Supercharge Your Gold Position With Precious MetalRoyalty Companies

December 6, 2019by Frank Holmes

of U.S. Global Investors

Gold closed down as much as 1.26 percent today on a blowout jobs report that seemed to alleviate investor fears of animpending economic slowdown. The U.S. added as many as 266,000 jobs in November, beating expectations of 180,000,while the unemployment rate ticked down to a 50-year low of 3.5 percent.

The yellow metal remains on sound footing, though, and over the next 12 to 24 months, I see its price advancing further onstrong fundamentals. Mean reversion, in particular, is the theme I believe investors should be focused on in 2020 andbeyond.

This was the message shared by Bloomberg Intelligence commodity strategist Mike McGlone in a note to investors thisweek.

The chart below illustrates the 10-year rate of change for gold, the S&P 500 and U.S. trade-weighted dollar. In other words,it shows you how much each asset class has changed from a decade earlier.

As McGlone points out, both the stock market and U.S. dollar have recently increased at their fastest pace since thebeginning of the millennium, whereas gold’s rate of change has slumped after hitting its all-time high of $1,900 an ounce in2011. The law of mean reversion suggests a rerating could occur in the early 2020s.

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“The unsustainability of these trends in the third decade is a primary support factor for the dollar price of gold,” McGlonewrites.

“Unless the greenback and U.S. stocks are embarking on a new higher plateau,” he adds, “dollar-denominated gold ispoised to take the all-time new highs baton.”

Here’s another way to look at it. The left chart below shows the stock market priced in ounces of gold, while the right chartshows the market priced in gold miners, as measured by the NYSE Arca Gold Miners Index. Both bullion and miners arecurrently below their mean, indicating they’re undervalued relative to the market. For mean reversion to take place, eithergold will need to soar to new all-time highs or beyond, or stocks must tumble. In both cases, holding gold, I believe, isrational and prudent.

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Royalty of the Precious Metal Industry

There are other ways to get exposure to gold than coins and bars, of course. One of the best ways to “supercharge” yourgold position, I believe, is with precious metal royalty and streaming companies. Think Franco-Nevada, Wheaton PreciousMetals, Royal Gold and others.

Loyal readers should know that I’ve discussed royalty companies a number of times before. Even so, I still come acrossnew research and data that demonstrates their superiority in the metals and mining industry.

Take a look below. The world’s largest royalty and streaming company with a market cap of $25 billion, Franco-Nevada hasoutperformed gold bullion and gold equities in both bull markets and bear markets. Investors who like gold do so becausethey understand that the yellow metal can limit losses in their equity position and reduce volatility. Adding a royaltycompany such as Franco-Nevada to the mix can be like injecting nitro into your souped-up sports car.

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This is because while they enjoy a lot of the upside potential when gold prices are rising, royalty companies share very littleof the downside potential with producers and explorers when the metal is in decline. Royalty companies are betterinsulated from bear markets because they have a diversity of high-quality active mines in their portfolio.

What’s more, they’re not the ones spending money to develop a project. They simply put up the capital, and in exchangethey enjoy either a royalty on whatever the miner produces or rights to a stream of metal supply at a fixed, lower-than-average cost.

It’s a win-win for the miner and royalty company, a win-win-win if you also include the investor.

To give you an idea of just how profitable royalty companies can be, look at the chart below, courtesy of Katusa Research.What you see is each company’s net income, or profit, per employee. Some of the world’s most recognizable names arehighly profitable, generating around half a million dollars or more per employee after expenses. And then there’s Franco-Nevada, which makes approximately $3.5 million per employee, or seven times Facebook’s net income. It’s in a league allits own.

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And it’s not alone. If Royal Gold were in the S&P 500, it would rank second in revenue per employee at $18.4 million,following only Host Hotels & Resorts, which generated an incredible $30.2 million per employee in fiscal year 2018.

It doesn’t hurt that, as of August 2019, Royal Gold had only 23 employees. Compare that to the workforce of major metalproducers such as Barrick (18,400 employees), Newmont-Goldcorp (39,600) and BHP Billiton (62,500).

I often recommend the 10 Percent Golden Rule, with 5 percent in physical gold and the other 5 percent in gold equities. Butto supercharge your portfolio, I would strongly consider royalty and streaming companies.

Click here to see the estimated year-end distributions for our equity funds.

Gold MarketThis week spot gold closed at $1,460.16, down $3.78 per ounce, or 0.26 percent. Gold stocks, as measured by the NYSEArca Gold Miners Index, ended the week lower by 0.23 percent. The S&P/TSX Venture Index came finished up 1.13percent. The U.S. Trade-Weighted Dollar fell 0.61 percent.

