Blockchain Will Completely Revolutionize How We Mine Gold And Precious Metals – ValueWalk Premium
Blockchain

Blockchain Will Completely Revolutionize How We Mine Gold And Precious Metals

This week I had the pleasure to attend Consensus 2018 in New York, the premiere gathering for the who’s who in blockchain, bitcoin and cryptocurrencies. Attendance doubled from last year to an estimated 8,500 people, all of them packed in a Hilton built for only 3,000. Ticket sales alone pulled in a whopping $17 million, while event booths—the largest of which belonged to Microsoft and IBM—generated untold millions more.

Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?

The entire three-day conference, hosted by crypto news outlet CoinDesk, had the energy and flair of the world’s greatest carnival. Sleek lambos sat outside the hotel, attracting all sorts of gawkers. Passersby also stopped and stared at the “bankers against bitcoin” protest, conceived and funded by Genesis Mining, one of the largest bitcoin mining companies. (You can read my interview with Genesis cofounder and CEO Marco Streng here.)

The same money went to finance bitcoin awareness billboards outside the Omaha office of Warren Buffett, who recently bashed the cryptocurrency, calling it “rat poison squared.”

“Warren,” the billboards read, “you said you were wrong about Google and Amazon. Maybe you’re wrong about Bitcoin?”

Bringing #BitcoinAwareness to the Masses

That Buffett has a negative opinion of bitcoin shouldn’t surprise anyone. The “Oracle of Omaha” has famously been averse to emerging technology and tech stocks he doesn’t fully understand, including Google, Amazon, Microsoft and others. But he’s changed his mind in the past after he’s seen the value these companies provide.

I’m old enough to remember when Buffett was vehemently against airline stocks. The industry was a “death trap” for investors, he once said. Today, his company Berkshire Hathaway is one of the top holders of stock in the big four carriers—United Continental, Delta Air Lines, Southwest Airlines and American Airlines. He even told CNBC he “wouldn’t rule out owning an entire airline.”

Obviously there’s a world of difference between airline stocks and bitcoin—although blockchain, the technology that bitcoin is built on top of, is already being used in aviation to increase transparency in aircraft manufacturing and maintenance. All I’m saying is I wouldn’t rule out bitcoin, or cryptocurrencies in general, just because Buffett isn’t a fan. He doesn’t like gold as an investment either, and that hasn’t stopped it from being one of the most liquid assets on the planet.

The Future of Gold Mining (And Investing)

But back to Consensus. It wasn’t all fun and games, and there were some serious discussions on how governments might one day use cryptocurrencies; the future of bitcoin mining; and blockchain applications in finance, health care, insurance, energy and more. As I explain in this week’s Frank Talk Live, charitable giving is down because donors are increasingly concerned about fraud. Blockchain can help validate where your money is going.

I would include the mining industry to that list. Blockchain has the potential to revolutionize how gold and precious metals are manufactured and delivered. Consider the journey a gold nugget must take along its supply chain, from mine to end consumer—it cuts through several other industries and practices, including legal, regulatory, financial, manufacturing and retail, each of which might have its own ledger system.

These ledgers are vulnerable to hacking, fraud, errors and misinterpretations. They can be forged, for example, to conceal how the metal or mineral was sourced.

With blockchain technology, there’s no hiding anything. Decentralization guarantees complete transparency, meaning anyone along the supply chain can see how, when and where the metal was produced, and who was involved every step of the way.

This will give the industry a huge shot of trust, not to mention dramatically increase efficiency.

Many producers, tech firms and entire jurisdictions have already adopted, or plan to adopt, blockchain technology for these very reasons. IAMGOLD, a Toronto-based producer, announced last month that it partnered with Tradewind Markets, a fintech firm that uses blockchain technology to facilitate digital gold trading. IBM just helped launch a diamond and jewelry blockchain consortium, TrustChain, that will track and authenticate diamonds, metals and jewelry from all over the world. And sometime this year, the Democratic Republic of Congo will begin tracking cobalt supply from mines to ensure children were not involved.

With precious metals being used more widely in industrial applications, from smartphones to electric cars to Internet of Things (IoT) appliances, tracking metals across the supply chain has become increasingly more important to businesses and consumers. According to the Semiconductor Industry Association (SIA), global sales of semiconductors—which contain various metals, including gold—crossed above $400 billion for the first time in 2017. Total sales were $412.2 billion, an increase of nearly 22 percent from the previous year.

That’s a lot of metal and other materials that blockchain tech can help authenticate.

