spending. Nearly every emerging market country Merrill researched will make an investment in all three.
Railway Revolution Builds China's Consumer Culture
China is building the world?s largest network of high speed rails. Since opening the first high speed line between Beijing and Tianjin in 2008, the country has laid down more than 4,600 miles of new tracks. This is three times more than Japan, where the bullet train was invented. Once completed near the end of this decade, the high speed rail system will connect more than 250 Chinese cities, span 18,641 miles and reach roughly 700 million people. Currently, the high speed rail network connects about one-third of China?s cities. That figure is set to nearly double over the next two years.
Why Asia is the Epicenter of Oil Demand Growth
A few weeks back we highlighted the strong link between GDP growth and oil consumption by showing you how oil consumption per capita has risen in selected countries as per capita incomes rise. Specifically, we noted the potential for China?s oil consumption?already the second-largest oil consumer in the world?to catch up on a per capita basis with other Asian countries such as Taiwan and South Korea. That?s where we think China?s oil consumption is headed, but this shows how strong oil consumption per capita growth has been over the past 50 years.
Asian Tiger Sinks Teeth Into Gold
The World Gold Council (WGC) released its quarterly ?Gold Demand Trends? report this week and, as always, it was filled with fascinating data on the strength of the global gold market. Gold demand grew 11 percent to 981.3 tons during the first quarter of 2011, worth $43.7 billion at quarter-end?s price levels. The increase was driven by a significant rise in demand for gold as an investment, up 26 percent from a year ago, as emerging markets look to protect their assets from rising inflation. Demand for gold bars and coins was up 62 percent and 42 percent, respectively.
The Dollar and Oil Debate on CNBC Europe
This week in London, I joined CNBC Europe?s Commodities Corner to discuss an earlier post regarding my Three Reasons to Believe in $100 Oil. Of the three reasons I gave, most striking to this group was my belief that higher oil prices will continue because of a weakness in the dollar. What I explained during the discussion was that a falling dollar causes short-term volatility. As the demand for a particular commodity increases and the dollar weakens, or vice versa, investors need to deal with an exaggerated movement in the price. However, I stressed the short-term nature of these events.
Chart of the Week: Emerging Europe's Middle Class
Middle-class, affluent, bourgeois - they describe a group of people who enjoy a comfortable life, have access to healthcare and, have discretionary income. And across developing nations, there is a growing group that are just settling in to this lifestyle. A few weeks ago we discussed how economic power is gradually shifting eastward and highlighted a McKinsey Global Institute report that showed China, Latin America and South Asia are projected to account for most of the middle class children by 2025. Those regions aren?t the only ones. A surging middle class exists in Eastern Europe as well.
Policy Reforms Pave Way for Indonesia
Known as the world?s largest archipelago, Indonesia is made of 17,000 islands?eight major ones?between the Indian and Pacific Oceans with the most volcanoes in the world. Almost half of the country?s population lives in an urban environment. Jakarta, the capital and largest city, is home to more than 9 million people. Literacy in Indonesia is high: 90 percent of the population aged 15 and over can read and write. Yet this highly literate country lags nearby southeastern Asian countries when it comes to infrastructure, according to a recent report by Morgan Stanley.
Visiting a West African Gold Mine
This week I?m back on the continent of Africa. Along with 20 analysts from investment firms around the world, I spent a total of 17 hours traveling to Tasiast, Mauritania, kicking the tires and checking out Kinross Gold?s open pit operations there. Kinross is among the top 10 gold mining production companies in the world. According to the CPM Gold Yearbook 2011, the company produced 2.2 million troy ounces of gold in 2009, nearly 3 percent of the world?s total.
Three Reasons to Believe in $100 Oil
After selling off nearly 14% last week, oil prices finished this week slightly higher at $99.65 per barrel. While the end result was a net positive, the volatility continued. Oil reached $104/bbl, then fell to around $96, before nesting just below $100. As an investor, this volatility can be difficult to handle. Throw in the uncertainty of today?s geopolitical environment, and investors feel the need to downsize their positions in commodity investments, such as oil. Markets could remain volatile in the short-term, but here are three long-term indicators to support $100+/bbl oil prices.
The Strong Bond Between India and Gold
Casey Research?s BIG GOLD newsletter recently published a great interview that I?d like to share with you. BIG GOLD editor Jeff Clark interviewed Shanta, the mother of U.S. Global consultant and longtime friend Jayant Bhandari, on how strong the cultural bond between gold and Indians is, especially women. "When it comes to supply and demand, what you?ve been told about gold jewelry is wrong. That?s a strong statement, but I?ve got a firsthand account to back it up."
Don?t Turn Out the Lights on Commodities Just Yet
The prices for many commodities suffered the worst week in recent memory this week. Oil prices dipped below $100 per barrel, gold fell below $1,500 an ounce and silver gave back much of the past month?s gains by falling to the $35 an ounce level. The prices for other commodities such as sugar, tin, nickel, aluminum, lead and copper also pulled back. Immediately, headlines on websites such as Marketwatch, Bloomberg and SmartMoney read ?Has the Commodity Bubble Popped?? and ?Imploding Commodities Complex.? In our opinion, not likely.