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Date Event SurveyActualPriorDec-1 China Caxin PMI Mfg 51.5 51.8 51.7Dec-2 ISM Manufacturing 49.2 48.1 48.3Dec-4 ADP Employement Change 135k 67k 121kDec-5 Initial Jobless Claims 215k 203k 213kDec-5 Durable Goods Orders 0.6% 0.5% 0.6%Dec-6 Change in Nonfarm Payrolls 180k 266k 156kDec-10Germany ZEW Survey Current Situation-22.1 -- -24.7Dec-10Germany ZEW Survey Expectations 0.0 -- -2.1Dec-11CPI YoY 2.0% -- 1.8%Dec-11FOMC Rate Decision (Upper Bound) 1.75% -- 1.75%Dec-12Germany CPI YoY 1.1% -- 1.1%Dec-12ECB Main Refinancing Rate 0.00% -- 0.00%Dec-12PPI Final Demand YoY 1.2% -- 1.1%Dec-12Initial Jobless Claims 215k -- 203k

Strengths

The best performing metal this week was palladium, up 2.04 percent as hedge funds increased their net-long positionin the futures market to a five-week high. Gold traders and analysts are mostly bullish going into next week in theBloomberg survey amid mixed signals over progress in the U.S.-China trade war. The yellow metal climbed sharplyearly in the week after President Trump said that he would be willing to wait another year before striking a deal withChina.The ISM non-manufacturing PMI fell to 53.9 in November, missing the median estimate of 54.5. Bloomberg reportsthe decrease was driven by the weakest reading of business activity since 2010. Gold rebounded slightly onWednesday after ADP data showed fewer-than-expected jobs were added to the economy.Australia’s Perth Mint reported a 67 percent increase of sales of coins and minted bars in November from October of54,261 ounces. This buying is largely driven by purchases by Britons amid uncertainty surrounding Brexit. TheAustralian Bureau of Statistics shows that Britons bought $5.3 billion of Australian gold in the third quarter of thisyear, which is the most ever in a single quarter and a 1,400 percent increase over the prior quarter.

Weaknesses

The worst performing metal this week was silver, down 2.67 percent on little news. According to a government reporton Friday morning, the economy added 266,000 jobs in November, the most since January. Gold fell sharply on thenews. Gold imports by India fell for a fifth straight month in November amid the slowest economic growth in six yearsthat has curbed demand during peak wedding season, reports Bloomberg. Turkey’s gold reserves continue to fall.The central bank’s holdings fell $102 million from the previous week to now total $26.5 billion. Russia’s goldproduction from January to September rose 11 percent year-over-year to 268.6 tons.

Bank of America downgraded Fresnillo to neutral from buy following “fairly disappointing longer-term productionguidance”, reports Bloomberg. Centerra Gold says that two employees are missing at its Kumtor Mine in the KyrgyzRepublic after a big rock movement, according to a company statement. Newmont Goldcorp lowered its productionforecast and raised its cost outlook. Bloomberg reports that the world’s largest gold miner says output will be 6.7million ounces in 2020 and all-in sustaining costs will be $975 an ounce. On a positive note, Newmont said it willrepurchase as much as $1 billion of its own shares over the next year.Burkina Faso has become increasingly dangerous for miners as a wave of militants from neighboring Mali movedeastward. Last month 39 people were killed on a bus convoy that was heading for a Semafo operation. The country isresponding by increasing spending on defense and security to 13 percent of its 2020 budget. Bloomberg reports thatgold mining and cotton are expected to help push economic growth in the West African nation to around 6 percentnext year.

Opportunities

2019 is on track to be a 50-year high in central banks’ net gold purchases. Bloomberg Intelligence reports that centralbanks have been absorbing about 20 percent of global gold mine supply. Based on the gold-to-silver ratio, it looks likesilver might have more upside if demand for safe haven assets rises. Bloomberg’s Eddie van der Walt writes that thegold-silver ratio has dropped to 86 from 93 in July and that means silver has outperformed on the back of gold’sgains. UBS analyst Giovanni Staunovo is bullish on palladium and platinum. Staunovo wrote in a December 5 reportthat palladium will likely enter its ninth straight year of market deficit in 2020 and could climb above $2,000 an ounce.Even as platinum is set to enter a surplus, its price could be driven by gold. “As platinum is highly correlated to gold,our bullish view for gold should mean higher platinum prices, which we expect to trade at around $1,000 an ouncenext year.”

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Zijin Mining Group Co. has agreed to buy Continental Gold in a rare all-cash deal worth C$1.37 billion – the secondbig takeover in a few weeks of a junior Canadian gold miner. Bloomberg reports the offer reflects a 29 percentpremium to the Continental Gold share price from the past 20 days and that major shareholder Newmont Goldcorpwas supportive of the deal. In hostile M&A news, Centamin Plc rejected Endeavour Mining Corp.’s $1.9 billiontakeover offer saying that it undervalues its assets, reports Bloomberg News. Centamin has been a takeovercandidate since the size of its Egyptian mine was discovered at the start of the decade, though the company hasfaced many operational setbacks.Kinross Gold has been busy raising cash. Kinross announced this week that it has agreed to sell its remaining sharesof Lundin Gold for C$150 million to Newcrest Mining and the Lundin Family Trust. Kinross earlier announced that ithas sold its royalty portfolio to Maverix Metals for $74 million.