Blockchain

Before I get off this topic, I want to mention that blockchain is also bringing change to gold investment. Consider Royal Mint Gold (RMG), which aims to provide the “performance of the London Gold Market with the transparency of an exchange-traded security.” There’s also the Perth Mint’s InfiniGold, which issues digital certificates guaranteeing ownership of gold and silver in the mint’s vault. A number of other platforms exist to help facilitate gold trading.

Should even one of these become hugely popular, it “could be as big a change to the gold markets as the development of ETFs, but with the added advantage of appealing to younger generations,” according to the World Gold Council’s (WGC) chief strategist, John Reade.

Who Says Size Matters?

The small-cap Russell 2000 Index closed at its third straight record high today after putting up bigger gains than the larger-cap S&P 500 Index and Dow Jones Industrial Average.

Blockchain

As I’ve explained before, President Donald Trump’s protectionist policies and low corporate tax and regulatory environment strongly favor small-cap stocks. Investors hate uncertainty, which is precisely what the market is feeling with regard to tariffs and global trade. Because small-cap companies don’t rely as heavily on overseas markets as huge multinationals do, it’s little wonder why we’re seeing money flow into the Angie’s Lists and Yelps of the world right now.

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.47 percent. The S&P 500 Stock Index fell 0.54 percent, while the Nasdaq Composite fell 0.66 percent. The Russell 2000 small capitalization index gained 1.23 percent this week.
  • The Hang Seng Composite gained 0.21 percent this week; while Taiwan was down 0.26 percent and the KOSPI fell 0.69 percent.
  • The 10-year Treasury bond yield rose 8.8 basis points to 3.059 percent.

Domestic Equity Market

Blockchain

Strengths

  • Materials was the best performing sector of the week, increasing by 1.60 percent versus an overall decrease of 0.54 percent for the S&P 500.
  • Macy’s was the best performing stock for the week, increasing 14.57 percent.
  • Macy’s reported stellar results for the first quarter of fiscal 2018. Revenue rose 3.6 percent year-over-year last quarter, reaching $5.54 billion – far ahead of the average analyst estimate of $5.39 billion. Comp sales surged 4.2 percent, driven in part by the timing of Macy’s annual Friends and Family promotion. Further, sales to international tourists rose by nearly 10 percent, following years of declines. This gave management the confidence to raise its full-year guidance.

Weaknesses

  • Real estate was the worst performing sector for the week, decreasing by 3.21 percent versus an overall decrease of 0.54 percent for the S&P 500.
  • Campbell Soup was the worst performing stock for the week, falling 15.51 percent.
  • Snap hit a record low of $10.51 on Tuesday as the company struggles to rebound following the disastrous Snapchat redesign.

Opportunities

  • Pluralsight saw a big surge in its trading debut. The company that teaches technical skills and markets its online, on-demand classes to enterprises popped 35 percent in its Thursday trading debut on the Nasdaq.
  • Nintendo will re-release its classic NES on June 29. The first re-release sold out immediately when it went on sale in November.
  • JPMorgan is making a big move into China. It’s setting up a new brokerage in China in which it would own a 51 percent stake — but first, it must gain regulatory approval.

Threats

  • The owner of MoviePass said it could stay afloat for 17 months without raising money. MoviePass owner Helios & Matheson Analytics CEO Ted Farnsworth told Variety that the company has a $300 million line of credit that can keep it afloat without raising additional cash.
  • Elon Musk may need to tap capital markets for more than $10 billion by 2020 to fund Tesla’s auto-making operations, new products and an expected expansion into China, according to Goldman Sachs. While Tesla has options to issue new bonds, convertible notes or equity, each choice would have downsides for investors, analyst David Tamberrino said in a research note. Additionally, Tesla’s engineering head took a leave of absence, with timing of his return unknown.
  • Nordstrom comparable sales missed estimates. The retailer beat on both the top and bottom lines, but comparable store sales increased 0.7 percent at its full-priced stores, missing the 1 percent gain that analysts were expecting.

The Economy and Bond Market

Strengths

  • Retail activity improved in April, helping to reinforce the idea of stronger consumer spending in the second quarter. The Census Bureau reported that total retail sales rose 0.3 percent in April from March’s levels, continuing to rebound from early-year struggles. This falls in line with consensus expectations and puts retail growth 4.7 percent higher than at this point last year.
  • The Conference Board reported its Leading Economic Index rose 0.4 percent to 109.4 in April. Separate measures of current and past economic performance also increased. “April’s increase and continued upward trend in the U.S. LEI suggest solid growth should continue in the second half of 2018,” said Ataman Ozyildirim, an economist with the Conference Board.
  • U.S. industrial production increased solidly in April amid acceleration in manufacturing and mining output, the latest indication that the economy was gathering momentum early in the second quarter. Industrial production expanded 0.7 percent in April, matching March’s increase and ahead of expectations of 0.6 percent, according to the Federal Reserve.

