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Today’s Featured Topic The Stage is Set for a New Bull Market in GOLD Summary: MRP believes gold is in the early stages of a new bull market. The dollar/gold ratio, which measures the relative strength of the dollar versus gold, is starting to tilt in gold’s favor; supply constraints are emerging; and demand is picking up again in some important growth markets. After dropping to its lowest level of the year last month, gold is starting to recover its luster. Moreover, several macro and structural shifts are unfolding, which could send the metal on a multi-year rally. Here are three reasons we’re bullish on gold. US Dollar Effect MRP has been bearish on the US dollar since December 2015. While the greenback has enjoyed a period of strength during the past two months, we believe this is a temporary bounce and that the dollar is in a multi-year bear market that began 2.5 years ago. US nominal rates have risen while the ECB has remained on hold, however, there’s chatter that the ECB’s bond-buying era might be coming to a close, which should drive European bond yields higher. Meanwhile, there’s been a resurgence of US inflation which we expect to accelerate in the coming months. As a result, the inflation-adjusted central bank rate differentials should begin to weigh on the dollar. Services inflation is at cycle highs, while prices in other areas have been creeping up including, energy, housing, and even food. Because the U.S. dollar is the benchmark pricing mechanism for gold, there’s a special relationship between them. As a rule, when the value of the dollar increases relative to other currencies around the world, the price of gold tends to fall in U.S. dollar terms. Part of the reason is that gold becomes more expensive in those other currencies, causing demand to recede. Conversely, as the dollar falls, gold tends to appreciate. If the value of the dollar declines, as we expect it to, the price of gold should move higher. Peak Gold Mining gold has become more difficult and global output is expected to decrease steadily, with many experts now predicting an era of “peak gold.” Some industry insiders believe 2017 was the peak point for gold, and anticipate supply to fall up to 20% by 2022. That’s because all the gold that could be easily accessed has already been mined, and new discoveries since 2006 have plunged by 85%. In fact, the $54 billion spent on exploration over the past two decades resulted in a mere 41 discoveries, yielding only an aggregate of 215 million ounces of gold. Gold deposits in China, Australia and South Africa, some of the top producing nations, are showing signs of becoming depleted in some mines. In the meantime, lower gold prices in the past have made it too expensive to explore new mines, especially given that the lead time between discovery and production of a new gold deposit is now 20 years. With costs rising and profits decreasing, fewer and fewer new projects are being started, and some mines have folded. Last year, total supply dipped 4% to 4,398.4t against demand of 4,071.7t. Unless something changes, the supply constraints will eventually lead to a deficit which could cause prices to skyrocket. Rising Demand Global gold demand declined by 7% in 2017, largely due to a fall in investment demand for gold bars, gold-backed ETFs, and central bank gold reserve purchases. Nevertheless, a couple of bright spots are emerging. Although Asia gold demand has been tepid for a couple of years, the World Gold Council (WGC) just published a report this month noting that China’s market for gold jewelry has been quietly improving. This is a big deal, as China consumes the most gold in the world, and accounts for about 30% of global demand in the gold jewelry market. Another interesting data point is that technology demand for gold grew last year for the first time since 2010. In fact, the WGC believes that the major slump in the electronic sector’s demand for gold may be behind us, due to the rising electrification of the world, the advent of the Internet of Things (IoT), the electric vehicle revolution, and increased use of gold in devices like smartphones. A mobile phone contains on average of 50 milligrams of gold. With an estimated 7 billion mobile phones worldwide, that adds up to 350 tons of gold contained in these devices. It would take a country like New Zealand 30 years to produce that much gold. The unique properties of gold are driving new uses in medicine, engineering, and renewable energy technologies, as well as electronics every day. These industrial uses account for about 11% of global gold demand, or approximately 450 tons a year, and that could easily grow. To say that this new century has been dramatic for gold would be an understatement. After an astonishing six-fold rise from 2000 to mid-2011, when gold hit an all-time high of $1,920, the precious metal then dropped over 45% through the end of 2015. MRP added Long Gold as a theme on October 21, 2015. At the time, we wrote that “the extraordinary period of strength in the U.S currency may now finally be ending, marking a bottom for gold and reversal of its performance going forward”. Since the theme launch date, gold is up 12.5% and the dollar has declined 2.4%, with a few ups and downs in between. Given the factors discussed above, MRP continues to like the theme and maintains the view that gold is in the early stages of a new bull market. We’ve also summarized the following articles related to this topic in the Commodities section of today’s report.