Threats

ABN Amro strategist Georgette Boele says they see gold weakening in the coming weeks and months with a priceaverage of $1,400 an ounce. However, they do expect prices to increase to $1,600 by December of 2020. Before thishappens, extreme net-long positioning would clear up because “these positions currently hang over the market andprevent prices from moving substantially higher.”Another sign of a weakening economy was released last week. The ISM manufacturing PMI unexpectedly declined to48.1 in November, below the median forecast of 49.2. The reading remains below the 50 level that indicates activity isshrinking.Bloomberg’s Enda Curran writes that cheap borrowing costs have sent global debt to another record - $250 trillion ofgovernment, corporate and household debt. This level is almost three times global economic output and policymakersare now grappling with how to keep economies afloat – with more debt? According to Cornerstone Macro’s head oftechnical analysis Carter Worth, his S&P 500 chart signals a 5 to 8 percent decline in the coming months. Bloombergreports that the S&P 500 fell 1.4 percent on Tuesday, pushing it below an upward trend line established in October.

Index SummaryThe major market indices finished mix this week. The Dow Jones Industrial Average lost 0.13 percent. The S&P 500Stock Index rose 0.22 percent, while the Nasdaq Composite fell 0.10 percent. The Russell 2000 small capitalizationindex gained 0.69 percent this week.The Hang Seng Composite gained 0.84 percent this week; while Taiwan was gained 1.05 percent and the KOSPI fell0.29 percent.The 10-year Treasury bond yield rose 6 basis points to 1.84 percent.

Domestic Equity Market

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Strengths

Energy was the best performing sector of the week, increasing by 1.52 percent versus an overall increase of 0.12percent for the S&P 500.Ulta Beauty was the best performing S&P 500 stock for the week, increasing 12.12 percent.Ulta Beauty stock rallied after it issued positive financial results for its third quarter of fiscal 2019, reports Yahoo!Finance. The operator of beauty stores posted adjusted earnings per share of $2.23, a 3.2 percent increase from theprior quarter, on net sales of $1.68 billion.

Weaknesses

Industrials was the worst performing sector for the week, decreasing by 1.09 percent versus an overall increase of0.12 percent for the S&P 500.Apache was the worst performing S&P 500 stock for the week, falling 10.28 percent.Apache’s stock plunged to an 18-year low on Monday, writes MarketWatch, after the oil and natural gas producerprovided a disappointing update of its first exploratory well in Block 58 offshore Suriname.

Opportunities

It looks like Diamondback Energy is starting a new chapter, reports Nasdaq. The energy company spent the past fiveyears building out a large-scale drilling operation in the oil-rich Permian Basin. As a result, the company has rapidlygrown its oil production in recent years through a combination of acquisitions and organic drilling, the article explains.However, it plans to slow its investment pace in the new year. That will enable it to turn its focus toward generatingfree cash flow, which was one of the key themes on its third-quarter conference call. That could make it a big winnernext year.Expedia’s CEO and CFO are leaving and the stock market seems to like the move, reports Barron’s. Shares rose onWednesday morning after the travel-booking company announced that its chief executive and chief financial officerare leaving, after poor financial results led to disagreements with the board on strategy.UBS analysts placed a buy rating on Jacobs Engineering saying: “We expect the next leg up in the stock to be drivenby cleaner earnings reports with fewer adjustments, improved cash flow, and results approaching JEC's identifiedearnings potential. We think earnings will be driven by steady core growth, margin initiatives, some M&A, andbuybacks. JEC is in the middle of shifting its business mix to higher-margin opportunities.”

Threats

Oil and gas stocks have never fallen for three straight years in the S&P 500 Energy Index’s three-decade history. Thisyear, however, that streak is at risk of ending. The industry gauge was up only 1.2 percent for the year, as ofThursday, after dropping as much as 19 percent from a peak in April. Energy had the worst year-to-date performanceamong the S&P 500’s 11 main industry groups through Thursday, when it lagged behind the broader index by 23percentage points.Although Zoom Video Communications raised its full-year revenue outlook, RBC Capital warns that the narrowingupside surprise on revenue compared to last quarter, and the divergence of billings and RPO growth rates may serveto pressure the share price in the near-term. Analyst Alex Zukin cut his price target by $20 to $75 per share.Yext, a New York City technology company, plunged as much as 23 percent on Friday after disappointing third-quarter results and a forecast cut, its biggest drop since going public in 2017. Yext said the launch of its new searchproduct disrupted its sales execution and prolonged purchasing cycles.