Weaknesses

  • The Commerce Department said housing starts dropped 3.7 percent to a seasonally adjusted annual rate of 1.287 million units in April. The decline reversed March’s rise, indicating that housing continues on an uneven path. Building permits fell 1.8 percent to a rate of 1.352 million units last month. Starts fell in every region except the South.
  • Mortgage applications continued last week’s decreasing trend, falling 2.7 percent from last week, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending May 11, 2018.
  • Some of the biggest U.S. insurers reduced their holdings of state and local government bonds after the corporate tax cut took effect this year. Progressive, Travelers and Chubb have collectively decreased their holdings of munis by $2.37 billion. Progressive cut its holdings by 24 percent, the steepest drop among the largest publicly-traded property and casualty insurers. Chubb cut its investments by 4.6 percent, while Travelers reduced its stake by 2.9 percent.

Opportunities

  • The jump in the May Philadelphia Fed survey gave further credence to the argument that factory confidence has returned as trade-war concerns subside, say Bloomberg Economists Niraj Shah and Carl Riccadonna. The survey comes after the Empire State release and both point to robust growth ahead. While the Trump administration’s tariffs weighed on sentiment earlier in the year, talks of a trade war looked to particularly hit factory plans. Confidence now appears to have returned. The recent rise in oil prices also does not seem to have stifled sentiment. Importantly, forward-looking components including new orders, bounced back while factories plan to continue hiring more workers.
  • Shares of municipal-bond funds are trading at the deepest discounts since 2013 as the rising cost of leverage, dividend cuts and the market’s worst first quarter since 1996 have pushed share prices down. The discount, or the difference between a closed end fund’s share price and the underlying value of its assets, is 9.1 percent, according to Ryan Paylor of Thomas J. Herzfeld Advisors. Additionally, municipal market fundamentals are the best in more than a decade, according to Rob Amodeo, head of municipals at Western Asset. “Municipal bonds have performed extremely well in a very challenging marketplace. We’ve all seen levels of rates rise as inflation sentiment has turned bearish,” he said.
  • Bank of America strategists expect a wave of corporate promotions to investment grade this year amid faster economic growth. Credit upgrades outpaced downgrades by $20 billion in the first four months of the year, and there are some $70 billion of net upgrades to high grade in the cards for 2018 as a whole, the strategists said.

Threats

  • The yield on the 30-year Treasury bond is basis points away from its high-water mark from the past few years. It touched 3.23 percent on Thursday, the same level it reached in February, which was the highest since 2015, when it peaked at 3.25 percent. The last time it was higher than that was back in 2014, a period when long bonds were recovering after the taper tantrum that helped drive the yield to almost 4 percent. Jeffrey Gundlach, chief investment officer at DoubleLine Capital, is among those watching the long bond closely. He’s singled out a 3.22 percent closing yield as a critical line in the sand for fixed-income investors.

Blockchain

  • Inflation is accelerating toward the Fed’s target, which should lead to a long-awaited pickup in wages. But if wage growth remains sluggish, even a modest overshoot of inflation could weigh on consumer spending, says Bloomberg Opinion columnist Tim Duy. The April jobs report revealed that wage growth remains tepid, rising just 2.6 percent from a year earlier. This occurred even as unemployment sunk to 3.9 percent, a level the Fed believes is consistent with an economy operating beyond full employment. Theoretically, such tight labor markets should foster higher wages as firms compete for workers. Yet, so-called real wage growth, which is what workers get after taking into account the Fed’s preferred measure of inflation, decelerated to an estimated 0.6 percent rate in April.
  • It’s getting riskier and riskier to own Connecticut debt, according to a key bond market metric. The extra yield that investors demand on 10-year Connecticut general obligations rose to 0.95 percentage points Thursday, according to data compiled by Bloomberg. That’s just shy of the all-time high of 0.96 percentage point reached last June, when state lawmakers were contending with what became a prolonged stalemate over how to close its budget deficit. That extra yield on Connecticut debt is now as much as investors demand from New Jersey, which is also struggling with an underfunded pension system. Connecticut’s net pension liability totaled $37.2 billion in fiscal 2017, up from $27.4 billion the prior year. New Jersey’s net pension liability totals about $115 billion. Only Illinois, whose credit rating has been dropped to the precipice of junk, faces a steeper penalty in the bond market.

