5 Things Investors Should Know About China this New Year

Record number of Chinese New Year travelers to take to the skies in 2018
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As the size of China’s middle class continues to surge and incomes rise, this upward trend in flight demand and overall consumer spending appears sustainable, creating some very attractive investment opportunities.

Below are five additional things I think investors should know about China and the surrounding region in the New Year.

1. China is a veritable wealth factory.

China surpasses the US as the worlds largest crude oil importer 2017

Speaking of disposable income: Last year, the China region added more new billionaires than the U.S. for the first time ever. UBS and PricewaterhouseCoopers’ (PwC)

Last Friday marked the first day of the Chinese Lunar New Year, also known as the Spring Festival, China’s most important holiday. The fire rooster struts off-stage, clearing the way for the loyal earth dog. According to CLSA’s tongue-in-cheek Feng Shui Index, health care, consumer and paper products are favored to outperform early this year, followed by internet, utilities and tech leading into the summer.

Around this time I always pay close attention to transportation and industrials. “Chunyun,” which translates to “Spring Festival Transportation,” is a 40-day travel season that’s known as the world’s largest human migration. This year, as many as 390 million Chinese travelers—more people than live in the U.S. and Canada combined—are forecast to put roads, highways, passenger trains and airlines through their paces as they visit families, go on vacation and travel abroad. Airlines alone are expected to serve 65 million passengers, a 10 percent increase from last year.

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As the size of China’s middle class continues to surge and incomes rise, this upward trend in flight demand and overall consumer spending appears sustainable, creating some very attractive investment opportunities.

Below are five additional things I think investors should know about China and the surrounding region in the New Year.

1. China is a veritable wealth factory.

Speaking of disposable income: Last year, the China region added more new billionaires than the U.S. for the first time ever. UBS and PricewaterhouseCoopers’ (PwC) annual report on billionaires found that the total number of Asian billionaires rose to 637, followed by the U.S. (563) and Europe (342). China alone minted 67 new billionaires in 2017 and is now home to nearly 320.

Combine this with a surging middle class—already the largest in the world—and the consequences on consumption could be huge.

As I’ve shared with you before, China is still in the early stages transitioning from a manufacturing to a consumption and services-based economy. According to the World Economic Forum (WEF), Chinese household income is projected to grow around 5 percent annually between now and 2027, elevating approximately 180 million people into the middle-income bracket. This will contribute to greater demand for everything from appliances to smartphones to automobiles to luxury goods.

Gold jewelry demand, for instance, grew 10.35 percent year-over-year in 2017. And it wasn’t just the super wealthy making purchases, the China Gold Association reported. Less affluent consumers also had an appetite, helping China maintain its ranking as the world’s largest buyer of gold for the fifth straight year.

Heavier spending is also showing up in Macau casinos, which saw revenues jump an incredible 36.4 percent year-over-year in January. This was the gaming territory’s 18th straight positive month and its largest such increase in nearly four years, suggesting Macau is well on its road to recovery after Chinese president …read more

Is American Energy on the Verge of a New Golden Age?

US forecast to become a net exporter of energy by 2022
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The 40-year-old ban restricting U.S. oil exports was lifted in December 2015, and between then and October 2017, exports skyrocketed nearly 300 percent.

A US oil export boom 40 years in the making
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This has galvanized shale producers into doubling their efforts to meet growing demand. Earlier in the month, I told you the U.S. produced

The U.S. has been a net importer of energy since 1953, but that’s set to change early next decade, according to the Energy Information Administration (EIA). In its highly anticipated Annual Energy Outlook 2018, the agency forecasts that the U.S. will become a net exporter of energy by as early as 2022, thanks in large part to the boom in shale oil and liquefied natural gas (LNG) production as well as the relaxation of export restrictions. A “golden age of American energy dominance,” as President Donald Trump described it back in June, could be upon us sooner than anticipated, putting the U.S. on a path to dethrone Saudi Arabia and Russia as the world’s top oil powerhouse.

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The 40-year-old ban restricting U.S. oil exports was lifted in December 2015, and between then and October 2017, exports skyrocketed nearly 300 percent.

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This has galvanized shale producers into doubling their efforts to meet growing demand. Earlier in the month, I told you the U.S. produced more than 10 million barrels of oil per day in November for the first time since 1970. And in the week ended February 9, the number of active North American oil rigs rose sharply from 765 to 791, the most in nearly three years.

