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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Brexit One Year Later, in Five Charts
June 26, 2017

now the hard work begins

One year ago, British voters cast their ballots in favor of leaving the 28-member European Union, defying multiple opinion polls leading up to the Brexit referendum that said the “remain” camp would notch a narrow victory.

In a pre-Brexit Frank Talk last year, I wrote that Brexit would be regarded as the most consequential political event of 2016. President Donald Trump’s surprise election notwithstanding, I stand by my earlier comment.

Brexit, in fact, laid the groundwork for Trump. Both movements, described by many observers as populist and nationalistic, exposed an impatience and frustration with rampant bureaucracy, strangulating regulations, lax border security, political correctness and a sense of a loss of autonomy. “Take our country back!” and “We want our country back!” were the battle cries of supporters of Trump and Nigel Farage, then-leader of the UK Independence Party (UKIP).

EU membership has been nothing if not costly. As I shared with you last year, the U.K. is the third-largest net contributor to the Brussels-based bloc after Germany and France, paying the equivalent of between $11 billion and $14 billion every year. On top of that, the 100 most expensive EU regulations, passed down by unelected officials, are estimated to cost somewhere in the vicinity of 33.3 billion pounds, or $49 billion.

Although the British economy is showing signs of slowing down, the country has not contracted or imploded as many Brexit opponents had predicted. In fact, certain British sectors such as exports and manufacturing continue to expand.

Where the Rubber Meets the Road

Now that the “leave” camp has its country back, the hard work of negotiating a satisfactory departure from the EU, of which it has been a member for four decades, has begun. Talks are expected to last at least two years. In a closely-watched speech before the House of Lords last week, Queen Elizabeth II, attired in what many saw as a not-so-subtle EU flag-inspired gown and hat, said that her government’s priority “is to secure the best possible deal as the country leaves the European Union.”

Uk primminister theresa mays failure to secure a majority government could sour her efforts to negotiate a satisfactory exit from the EU

That task, however, has recently been complicated by Prime Minister Theresa May’s humiliating loss of her government majority in the June 8 snap election. The disappointing outcome possibly signals waning public support for Brexit, which Brussels officials could very likely capitalize on and see as giving them increased leverage over making demands. A 100 billion pound exit fee, which has been hinted at, would be a decisive negotiation defeat.

What’s unclear at this point is what kind of Brexit the U.K. and the EU will pursue: a “hard” or “soft” exit. The former, favored by British nationalists, would strip the U.K. of all access to the single market and customs union. The country would effectively have full control of its borders and would also be required to assemble new trade deals from scratch.

A “soft” arrangement, on the other hand, would keep in place the country’s role in the European single market, meaning goods and services could still be traded tariff-free. As such, the U.K. would need to adhere to some basic rules involving the movement of goods, capital and people. Other European countries with similar arrangements include Iceland, Norway and Liechtenstein.

A piece in the Financial Times makes it clear that it’s this latter arrangement, the “soft” exit, that’s highly favored by British businesses of all sizes and from every sector. To be able to trade freely across borders without tariffs or other barriers, and to be able to hire skilled workers from the continent, would ensure that U.K. companies could remain competitive.

At this point, it’s really too early to tell which direction the two parties might take, but May’s crippling setback earlier this month will undoubtedly have a significant impact.

Below are five charts that illustrate where the U.K. has been in the 12 months following Brexit, both the good and bad—and where it could be headed next.  

1. Stocks Head Higher

The benchmark British index, the FTSE 100 Index, has performed relatively well since last year’s referendum, despite skeptics’ pessimistic attitudes. Stocks have risen about 18 percent, even though they’ve trailed the Euro Stoxx 50, which has likely benefited from the euro’s rally since the start of the year.

eurozone stocks have outperformed british stocks following brexit
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Working in the FTSE 100’s favor is the weaker British pound, which has contracted 13.5 percent against the U.S. dollar as of today. A weaker national currency gives exporters a more competitive advantage and helps boost corporate earnings.