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The Economy and Bond MarketStrengths

Hiring roared back in a big way in November. U.S. employers added 266,000 jobs last month, topping all estimates ina Bloomberg survey, according to Labor Department report Friday. The surge was boosted by General Motors Co.workers returning to work after a 40-day strike.

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American consumer attitudes improved markedly in December, the University of Michigan said Friday in a preliminaryestimate. The University of Michigan’s gauge of consumer sentiment rose to a preliminary December reading of 99.2from a final November reading of 96.8. Economists polled by MarketWatch expected a December reading of 96.9.The jobless rate dipped to 3.5 percent and average hourly earnings climbed 3.1 percent from a year earlier, beatingforecasts.

Weaknesses

Manufacturing activity continued to lag in November amid a decline in inventories and new orders, according to thelatest ISM Manufacturing reading released Monday. The reading came in at 48.1 versus an expectation of 49.4 andthe previous month’s reading of 48.3. Though the level is usually reported as a simple number, it actually denotes thepercentage of manufacturers planning to expand operations. A reading below 50.0 represents contraction; Novemberwas the fourth straight month below the expansion level.U.S. services sector activity slowed more than expected in November amid lingering concerns about trade tensionsand worker shortages, which could revive fears about the economy’s health. The Institute for Supply Management(ISM) said on Wednesday its non-manufacturing activity index fell to a reading of 53.9 in last month from 54.7 inOctober. Economists polled by Reuters had forecast the index dipping to a reading of 54.5 in November.Spending on U.S. construction projects fell 0.8 percent in October, dragged down by declines in apartment and multi-family homebuilding. Private construction spending declined 1 percent in October, the Commerce Department saidMonday. That follows another significant 1.1 percent decline in September. Overall private residential constructiondipped 0.9 percent, with multifamily projects declining 1.6 percent in October after a 2.1 percent decline inSeptember.

Opportunities

The spotlight next week will fall on the Federal Reserve meeting on Wednesday. Markets are confident rates will bekept unchanged, pricing in no chance of a rate cut, as policymakers have been clear that they will stay on hold forsome time.Retail sales numbers for November will come out on Friday. They are expected to move up marginally to 0.4 percentfrom last month’s 0.3 percent.Consumer price index (CPI) inflation figures for November will come out on Wednesday before the Fed decision. Theforecast is for inflation to ramp up to 2 percent on a year-over-year measure, up from the previous 1.8 percentreading.

Threats

In China, the world’s second-largest economy, trade data for November will be released over the weekend, and

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inflation figures for that month will follow on Tuesday. Markets typically pay most attention to exports and producerprices – the former seen as a gauge of global demand and the latter of factory activity in China. While these could beimportant for global risk appetite, the main factor will be what happens in the trade saga. The coming week is crucialbecause unless a “phase one” deal is reached – or at least appears imminent – then the Trump administration hasstated it will slap tariffs on almost all remaining imports from China on December 15.On the data front out of the Eurozone, Germany’s ZEW survey for December is due on Tuesday. Given the country’srecent economic weakness, a disappointing survey would further unsettle investors.State and local governments’ frenzy to seize on lower interest rates could leave them issuing new bonds next year ata faster pace than they’re paying them off, causing an increase in the net supply of outstanding securities. Usually,that’s viewed as a negative in the $3.8 trillion municipal market, given that the increase in supply can exert a drag onprices.

Energy and Natural Resources MarketStrengths

The best performing major commodity for the week was crude oil, which gained 7.05 percent with Saudi Arabiapledging additional oil production cuts post this week’s OPCE+ meeting. Cleveland-Cliffs Inc., the largest U.S. minerof iron ore, is set to buy AK Steel Holding Corp. for $1.1 billion. Bloomberg reports that this is the biggest takeover ofa U.S. steelmaker since President Donald Trump imposed tariffs to protect the domestic steel industry. Cliffs CEOLourenco Goncalves says the takeover is “creating a premier North American company, self-sufficient in iron orepellets and geared toward high value-added steel products.”American uranium miners rose on Thursday after a White House task force recommended that President Trumpdirect the government to buy more uranium from domestic producers, reports Bloomberg News. Energy Fuels Inc.rose 18 percent and Ur-Energy Inc. rose 16 percent on the positive news.Blackrock, the world’s largest money manager, just raised $1 billion from over 35 institutional investors for its thirdglobal renewables fund focusing on wind, solar and battery-storage projects, reports Bloomberg. Blackrock’s globalhead of renewable power David Giordano says renewables are becoming one of the most active sectors ininfrastructure. This is a strong sign of investor demand for cleaner energy projects.

