by Frank Holmes, CIO, CEO, U.S. Global Investors
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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.
October 16, 2017
As many of you know, copper is often seen as an indicator of economic health, historically falling when overall manufacturing and construction is in contraction mode, rising in times of expansion.
That appears to be the case today. Currently trading above $3 a pound, “Doctor Copper” is up close to 28 percent year-to-date and far outperforming its five-year average from 2012 to 2016.
Several factors are driving the price of the red metal right now. Manufacturing activity, as measured by the purchasing manager’s index (PMI), is expanding at a pace we haven’t seen in years in the U.S., eurozone and China. The U.S. expanded for the 100th straight month in September, climbing to a 13-year high of 60.8.
Speculators are also buying in response to word of copper shortages in China, despite September imports of the metal rising to its highest level since March. The world’s second-largest economy took in 1.47 million metric tons of copper ore and concentrates last month, an amount that’s 6 percent higher than the same month in 2016.
Why Copper Is the “Metal of the Future”
Why are we seeing so much copper entering China? One reason could be battery electric vehicles (BEVs), which require three to four times as much copper as traditional fossil fuel-powered vehicles.
China is already the world’s largest and most profitable market for BEVs, and Beijing is now reportedly working on plans to curb and eventually ban the sale of fossil fuel-powered vehicles, according to the Financial Times. This would place the Asian giant in league with a number of other powerful countries similarly crafting bans on internal combustion engines within the next 25 years, including Germany, France, Norway, the United Kingdom and India.
Because of the sheer size of the Chinese market, this move is sure to delight copper bulls and investors in any metal that’s set to benefit from higher BEV production. That includes cobalt, lithium and nickel.
According to Bloomberg New Energy Finance, BEVs will account for 54 percent of all new car sales by 2040. That year, China, Europe and the U.S. are expected to make up 60 percent of the global BEV fleet.
This could have a huge effect on copper prices over the next 10 years and more. With fewer and fewer large deposits being discovered, demand should accelerate from 185,000 metric tons today to an estimated 1.74 million tonnes in 2027, according to the International Copper Association.
These are among the reasons why Arnoud Balhuizen, chief commercial officer of Australian mining giant BHP Billiton, called copper “the metal of the future” in an interview with Reuters last month.
“2017 is the revolution year [for electric vehicles], and copper is the metal of the future,” Balhuizen said, adding that the market is grossly underestimating the red metal’s potential as BEV adoption surges around the world.
Cobalt Gets Its Day in the Sun
And let’s not forget cobalt. The brittle, silver-gray metal, used to extend the life expectancy of rechargeable batteries, is up more than 81 percent so far in 2017 and 109 percent for the 12-month period. Performance is being driven not only by growing BEV demand but also supply disruptions in the Republic of the Congo, where more than 60 percent of the world’s cobalt is mined.
“It’s a really bright future for cobalt,” Vivienne Lloyd, analyst at Macquarie Research, told the Financial Times. “There doesn’t seem to be enough of it.”
Before now, there was very little mainstream interest in cobalt as an investment, but that’s changing as rapidly as world governments are joining the chorus to move away from fossil fuels. One sign of that change is the London Metal Exchange’s (LME) upcoming cobalt contracts, one for the physical metal and another for the chemical compound cobalt sulphate. This will allow investors to trade the underlying metal and participate in the electric vehicle “revolution,” as Balhuizen calls it.
In the meantime, investors can participate by investing in a producer with exposure to cobalt—among our favorites are Glencore, Freeport-McMoRan and Norilsk Nickel—or a natural resources fund.
Gold Closes Above $1,300 an Ounce
Gold also looks constructive as we head into the fourth quarter and beyond, according to a number of new reports and analysis last week.
UBS strategist Joni Teves finds it “encouraging” that gold has managed to recover this year off its 2016 lows. Although a likely December rate hike could be a headwind, Teves points out that the metal performed well in the months that followed the previous three rate hikes. What’s more, gold has rallied in each January since 2014. We could see a similar bump in price this coming January.
Not only is gold trading above its 50-day moving average again, but for all of 2017, it’s been following a nice upward trend as the U.S. dollar dips further.
A weaker greenback, of course, is bullish for all commodities, including copper. According to Bloomberg strategist Mike McGlone, unless the dollar unexpectedly recovers in the near term, commodities, as measured by the Bloomberg Commodities Index, could gain as much as 20 percent between now and year’s end.
Meanwhile, BCA writes that major risks in 2018—inflationary expectations stemming from President Donald Trump’s protectionism, tensions between the U.S. and China, and continued strife in the Middle East among them—could keep the shine on gold.
The research firm reminds investors that gold has historically done well in times of economic and geopolitical crisis, outperforming the S&P 500 Index, U.S. dollar and 10-year Treasury by wide margins. Because the metal is negatively correlated to other assets, it could potentially serve as a good store of value if equities entered a bear market.
Such a bear market, triggered by tighter U.S. monetary policy, could take place as early as 2019, BCA analysts estimate. Gold would then stand out as a favorable asset to hold, especially if inflationary pressures pushed real Treasury yields into negative territory.
A Fear Trade Lesson from Germany
This is the lesson Germany has learned over the past 10 years, as I shared with you last week. Before 2008, Germans’ investment in physical gold barely registered on anyone’s radar, with average annual demand at 17 metrics tons. The country’s first gold-backed exchange-trade commodities (ETCs) didn’t even appear on the market until 2007.
But then the financial crisis struck, followed by monetary easing and low to negative interest rates. These events ultimately pushed many Germans into seeking a more reliable store of value.
Now, a new report from the World Gold Council (WGC) shows that German investors became the world’s top gold buyers in 2016, ploughing as much as $8 billion into gold coins, bars and ETCs. Amazingly, they outspent Indian, Chinese and U.S. investors.
Analysts with the WGC believe there is room for further growth, citing a recent survey that shows latent demand in Germany holding strong. Impressively, 59 percent of German investors agreed that “gold will never lose its value in the long-term.” That’s a huge number, suggesting the investment case for gold remains attractive.
Learn more about investing in gold mining by watching my interview on the floor of the New York Stock Exchange!
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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
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 U.S. Dollar Index measures the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.
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 6/30/2017: BHP Billiton Ltd., Glencore PLC, Freeport McMoRan Inc., MMC Norilsk Nickel PJSC.
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