2. Gold Profits from Volatile Government Bonds

Also as a consequence of a weaker currency, gold priced in pounds is up close to 14 percent over the same period, from 861.2 pounds to 980.6 pounds. Supporting the yellow metal is low government bond yields, with nominal yields decaying to nearly 0.5 percent in August and September of last year.

brexit introduced volatility in UK bond yields and gold
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3. Economic Growth Stalls

GDP growth in the U.K. was worse than expected in the first quarter of 2017, gaining only 0.2 percent, its weakest showing in 12 months. The eurozone, by comparison, rose 0.5 percent in the March quarter.

UK growth fell behind rivals in first quarter
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CBI, the U.K.’s top business organization, recently announced expectations that the country’s economy will slow in the coming years. The group sees the U.K. growing at a weak 1.6 percent this year and 1.4 percent in 2018, with “domestic political turmoil” mostly to blame. Strength in manufacturing and exports could be tempered by higher-than-expected inflation and low wage growth.

4. But Manufacturing Sees Further Growth

Many naysayers of the U.K. leaving the EU said demand for British-made goods would crumble, but the reverse has happened. The manufacturing sector remained strong and resilient in May, the most recent month of available data, with the PMI posting a 56.7. Output and new orders were strong, and job creation—its rate was positive for a straight 10 months—stood at a 35-month high, according to IHS Markit. What’s more, a survey of manufacturers found that 56 percent expected conditions to improve during the next 12 months.

UK manufacturing has improved since brexit
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5. Financial Trouble Brewing?

Manufacturing might be looking good, but the financial sector is preparing for the worst. A survey conducted recently by the CFA Institute found that 70 percent of respondents said Brexit has deteriorated competitiveness of the market. Troublingly, 57 percent said they thought financial institutions based primarily in the U.K. would eventually reduce their presence in the U.K. because of added uncertainty. And when asked which world cities were poised to benefit from Brexit, participants placed London last at only 10 percent. Frankfurt, Dublin and New York topped the list of cities expected to benefit from financial professionals relocating from the U.K., should the country lose access to the single market.

Brexit winners financial centers
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A similar study conducted by financial consultancy firm Synechron found that, were the U.K. to leave the European single market, giant financial services firms with a presence in the U.K. could face some steep departures. JP Morgan Chase could lose up to 1,000 personnel; Morgan Stanley, 1,250; Bank of America, 1,386; Goldman Sachs, 1,603; and Citigroup, 2,000.

Again, we’re too early in the divorce process to make any firm predictions. We could be looking at two long years that hopefully aren’t as grueling and messy as some people fear.

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The EURO STOXX 50 Index provides a Blue-chip representation of supersector leaders in the eurozone. The index covers 50 stocks from 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2016.

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Does Coal Stand a Chance Against Renewable Energy?
June 21, 2017

world coal production fell a record amount in 2016

You might have heard the news that the first new coal mine in a decade opened this month in a small Pennsylvania town called Friedens. The Acosta Mine—the output from which will be used in the production of steel—is expected to employ between 70 and 100 people over 15 years, with salaries ranging between $50,000 and $100,000. President Donald Trump, a strong supporter of coal and fossil fuels in general, even appeared live on video during the grand opening, saying it “signals a new chapter in America’s long, proud coal mining tradition.”

Like the president, I applaud the mine’s opening. In a region that’s been hit particularly hard by the dramatic reduction in coal demand over the past five years alone, the local economy should benefit nicely from the fresh injection of high-paying jobs and tax revenue.

But does the Acosta Mine really “signal a new chapter”? Will it stanch the decades-long loss of coal mining jobs? Will it help make coal more competitive than natural gas or renewables such as wind and solar?

The simplest answer to the questions above is: Not likely. Energy markets are in full transition mode, both in the U.S. and abroad, and there really isn’t much that can be done to stop it, despite Trump’s best efforts.