Weaknesses

The worst performing major commodity for the week was wheat, which fell 3.18 percent, giving back much of the priorweek’s gain. Oil and gas stocks that make up the S&P 500 Energy Index might be on trend to fall in price for a thirdstraight year, something that has never happen in their 30-year history. The benchmark is down 19 percent from itspeak, set earlier in the year but is now only up 1.2 percent. There is a 23 percent gap between the energy stocks andthe S&P 500 so far this year. If that persists, it would be the fourth time in six years that the energy index has laggedthe market by more than 20 percent. OPEC reached a new deal that adjusts official production targets, but removesonly a few barrels from the market that is forecast to return to a surplus in early 2020. On Friday morning, SaudiArabia surprised the markets by announcing even deeper production cuts, hoping that Saudi Aramco will surge to a$2 trillion valuation.A researcher at China’s economic planning department said at the BloombergNEF summit in Shanghai this week thatLNG consumption in 2021-2025 will grow at a slower pace than it has in the current five-year period. China is thedriver of global LNG use and has expanded its use 9.5 percent so far in 2019, which is down from 18 percent in 2018,reports Bloomberg News. The nation’s slowing economy has prompted the government to focus less on pollutioncontrol, which was previously one of the big demand drivers for gas.Glencore Plc, the world’s biggest commodities trader, is being investigated by U.K. authorities for bribery. Shares fell8.6 percent in London on the news, reports Bloomberg. Glencore is already facing corruption probes in the U.S. andBrazil. Hunter Hillcoat, an analyst at Investec Securities Ltd., says, “Glencore was already trading at a discountbecause of the Department of Justice, but when this news comes out it gets whacked again.”

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Opportunities

Trina Solar Ltd. Chairman Gao Jifan said in an interview this week that annual solar capacity additions in China areforecast at 50 gigawatts in 2021 and then increasing 10 percent every year through 2025, reports Bloomberg. This isa positive turnaround for the solar industry in China after installations fell in 2018 and 2019 due to the removal ofgovernment subsidies. The country is also working to boost demand for electric cars. China raised its 2025 salestarget for electrified cars, saying it wants 25 percent of all new cars sold to be electric.Orsted A/S inked a deal with Covestro AG to sell 100 megawatts of power from a German wind farm in the North Sea,reports Bloomberg. The companies said that this is the largest corporate purchase agreement ever for offshore wind.Orsted says that this is an example of how massive renewable power projects can secure cash flow withoutgovernment subsidies.Apple is making big steps to achieving its greenhouse gas reduction goal. The tech giant is taking delivery this monthof the first batch of carbon-free aluminum produced by a venture between Rio Tinto Group and Aloca Corp., reportsBloomberg. The new technology emits pure oxygen when producing the metal rather than carbon.

Threats

President Trump re-imposed steel and aluminum tariffs on Argentina and Brazil, saying that the nations areweakening their currencies to the detriment of American farmers, reports Bloomberg. Argentina and Brazil hadbecome alternative suppliers of soybeans to China, which has taken away market share from American farmers.The World Meteorologic Organization (WMO) says that the world’s average temperature is moving toward a gain of 3to 5 degrees Celsius by the end of the century – far from targets to contain global warning to 1.5 degrees. WMOSecretary General Petteri Taalas said “if we wanted to reach a 1.5 degree increase we would need to bend emissionsand at the moment countries haven’t been following on their Paris pledges.”Carmakers globally are cutting more than 80,000 jobs in the coming years, according to data compiled by BloombergNews. Daimler AG and Audi both announced around 20,000 job eliminations in the past week. Researcher IHS Markitsays the global auto industry will make 88.8 million cars and light trucks in 2019, a 6 percent drop from a year ago.Auto companies are working to cut costs due to lower demand and a shift toward greener car technology.

Emerging EuropeStrengths

Turkey was the best performing country this week, gaining 1.84 percent. The country’s banking regulator easedmeasures on how banks classify credit to once-troubled companies, helping lenders to potentially avoid adding morenon-performing loans to their books.The Hungarian forint was the best performing currency this week, gaining 1.49 percent.Health care was the best performing sector among eastern European markets this week.

Weaknesses

Poland was the worst performing country this week, losing 2.62 percent. The country’s central bank maintained itslongest interest rate pause on Wednesday, playing down concerns over a slowing economy and signaling no changein monetary policy until the end of its term.The Turkish lira was the worst performing currency in the region this week, losing 65 basis points. Turkey’s decisionto test the S-400 anti-aircraft missile system purchased from Russia sparked fresh talks in the U.S. Senate toimposed sanctions on the NATO ally mandated by the current law.Consumer staples was the worst performing sector among eastern European markets this week.