North America Expected to Drive Global Growth

The EIA’s forecast is in line with those of independent analysts, who see the U.S., along with Canada, dominating global growth in well demand.

“North American shale activity is the primary mechanism driving growth globally,” writes energy consulting firm Rystad Energy in its January global well market outlook. The group adds that the number of wells “completed in North America increased 40 percent in 2017, and we expect 11 percent average annual growth toward 2020.”

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Sign of the Times: U.S. Import Terminal Preparing for First-Ever Exports

From Texas ports, the U.S. now exports crude to as many as 30 countries, seizing valuable market share from members of the Organization of Petroleum Exporting Countries (OPEC). Since November, China has become the largest consumer of U.S. crude other than Canada, according to Reuters. (Last year, in fact, China surpassed the U.S. to become the world’s largest overall importer of oil.) And in a surprising move that shows how the rise of American shale is reshaping the global market, the United Arab Emirates, a significant oil producer in its own right, purchased 700,000 barrels of oil from the U.S. in December, Bloomberg reports.

Now, for the first time ever, exports are set to be conducted from America’s only deepwater supertanker offloading terminal, the Louisiana Offshore Oil Port (LOOP). According to its website, LOOP has received more than 12 billion barrels of oil from foreign and domestic sources over the past three decades, but as an imports-only facility, it’s never been used to load an …read more

An Olympian's Guide to the Market Selloff: Seeking Rewards In High-Risk Situations

volatility returns to the markets
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As I explained last week, the selloff appears to have been triggered by a number of things, including the

Today I’d like to share a few words about the Olympics, but first, two words: Don’t panic.

The stock selloffs last Monday and Thursday were the two biggest daily point drops in the history of the Dow Jones Industrial Average, but in terms of percentage point losses, they don’t even come close to cracking the top 10 worst days in the past 10 years alone.

After a year of record closing highs and little to no volatility, it was expected that the stock market would need to blow off some steam. Last Monday, the CBOE Volatility Index, or VIX, surged nearly 116 percent, its biggest one-day increase since at least 2000.

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As I explained last week, the selloff appears to have been triggered by a number of things, including the positive wage growth report. This stoked fears of higher inflation, which in turn raised the likelihood that the Federal Reserve, now under control of newcomer Jerome Powell, will raise borrowing costs more aggressively than expected to prevent the economy from overheating.

Also contributing to the uncertainty was news from the Treasury Department that the U.S. government plans to borrow nearly $1 trillion this year, compared to almost half that last year. In the first quarter alone, the Donald Trump administration will issue $66 billion in long-term debt, the first such boost in borrowing since 2009, as the U.S. Treasury seeks to cover budget deficits brought on by higher entitlement spending, not to mention the recently passed tax overhaul.

On Friday, the S&P 500 Index briefly plunged below its 200-day moving average before rebounding in volatile trading.

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With stocks down more than 8 percent from its closing high on January 26, we’re closing to entering correction territory. Historically, it’s taken four months for stocks to recover from a correction, according to Goldman Sachs analysis. By comparison, a bear market, which is generally defined as more than a 20 percent drop, can take up to two years.

I’m not saying a bear market is imminent—only that it might be time to reevaluate your tolerance for risk and, if appropriate, act accordingly. It’s times like these that highlight how important it is to be diversified in a number of asset classes such as gold, commodities, municipal bonds and international stocks.

Diversity Is Key in Volatile Times

I remain bullish on the U.S. market, but there will always be risk—even in a booming economy. This is one of the biggest reasons why I recommend a 10 percent weighting in gold and gold stocks, with additional diversification in commodities, international stocks and other asset classes.

But to get the greatest benefits, it’s important to rebalance at least once a year, based on your risk tolerance.

Last week, gold was under pressure from surging Treasury yields. Since its 52-week low in September, the 10-year yield has increased almost 40 percent. Not …read more

Fear Creeps Back into Stocks, Shining a Light on Gold

Gold has historically outperformed during geopolitical crises and recessions
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“We expect gold will provide a good hedge against a likely equity downturn, as the bull market turns into a bear market” in the second half of 2019, BCA analysts write in their February 1 report.