An April study conducted by Columbia University’s Center on Global Energy Policy concluded that “President Trump’s efforts to roll back environmental regulations will not materially improve economic conditions in America’s coal communities.” According to the report, nearly half of coal consumption’s decline can be attributed to increased competition from natural gas. Solar and wind are responsible for about 20 percent of the decline. And as for izndustry regulations? They’re responsible for only 3.5 percent of coal’s decay, the study’s researchers say.

top contributions to coal's decline
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In light of this, I think it would be prudent for investors in natural resources and energy to adjust their holdings to reflect this transition. In the past year, we’ve overweighed renewable energy stocks in our Global Resources Fund (PSPFX), and the allocation is now a core driver of the fund’s performance.  

Coal at a Tipping Point

Let’s look at the facts. This month, just as Trump was celebrating the opening of a new coal mine, British oil and gas company BP reported in its annual review of global energy trends that coal production saw a record decline in 2016. Coal fell 6.2 percent, or 231 million tons of oil equivalent (mtoe), on a global scale. In China, the decline was even more severe.

world coal production fell by a record amount last year
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BP’s chief executive, Bob Dudley, showed little optimism that coal can be revived, even going so far as to say that 2016 marked the completion of “an entire cycle” for coal. Production and consumption were “falling back to levels last seen almost 200 years ago around the time of the Industrial Revolution,” he said, adding that the United Kingdom recorded its “first ever coal-free day in April of this year.”  

The U.S. might not have had a coal-free day, but domestic consumption is definitely in freefall. Last year, for the first time ever, natural gas represented a larger share of U.S. electricity generation than coal. Gas provided 34 percent of the nation’s power, coal 30 percent. This gap will only widen as more coal-fired plants are converted to burn natural gas, which is cheaper and cleaner. Facilities that still burn coal are rapidly aging into obscurity, with a vast majority of them (88 percent) built between 1950 and 1990.

Coal is also facing steep competition from renewables. For the first time in March, wind and solar made up 10 percent of total U.S. electricity generation, according to the U.S. Energy Information Administration (EIA). Windfarms in Texas, Oklahoma, Iowa and other states provided 8 percent, while commercial and residential solar installations represented about 2 percent.

Wind and solar made up 10% of total US electricity for first time in March
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As I shared with you last month, 2016 saw record installation of new renewable capacity across the world, with investment in wind and solar double that found in coal, gas and other fossil fuels. In the U.S., solar ranked as the number one source of new electricity generating capacity.

Renewables Cheaper than Coal

Part of the reason we’re seeing such significant growth in renewable capacity is that solar and wind make good economic sense. Bloomberg New Energy Finance (BNEF) recently reported that solar costs already rival coal in Germany and the U.S. and very soon will do so in China, the world’s largest investor in renewable energy.

Solar Will Soon Become Cheaper than Coal for China
click to enlarge

For years, solar has been regarded as an inefficient and costly source of energy. But its economics are now beginning to become cheap enough to potentially push coal and even some natural-gas plants out of business faster than what was once previously forecasted.

According to BNEF, costs of new energy technologies are falling so fast that it’s more a matter of when than if solar power and alternative energy sources gain a larger market share than fossil fuels.

China and India a $4 Trillion Opportunity

BNEF now estimates that China and India, the two most populous countries, represent a $4 trillion investment opportunity in new energy capacity by 2040, with most of the investment (nearly 75 percent) in wind and solar.

Although coal will likely be needed to meet the huge population explosions in the two economic powerhouses, its role will steadily diminish, falling to a 17 percent share in India by 2040, according to BNEF estimates. Renewables, meanwhile, will represent about half of all energy capacity.

Wind and Solar: Performance Drivers

This is why we’ve given renewables an overweight position in our Global Resources Fund (PSPFX). There’s still room in the fund for coal—Australia’s Whitehaven Coal has gained more than 190 percent for the 12-month period as of June 20—but we see attractive opportunities in wind and solar.

