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How to Unrig the Gold Market, According to GATA's Chris Powell
May 21, 2019

In an earlier post, I gave you a sneak preview of my interview with Chris Powell, secretary/treasurer at Gold Anti-Trust Action Committee (GATA). For 20 years now, Chris and others at GATA have made it their mission to expose collusion by international financial institutions to control the price and supply of gold.

Below are highlights from the interview. I have to say that during much of our conversation, my jaw was on the floor. I don’t want to say much more than that! Read on, and remember to share widely.

Tell us about GATA’s background and what it does.

GATA was founded in 1999 to expose and litigate against the longstanding Western central bank policy of suppressing the price of gold. At first we weren’t even sure if it was Western banks that were doing it. But after a year or so of research and investigation, we concluded that the bullion banks were operating surreptitiously as brokers for governments, giving cover to their intervention in the gold market. At the time, we had a law firm advise us that this rigging was very likely authorized by the Gold Reserve Act of 1934, as amended since then, and as such, there may not be grounds to sue the government directly over gold price manipulation.

We went ahead and filed suit in 2001 anyway, in the U.S. District Court in Boston. We had a consultant, a Harvard-trained lawyer and gold investor, who brought a case against the Bank of International Settlements (BIS), the U.S. Treasury and various bullion banks.

One particular hearing I attended that year produced a remarkable admission from an assistant U.S. attorney. In short he said that, while the government was not admitting to the complaint, it nevertheless had the power and authority to do all the things the suit complained of—manipulating the price of gold, in other words. I made a record of this admission and put out a press release. The lawsuit was ultimately dismissed by the judge on technical jurisdictional grounds.

Having lost a little hope of suing the government directly, we determined that the best course of action going forward was to try to publicize our findings. We’re convinced that the Gold Reserve Act gives the U.S. government, particularly the Treasury Department and the Exchange Stabilization Fund (ESF), the unrestricted authority to intervene in and secretly rig any market in the world. Our work now is simply to expose this policy to as large an audience as possible.

On a practical level, how does manipulation like this occur on such a global scale?

It’s done largely in the futures markets. It’s also done in the London over-the-counter (OTC) market. The mechanisms are gold swaps and leases between central banks and bullion banks, and through the sale of futures contracts.

We’ve seen a number of flash crashes in the price of gold, but lately they’ve been happening every few weeks. Somebody will dump a billion dollars or more of gold futures contracts in New York. That can be achieved only by someone with infinite resources and money, who also has a powerful interest in suppressing the price of gold. Nobody interested in making good money would dump that much gold all at once. He would sell it gradually over a period of time. I think these flash crashes are irrefutable evidence of price suppression.

the gold futures flash crash of January 6, 2014
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Are there any public records that point to all of this?

Yes. There’s all sorts of material in the Treasury Department and Federal Reserve archives about gold price suppression being U.S. policy. Jelle Zijlstra—the former president of the Netherlands’ central bank, who simultaneously served as president of the BIS—wrote in his memoirs that the gold price has always been suppressed at the behest of the United States through international action. You can go back to the years of the London gold pool in the 1960s, where the control of the gold price through international action was a matter of public record, operating through the Bank of England (BoE).

A very remarkable transcript exists of a meeting in April 1974 between Secretary of State Henry Kissinger and Thomas Enders, the assistant under secretary of state for economic and business affairs. Enders explains to Kissinger that U.S. government policy is to drive gold out of the world’s financial system and prevent European governments from remonetizing the metal in any way. The purpose of this policy is to support the U.S. dollar as the world reserve currency, and if not the dollar, then the International Monetary Fund’s (IMF) special drawing rights (SDR).

The most compelling evidence, I believe, are letters sent by Representative Alex Mooney of West Virginia to the Federal Reserve, Treasury Department and U.S. Commodity Futures Trading Commission (CFTC). Mooney asked the Fed and Treasury to identify which markets they’re secretly trading in, and to explain the purposes of this trading. Fed Chair Jerome Powell essentially refused to answer the question, as did the Treasury. Mooney asked the CFTC to state whether manipulation trading in the futures markets undertaken by the U.S. government or its agents or brokers is subject to the CFTC’s jurisdiction, or whether such manipulation is actually legal or exempt from ordinary commodities law. The CFTC refused to answer the question.