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Opportunities

The world’s biggest natural gas exporter and one of the globe’s top consumers of the fuel cemented their energycooperation on Monday with the launch of Russia’s giant Power of Siberia pipeline to northern China, writesBloomberg. The 3,000-kilometer link, which has become a symbol of President Vladimir Putin’s pivot to the fast-growing economies of Asia as relations deteriorate with the West, begins shipping gas from Russia’s enormousreserves in its eastern regions to the border.Eurozone factory activity rose to a three-month high last month. The Purchasing Managers’ Index for the 19-nationeuro region rose slightly to 46.9 in November as confidence improved and a drop in new orders slowed. CompositePMI stabilized at 50.6 in November, above initial 50.3 reading. France remained the region’s top performer posting“solid” growth, with Ireland and Spain also expanding.In Turkish stocks this year, small is beautiful, thanks to local investors, writes BN's Tugce Ozsoy. Even asinternational fund managers have walked away from the market in recent months, domestic buyers poured in, leadingto a homegrown rally that has sent shares of smaller companies soaring.

Threats

The U.S.-France trade tiff has deepened. France says the European Union will retaliate if the U.S. slaps tariffs on$2.4 billion of its products, including sparkling wine, cheeses, handbags and makeup. The U.S. threat is payback for aFrench tax on online revenue that hits Google, Apple, Facebook and Amazon.Turkey has just tested radar systems for the Russian S-400 missile-defense technology, writes Bloomberg, providingfurther ammunition for U.S. lawmakers who favor punishing their NATO ally for the purchase. Such measures, ifimposed, could limit any gains in Istanbul stocks, leaving investors facing geopolitical risks disproportionate to theirpotential returns.

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German factory orders unexpectedly fell, suggesting Europe’s largest economy is still struggling to overcome amanufacturing slump and fend off recession. Demand dropped 0.4 percent in October, defying estimates for a 0.4percent gain. It was driven by weak demand for investment goods within Germany and outside the euro area. Orderswere down 5.5 percent from a year earlier in October, highlighting the damage global trade conflicts have inflicted onGerman industry.

China RegionStrengths

The best performing index in the region was Indonesia’s Jakarta Composite, which jumped 3.02 percent on the week,handily outpacing its regional peer indices.Industrials and information technology were the top performers in the Hang Seng Composite on the week, climbing3.83 and 1.48 percent, respectively.China’s official manufacturing PMI rose to 50.2 last month, marking the first reading above the 50 level since April.The Caixin factory gauge also beat estimates, clocking in at 51.8. Official non-manufacturing PMI came in at 54.4,ahead of estimates for a 53.1 reading, and the Caixin services PMI also beat handily, with a 53.5 reading versusexpectations for only a 51.2 print.

Weaknesses

The worst performing index in the region was Thailand’s SET Index, which fell by 1.97 percent amid weaker data.Energy was the worst performing sector in the HSCI on the week, falling 76 basis points.Following Thailand’s recent GDP disappointment, the Markit Thailand Manufacturing PMI dipped into contractionary

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territory at a 49.3 reading, down from 50.0 in October.

Opportunities

A Phase One U.S.-China trade deal remains an opportunity, and while President Trump said recently that he has nodeadline of any sort, reports nonetheless swirl that the two sides are “close”—read as positive by markets—and latethis week China waived retaliatory tariffs on imports of U.S. pork and soy, which is certainly not a negative.Bloomberg News reported that National Security Advisor Robert O’Brien told Fox News that the two sides are nearinga deal.One upside to the issues of Hong Kong, perhaps, might be discernable in tourist arrivals to Singapore, which leapedto a record 5 million in the third quarter.Hong Kong remains troubled by ongoing protests, to be sure, and there’s no doubt that changes in visitor patterns andtraffic have cut deeply into numbers like HK’s Retail Sales and Visitor Arrivals, etc. But note well: life goes on in themeantime, and according to a Bloomberg Spotlight chart this week that featured data from Euromonitor International,“Hong Kong is likely to hold on to its status as the world’s most popular city with international visitors in 2019, despitemonths of political unrest that led to a sharp drop in tourist numbers.” The other cities in the top five? Here they are inorder, starting with a close second: Bangkok, then Macau, followed by Singapore, and finally, London. There’s somefood for thought.

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Threats

In keeping with this section’s views, we again reiterate that trade war escalation must remain a threat until it isn’t.While progress of late appears more positive than otherwise, as mentioned above—especially given the agriculturalwaivers and comments from O’Brien—there remains a significant risk that sentiment and prices could deterioratequickly if there is no deal of any sort between the United States and China.The situation in Hong Kong continues to remain problematic, with weekend protests lined up and some talk of apossible strike next week. Time will tell, but the tension continues and thorny issues remain resolved. Following lastweek’s signing of the new HK bill into law and a HK protester march to the U.S. embassy over last weekend as ameasure of thanks to the United States, China vowed to sanction some U.S. rights organizations and suspend furtherHong Kong port visits by U.S. Navy ships. This week the House of Representatives passed the Uighur Act, banningexports to China of items that can be used for surveillance of individuals, including facial and voice-recognitiontechnology, which may exacerbate things further, although it can hardly come as a surprise at this point. The Act—which yet requires Senate passage and a presidential signature before it could become U.S. law—also calls, for thefirst time, for sanctioning a member of the powerful Chinese politburo.Related to the political issues in Hong Kong are, of course, the economic ones, some of which have already beenhinted at above. Retail sales in the SAR suffered a record contraction in October, by value contracting some 24percent year over year and marking a fourth month of double-digit declines. By volume, sales fell 26 percent percent,also a record. Financial Secretary Paul Chan said Hong Kong will probably have its first budget deficit since 2004,according to a Bloomberg News report earlier this week, which noted that the economy has sustained damageequivalent to 2 percentage points of output growth and that the HK economy is currently forecasted to contract 1.3percent in 2019 from a year earlier.