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Chart: Gold ETF (GDL) vs US Dollar ETF (UUP) Performance since MRP theme inception (10/21/2015 to Now) |
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Other Disruptive Change
Labor, Education & Demographics
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Joe Mac’s Market Viewpoint |
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The Federal Reserve has said for years that it wants to get inflation in the U.S. back to 2% per year. Some indicators are already showing inflation rates higher than that. But, the Fed persists with its fixation on the core personal consumption expenditures (“PCE”) deflator as a superior measure. That number has been stuck below 2% since May 2012. The trend of the inflation data, however, may be changing soon. Joe Mac’s Market Viewpoint: CAPEX Booms! →
Other Viewpoint Reports Joe Mac’s Market Viewpoint: The Inflation Complication → Joe Mac’s Market Viewpoint: A Review of MRP Themes → |
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Current MRP Themes |
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Major Data Points |
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US Wholesale Inventories Revised Higher in April US wholesale inventories edged up 0.1 percent month-over-month in April 2018, instead of being unchanged as previously estimated and compared with a 0.2 percent gain in March. There were increases in the stocks of motor vehicles, professional and computer equipment, metals and hardware, and petroleum. Wholesale stocks excluding autos, which goes into the calculation of GDP, nudged up 0.1 percent in April. Year-on-year, wholesale inventories increased 5.8 percent. TE |
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US Economic Optimism Index at 3-Month High in June The IBD/TIPP Economic Optimism Index in the United States increased 0.6 percent to 53.9 in June of 2018, but slightly below market expectations of 54.2. It was the strongest reading since March, as the personal financial outlook sub-index rose 1.8 percent to 62.1 in June. In contrast, the Six-Month Outlook which is a forward-looking gauge that looks at how consumers feel about the economy’s prospects over the next half year fell 0.2 percent to 51.2 and the gauge measuring confidence in federal economic policies dipped 0.3 percent to 48.3. TE |
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US Stocks Edge Up on Friday Wall Street closed modestly in the green on Friday 8 June 2018, as trade tensions between the US and its key trade partners persisted with President Trump arriving to the G7 meeting. The Dow Jones gained 75 points or 0.3% to 25317. The S&P 500 increased 9 points or 0.3% to 2779. The Nasdaq edged up 10 points or 0.1% to 7646. TE |
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European Stocks Slump on Trade Tensions European stock markets closed mostly in the red Friday on the back of increasing global trade tensions as the leaders of the G7 gathered for a two-day summit where trade issues will be in focus. TE |
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Argentine Peso Hits All-time Low The Argentine peso touched a new record low against the greenback on Friday, as the central bank ended a 3-week intervention in currency markets to stabilize the peso. The fall comes after the announcement of the country’s deal with IMF on Thursday night. If the IMF board approves the agreement, Argentina will receive a USD 50 billion loan for three years, an amount higher than markets were expecting. In exchange, Argentina must cut its deficit to 1.3 percent in 2019 and seek to cut inflation to 17 percent next year. The peso was down about 1.8 percent to 25.42 per USD around 12.00 PM NY time. TE |
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Other Disruptive Change |
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Brazil: El-Erian Warns Brazil May Be Next Emerging-Market Domino to Fall First Argentina. Then Turkey. Could Brazil be next? Mohamed El-Erian hinted at exactly that as the Brazilian real led major currency losses Wednesday, even after the nation’s central bank offered $1.5 billion in extra swap contracts to keep it above water. Brazilian policymakers are in a “tricky position — and there’s little room for error,” El-Erian, the chief economic adviser to Allianz SE and a Bloomberg Opinion contributor, wrote on Twitter. The central bank’s intervention followed similar actions by central bankers in Argentina, Turkey, India and Indonesia. While India and Indonesia have curbed some of their losses, currencies in Argentina, Turkey and now Brazil remain in precarious positions with world-leading selloffs this year. B
Italy: Italy Banks From UniCredit to Intesa May Face Costly Ringfencing Italy’s ruling populist parties have opened the door to separating banks’ trading and deposit-taking operations, a shift that proved expensive to banks in other countries where the split up has been enforced. While short on details, the approach echoes initiatives taken by governments from Europe to the U.S. to protect retail depositors and borrowers from the riskier parts of investment banking in the wake of the financial crisis. The so-called ringfencing in the U.K. imposed heavy costs on the country’s biggest lenders. In the U.K., where investment-banking tends to take up a large part of lenders’ businesses, lawmakers required that investment banking units must be separated from core retail businesses by the end of this year. Measures to improve the banks’ governance and competitiveness, including transforming the country’s 10 largest cooperative banks into joint-stock companies and the forced merger of smaller mutual banks into larger groups, are now at risk. A few weeks ago, the League put in a request to both houses of parliament to delay the finalization of the process to combine the mutual banks into two groups. Shares of Italian banks tumbled as negotiations over a new government dragged on. Italian lenders including UniCredit and Intesa Sanpaolo posted some of the biggest declines on the Bloomberg Europe Banks Index on Thursday. B 3DP Housing: The first 3D printed houses will be built in the Netherlands this year The city of Eindhoven soon hopes to boast the world’s first commercially-developed 3D-printed homes, an endeavor known as Project Milestone. Construction on the first home begins this year and five houses will be on the rental market by 2019; within a week of releasing images of the new homes, 20 families expressed interest in dwelling in these postmodern pods. The “printer” in this case is a big robotic arm that will shape cement of a light, whipped-cream consistency, based on an architect’s design. The project developers say that the consistency of this concrete and the precision of the printer will make it possible to mix and use only as much cement as is needed, which makes it environmentally-friendly and less expensive than classic construction methods. The printer and unique cement will also allow them to create unusual forms that challenge conventional notions of home design. These rounded constructions will be built in Bosrijk, a new, futuristic neighborhood in development. Bosrijk is literally and figuratively green. It’s in a park and by a canal. It isn’t connected to the natural gas grid, and constructions there must be environmentally-friendly. QZ