Among our favorite energy stocks right now are SolarEdge Technologies, up 50 percent year-to-date as of June 20; Vestas Wind Systems, the largest wind farm manufacturer in the world, up 33 percent; Siemens Gamesa, up 15 percent; and Sociedad Química y Minera de Chile (SQM), one of the world’s top three lithium producers, up 16 percent. (Lithium is used to manufacture lithium-ion batteries.) 

Year-to-date, these companies are outperforming the broader S&P 500 Energy Index and are strong drivers of PSPFX’s performance.

Click here to learn more about the Global Resources Fund (PSPFX) and to see its performance and composition!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by the Global Resources Fund 3/31/2017: BP PLC 0.13%, Whitehaven Coal Ltd. 1.47%, SolarEdge Technologies Inc. 1.25%, Vestas Wind Systems A/S 1.54%, Gamesa Corp Tecnologica SA 1.30%, Sociedad Química y Minera de Chile 1.22%.

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Small-Cap Mining Stocks, Big-Time Opportunity
June 19, 2017

wesdome eagle river complex

Last month I told you about the upcoming rebalance of the hugely popular VanEck Vectors Junior Gold Miners ETF (GDXJ), and how it would distress shares of junior, small-cap mining stocks. I said then that the rebalance could create some excellent opportunities for astute investors to accumulate high-quality, well-managed producers at discount prices.

That day has finally arrived, bringing with it a tsunami in the junior resource space, as I told Collin Kettell on Palisade Radio the week before. It’s a buyer’s market—if you know what you’re looking for. The last time the GDXJ underwent a rebalance of this magnitude was in December 2014, so I see this as a rare event savvy investors shouldn’t miss out on.

But first a reminder of what’s been happening with the GDXJ. Basically, it had become too massive for its underlying index—composed mostly of Canadian junior gold producers—with assets rising close to $5.5 billion earlier this year, up from $1 billion only last year.

Mo Money Mo Problems

Normally this wouldn’t be such a concern. But the GDXJ was getting precariously close to owning a 20 percent share of several names in its index, which would have triggered all sorts of regulatory and tax conundrums in Canada and the U.S.

So the fund made several adjustments to its methodology, including raising the market cap threshold of allowable companies to $2.9 billion, up sharply from $1.6 billion. This means it can now hold large producers that don’t appear in its index, the MVIS Global Junior Gold Miners Index. It also means that a number of smaller constituents were down-weighted or divested altogether, giving investors less exposure to junior miners than what the fund’s name implies.

Before any of this took effect, though, many investors, hedge funds and other market participants acted on the rebalance news by indiscriminately selling down their junior mining assets. This introduced fresh volatility to underlying stocks and depreciated prices.

The selloff, I might add, was done mostly without regard for the phenomenal fundamentals and growth profiles some of these companies reported.

These Miners Get High Grades

Take one of our favorite names, Wesdome Gold Mines. The Toronto-based producer has been operating in Canada for 30 straight years as of 2017 and currently carries no debt. Two of its mines, Eagle River and Mishi, are among Canada’s highest-grade gold mines. Last summer, the company made headlines when it discovered gold at its Kiena property in Quebec, sending its stock up an amazing 49 percent to $2.24 on August 25.

wesdome eagle river complex

When Wesdome was added to the GDXJ in March, it cast newfound attention on the $417 million company. Only a month later, the rebalance was announced, and since then, its stock has eased about 19 percent.

GDXJ rebalance has created a buying opportunity for distressed smallcap mining stocks
click to enlarge

I see this as a can’t-miss opportunity for retail and institutional investors to start nibbling on Wesdome and other junior miners that have been similarly knocked down only because of fund flows.

