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Frank Talk: US Global Investors on Commodity Market Drivers

Frank Talk: US Global Investors on Commodity Market Drivers

Frank Holmes, CEO of US Global Investors, and one of the most experienced and successful capital managers in the mining sector, in a series of exclusive market snapshots for Miners & Investors talks about broad trends in the commodities markets, the long-term prospects of palladium and outlook for infrastructure-driven global copper rally.

On USGI’s key focus areas in commodities: Currently iron ore prices are up 300%, which has to do with supply side issues in Brazil and also Australia; but is that indicative of a strong and robust global economy? Not necessarily, because the zinc prices really haven’t responded as you would expect – not all metals are in unison at the moment. So that’s why one has to be very selective when investing into this market.

On palladium: Palladium is a good example: we are long on Palladium ETFs. Who benefits from this rally? Norilsk Nickel, for one; Ivanhoe Mines are also on a speculative binge, with a project in South Africa, which is therefore a great opportunity to invest in. We got into Norilsk too – part of their success this year is also down to the rising rouble. Oil is not up by very much, natural gas is down in the US, while most of the gas coming out of Russia is contracted on higher prices to Europe and is therefore supportive of the rouble, which in turn is pushing their metal and steel stocks. As investors, we have to align all of these drivers: the underlying price of commodities, the FX and the real interest rates. From that perspective, 2 year government bonds give you a good perspective on relative currency movements in these countries, and key exports tend to have a big impact on the performance of the respective currencies.

On copper: Beyond that, we are looking at the likes of Sibanye Steelwater, North American Palladium. Meanwhile, in terms of disappointments, copper has been one of them – we are very bullish on copper long term, buying into the big infrastructure and rewiring plans around the globe, which ought to provide a demand-side boost; and supply is not there, grades have dropped dramatically, and while longer term we remain very bullish on the metal, it is seeing some short term volatility due to the trade war with China.

Copper is generally seen as a bellwether for commodities, and with supply having a stronger impact on its pricing than, for example, in 2002, 2007-08, which had periods of synchronized global growth. Since 2009, the world has seen a growing influence of central bankers, more than respective political leaders, and so we went from synchronized global trade to aligned tax and regulations. There is no abatement yet in these regulations, so that has essentially created a different form of capital.

With new restrictions it is harder to make private placements in new mining companies for example, with the bulk of liquidity going to the large-cap corporates. That is impacting the speculative capital going into the metals industry, or even beyond that into more exotic speculative assets like crypto currencies, instead of the small and mid-tier corporates. This creates a distortion in flows of capital going into the mining space, and you are seeing a lot of cash-starved miners at the moment; but longer term, we are still very bullish on the sector.


Frank Holmes will be delivering a keynote presentation at the Mining & Investment Latin America on the 6th November at the Westin Lima. Visit www.mininglatam.com for more information or download the brochure here.  

 

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 Frank Holmes, CEO, US Global Investors

 

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