Gold Market

This week spot gold closed at $1,292.60 down $25.70 per ounce, or 1.95 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 3.26 percent. Junior-tiered stocks outperformed seniors for the week, as the S&P/TSX Venture Index rose 0.44 percent. The U.S. Trade-Weighted Dollar continued higher this week, climbing 1.22 percent.

Date Event Survey Actual Prior
May-14 China Retail Sales YoY 10.0% 9.4% 10.1%
May-15 Germany ZEW Survey Current Situation 85.5 87.4 87.9
May-15 Germany ZEW Survey Expectations -8.2 -8.2 -8.2
May-16 Germany CPI YoY 1.6% 1.6% 1.6%
May-16 Eurozone CPI Core YoY 0.7% 0.7% 0.7%
May-16 Housing Starts 1310k 1287k 1336k
May-17 Initial Jobless Claims 215k 222k 211k
May-23 New Home Sales 678k 694k
May-24 Initial Jobless Claims 220k 222k
May-25 Durable Goods Orders -1.4% 2.6%

Strengths

  • The best performing metal this week was silver, down just 1.34 percent. Both gold and silver stabilized by Wednesday, after real yields surged about 9 basis points the first few days of the week, and then largely traded sideways the rest of the week. Despite the dollar the interest rates continued higher, but at a slower pace.
  • During the first quarter of 2018, demand for gold jewelry was up 7 percent, totaling 187.7 tons. Chinese jewelers said they are working to attract a younger, wealthier generation of customers by expanding their collections of gold jewelry. According to Seeking Alpha, Chinese investors are turning to bullion as an economic hedge against political tension, with first-quarter demand at 78 tons.
  • Bloomberg reports that the world’s biggest farm machinery maker, Deere & Co., dropped early Friday morning after reporting disappointing first-quarter earnings and saying that it will increase prices due to higher raw material and freight costs. Sam Allen, Deere & Co CEO said that the company is grappling with higher expenses. Here we find an “Easter Egg” in this press release where a company, literally at the bottom of the food chain, opining on passing its input costs and higher delivery costs on to the base of the food growing chain. Farmers will now need higher retail food prices to recover their expenses too. Sounds like the virtuous inflationary cycle is being unleashed upon us.

Weaknesses

  • The worst performing metal this week was platinum, down 3.78 percent and never closed a trading session with a positive print. Bloomberg reports that gold posted its biggest weekly drop since December due to a stronger U.S. dollar and the 10-year Treasury yield piercing 3 percent. Data shows that retail sales rose for the second straight month in April and the Empire State Manufacturing Index rose this month, both of which point to an improving economy.
  • Reuters reports that gold fell to a 2018 low as the dollar continued to rise. The dollar has climbed nearly 4 percent this quarter on the heels of expectations that the Fed will raise interest rates later this year, according to media.
  • Detour Gold announced that its CEO Paul Martin will retire on June 1 and will be replaced with Michael Kenyon. While Detour is in the penalty box, the retiring of its CEO likely does not mean it’s time to load up on the stock at current gold prices. While management set expectations too high perhaps, it is the asset that did not perform, and analysts have free cash flow going to nil for the second quarter and the third quarter of 2018.

Opportunities

  • The SPDR Gold Shares ETF saw $396 million of inflows in the first quarter this year, boosting holdings to its highest level since 2013. Bloomberg writes that top hedge-fund managers John Paulson and Ray Dalio have kept their faith in bullion after a strong first quarter. Paulson & Co. had 4.32 million shares in SPDR Gold as of March 31, and Bridgewater Associates also maintained its stake in the second largest bullion-backed ETF.

Blockchain

  • Credit Agricole strategists Valentin Marinov and Manuel Oliveri wrote in a note this week that the dollar’s recent rally has “pressured gold to levels where it is a worthwhile investment” with limited downside risk, reports Bloomberg. The gold-silver ratio shows that an ounce of gold can buy you 79 ounces of silver, compared to the average of 63 ounces since 1994, which indicates that silver is poised for a rebound. Silver could rise at a faster rate than gold due to stronger industrial demand and the Chinese middle class boosting demand for silver jewelry, writes Bloomberg Intelligence analyst Eily Ong.
  • Bloomberg reports that Zimbabwe is set to unveil a program in three weeks to boost gold production, with output forecast to rise 15 percent to 30 metric tons this year. The southern African nation is home to the second-largest deposits of platinum group metals plus substantial deposits of chrome, lithium, coal and iron ore. The plan, called Vision 2030, implemented by the government, would help miners increase production over the next 12 years in an effort to build Zimbabwe’s economy.