That includes Gran Colombia Gold, the largest gold and silver producer in Colombia, and Klondex Mines, whose Fire Creek Mine in Nevada was estimated to be the highest-grade underground gold mine in the world. (According to IntelligenceMine, Fire Creek averaged 44.1 grams per metric ton (g/t) in 2015, double the ore grade of the world’s number two project, Kirkland Lake Gold’s Macassa Mine, at 22.2 g/t.)

Gran Colombia announced last week that it produced 15,444 ounces of gold in May, representing a new monthly record for the company. This brings the total amount for the first five months of the year to 68,783 ounces, an impressive 21 percent increase over the same period last year. The Canadian-based producer has a very attractive convertible bond that pays monthly.

I’ve frequently praised Klondex for its frugality, strong revenue growth and exceptional management team. The last time I visited Vancouver, I had the opportunity to chat one-on-one with its president and CEO, Paul Andre Hurt, who has 30 years of experience in high-grade mining. Not only is Paul a highly-respected chief executive in the mining space, he’s also a devoted father of five.

A Golden Opportunity

The GDXJ rebalance represents a rare opportunity to accumulate high-quality junior producers at discount prices. I always recommend a 10 percent weighting in gold—5 percent in gold stocks or mutual funds, 5 percent in bars, coins and jewelry.

Commodity prices have lately underperformed equities mostly on subdued oil demand growth, with the S&P GSCI commodity index falling about 4 percent over the last month. If we separate the index components, however, we see that precious metals have posted positive gains year-to-date along with industrial metals.  

Precious metals have outperformed so far this year
click to enlarge

As I mentioned recently, gold imports in China and India, the world’s top two consumers of the yellow metal, have advanced strongly this year on safe haven demand. China boosted its gold purchases from Hong Kong as much as 50 percent this year to 1,000 metric tons, the most since 2013. India’s imports rose fourfold in May compared to the same month last year as traders fear a higher tax rate on jewelry.

With the GDXJ down-weighting junior producers, investors might wonder how they can get broad exposure to small-cap mining stocks.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.

The MVIS Global Junior Gold Miners Index tracks the performance of the most liquid junior companies in the global gold and silver mining industry.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 3/31/2017: VanEck Vectors Junior Gold Miners ETF, Wesdome Gold Mines Ltd., Gran Colombia Gold Corp., Kirkland Lake Gold Ltd., Klondex Mines Ltd.

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One Easy Way to Invest in the “Asian Century”
June 15, 2017

One Easy Way to Invest in the “Asian Century”

The 19th century belonged to the United Kingdom, the 20th century to the United States. Many market experts and analysts now speculate that the 21st century will be remembered as the “Asian Century,” dominated by rising superpowers such as Indonesia, India and China.

It’s those last two countries, India and China—home to nearly 40 percent of the world’s population—that I want to focus on. Both emerging markets offer attractive investment opportunities, especially for growth investors who seek to derisk from American equities.

Look at how dramatically the two have expanded in the last half century. As recently as 1970, neither country controlled a significant share of world gross domestic product (GDP). As of June of this year, however, China represents more than 15 percent of world GDP, India more than 3 percent. This has displaced Russia and Spain, itself the world’s wealthiest economy in the 16th century.

China and India Cracked the Top 10 List of World Economies
click to enlarge

And the expansion is expected to continue. Back in February, I shared with you research from PricewaterhouseCoopers (PwC), which predicts that by 2050, China and India will become the world’s number one and number two largest economies based on purchasing power parity (PPP). (PPP, if you’re unfamiliar, is a theory that states that exchange rates between two nations are equal when price levels of a fixed basket of goods and services are the same.)

top 10 economies expected to be dominated by 7 largest markets in 2050
click to enlarge

Also note Indonesia, which is expected to replace Japan as the fourth-largest economy by midcentury.

A Surge in Middle Class Spenders

What should excite investors the most is the growing size of the middle class in China and India. More middle class consumers means more spending on goods and services and more investing.