Housing: How US Real Estate Will Be Upended The US real estate market looks set to change in a big way. Brokers and developers are sensing it, and consumers are making it happen. The change is in the geography of the market. The new SALT limits in the updated tax code mean that wealthy residents of higher tax states like New York, New Jersey, and California, now face much higher tax liabilities. As a response, many of them are seeking to buy homes and domicile themselves in tax-free states like Florida, Texas, or Nevada. One real estate developer in Nevada explains the situation, saying “If you’re a wealthy tech executive from the Bay Area who can live wherever you want and you have a $3 million income, you would have $399,000 a year in savings here. That’s a lot of money to spend on real estate”. Finsum
Industrials: House Backs $3 Billion Bill to Boost Ports, Dams, Harbors The House on Wednesday night approved a nearly $3 billion bill to improve the nation’s ports, dams and harbors, protect against floods, restore shorelines and support other water-related projects. The Water Resources Development Act would authorize a host of projects nationwide, including nearly $1 billion for a massive project to stem coastal erosion in Galveston, Texas, and restore wetlands and marshes damaged by Hurricane Harvey. The bill also would boost a project to deepen and expand the harbor in Savannah, Georgia, and direct the Army Corps of Engineers to study two dozen projects to reduce flood risks, improve navigation and protect against aquatic invasive species. Rep. Bill Shuster, R-Pa., chairman of the House Transportation and Infrastructure Committee, said the water projects bill targets important investments in the nation’s harbors, ports, locks, dams, inland waterways and other infrastructure. Water-resource projects directly affect “how efficiently the things we buy get onto store shelves and how quickly the goods we produce get to markets around the world,” Shuster said. “They grow our local, regional and national economies, and they create good-paying jobs.” MNet Labour, Education & Demographics Millennials: How millennials became the world’s most powerful consumers This is the millennial moment, long expected and feared by companies that built their brands for baby boomers. They are ageing and their offspring, once called the “echo boom”, are no longer teenagers, or even students. Pew Research Center, the US research group, defines millennials as the 73m Americans aged between 22 and 37, who will next year overtake boomers in number. “We don’t think of them as special or different any more. They are the core of our business,” says Alan Jope, president of beauty and personal care at Unilever. Millennials have reached what the bank calls “the most important age range for economic activity”, when households are formed, babies are born and money is spent not just on going out but on settling down. It is placing immense strain on institutions that once thrived on mass marketing of products through television advertising. In the US and Europe, many millennials are disenchanted with their lot as they attain maturity. A UK Resolution Foundation study found that pessimists outweighed optimists by two to one when they were asked about their chances of improving on their parents’ fortunes. This is largely an accident of history. Older millennials entered the workforce in the mid-2000s, and many lost jobs after the 2008 crisis. They were also caught by rapid inflation in house prices as interest rates fell and remained low. Meanwhile Asia’s millennials, the biggest generation of all, share many attributes with those in the west, but not their insecurity. Millennials in China, many of whom are single children, behave quite differently – optimistic about the future and willing to spend money. It is having a profound effect on global patterns of consumption, with more to come. Emerging and developing economies are home to 86 per cent of millennials, and the World Bank estimates that Chinese millennials’ income will overtake that in the US by 2035. FT Supermarkets: What’s Working and What’s Not in the Supermarket? Packaged-food companies have lost favor with investors. Their share prices have taken a beating over the last year even as the broader market has rallied. There are several reasons. The most fundamental one is a shift in consumer preferences. Put simply, customers are buying more fresh vegetables and meat, and shying away from packaged, processed foods. Supermarkets are responding to this trend in a number of ways. They are renovating stores to allocate more space to the perimeter, where fresh produce is sold. Big retailers including Kroger and Walmart are also investing more in their own private-label brands, improving their quality, promoting them, and giving them more prominent shelf space. As a result, there has been a clear acceleration in private-label sales. Analysts believe the trend toward own-brand goods has room to run, pointing to European markets like the U.K. where private-label penetration is more than twice as high. In addition, small challenger brands are proving more responsive to consumer trends. In categories like snack bars and yogurt, the shift in market share to alternatives with less sugar and more protein has been dramatic. One potential bright spot for packaged-food companies is the frozen aisle. Here sales are on the rise as customers look for a place to pick up produce and vegetables in a convenient format. In particular, health-oriented frozen goods like vegetable-based meat substitutes are taking off. WSJ
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