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Blockchain and Digital CurrenciesStrengths

Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended December 6 wasBlockium, up 423.62 percent.Mike McGlone, Bloomberg Intelligence commodity strategist, wrote this week that increasing adoption of bitcoin hastitled his team’s price outlook on the coin favorably for 2020 and the next decade. “This year was part of its transitiontoward the crypto-market version of gold. The maturation process should continue, notably as volatility declines.”McGlone adds that bitcoin sustaining below $6,500 is unlikely and $10,000 is the initial resistance for 2020.

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Cryptographic research hub Matter Labs has unveiled Layer 2 scaling solutions for Ethereum payments, reportsCoinDesk. On Thursday, the testnet of ZK-Sync was released, in which the firm claims is a step toward makingblockchains compete with centralized systems for handling millions of transactions a day.

Weaknesses

Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended December 6 wasFirmaChain, down 99.92 percent.Nearly 70 cryptocurrency-focused hedge funds are closing this year, according to San Francisco-based Crypto FundResearch. As Bloomberg reports, that means the number of new funds launched is less than half the amount startedin 2018. One reason for the retrenchment is the volatile year that digital currencies have had. Despite the swings,advocates like Fidelity Investments continue to move forward with initiatives making it easier to own cryptocurrencies.According to filings, Great North Data (a firm that runs bitcoin mining and A.I. processing data centers in Canada) hasfiled for bankruptcy. While the firm has 4.6 million Canadian dollars in assets, it owes creditors CA$13.2 million. Asreported by CoinDesk, the data processor also owes CA$313,718 to the Business Investment Corporation of theprovincial Newfoundland and Labrador government.

Opportunities

Gemini, a top global cryptocurrency exchange, has hired Julian Saqyer, a former CEO and co-founder at UnitedKingdom-based Starling Bank, to lead Gemini Europe, reports CoinTelegraph. An announcement by Gemini presidentCameron Winklevoss explains that Sawyer is joining the exchange with a total of 20 years’ experience at growingfinancial service organizations. For example, prior to Starling, he founded Bluerock Consulting, a financialmanagement consultancy, which he sold in 2012.BlockFi, the cryptocurrency lending service, is expanding into trading with an unusual, zero-fee model, writesCoinDesk. The service will have a different profit model, the article explains: the money will be coming from sellingdata on the users’ trades to big institutional crypto firms that, in turn, will act as market makers at BlockFi, providingliquidity.KT Corporation, South Korea’s largest telecoms provider, is boosting a partnership with Cina Mobile targetingblockchain technology and 5G roaming, writes CoinTelegraph. The two companies are working on a blockchainsystem which will allow them to save time and costs when computing roaming charges for mobile users, the articleexplains.

Threats

State Street bank has cut hundreds of developer jobs as it rethinks its blockchain strategy, reports CoinDesk. Peoplefamiliar with the matter explain that the focus is now more on digital assets such as tokenized stocks and bondsthrough to cryptos, rather than the distributed ledger technology (DLT).

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On December 4, the Financial Stability Oversight Council (FSOC) highlighted in a report the potential problemsresulting from stablecoins gaining wider recognition. In the report, as shared by CoinTelegraph, the regulators stated“If a stablecoin became widely adopted as a means of payment or store of value, disruptions to the stablecoin systemcould affect the wider economy. Financial regulators should review existing and planned digital asset arrangementsand their risks, as appropriate.”One of the original co-founders of payments company Circle has quit, reports CoinTelegraph. Co-CEO and co-founder Sean Neville launched Circle with Jeremy Allaire in 2013 and “has presided over its metamorphosis in theensuing years, including a pivot away from bitcoin and the acquisition of crypto exchange Poloniex last year,” thearticle explains. Circle, however, is now selling Poloniex and Neville described the current event as forming anappropriate time to switch roles. He will now transition to a post on the company’s board of directors in January.