Remember, China’s middle class is already larger than that found here in the U.S., according to Credit Suisse. In October 2015, the investment bank reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durables, luxury goods, vehicles, air travel, energy and more.

109 million for the first time, the size of china's middle class has overtaken the U.S. 109 million compared to 92 million

Living standards have risen dramatically in China. According to Dr. Ira Kalish, a specialist in global economic issues for Deloitte, hourly wages for manufacturing jobs in China are now higher than those found in Latin American countries except for Chile. They’re even nearing wages found in lower-income European countries such as Greece and Portugal.  

Looking ahead to 2030, China is expected to have a mind-boggling 1 billion people—more than three times the current U.S. population—enjoying a middle class lifestyle filled with middle class things, from cars to designer clothes to electronics and appliances.

Asia's Growing Middle Class
click to enlarge

India, meanwhile, will have an estimated 475 million people among its middle class ranks. The South Asian country is currently the fastest-growing G20 economy, with Morgan Stanley analysts estimating year-over-year growth to hit 7.9 percent in December. Driving this growth is a steady increase in wages and pensions, which will support consumption of goods and services.

Demographic trends in India make the country look especially favorable. As I’ve shared with you before, India has a young population, with an average age of 29. (The average age in China, by comparison, is around 37, while Japan’s is 48.) By 2020, more than 64 percent of Indians will be under the age of 35. For many years to come, therefore, India will have a much larger group of working-age individuals than any other country on earth.

In fact, India’s total population could now be larger than China’s, according to new estimates. Yi Fuxian, a researcher at the University of Wisconsin-Madison, believes China’s population is much smaller than official statistics, owing to years of slower population growth under the one-child policy. Yi insists that about 90 million fewer people reside in China than previously thought, meaning its 2017 population could be closer to 1.29 billion people. That would narrowly make India, home to 1.31 billion people, the world’s most populous country.

Investing in 40 Percent of Humanity

So how can investors take advantage of this rapid growth in spending power?

One of the best ways, I believe, is with our China Region Fund (USCOX), which invests in securities in the authorized China securities markets (Hong Kong, Shenzhen and Shanghai) as well as the surrounding countries, including India.

The fund, which seeks to achieve long-term capital appreciation, focuses on companies that we believe are poised to benefit the most from an increase in middle class consumption. That includes automotive firms (Geely Automotive, Great Wall Motor), pharmaceuticals (CSPC Pharmaceutical, Sinopharm), information technology (Tencent, NetEase), consumer discretionary (Anta Sports) and much more.

For the one-year period as of June 12, USCOX was up more than 35 percent, well ahead of its 50-day and 200-day moving averages.

U.S. Global Investors China Region Fund (USCOX)
click to enlarge

Click here to see the fund’s performance.

To learn more about investment opportunities in the “Asian Century,” visit the USCOX fund page!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less conc entrated portfolio.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2017: Geely Automobile Holdings Ltd. 7.00%, Great Wall Motor Co. Ltd. 0.54%, CSPC Pharmaceutical Group Ltd. 3.48%, Sinopharm Group Co. Ltd. 1.84%, Tencent Holdings Ltd. 5.47%, NetEase Inc. 0.75%, ANTA Sports Products Ltd. 2.36%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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Hope for the Best but Prepare for the Worst (with Gold and Munis)
June 12, 2017

Hope for the best expect the worst

Last week investors shrugged off even more drama coming out of Washington. Stocks continued to rally and hit record highs, even as former FBI director James Comey testified that, in his opinion, President Donald Trump fired him in an attempt to lift the “cloud” of the Russia investigation.

If true, this suggests obstruction of justice, an impeachable offense. And if impeached, or in the event of a resignation, Trump’s political agenda would likely be derailed. The last (and only) time a U.S. president resigned, the Dow Jones Industrial Average lost up to 40 percent, as a recent article in TheStreet reminds us.