The reemergence of volatility and fear raises the question of whether we could find ourselves in a bear market much sooner than that.

So how did we get here, and what can we expect in the days and weeks to come?

Gold Has Helped Preserve and Grow Capital in Times of Rising Inflation

It’s important to point out that the U.S. economy is strong right now, so the selloff likely had little to do with concerns that a recession is near or that fundamentals are breaking down. The Atlanta Federal Reserve is forecasting first-quarter GDP growth at 5.4 percent—something we haven’t seen since 2006. And FactSet reports that S&P 500 earnings per share (EPS) estimates for the first quarter

Monday’s monster stock selloff is exhibit A for why I frequently recommend a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

What began on Friday after the positive wage growth report extended into Monday, with all major averages dipping into negative territory for the year. The Dow Jones Industrial Average saw its steepest intraday point drop in history, losing nearly 1,600 points at its low, while the CBOE Volatility Index, widely known as the “fear index,” spiked almost 100 percent to hit its highest point ever recorded.

Gold bullion and a number of gold stocks, however, did precisely as expected, holding up well against the rout and helping savvy investors ward off even more catastrophic losses. Klondex Mines and Harmony Gold Mining, among our favorite small-cap names in the space, ended the day up 4.6 percent and 4.8 percent, respectively. Royalty company Sandstorm Gold added 1.4 percent.

The research backs up my 10 percent weighting recommendation. The following chart, courtesy of BCA Research, shows that gold has historically outperformed other assets in times of geopolitical crisis and recession. Granted, the selloff was not triggered specifically by geopolitics or recessionary fears, but it’s an effective reminder of the low to negative correlation between gold and other assets such as equities, cash and Treasuries.

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“We expect gold will provide a good hedge against a likely equity downturn, as the bull market turns into a bear market” in the second half of 2019, BCA analysts write in their February 1 report.

The reemergence of volatility and fear raises the question of whether we could find ourselves in a bear market much sooner than that.

So how did we get here, and what can we expect in the days and weeks to come?

Gold Has Helped Preserve and Grow Capital in Times of Rising Inflation

It’s important to point out that the U.S. economy is strong right now, so the selloff likely had little to do with concerns that a recession is near or that fundamentals are breaking down. The Atlanta Federal Reserve is forecasting first-quarter GDP growth at 5.4 percent—something we haven’t seen since 2006. And FactSet reports that S&P 500 earnings per share (EPS) estimates for the first quarter are presently at a record high. A correction after last year’s phenomenal run-up is healthy.

Several factors could have been at work, including algorithmic and high-frequency quant trading systems that appear to have made the call Monday that it was a good time to take profits. Other investors seemed to have responded to Friday’s report from the Labor Department, which showed that wages in December grew nearly 3 percent year-over-year, their fastest pace since the financial crisis. This is a clear sign that inflationary pressure is building, raising the likelihood that the Federal Reserve will hike borrowing costs more aggressively than some investors had anticipated.

A $1.5 Trillion Opportunity You Wouldn't Want to Miss!

Public Infrastructure in the U.S. Has Been Neglected
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Take a look at public spending on U.S. streets and highways as a percent of GDP. Since the financial crisis a decade ago, investment has tanked, and anyone who regularly drives can see firsthand the consequences of this negligence. Americans spend

On the campaign trail, then-presidential candidate Donald Trump pledged to invest as much as $1 trillion in U.S. infrastructure if he were elected. Last week during his first State of the Union address, now-President Trump added half a trillion dollars more to that figure.

The hefty price tag likely raised some eyebrows among Congress members, but Trump is right in aiming high to fix the country’s “crumbling infrastructure,” as he calls it. According to the American Society of Civil Engineers (ASCE), the U.S. faces an infrastructure funding gap of more than $2 trillion between now and 2025, resulting in potential losses of nearly $4 trillion in gross domestic product (GDP), or $34,000 per household.

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Take a look at public spending on U.S. streets and highways as a percent of GDP. Since the financial crisis a decade ago, investment has tanked, and anyone who regularly drives can see firsthand the consequences of this negligence. Americans spend 42 hours on average sitting in congestion every year, costing each driver roughly $1,400, and last week the American Roads & Transportation Builders Association (ARTBA) reported that more than 54,000 of the country’s 612,677 bridges are rated “structurally deficient.”