Airline SectorStrengths

In the quarter ended September 30, Singapore Airlines Ltd. saw a 68 percent rise in profit year-over-year. The carrierreported that net income was around $70 million and that sales climbed 3.9 percent. Singapore Air has added morefuel-efficient A350s and 787-10s to its fleet to help mitigate uncertainty related to fuel costs.IAG SA, parent company to British Airways, is set to buy Spanish carrier Air Europa for $1.1 billion in a push tostrengthen Madrid as a rival to European hubs. Daniel Roeska, analyst at Berstein, wrote in a note to clients that thedeal is “strategically sensible” and will give IAG 26 percent market share of the Europe-Latin America routes, up from19 percent.Air Arabia ordered a whopping 120 single-aisle A320 aircraft worth approximately $14 billion at the Dubai Air Show,reports Bloomberg News. Air Arabia says the deal is a “game-changer for Air Arabia’s business” as the new planeswill allow the discount carrier to expand into Southeast Asia and Africa. This is a big victory for Airbus as rival Boeingcontinues to see orders cancelled due to its two high profile crashes in the last 18 months.

Weaknesses

Although Airbus scored big deals, the biennial Dubai Air Show, known as one of the largest air shows in the world,had a lackluster year overall. The three-day show in mid-November said on site orders totaled $54.5 billion this year,down significantly from $113.8 billion in 2017. Airbus landed orders and non-firm commitments for 232 commercialplanes versus Boeing’s 95. Although Boeing saw a big drop in sales due to its ongoing issues with the737 MAX jets,the fact that it secured orders for more of the jet is a positive sign.

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The Boeing 737 MAX 8 jet that was involved in two deadly crashes remains grounded with an unknown return toservice date. Many expect the jet to be in the air again in 2020, but airlines that fly the plane have it removed fromflight schedules until at least March. On November 25, Boeing quietly unveiled a new version of the jet, the Max 10,which can hold 30 more passengers than the Max 8. The Max 10 is Boeing’s competition to the Airbus A321 XLR,which was a star of the Dubai Air Show.One of the world’s fastest growing carriers, IndiGo, has been forced to ground some of its Airbus SE A320neo planesfor engine upgrades, which could impede its expansion, reports Bloomberg News. India’s Directorate General of CivilAviation said that a series of problems involving the carrier’s jets, including in-flight shutdowns, must be addressed byupgrading engines. For every jet that IndiGo adds to its fleet, it must ground another jet, essentially preventing it fromadding new routes or increasing frequencies until all engine problems are resolved.

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Opportunities

According to Boeing, the Latin America aviation market will more than double in 20 years and drive a need for 2,960new planes due to Brazil’s recovering economy and discount carriers boosting demand. Brazil makes up 40 percentof the region’s market and will grow 4 percent to 5 percent in the next year as economic growth slowly resumes andcapacity returns, reports Bloomberg News. International Air Transport Association (IATA) data shows that the numberof passengers carried by Latin America airlines have more than doubled in the last decade.The first blockchain-based airline tickets were issued this week. German airline Hahn Air flew passengers withblockchain-powered tickets on a routine flight between Dusseldorf and Luxemburg, reports Reuters. The airlinepartnered with Winding Tree, an open-source travel distribution platform, to issue the tickets. Hahn Air head ofcorporate strategy and government and industry affairs Jorg Troester said “it is important to look into the future tounderstand how can we make distribution faster.”As airlines are under growing pressure to reduce carbon emissions, especially in Europe, some carriers are takinginitial steps. EasyJet announced that it will spend 25 million pounds ($32.3 million) on planting trees and protectingdeforestation with the objective of removing as much carbon dioxide from the atmosphere as its fleet emits, reportsBloomberg News. EasyJet CEO Johan Lundgren said “it’s not to say that this is the perfect solution, we know it’s aninterim step before new technologies come into play.” Aircraft are becoming increasingly fuel efficient, but hybrid andfully electric jetliners are not expected until the 2030s.

Threats

The U.S. Federal Aviation Administration (FAA) downgraded Malaysia to a category 2 nation, banning the nation’scarriers from setting up new flights to America. The FAA said that Malaysia does not currently meet International CivilAviation Organization safety standards. It was awarded a category 1 status in 2003. Bloomberg reports that the onlyother category 2 countries are Bangladesh, Thailand, Costa Rica, Curacao and Ghana.The airline operating the first Boeing MAX 737 crash has largely escaped criticism over its role in causing thedisaster. Lion Air, a low-cost Indonesian carrier, has a long track record of overworking pilots, faking trainingcertifications and forcing pilots to fly planes they worried were unsafe, according to an investigation by the New YorkTimes. Lion Air Flight 610 crashed shortly after takeoff in part due to a flawed anti-stall system, but new details aboutthe crash show that other factors contributed including improper maintenance, overworked pilots and improperrecordkeeping of the planes issues. The airline, which is the world’s fastest growing and benefits from strong politicalconnections, has not fully acknowledged the concerns regarding its safety practices.Allen Onyema, a Nigerian businessman who is owner and CEO of Air Peace, was indicted by U.S. authorities oncharges of fraud and money laundering, reports Bloomberg News. A statement by the U.S. Department of Justicesays that Onyema moved more than $20 million from Nigeria to the U.S. involving fake documents based on thepurchase of airlines.

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