Threats

  •  According to ABN Amro’s Georgette Boele, a gold price below $1,250 per ounce is an “opportunity to position for higher gold prices next year.” ABN predicts that 10-year Treasury yields will rise to 3.2 percent before year-end and that the Fed will hike rates another 75 basis points this year.
  • Bloomberg reports that institutional prime money funds drew a net $8.1 billion in the week ended May 9, to the most since mid-2016, which is a signal that repatriated profits from U.S. companies are ending up in money-market funds, after last year’s tax overhaul. Much of the money held overseas is thought to be already held in dollars, but that might not be the case considering the 4 percent rise in the dollar this quarter coincides with the surge in money market flows.  Thus, the U.S. dollar could continue to surge due to investors focusing more on the short-term upside. Richard Benson, head of portfolio investments at Millennium Global, said that “the very slow and gradually widening interest-rate differentials against the euro have now reached a tipping point where that is very powerfully positive for the U.S. dollar.”
  • Glencore is being investigated by the U.K.’s Serious Fraud Office on bribery suspicion over its work with Israeli businessman Dan Gertler in the Democratic Republic of Congo, reports Bloomberg First World. Goldcorp Chairman Ian Telfer predicts that the world has reached peak gold supply and mine production will continue to fall, reports Seeking Alpha. Telfer said, “Are we not looking for it? Are we bad at finding it? Or have we found it all? My answer is we found it all. At $1,300/ounce gold, we found it all.” Shrinking gold supply could be positive for the bullion price, while it could be negative for the larger gold mining companies.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended May 18 was WeAreSatoshi, which gained 555.41 percent.
  • According to HSBC Holdings, the technology behind blockchain is “commercially viable for trade finance.” The London-based bank, together with ING Bank, handled a letter of credit for Cargill Inc. which relied on blockchain technology developed by the R3 consortium, reports Bloomberg.
  • This week Coindesk held its Consensus Conference in New York on bitcoin and the underlying blockchain technology, reports CNBC. The conference has apparently tripled in size and with tickets going for roughly $2,000 each, along with 8,500 people attending, it looks as though the conference is raking in at least $17 million in ticket sales alone this year, the article continues.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended May 18 was Hydrogen, which lost 46.41 percent.
  • Microsoft announced this week that it would ban all Bing Ads related to cryptocurrencies by July. The company stated in an official blog post that digital currencies “present a possible elevated risk to our users with the potential for bad actors to participate in predatory behaviors, or otherwise scam consumers.” Google and Facebook have already taken steps to remove such ads from their platforms.
  • In a review of documents produced for 1,450 digital coin offerings, the Wall Street Journal found that 271 of them used “deception, or even fraudulent methods to attract investors,” reports Seeking Alpha. Some of these fraudulent methods include plagiarism of investor documents, promises of guaranteed returns and fake or missing executive teams.

Opportunities

  • On Monday, Sharps Pixley announced that it is now officially allowing customers to convert their gold directly into bitcoin via the leading payment processor BitPay. In September 2017, Sharps Pixley and BitPay announced that they had teamed up on trades converting bitcoin into gold, but this new arrangement permits trades the other way, from gold to bitcoin. “Sharps Pixley is one of the largest and most reputable gold dealers in the world and we are excited for them to be the first merchant to offer payouts in bitcoin for gold, CCO of BitPay Sonny Singh said. In addition, the long-awaited Nasdaq-powered cryptocurrency exchange is set to launch next month, according to Finance Magnates. DX.Exchange promises a “transparent and ethical exchange between interested parties” and will not charge fees for trading operations, though there will be a monthly fee of around 10 euros, or $11.80.
  • The world’s second-biggest maker of bitcoin mining hardware, Canaan Creative, submitted an application for a Hong Kong initial public offering (IPO), reports Bloomberg, which could raise around $1 billion. Someone with knowledge of the matter says the Chinese company aims to start trading as soon as July.
  • Although blockchain might be one of the hottest catchphrases among global companies right now, writes Bloomberg, the technology behind it is actually being taken seriously. According to a survey from Deloitte LLP, some 43 percent of respondents said blockchain is one of their top-five strategic priorities. In addition, “almost 30 percent of respondents said they have already joined a blockchain-focused consortium, while 45 percent said they are likely to join one within a year,” the story continues.