But markets paid no mind to Comey’s insinuations, underscoring investors’ confidence that tax reform and deregulation will proceed as planned. And sure enough, just hours after Comey testified, the House of Representatives voted to repeal key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has contributed to an alarming number of small bank closures since its passage in 2010.

So once again, the wisdom of crowds prevails. If you remember, markets were forecasting as far back ago as last summer that Trump would win the November election.

This doesn’t mean, however, that Trump’s problems are behind him.

Last week I was speaking with Mike Ward, a top publisher with Agora Financial, who compared Presidents Trump and Ronald Reagan. It was suggested that, despite Trump’s apparent affection for the 40th president, he has so far failed to live up to the Great Communicator’s memory of optimism and deep respect for the office.

Whereas Reagan wanted to “tear down this wall,” Trump wants to “put up that wall.” Whereas Reagan insisted it was “morning in America,” Trump insists it’s “American carnage.” Reagan succeeded in building coalitions and unifying our allies against the Soviet Union. Trump has already managed to destabilize many of those alliances.

During the 1988 vice-presidential debate, Texas Senator Lloyd Bentsen famously ribbed then-Senator of Indiana Dan Quale for comparing himself favorably to John F. Kennedy. “I served with Jack Kennedy. I knew Jack Kennedy,” Bentsen said. “Senator, you’re no Jack Kennedy.”

Similarly, many observers are of the opinion that Trump is no Reagan.

Don’t get me wrong. I remain hopeful. President Trump wants to make America great again, and it’s still well within his power to do so—if he can practice some self-restraint and not get caught up in petty feuds. Voters support his vision. They gave him not only the Executive Branch but also Congress and most states’ governorships and legislatures.

You could say I’m hoping for the best but preparing for the worst. I advise investors to do the same. No one can say what the future holds, and it’s prudent to have a portion of your portfolio in gold, gold stocks and short-term, tax-free municipal bonds, all of which have a history of performing well in volatile times.

Gold Poised for a Breakout

Following bitcoin’s breathtaking ascent to fresh highs, gold rose to a seven-month high last week on safe-haven demand, stopping just short of the psychologically important $1,300 level. Supported by Fear Trade factors such as geopolitical turmoil—both in the U.S. and abroad—and low to negative government bond yields, gold’s move here can be seen as a bullish sign.

As others have pointed out, the yellow metal breached the downward trend of the past six years, possibly pointing to further gains.

gold just breached key resistence
click to enlarge

Under pressure from a beleaguered White House and stalled policy reform, the U.S. dollar continued to sink last week, with gold outperforming the greenback for the first time since the November election. Because gold is priced in dollars, its value increases when the dollar contracts.

Gold outperforms the US dollar for the first time since election
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It’s also important for investors to remember that gold has often rallied when Treasuries yielded little or nothing. Why would investors knowingly lock in guaranteed losses for the next two or five years, or near-zero returns for the next 10 years? That’s precisely what Treasuries are offering, as you can see below:

Low to negative real treasury yeilds support gold
click to enlarge

Minus inflation, the two-year Treasury yielded negative 0.96 percent in April; the five-year, negative 0.38 percent; and the 10-year, a paltry 0.10 percent. (I’m using April data since May inflation data won’t be available until this Wednesday, but I expect results to look the same.)  

When this happens, investors tend to shift into other safe-haven assets, including municipal bonds and gold.

Year-to-date, the yellow metal is up more than 9.7 percent, even as the stock market extends its rally. This runs counter to what we’ve seen in the past. As I’ve explained before, gold usually has a low correlation to other assets, including stocks and bonds, which is why investors all around the globe favor it as a diversifier.

So what gives?

Top Money Managers Sound the Warning Bell

One of the most compelling answers to this question, I believe, is that stocks appear to be overvalued right now, in turn boosting gold’s safe-haven investment case. This is the assessment of Bill Gross, the legendary bond guru who currently manages $2 billion with Janus Henderson.