I think these agencies’ refusal to answer Mooney’s questions is quite revealing. And notably, mainstream financial journalists don’t find any of this curious. They have a rule never to put a critical question to any central bank about anything. Theoretically, somebody could do it. It’s being attempted by alternate news agencies and research organizations, but you can’t get an answer. That’s a good indication, I believe, that central banks are doing things they don’t want the markets to know about.

My next question has to do with central banks and their consumption of gold. They’ve been net buyers since 2010. The United States continues to be the single largest holder of gold of any institution on the planet. How do we reconcile that? If they own all this gold, wouldn’t it go against their self-interest to suppress its price?

global central banks have been net buyers of gold since 2010
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That seemed to be a paradox to GATA some years ago, but we don’t believe it is any longer. To suppress the price of gold, you need a certain amount of inventory to knock the market down. You can’t do it entirely through the naked shorting that they do in the futures market. You always need to be bleeding a certain amount of the metal into the market to maintain the appearance of a gold market. You can’t just be trading paper all the time—it’s not enough.

The U.S. economists Paul Brodsky and Lee Quaintance wrote a paper a few years ago that floats a plausible hypothesis of what’s going on. The two hypothesized that the policy in recent years has been to redistribute world gold reserves among central banks so that those banks that have been overweight in U.S. dollars and Treasuries could hedge themselves in anticipation of an inevitable devaluation of the dollar and revaluation of gold. Central banks, the two allege, intervene together in the futures market to drive the nominal price down to facilitate easy acquisition of gold. They would prefer to keep the public out of acquiring the metal.

Full disclosure, I don’t have any particular evidence from government sources that confirms Brodsky and Quaintance’s hypothesis. But it certainly fits the facts as we understand them.

As you likely know, a JPMorgan trader is awaiting sentencing right now for his participation in gold price rigging. What’s your reaction to this?

His sentencing has been delayed twice now. It was delayed again the other day for another six months.

I’m not sure what to make of it, to be honest. There’s some confusion here because a few years ago, the chief executive of JPMorgan, Jamie Dimon, and the woman who was running its commodities desk at the time, Blythe Masters, both gave interviews saying that JPMorgan has no position of its own in the monetary metals markets. They were trading them only for clients. Of course, nobody in journalism followed up by asking Dimon or Masters who the clients were. I would have wondered if the bank was acting as the broker for the U.S. or Chinese government. That was certainly implied from the answers they gave.

Now this trader, John Edmonds, apparently had to admit that he was rigging the gold and silver markets while trading at JPMorgan. He was allegedly doing it with the knowledge and counsel of his superiors, and if it were done on behalf of the government, presumably it’s legal under the Gold Reserve Act. But as Charles Peters, former editor of the Washington Monthly, used to say: “The scandal is never what’s illegal. The scandal is what’s perfectly legal.”

So why is Edmonds being prosecuted? Because he was front-running government trades? Was he doing it just for himself? I can’t imagine the Justice Department would be prosecuting him if his trading was being conducted on behalf of the U.S. government.

Where do you think gold prices would be right now if not for this manipulation? What’s the true value of gold?

The true value of gold is whatever our free market wants it to be. Our attitude toward money is very libertarian. Let there be free markets and currencies, and if governments are intervening, they should be transparent about what they’re doing.

Having said that, the disparagement of gold for years is that its price has not kept up with inflation. Everything keeps up with inflation. That in itself is pretty powerful evidence of government intervention. It’s not keeping health insurance costs and medical care prices down. It’s not keeping college tuition down. It’s not keeping grocery prices down. How come gold is the only thing that doesn’t keep up with inflation? Silver, too? All of the traditional ratios of monetary metals values compared to stock market levels and other prices have been thrown off in recent years because of government intervention.

global central banks have been net buyers of gold since 2010
click to enlarge

So what would those prices be if the traditional ratios were enforced again? I can’t say for sure, but obviously they would be far, far higher than they are today. And the government knows this. If the government ever got out of the futures market and abandoned its manipulation scheme, metal prices would remonetize in as little as a week.

I’ll add that if you want the gold or silver price to go up, you’ve got to buy real physical metal. Take it out of the banking system and weaken the futures market, which is where the manipulation takes place.