Blockchain

Threats

  • Rather than pushing the U.S. into the future, St. Louis Fed President James Bullard told Consensus Conference attendees on Monday that cryptocurrencies are taking the country back to the 1830s, reports MarketWatch. In the pre-Civil War era, 90 percent of U.S. money supply was privately issued banknotes, the article explains. “At present, there are lots of privately issued cryptocurrencies, trading at various rates minute by minute, Bullard said. The currency arrangement pre-Civil War wasn’t popular and there was a call for uniform currency. “The only reason this is not a bigger issue today is that the total volume of cryptocurrency trade is not that large in relation to the entire economy,” he continued.
  • Central banks could conceivably use cryptocurrencies to drive interest rates deep into negative territory, according to a report from Morgan Stanley. The team, led by strategist Sheena Shah, writes that in the event of another financial crisis, monetary stimulus in the form of negative rates could be applied more easily than ever before. “Freely circulating paper notes and coins (cash) limits the ability of the central banks to force negative deposit rates,” Shah says. “A digital version of cash could theoretically allow negative deposit rates to be charged on all money in circulation with any economy.”
  • In a study published this week, a blockchain specialist with PwC makes the case that the electricity needed to mine bitcoin is already at epic proportions and expected to climb higher. Alex de Vries estimates that the global bitcoin network currently consumes at least 2.55 gigawatts of energy, or nearly as much as Ireland does. In the future, that figure could reach at least 7.67 gigawatts, putting it on par with the entire country of Austria. The study, appearing in the journal Joule, could attract additional negative attention to the cryptocurrency space.

Energy and Natural Resources Market

Strengths

  • Nickel was the best performing major commodity this week rising 4.84 percent. The commodity rallied after trend-following funds chased prices higher and Goldman Sachs Group Inc. delivered a ringing endorsement of electric vehicles at a time when inventories in exchange warehouses from London to Shanghai slid to the lowest levels in several years.
  • The best performing sector this week was the S&P 1500 Oil & Gas Equipment and Services Index. The index rose 4.55 percent, with each of its 27-constituents advancing, after Brent crude prices hit a fresh three-year high. Traditionally, oil services provide the highest beta exposure to crude oil price changes.
  • The best performing stock for the week was DaQo New Energy Corp. The Chinese producer of photovoltaic cells for the solar power industry rose 18.02 percent after Chinese investors reacted positively toward renewable energy peers as a result of Tianqi Lithium Corp striking a deal to take a $4.1 billion stake in Chilean rival SQM.

Weaknesses

  • Gold was the worst performing commodity this week. The yellow metal dropped 1.99 percent after the U.S. dollar and Treasury yields rallied.
  • The worst performing sector this week was the NSYE ARCA Gold Miners Index. The index dropped 3.20 percent after gold prices posted their worst weekly decline so far in 2018.
  • The worst performing stock for the week was Golden Agri-Resources Ltd. The Singapore-based producer of palm oil dropped to a 52-week low after reporting weaker-than-expected profits.

Opportunities

  • Crude oil is set for the longest run of weekly gains in seven years as concern over supply disruptions from the Middle East to Venezuela grows and a global glut dissipates. Renewed U.S. sanctions on Iran and shrinking supplies from Venezuela have buoyed crude’s recent rally. The International Energy Agency said OPEC and its allies have finally eliminated a global surplus, adding to the bullish signs.

Blockchain

  • China said on Monday it is willing to work with the United States for a positive outcome in trade negotiations this week.  Foreign Ministry spokesman Lu Kang made the comment at a regular briefing.
  • China tightened its grip on the global supply chain for battery raw materials as Tianqi Lithium Corp struck a deal to take a $4.1 billion stake in Chilean rival SQM, the world’s second-largest lithium producer.

Threats

  • Surging oil prices have led Goldman Sachs Group Inc. to say the market could be heading for a shortfall. Investors are watching for clues on whether the Organization of Petroleum Exporting Countries and Russia will ease their supply-curb agreement and instead raise output to fill any deficit. Still, crude at more than three-year highs could end up slowing demand growth, according to the IEA and Total SA.
  • In what has proven to be a sign of an oversupplied market in the past, the front-month Brent crude futures curve has flipped into contango suggesting notable physical supply is available.  In addition, physical trades have commented that oil refiners have plenty of crude at hand right now, with unsold cargoes in north-west Europe, the Mediterranean, China and West Africa, thus creating a prompt overhand on further price increases.
  • Japan’s economy contracted in the first three months of 2018 due to weak private consumption and business investment, putting the brakes on the nation’s longest growth streak in 28 years, government data shows.

China Region

Strengths

  • The Shanghai Composite Index rose 97 basis points this week, and Hong Kong’s HSCI climbed 21 basis points. Malaysia’s FTSE Bursa Malaysia Kuala Lumpur Composite also gained, rising some 47 basis points since trading last Tuesday before elections.
  • Chinese tech juggernaut Tencent Holdings Ltd. (700 HK) reported record quarterly earnings this week and the company announced that its WeChat platform now has more than 1 billion users.
  • Hong Kong’s unemployment rate dropped to 2.8 percent, a level unseen since 1998. Analysts were looking for a 2.9 percent showing.