Speaking at the Bloomberg Invest New York summit last week, the 73-year-old Gross said markets are now at their highest risk levels since before the 2008 financial crisis. Loose monetary policy has artificially inflated stock prices despite weak economic growth, he said, adding: “Instead of buying low and selling high, you’re buying high and crossing your fingers.”

Doomsdayers bill gross paul singer marc faber trouble brewing capital markets

Marc Faber, the Swiss investor often referred to as Dr. Doom, echoed Gross’ thoughts, telling CNBC last week that “everything” is in a bubble right now, similar to the days of the dotcom bust of the late 1990s. And when this bubble bursts, Marc said, investors could lose as much as half of their assets.

That stocks appear overvalued could be a driver of gold’s performance right now, with savvy investors, anticipating a possible market correction, loading up on assets that have historically held their value in times of economic crisis.

A cadre of other top money managers and analysts share Bill Gross and Marc’s less-than-rosy market view.

At the same Bloomberg event, billionaire hedge fund manager Paul Singer—whose firm, Elliott Management, recently raised $5 billion in as little as 24 hours—warned attendees that the U.S. was at risk of another debt shock.

“What we have today is a global financial system that’s just about as leveraged—and in many cases more leveraged—than before 2008, and I don’t think the financial system is more sound,” Singer said.

Indeed, U.S. debt levels are higher now than they’ve ever been, according to the Federal Reserve Bank of New York. In the first quarter of 2017, total U.S. household indebtedness reached a mind-boggling $12.73 trillion. That’s $150 billion more than the end of 2016 and $50 billion above the previous peak set in 2008.

Low to negative real treasury yeilds support gold
click to enlarge

Even more concerning is the fact that the number of delinquencies grew for the second straight quarter as more income-strapped Americans binged on credit. We could be headed for a massive hangover.

Cumulatively, these warnings stress the importance of hoping for the best while planning for the worst. In the past, there have been few ways as effective at preserving wealth as gold, gold stocks and tax-free, short-term munis.  

Gold Vaults a Sign of Increased Demand

Demand for safety deposit boxes is surging as more savers and investors convert cash into gold

The world’s two largest consumers of gold by far, China and India, are currently importing enormous amounts of the yellow metal on safe-haven demand. Bloomberg reports that China could boost its gold purchases from Hong Kong as much as 50 percent this year over concerns of currency devaluation, a slowing real estate market and shaky stocks. Imports could advance to 1,000 metric tons, which would be the most since 2013.

Meanwhile, India—whose affection for gold goes back millennia—saw its imports of the yellow metal rise fourfold in May compared to the same month last year as traders fear a higher tax rate on jewelry. Imports climbed to 126 tons, versus 31.5 tons last May.

As impressive as this news is, there’s no sign more compelling that investors have an insatiable appetite for gold right now than the growing demand for safety-deposit boxes. According to Bloomberg, companies in Europe are scrambling to meet customers’ needs for a safe, inexpensive place to store their bullion in the face of negative interest rates and rising inflation. Two firms in particular have plans to build additional facilities capable of holding 100 million euros ($112 million) each in bars and coins.

Daniel Marburger, CEO of European coin dealer CoinInvest, told Bloomberg that he had just finished working with a German customer whose bank account was charged negative interest rates. To prevent this from happening again, the customer converted his cash into gold and silver, which he sees as a more reliable store of value.

Negative rates are “definitely a driving factor and will lead to more sales and also more storage clients,” Marburger said.

 

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Net Asset Value
as of 06/28/2017

Global Resources Fund PSPFX $5.39 0.06 Gold and Precious Metals Fund USERX $7.37 0.06 World Precious Minerals Fund UNWPX $6.29 0.01 China Region Fund USCOX $9.45 -0.04 Emerging Europe Fund EUROX $6.32 0.05 All American Equity Fund GBTFX $24.45 0.18 Holmes Macro Trends Fund MEGAX $19.91 0.26 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change