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Anticipating a shift in priority toward infrastructure, contractors and construction firms are gearing up to take on new projects, with a whopping 75 percent of them planning to expand their headcount this year. This comes after an estimated 192,000 new construction jobs opened up every month in 2017, a figure that’s significantly up from the 88,000 new positions that came online every month only five years ago.

But contractors shouldn’t be the only ones getting ready for a new American construction boom. As I shared with you last month, the recipe calls for a broad commodities rally this year, and I would hate for investors to miss out. With global synchronized growth underway and demand outstripping supply in a number of cases, not to mention the U.S. dollar in decline and inflation on the rise, commodities are poised to be among the best performing asset classes in 2018.

Commodities as Cheap as (or Cheaper Than) They’ve Ever Been

Pay close attention to where commodities are relative to equities right now. Compared to the S&P 500 Index, materials are extremely undervalued, the most since at least 1970. This makes now a very attractive entry point—or as natural resource investors Goehring & Rozencwajg Associates writes in its quarterly report, there could be “a proverbial fortune to be made” if investors take advantage of this once-in-a-generation opportunity.

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Bitcoin Is Just the Latest in the Trend Toward Decentralization (INFOGRAPHIC)

Something Interesting is Happening

It’s been called a number of things: The sharing economy, or “shareconomy.” Peer-to-peer economy. Collaborative consumption. What all of these terms have in common is the idea of decentralization—and blockchain applications, including bitcoin and other cryptocurrencies, are just the latest in a trend toward this new economic paradigm.

If it’s unclear what decentralization means, consider the following visual. You might have seen one like it before. On the left is a representation of a centralized, top-down system. Think of a traditional corporation, one that has only one CEO and one head office.

Now compare that to the next two visuals depicting decentralized and distributed systems. Instead of being top-down, their infrastructures are more collaborative, helping to prevent systemic failure, collusion and more.

This is the “sharing economy” business model that’s growing in prominence thanks to the internet and practiced by companies such as Facebook, Airbnb, Uber and more. Although these firms have one CEO and headquarters like a more traditional company, their assets are decentralized and widely distributed: Facebook’s content is collaborative among 2 billion users worldwide. Airbnb and Uber’s hotels and cabs are privately owned. Jack Ma’s Alibaba has no inventory of its own, relying instead on a decentralized network of retailers and manufacturers.

Blockchain, and bitcoin specifically, is the logical conclusion to this trend. Bitcoin is completely open-source and peer-to-peer. No one owns it. Unlike fiat currencies, it’s not controlled or regulated by a central authority. This is possible only through the power of blockchain, the decentralized, unmodifiable electronic ledger that records all activity across the entire system.

We’re in the very early stages of this new paradigm, but already much is expected. Mastercard believes the sharing economy will inevitably graduate beyond social media and accommodations, spreading “into new sectors, including insurance, utilities, health and social care.” And UBS estimates that by 2027, blockchain could add between $300 and $400 billion of annual economic value to the global economy.

Indeed, something interesting is happening!

Curious to learn more? Watch my interview with SmallCapPower, where I explain the reasons for my decision to invest in HIVE Blockchain Technologies!

WATCH THE INTERVIEW!

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

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly. This interview should not be considered a solicitation or offering of any investment product.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2017.

…read more

What Do Quincy Jones, Serena Williams and Blockchain Have in Common?

Frank Holmes Robert Friedland

Two big themes last week at Inside ETFs, the Comic-Con of exchange-traded funds attended by more than 2,300 advisors and investors, were innovation and disruption. Like all other industries, the investing world has seen its fair share of disruption in the past quarter-century—think indexing, passive investing, the rise of robo-allocation and now blockchain and cryptocurrencies. This year marks the 25th anniversary of the first ever ETF, and today total ETF assets top $3 trillion. That’s a far cry from the estimated $40 trillion sitting in mutual funds worldwide, but exchange-traded funds are rapidly catching up as investors seek cheaper, more innovative and tax-efficient instruments.

Consider robo-advisors, which emerged only 10 years ago. Who would have thought in the mid-2000s that so many investors would be comfortable enough with the idea of a machine managing their money? And yet here we are. By 2020, Citi analysts predict, assets controlled by robo-advisors could reach close to $450 billion globally.

