Jaime Carrasco, portfolio manager at Canaccord Genuity
Focus: Precious metals, REITS, utilities and energy

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MARKET OUTLOOK

THE PETRO-YUAN AND TARIFFS

Did anybody notice that President Trump’s tariffs started on March 23, just ahead of the launch of China’s new “petro-yuan” gold convertible oil contract?

While the western media’s focus will be on the tariffs, the petro-yuan is the real story, since it’s positioned to become the next reserve currency. By giving the petro-yuan gold convertibility, China is in effect reinstituting real money back into the global trade system and taking on the petrodollar, the very foundation of the monetary system since Nixon took the U.S. off the gold standard in 1971.

This is an important distinction because both the tariffs and the petro-yuan may well destabilize the global economy and the credit cycle that supports it. But if one only focuses on the disruptions being created by Trump’s tariffs, one will fail to see that the petro-yuan is making possible a paradigm shift that will completely transform the global monetary system forever. By reintroducing gold into the equation, China is doing to the U.S. dollar what Roosevelt did to the British pound in 1933 when he introduced the new dollar, using that historical adage that “he who controls the gold makes the rules.”

Why? During its first week of trading, over US$14.5 billion in nominal contracts were traded. US$14.5 billion divided by US$1,300 (around the current price of gold) is equal to 11,153,846 ounces, or 348.56 tons of gold that might have to be delivered fairly soon for all those that convert — and I suspect that they will convert. No wonder they started the petro-yuan on the last week of March because, at this rate, April deliveries could amount to 1,394 tons. This matters because we just don’t control that kind of money, but China does.

China controls roughly 20,000 tons of the 37,000 tons circulating between all central banks. Russia and India control another 6,800 tons, leaving only 10,200 tons (or 28 per cent) for the rest of us. Furthermore, the world produces only 2,700 tons of gold annually, with Russia and China controlling 30 per cent of the production, leaving only 1,890 tons to share between all western nations. That’s only five weeks’ worth of energy if measured by global production, and 29 weeks if measured by remaining reserves. History is repeating, and gold will once again rise to find its true purchasing power — for the benefit of those that have it.

China is holding all the chips and they’re cashing them in by remonetizing the “pet rock.” From this point on, the monetary currents will begin to shift never to return, making the transition inevitable and exactly as it has always happened throughout history. The only way to stop this is to go to war over it, and I don’t think we are stupid enough to take on a nuclear power. The petro-yuan guarantees that the purchasing power of the U.S. dollar will gradually, and then suddenly transfer to China. As this occurs some very important imbalances will matter:

• Asia controls well over 26,800 tons of the 37,000 tons of gold held by central banks.
• We only have access to 1,890 tons of global gold production.
• The price has been suppressed by the futures market.
• Most western investors have zero participation in the sector.
• Most western pension funds have zero allocation in the sector.
• Western central banks have, by and large, “leased out” the gold.
• We have allowed ourselves to forget the value of money.

I continue to urge investors to consider at least a 10 per cent allocation in the precious metals sector, and point out that, in preparation for this transition, my clients are now sitting on a minimum allocation of 20 per cent.

I manage three segregated portfolios designed to help our clients with their cash management needs, capital growth, and dividend income generation. The portfolios are tailored to meet each client’s risk-return profile based on their individual investment needs and are not suitable for everyone. The Special Opportunities Portfolio is designed as a stand-alone solution for those looking to get participation in the precious metals market, a sector long forgotten by most investment advisors. The Equity Income Portfolio is designed for growth and income through a “top-down” industry-specific approach. The Cash Management Portfolio is designed for short-term money management needs. All portfolios require a minimum investment account size of $300,000.

TOP PICKS

FRANCO-NEVADA (FNV.TO)

Franco-Nevada continues to be one of my top picks and primary consideration for anybody looking to enter this much unloved sector because of the quality of their assets, the diversified exposure to precious and primary metals, and due to being one of the few precious metal plays with a solid dividend. Canaccord has recently upgraded our target to $126.00 to reflect the value accretion of their projects and strong fundamentals.

FIRST MAJESTIC SILVER (FR.TO)

First Majestic continues to be one of the favorite silver picks because it is one of the few pure silver plays and meets all the criteria I like:  great management, great leverage to the price of silver, low cost of production with high reserves on the ground and it’s in Mexico (low geopolitical risk). I like silver because it’s rare, scares, and with the current gold/silver ratio, it’s as attractive as it’s ever been. The company recently bought Primero, announced that they will be buying back 4 per cent of their shares, and continues to increase reserves on the ground.

 HIVE BLOCKCHAIN (HIVE.V)

HIVE is the worlds' first public Ethereum miner and should benefit greatly through 2018 from the recent decline in the price of all crypto coins. HIVE is mining the cryptocurrency at a price of US$300, Fidelity Investments has been adding it to their portfolios, and they’re about to double their capacity again. In my opinion, the decentralized ledger abilities of blockchain will bring many cost savings for consumers. Keep in mind that HIVE is a highly volatile and aggressive consideration that might not be suitable for everybody.

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