Weaknesses

  • Indonesia’s Jakarta Composite Index declined by 2.86 percent this week amid central banking concerns and as the rupiah weakened in the face of continued strength in the U.S. dollar.
  • The conglomerates sector performed poorest amongst Hang Seng Composite Index sectors, declining by 1.99 percent over the past week.
  • Indonesia’s rupiah declined most among regional currencies, falling to new 52-week lows against the U.S. dollar.

Opportunities

Blockchain

  • 92 year-old Mahathir Mohamad has closed out his first week (back) in power and the de facto opposition leader and former Deputy Prime Minister Anwar Ibrahim is now out of jail after receiving a royal pardon in Malaysia. Indeed, a lot can happen in a week and a half. The recently-unseated ex-PM Najib Razak is said to be facing possible investigation for abuse of power and in relation to the IMDB scandal. (Malaysian authorities claim in press reports to have raided multiple Kuala Lumpur condominium units of Mr. Najib, in the process discovering some 350 boxes and bags containing cash, jewelry and designer handbags.) The new government will have its hands full, and faces questions regarding the fiscal sustainability of some of its campaign promises, but there may nonetheless be opportunity amid the political shift (despite some familiar faces) and higher energy prices. Mr. Mohamad has already suggested he will step aside in due time in favor of Mr. Ibrahim, whose pardon now enables him to seek elected office once again.
  • Weakening in the U.S. dollar or positive signs of developments in U.S. talks with either North Korea or China may prove supportive for regional markets.
  • The previously-discussed extension of the deadline for asset managers in China to comply with the new guidelines (now set for the end of 2020) may help to maintain market stability even as the authorities continue to focus on deleveraging and diminishing shadow-financing. Banks’ wealth management products provide the biggest source of shadow financing.

Threats

  • Ongoing trade talks with China remain front and center.
  • Indonesia suffered multiple terror attacks this week ranging from child suicide bombers on motorcycles attacking churches, to men armed with swords attacking police stations. The U.S. Embassy in Indonesia issued a nationwide security alert.
  • North Korea remains something of a wildcard, as the regime canceled a recently-scheduled meeting with South Korea and talked tough about the upcoming meeting with the United States. This may well all be “part of the game,” so to speak. The North Korean situation remains a definite opportunity of sorts, to be sure, but as U.S. President Donald Trump has said, “We’ll see what happens.”

Emerging Europe

Strengths

  • The Czech Republic was the best performing country this week, gaining 1.2 percent. Cez AS, a utility company, was the best performing equity trading on the Prague stock exchange, closing up 2 percent. A decision on a new nuclear plant has been delayed until year-end, while the previous target for a decision was by the end of June.
  • The Russian ruble was the best relative performing currency this week, losing 60 basis points against the dollar. Emerging market currencies declined as the dollar continued its uptrend. The ruble was the least affected by the dollar’s strength and supported by the upward price action of oil. Crude oil gained 1.8 percent, closing at $78.61 per barrel.
  • The health care sector was the best performing sector among eastern European markets this week.

Weaknesses

  • Greece was the worst performing country this week, losing 4.8 percent. Banks were the biggest losers trading on the Athens stock exchange. The banking index lost 11 percent, reversing the strong rebound as markets are awaiting ongoing negotiations to conclude on the fourth review of the Greek bailout program.
  • The Turkish lira was the worst performing currency this week, losing 4 percent against the dollar. Domestic political noise ahead of next month’s snap election weighed heavily on the currency with the lira reaching new multi-year low. The next central bank meeting is scheduled for the beginning of June.
  • The information technology sector was the worst performing sector among eastern European markets this week.

Opportunities

  • Russia could record a budget surplus this year for the first time since 2011. When budget was set at the beginning of the year, it was estimated that Russia would run a deficit of 1.3 percent of GDP, based on the oil price at $40 per barrel. However, crude oil is now trading above $70 per barrel. Thanks to higher oil prices, Russia may record a budget surplus of 0.45 percent of GDP this year, according to the finance ministry’s draft.
  • Italy, Europe’s third largest economy, may have a new government next week. After 10 weeks of political stalemate, two Eurosceptic populist parties, Five Star Movement and the far-right League, sealed a coalition deal to govern together. Both parties must agree on a choice of prime minister to present to President Sergio Mattarella by Monday.
  • According article published this week on Bloomberg by Anna Andrianova and Constantie Courcoulas, the ruble is once again an attractive carry trade in times of a weak Turkish lira. Russia competes with Turkey, and South Africa, for investments because they are grouped together as three high yielding currencies in the European time zone. The ruble was plagued last month by sanctions risk, but has strong fundamentals due to a conservative central bank, high interest rates and a budget surplus. Money managers at Goldman Sachs Asset Management and Aberdeen Standard Investments said in recent interview that they are buying the ruble because it has underperformed this year’s 16 percent surge in crude oil.