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Disruption was definitely top of mind during many of the presentations and interviews at Inside ETFs, including that of producer and composer Quincy Jones, who was at the conference to promote a new stock index that tracks music and entertainment companies. “Q” is the very definition of a legend, having been at the center of some of the most influential musicians, actors, and artists over the course of his long career. With a record 79 Grammy Award nominations to his name, he’s made an indelible impression on the music, television, and film we all consume and enjoy, whether we’re aware of it or not.

When CNBC’s Bob Pisani asked Jones if he was ready for the day when robots write and perform music, the 84-year-old Jones said, “You can’t stop the technology,” adding that he was among the earliest experimenters of synthesizers. (Anyone remember the synthy theme song to the old 1960s-1970s detective show, Ironside? That was composed by Quincy Jones.)

“You got to always stay curious. You got to be willing to take a chance,” he said.

A similar forward-thinking attitude was expressed by Serena Williams, who was also in attendance. The tennis virtuoso and four-time Olympic gold medal winner, who bagged her 23rd Grand Slam last year while pregnant, is a savvy businesswoman in her own right, sitting on the board of online survey firm SurveyMonkey and Oath, a subsidiary of Verizon that controls a number of media outlets such as HuffPost, Yahoo and Tumblr.

When asked why she was drawn to tech firms in particular—her husband Alexis Ohanian co-founded Reddit—Williams said, “This is a new time, and I don’t want to be left behind.”

I couldn’t agree more with Jones and Williams.

Embracing Disruption with HIVE Blockchain Technologies

Curiosity and a willingness to embrace change and innovation are what led me to

Another Positive Year Ahead for Gold, Says the World Gold Council

gold outperformed major asset classes in 2017
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The World Gold Council (WGC) recently released

In a year when the S&P 500 hit all-time highs, gold also held strong, finishing 2017 up 13.5 percent, according to the World Gold Council. Gold’s annual gain was the largest since 2010, outperforming all major asset classes other than stocks. Contributing to this gain was a weaker U.S. dollar, stock indices hitting new highs and geopolitical instability, all of which fueled uncertainty. Investors continued to add gold to their portfolios to manage risk exposure, with gold-backed ETFs seeing $8.2 billion of inflows last year.

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The World Gold Council (WGC) recently released its annual outlook on the yellow metal identifying four key market trends it believes will support positive gold performance in 2018, and we agree. Below I summarize the report for you and add some of my own thoughts on gold’s trajectory.

Key Trends Influencing Gold in 2018

1. A year of synchronized global economic growth
Economies are on the rise with global growth increasing in 2017 and on track to continue the trend this year. China and India, two of the world’s largest consumers of gold, will see their economies and incomes grow due to the implementation of new economic policies. WGC research shows that as incomes rise, the demand for gold jewelry and gold-containing technology tends to rise as well. Investment and consumer demand for the yellow metal results in a lower correlation to other mainstream financial assets, such as stocks, making it an effective portfolio diversifier.

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2. Shrinking balance sheets and rising interest rates
Expectations are for the Federal Reserve to raise interest rates three times this year and shrink its balance sheet by allowing $50 billion in Treasuries and mortgage-backed securities to mature each month. Over the past decade, central banks pumped trillions into the global economy and cut interest rates, allowing asset values to break records and market volatility to reach record lows.

With these banks reining in expansionary policies in 2018 and hiking rates as global debt increases, market volatility may go up again, making gold a more attractive asset. According to WGC research, when real rates are between zero and 4 percent, gold’s returns are positive and its volatility and correlation with other mainstream financial assets are below long-run averages.

3. Frothy asset prices
As the WGC points out, not only did asset prices hit multi-year highs around the world in 2017, but the S&P is still sitting at an all-time high. This rosy environment saw investors seeking out additional risks, hoping for additional returns. A continued search for yield has “fueled rampant asset price growth elsewhere,” the report explains. This includes exposure to lower quality companies in the credit markets as well as investments in China.

Although the bull market could very well continue throughout 2018, some analysts and investors alike are understandably cautious about just how much risk exposure to continue taking on. That’s where gold comes in. As you can see in the chart below, …read more

You'll Want to Read This Living Legend's Thoughts On Copper

Open interest in copper futures off record still historically high
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Robert expressed confidence that copper—along with aluminum, cobalt, nickel, platinum and scandium—will be among the biggest beneficiaries of the global transition to EVs and clean energy.