The Rising Financial Gold Market
When the University of Texas Investment Management Corporation (UTIMCO) took possession of more than 20 tons of gold worth $991.7 million earlier this year, its gold stockpile became larger than the official gold holdings of about 28 countries combined. UTIMCO manages the second-largest endowment in the U.S. However, UTIMCO?s gold holdings pale in comparison to the top five countries: United States, Germany, Italy, France and China. These countries hold approximately 19,000 tons combined, about two-thirds of official holdings at the end of 2010, according to the World Gold Council.
How a Falling Dollar Affects Gold
Statements by Chairman Ben Bernanke on April 27 shouldn?t have surprised investors. Following the Fed?s press conference, the Fear Trade continued. Gold hit a new high while the dollar fell further, touching a three-year low on Thursday. As gold investors know, the metal has historically been negatively correlated with the dollar, meaning when the greenback is weak, gold tends to be strong. That correlation is reaching an extreme, widening substantially over the last year. Spot gold prices on the COMEX closed above $1,527 yesterday while the U.S. Trade Weighted Dollar Index tumbled to 73.32.
Coal Use in China Shines Light on Growth
International coal prices hit $124 per ton this week, the highest levels in five months, as strong demand from reconstruction projects in Japan and reduced supply from flood-ravaged Australia has made coal supply tight. The floods in Queensland, Australia cut the country?s output of coal by 15 percent and other big coal producers such as Indonesia, South Africa and Colombia are experiencing similar production cuts due to floods of their own.
European Engines of Growth
Emerging countries in Europe are expected to outpace their developed counterparts over the next two years, with Latvia, Poland, Romania and Slovakia leading 2012 GDP growth, according to The World Bank. In its ?EU10 Regular Economic Report,? the organization expects Romania to lead the way with 2012 GDP growth of 4.4 percent followed by Slovakia?s projected growth of 4.3 percent. Poland?s GDP is anticipated to grow by 4 percent this year and 4.2 percent next year. As domestic demand recovers, Latvia is set to produce a GDP of 4 percent by 2012.
Energy and Natural Resources Market
China?s apparent fuel consumption has gained 12 percent to an all-time high of 21 million tons in March. Chinese oil demand averaged 9.265 million barrels per day during the first quarter. Even at $4 per gallon of gas, gasoline demand in the U.S. maintained levels around 9 million barrels per day, according to the U.S. Department of Energy. Aluminum shipments by North American service centers have rebounded in March. Total U.S. and Canadian shipments were 155 kilotons. This is the highest volume since October 2008 and represents a 25 percent month increase, 29 percent year.
Internet: Land of the Free?
Cell phones, computers, laptops, tablets and portable media players have freed Americans to access the Internet wherever they are and at whatever time of day. World markets are now updated every minute, news feeds change by the second, and the free flow of business communication never stops. While the U.S. and freedom seem to go hand-in-hand, it may surprise you that the U.S. actually ranks second behind Estonia in Internet independence. A new report, Freedom on the Net 2011, charts different countries? Internet activity against accessibility, revealing some rather important clusters.
Don?t Fear a Pullback in Prices
The S&P credit agency sent shockwaves through the global financial system on Monday. This sent markets lower and the prices of commodities such as oil rocketing back above $110 per barrel and both gold and silver to new highs. It should be clear the S&P announcement was just a warning, the rating was affirmed at AAA. The fears quickly subsided and U.S. markets hit fresh three-year highs. Essentially there?s only a one-third chance of a downgrade and anyone who?s ever listened to the weather man knows that a 33 percent chance of rain means you probably don?t need your umbrella.
Will China's Economy Overheat?
China?s GDP growth continued at a blistering pace during the first quarter of 2011, rising 9.7 percent from the previous year. Once again this outpaced many forecasts and reignited the discussion of China?s overheating economy. While its robust growth may raise a few eyebrows, the economy isn?t in danger of ?red-lining.? Andy Rothman points out that the first quarter growth figures ?[aren?t] dangerously high given the GDP growth rate and strong income growth? After rising nearly 8 percent during 2010, inflation-adjusted urban incomes rose 7.1 percent during the first quarter.
Middle East to Spend $80 Billion on Public Transport
This week, the International Association of Public Transport held its annual conference in Dubai. 2,000 delegates from 80 countries attended the 4 day event. Delegates took rides on the city public transportation, including the longest driverless metro line in the world. Long known as a city dependent on its cars for convenient travel, Dubai has been ramping up its infrastructure to relieve increasing traffic congestion driven by urbanization. Car traffic is forecasted to increase four times by 2020 as the population jumps from 1.2 million people in 2005 to more than 5 million by 2020.
Four Examples of China's Amazing Growth
It?s hard to grasp the growth China has had over the past few decades. The country?s GDP has grown tenfold since Deng Xiaoping?s reforms ushered in a new economic era in 1978. However, pessimists point to the very low base economic growth began and the fact that Beijing has manufactured this GDP growth via government subsidies. True, China?s economy in the 1970s was barely on the global radar, and the government has kept the country?s economy afloat when activity started to contract. However, these naysayers can?t deny that nearly every aspect of Chinese life has experienced a transformation.