If readers are interested in learning more, where should they go?

They can go to our site, GATA.org. In the upper right-hand side, visitors can subscribe to our daily newsletter, the “GATA Dispatch.” That’s absolutely free. On the left, in the “Articles” section, you’ll find a link to “The Basics” and “Documentation.” All of the documentation of gold price suppression and secret intervention in gold markets by governments is contained there. And if they’re searching for anything in particular, I’d be happy to help them or refer them to someone who can. They can just email me at cpowell@gata.org.

Thank you for your time, Chris! It was a pleasure.

The pleasure was all mine.

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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. 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.

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Yes, Gold Is Being Manipulated. But to What Extent?
May 20, 2019

Gold is being suppressed but to what extent

Another day, another banking scandal.

Last week the European Commission announced that it’s fining five big banks for rigging the international foreign exchange (forex) market. As many as 11 world currencies—including the euro, British pound, Japanese yen and U.S. dollar—were allegedly manipulated by traders working at Barclays, the Royal Bank of Scotland (RBS), Citigroup, JPMorgan and Japan’s MUFG Bank.

Altogether, the fines come out to a whopping 1.07 billion euros ($1.2 billion).

According to the press release dated May 16, the infringements took place between December 2007 and January 2013. Traders working on behalf of the offending banks secretly shared sensitive trading information. This enabled the traders—who were direct competitors—to “make informed market decisions on whether to sell or buy the currencies they had in their portfolios and when.”

Financial services is already the least trusted sector among seven others worldwide, according to the 2019 Edelman Trust Barometer. News of the coordinated forex rigging—which follows other high-profile scandals such as the Libor scandal, Wells Fargo fake account scandal, gold fixing scandal (which I’ll get to later), among many more—is unlikely to improve public sentiment.

As I’ve said before, I believe that strong distrust in traditional financial services, especially among millennials, greatly contributed to early bitcoin adoption. With bitcoin, there’s no third-party risk. Transactions are peer-to-peer. Users of the digital coin find this sort of freedom very attractive, and because it’s built on top of blockchain technology, price manipulation is much more difficult to pull off.

That’s not to say that bitcoin hasn’t been, or isn’t still being, manipulated. There are those who argue that the cryptocurrency’s meteoric rise to nearly $20,000 in late 2017 was at least in part due to coordinated price manipulation. And early Friday morning, its price dramatically lost as much as $1,702, its worst intraday drop since January 2018, after breaching $8,300 on Thursday.

Bitcoin price sharply plunged friday morning
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Bitcoin Seen as a Threat to Global Fiat Currencies

None of this should come as a surprise to anyone who’s been paying attention, of course. I’ve seen and heard the aggressive stance bankers have taken against bitcoin and other cryptocurrencies, as I’m sure you have.

Quite simply, banks don’t want the competition. If you recall, JPMorgan CEO Jamie Dimon called people who buy bitcoin “stupid” and said he’d fire any trader caught trading it. (And then in an amazing about-face, his bank announced in February the rollout of its own digital coin, the “JPM Coin.”)

Also consider the comments made by Agustín Carstens, general manager of the Bank of International Settlements (BIS). The BIS, in case you’re unfamiliar, is often called the “central bank of central banks.” That’s because it provides banking services to as many as 60 financial institutions from all over the world, including heavyweights such as the Federal Reserve, Bank of England (BoE), European Central Bank (ECB) and Bank of Japan (BoJ). Its influence on global monetary and financial policy, in other words, is monolithic.

Ever since bitcoin hit $4,000 or so, General Manager Carstens has been on a global PR campaign to stop its momentum—because, again, it’s seen as a threat to sovereign currencies. As recently as November of last year, he laid out 10 reasons why central banks should discourage the use of digital coins.

Among them: “Cryptocurrencies are highly conducive to illegal activities.”

Anyone else see the irony? Fiat currencies are still very much used to conduct illegal activities, despite the enactment of anti-money laundering (AML) and know your customer (KYC) laws. In November 2017, Jennifer Fowler, deputy assistant secretary for the Office of Terrorist Financing and Financial Crimes (TFFC), testified before the Senate Judiciary Committee that the U.S. dollar “continues to be a popular and persistent method of illicit commerce and money laundering,” and that, although virtual currencies are also used, “the volume is small compared to the volume of illicit activity through traditional financial services.”