“You’re going to need a telescope to see copper prices in 2021,” he told us theatrically.

A rally is already in the works. From its recent low two years ago this month, the Bloomberg Industrial Metals Subindex, which tracks aluminum, copper, nickel and zinc, has surged more than 65 percent. Support looks strong, and copper prices could be headed even higher on global supply disruptions, as labor negotiations continue in Chile, the world’s top producer of the red metal.

“There are between 20 and 25 collective negotiations expected. If some of them lead to significant strikes, that would have a positive impact on [copper] prices,” explained

Last week the U.S. Global Investors office was visited by a living legend in the junior mining industry, billionaire founder and executive chairman of Ivanhoe Mines, Robert Friedland. In case you don’t know, back in the mid-1970s, Robert was caretaker of an apple orchard south of Portland that one of his buddies from Reed College would often visit. That buddy’s name was Steve Jobs, who later went on to found a little company he named—what else?—Apple.

Before Robert and Steve Jobs began palling around, Jobs was known as shy and withdrawn. It was Robert who taught him his skills in what’s been described by many as “reality distortion.” Having seen numerous speeches by Robert over the years, I can attest to his masterful ability to utterly command a room of hundreds with his electric charisma. Some of that charisma must have rubbed off on Jobs, helping the future iPhone innovator evolve into the shrewd, larger-than-life business leader he’s celebrated as today.

Robert’s “reality distortion” was on full display during his visit. I was pleased and honored, as were my U.S. Global team members, to have the opportunity to hear his unique insights on a wide range of issues, from the debilitating smog in Delhi, India; to China’s efforts to become the world’s leading electric vehicle (EV) economy; to Ivanhoe’s development of the Kamoa-Kakula Copper Project in the Democratic Republic of Congo, independently ranked as the largest high-grade copper discovery in the world.

Robert made a very compelling case for Kamoa-Kakula, which he calls “the most disruptive Tier One copper project in the world today.” In its first year of production, its average copper grade is estimated to average an ultra-high 7.3 percent. Because the site is flat and uninhabited, and wages are paid in local currency, the cash cost for the life of the mine is projected to be a low, low $0.64 per pound of copper. As of my writing this, copper is priced at $3.20 a pound, so the margin is significant. After an initial $1.2 billion in capital costs to develop the project, the company expects a payback period of only 3.1 years.

It’s all a very attractive proposition.

Robert Friedland: You’re Going to Need a Telescope

I reminded Robert that we’re bullish on both copper and the industries it supports, including the imminent EV revolution and massive electricity demand in emerging markets, especially China and India. EVs, as I’ve pointed out before, require three to four times as much copper as traditional gas-powered vehicles. By 2027, as much as 1.74 million metric tons of copper will be needed to meet EV demand alone, up from only 185,000 tons today, according to the International Copper Association.

The red metal was …read more

Recipe Calls for a Broad Commodities Rally in 2018

the new periodic table of commodity returns 2017
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Gundlach has more to say on this subject. During his annual

At the beginning of every year, we update what’s typically one of our most popular pages, the Periodic Table of Commodity Returns. I encourage you to explore 10 years’ worth of data on basic materials such as aluminum, zinc and everything in between. A word of warning, though—the interactive feature makes the table highly addictive. Please feel free to share it with friends and family!

It was a photo finish for commodities in 2017. The group, as measured by the Bloomberg Commodity Index, barely eked out a win for the second straight year, edging up 0.7 percent. Spurred by a weaker U.S. dollar and strengthening materials demand from factories, the index headed higher thanks to a breathtaking rally late in the year that lasted a record 14 consecutive days.

The annual return might not look too impressive, but I believe the economic conditions are ripe for a broad commodities rally in 2018. I’m not alone in predicting they’ll be among the best performing asset classes by year end, perhaps even beating domestic equities as quantitative tightening threatens to put a damper on the nine-year bull run.