Blockchain

Threats

  • First quarter gross domestic product (GDP) data slowed down in Central and Eastern Europe (CEE). Poland was the only major CEE economy to report faster growth. Romania recorded the sharpest decline in economic activities. The pace of expansion slowed marginally in Hungary and the Czech Republic. The Capital Economics research team expects the gradual slowdown in CEE growth to continue over the course of 2018 and into 2019, as rising inflation and interest rates will weigh on domestic demand.

Blockchain

  • The Turkish lira has fallen further in recent days after President Erdogan said that he would lower rates after he wins the snap election next month. A weak currency will keep inflation high, which stood at 10.8 percent at the end of April, well above the central bank’s target of 5 percent. High inflation will lead to a faster wage growth and higher prices.
  • Next week preliminary May PMI data is set for release for the European region. The region has recorded weaker PMI data each month this year and Bloomberg’s survey estimates that Manufacturing PMI will decline further to 56 in May from 56.2 in April and the Service PMI to remain unchanged, at 54.7. Although the PMI data has been weakening, they still stay well above the 50 level that separates growth form contraction.

Leaders and Laggards

Weekly Performance
Index Close Weekly
Change($)
Weekly
Change(%)
Russell 2000 1,626.63 +19.84 +1.23%
S&P Basic Materials 374.52 +5.91 +1.60%
Nasdaq 7,354.34 -48.54 -0.66%
Hang Seng Composite Index 4,293.87 +9.15 +0.21%
S&P 500 2,712.97 -14.75 -0.54%
Gold Futures 1,291.80 -28.90 -2.19%
Korean KOSPI Index 2,460.65 -17.06 -0.69%
DJIA 24,715.09 -116.08 -0.47%
S&P/TSX Global Gold Index 187.00 -4.34 -2.27%
SS&P/TSX Venture Index 786.39 +3.48 +0.44%
XAU 82.06 -1.80 -2.15%
S&P Energy 573.85 +8.57 +1.52%
Oil Futures 71.38 +0.68 +0.96%
10-Yr Treasury Bond 3.06 +0.09 +2.96%
Natural Gas Futures 2.84 +0.03 +1.07%
Monthly Performance
Index Close Monthly
Change($)
Monthly
Change(%)
Korean KOSPI Index 2,460.65 -19.33 -0.78%
Hang Seng Composite Index 4,293.87 +131.75 +3.17%
Nasdaq 7,354.34 +59.10 +0.81%
XAU 82.06 -3.15 -3.70%
S&P/TSX Global Gold Index 187.00 -4.32 -2.26%
Gold Futures 1,291.80 -61.70 -4.56%
S&P 500 2,712.97 +4.33 +0.16%
S&P Basic Materials 374.52 -1.02 -0.27%
DJIA 24,715.09 -32.98 -0.13%
Russell 2000 1,626.63 +43.07 +2.72%
SS&P/TSX Venture Index 786.39 -16.21 -2.02%
Oil Futures 71.38 +2.91 +4.25%
S&P Energy 573.85 +30.35 +5.58%
Natural Gas Futures 2.84 +0.10 +3.54%
10-Yr Treasury Bond 3.06 +0.19 +6.44%
Quarterly Performance
Index Close Quarterly
Change($)
Quarterly
Change(%)
Korean KOSPI Index 2,460.65 +38.82 +1.60%
Hang Seng Composite Index 4,293.87 -1.07 -0.02%
Nasdaq 7,354.34 +114.87 +1.59%
Natural Gas Futures 2.84 +0.28 +10.87%
Gold Futures 1,291.80 -69.80 -5.13%
S&P 500 2,712.97 -19.25 -0.70%
S&P Basic Materials 374.52 -4.33 -1.14%
S&P/TSX Global Gold Index 187.00 -0.41 -0.22%
XAU 82.06 -1.17 -1.41%
DJIA 24,715.09 -504.29 -2.00%
Russell 2000 1,626.63 +83.08 +5.38%
SS&P/TSX Venture Index 786.39 -43.78 -5.27%
S&P Energy 573.85 +73.33 +14.65%
Oil Futures 71.38 +9.70 +15.73%
10-Yr Treasury Bond 3.06 +0.18 +6.36%

Article by Frank Holmes

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