Spotlight: Pivotal Peru Election
Peruvians will take the first step in electing their new president on Sunday. The top-two finishers in this round will compete in a runoff election next month. The outcome is meaningful to improving the quality of life in Peru, continuing its strong historical GDP growth and making the most from its ample natural resources. Politics in Peru have a history of surprises and this year?s surprise is how left-wing candidate Ollanta Humala is leading in the polls, though one-third of Peru?s population is still undecided. Several local news services show Humala well ahead of opponents.
Why High Oil Prices Are Likely Here to Stay
A number of forces continued to push oil prices higher this week, reaching their highest levels in the U.S. since September 2008. One factor fueling the run has been the continued decline of the U.S. dollar. Oil and the dollar historically are negatively correlated. This means that a rise in oil prices generally coincides with a decline in the dollar, and vice versa. The U.S. dollar has seen a dramatic decline since the beginning of the year as oil prices have moved some 30 percent higher. This could be due to fact that roughly two-thirds of the U.S. trade deficit is related to oil imports.
100 Years of Shifting Growth
As part of our research, we track the fiscal and monetary policies of countries around the world. We believe government policies are a precursor to change and that this change can lead to economic devastation, such as the nationalization of oil companies in Venezuela, or generate substantial growth, such as Colombia?s successful efforts to encourage foreign investment. Historical context allows us to gauge the outcome of these situations. For example, these pie charts from Credit Suisse show the relative sizes of the world stock markets from two very different periods.
The Bedrock of the Gold Bull Rally
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 and now $1,400 an ounce. However, gold prices appear asymptomatic of the signs generally associated with financial bubbles.
The Strong Link Between GDP and Oil Consumption
Global crude oil and liquid fuel consumption grew at its second-fastest pace in over three decades in 2010, rising 2.8 percent to 86.7 million barrels per day, according to the U.S. Energy Information Administration (EIA). In fact, worldwide oil consumption surpassed 2007 pre-recession levels. For 2011 and 2012, the EIA forecasts that, around the world, we?ll use an annual average of 1.6 million barrels of oil per day. The EIA says this increase is expected to be driven by rising demand from the emerging world, mainly China, Brazil and the Middle East.
Middle-Class Middleweights to be Growth Champions
Over the next 15 years, the number of children in middle-class households in emerging market cities around the world may grow 10 times faster than those in developed countries. This future generation living in places such as China, Latin America and South Asia should drive the demand for goods and services, housing and transportation that extend beyond the basic necessities of life. In McKinsey's report, ?Urban world: Mapping the Economic Power of Cities,? the researchers focus on demographic and economic trends to determine which cities will provide the most economic growth in the future.
What's Driving Russia's Outperformance?
All ten sectors of the S&P 500 Index increased this week. The best-performing sector for the week was energy which rose 4.08 percent. Other top-three sectors were technology and materials. Financials was the worst performer, up 0.50 percent. Other bottom-three performers were utilities and healthcare.
How the VAR Model and Japan?s Tragedy Affect Investors
The threat of disaster from the damaged Fukushima nuclear power plant unleashed a ferocious sell-off of Japanese equities, but the damage to other major markets has been limited. Already experiencing a slight pullback prior to the events on March 11, U.S. equities and emerging markets have held up quite well. The MSCI Emerging Markets Index has only pulled back 2 percent since the earthquake and the S&P 500 Index only 3 percent.
Oil's Piracy Premium
Over the past 30 years, the International Maritime Organization (IMO) has successfully lowered the risk of pirate attacks in other regions around the world. With the recent escalation of piracy around Somalia, governments and worldwide organizations including the United Nations are now working in concert with the IMO to curb these attacks. Their theme for 2011, ?Piracy: Orchestrating the Response,? represents an increased awareness of the world-wide political changes required to reverse this trend.
China's Urbanization Driving Housing Demand and Car Sales
It?s been an eventful week in Asia. The world turned its attention to Japan as it copes with the most powerful earthquake in the country?s history. The markets reacted, with Asian shares declining and uranium sentiment negative as investors rethink nuclear power. We are optimistic that a resilient Japan will turn from tragedy to opportunity by stimulating its economy through a reconstruction of the nation. This week, China was recognized for an achievement of its own. The country has resumed the leadership as the world?s top manufacturing country by output over Britain and the US.
Domestic Equity Market
The figure below shows the performance of each sector in the S&P 500 Index for the week. Four sectors increased and six decreased. The best-performing sector for the week was utilities which rose 1.5 percent. Other top-three sectors were telecom services and consumer staples. Energy was the worst performer, down 4.0 percent. Other bottom-three performers were materials and technology. Within the utilities sector the best-performing stock was Constellation Energy Group which rose 6.8 percent. Other top-five performers were Exelon, First Energy, DTE Energy, and Duke Energy.
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