Analysts at Goldman Sachs, for instance, are overly bullish commodities, recommending an overweight position for the next 12 months. Bank of America Merrill Lynch is calling for a $7,700-a-tonne copper price target by mid-2018, up from $7,140 today. In last Friday’s technical market outlook, Bloomberg Intelligence commodity strategist Mike McGlone writes that the “technical setup for metals is similar to the early days of the 2002-08 bull market.” Hedge fund managers are currently building never-before-seen long positions in heating oil and Brent crude oil, which broke above $70 a barrel in intraday trading Thursday for the first time since December 2014. It’s now up close to 160 percent since its recent low of $27 a barrel at the beginning of 2016.

Few have taken such a bullish position, though, as billionaire founder of DoubleLine Capital Jeffrey Gundlach, whose thoughts are always worth considering.

Commodities Ready for Mean Reversion?

Last month I shared with you a chart, courtesy of DoubleLine, that makes the case we could be entering an attractive entry point for commodities, based on previous booms and busts. The S&P GSCI Total Return Index-to-S&P 500 Index ratio is now at its lowest point since the dotcom bubble, meaning commodities and mining companies are highly undervalued relative to large-cap stocks. We could see mean reversion begin to happen as soon as this year, triggering a commodities super-cycle the likes of which we haven’t seen since the 2000s.

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Gundlach has more to say on this subject. During his annual “Just Markets” webcast, he told investors that “commodities will outperform in 2018” because they “always rally sharply—much more sharply than they have so far—late in the business cycle as we head into a recession.”

Speaking to CNBC, he added that the S&P 500 “may go up 15 percent in the first part of the year, but I believe, when it falls, it will …read more

2018 Could be Another Knockout Year for Emerging Europe

Will there be a fed rally in 2018
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This was a boon for our

Domestic stocks were a great place to invest in 2017, but hopefully you didn’t overlook opportunities overseas. Emerging markets had a gangbusters year, surging more than 37.5 percent with dividends reinvested, as measured by the MSCI Emerging Markets Index. A combination of rising PMIs—or the purchasing manager’s index I talk so often about—and a steadily declining U.S. dollar helped emerging economies in Asia, Latin America, Europe and elsewhere eke out their best year since 2010.

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This was a boon for our Emerging Europe Fund (EUROX), which crushed its benchmark in 2017.

EUROX, which invests in companies domiciled in Central and Eastern Europe (CEE) economies, beat its benchmark, the MSCI EM Europe 10/40 Index, by 2.4 percent and outperformed its main competitor, the T. Rowe Price Emerging Europe Fund (TREMX), by 4.7 percent. Throughout 2017, the fund traded consistently above its 200-day moving averages and ended the year at a three-year high.

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I’m optimistic this upswing can be sustained this year, supported by low unemployment, low inflation and record manufacturing growth. The European Central Bank (ECB) has indicated that it will continue its accommodative monetary policy by keeping rates low and expanding its balance sheet some 270 billion euros ($326 billion) through the first three quarters of 2018.

EUROX Outperformed, Thanks Largely to Active Management?

I can’t stress enough the role active management played here. Using financial indicators such as cash flow return on invested capital (CFROIC) and low debt-to-equity, we managed to outperform the fund’s benchmark and its main competitor.

Two positive contributors to fund performance last year were an overweight in Turkish stocks and underweight in Russian stocks. When screening for CFROIC, our model pointed to Turkey as having the most attractive companies on a relative basis. Our allocation was well-made, as Turkey far outperformed its CEE peers. The Borsa Istanbul 100 Index ended the year up close to 48 percent in local currency, followed by Poland’s WIG20, which advanced more than 26 percent.

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Again, we underweighted Russia based on our model and after factoring in overall negative investor sentiment, which really began in earnest in 2014 after the country annexed Crimea, inviting international sanctions. The ill will only intensified during and after the 2016 U.S. presidential election, and today, we see Russian stocks, as measured by the MOEX Russia Index, decoupling from Brent crude oil prices.

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Historically, Russian stocks have closely tracked Brent prices, which accounted for nearly 50 percent of the federation’s exports in 2016. But it seems now as if a selloff is underway as new details continue to emerge from the investigation into Russia’s meddling in the U.S. election. It appears markets have mostly soured on Vladimir Putin, with the MOEC ending the year down 5.5 percent.

A good illustration of our attentive stock selection in Russian equities was our exit out of Magnit, the country’s largest retailer. We dumped the stock in April after it …read more