The BIS doesn’t stop at bitcoin, though. It’s also put gold in its crosshairs.

Gold Suppression: It’s Not a Question of IF but to WHAT EXTENT

First of all, let me say that gold price suppression (“fixing,” “rigging,” “manipulating” or however else you want to think about it) is not just a conspiracy theory. It’s a well-documented phenomenon, with real actors and real ramifications. In 2014, Barclays was fined nearly $44 million for failing to prevent traders from manipulating the London gold “fix.” Late last year, a former JPMorgan trader pleaded guilty to manipulating the U.S. metals markets. Remember the gold futures “flash crash” of 2014?

The best people to speak to about this subject are the folks at the Gold Anti-Trust Action Committee, or GATA. For 20 years now, Chris Powell and others at GATA have made it their mission to expose collusion by international financial institutions to control the price and supply of gold.

Last week I had the chance to sit down with Chris, GATA’s secretary/treasurer. I asked him how institutions manage to manipulate the price of gold on such a global scale.

“It’s done largely in the futures markets,” Chris told me. “It’s also done in the London over-the-counter (OTC) market. The mechanisms are gold swaps and leases between central banks and bullion banks, and through the sale of futures contracts.”

GATA’s Robert Lambourne reported on this in March of this year. As you can see in the chart below, gold rallied between November 2018 and February, when it peaked at around $1,343 an ounce. Ordinarily, you could expect inventory in the bullion-backed SPDR Gold Shares ETF (GLD) to continue to climb at least until then. But that’s not at all what happened. Three weeks before the price of gold peaked, the holdings in the GLD curiously began to fall, and by March 4, the ETF had lost approximately 57.8 metric tonnes. And because the GLD is the largest gold ETF in the world—its value stands at $30.2 billion, as of this week—such selling will naturally impact the price of gold. Sure enough, the yellow metal soon fell below $1,300. What gives?

Is the Bank for International Settlemenst BIS suppressing teh price of gold?
click to enlarge

The answer to that question may lie in the BIS’ monthly statement of account for February. According to Robert’s reporting, the BIS was still actively trading gold swaps, which it uses to gain access to the metal held by commercial banks. Specifically, the bank placed as much as 56 metric tonnes of gold swaps into the market in February.

If you ask me, that amount is remarkably close to the 57.8 tonnes that fled the GLD in the first quarter of this year.

Hard to believe? This is only scratching the surface. I’ll let Chris Powell be the one to elaborate, but it will have to wait until a Frank Talk later this week. Trust me when I say this is an interview you don’t want to miss! Make sure you’re subscribed to Frank Talk so you can be one of the first to read it.

 

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.

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 3/31/2019.

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3 Mining Stocks for Investors Seeking Gold Exposure
May 14, 2019

3 Mining Stocks for Investors Seeking Gold Exposure

As the U.S.-China trade spat drags on, so too could the stock market volatility that has accompanied it so far this month. The S&P 500 and Dow Jones Industrial Average both fell 2.4 percent on May 13 – their worst days since January. The longer trade negotiations remain ongoing, the longer the geopolitical and economic risks remain.

One potential hedge against volatility and market risk is having an allocation to gold, which has historically moved in the opposite direction of equities. I often recommend having a 10 percent portfolio weighting in the yellow metal – with 5 percent in physical gold and the other 5 percent in gold mining equities, mutual funds and ETFs.

Gold mining stocks have been down so far this year, but I believe this represents a buying opportunity. The NYSE Arca Gold Miners Index, which tracks a diversified blend of small-, mid- and large-cap miners, is down 9.22 percent for the 12 months ended May 13.

To get additional insight on miners, I spoke with our portfolio manager and gold expert Ralph Aldis. Ralph has over 30 years’ experience in the gold space, and together we manage two mutual funds focused on the yellow metal. Some of Ralph’s top gold mining stocks as of late are Wheaton Precious Metals, Wesdome Gold Mines and K92 Mining – all three of which we own in our junior and intermediate miner mutual fund, the World Precious Minerals Fund (UNWPX).

Wesdome Gold Mines Ltd.

One miner that we really like is Canadian-based Wesdome Gold Mines. Ralph describes the company as having “delivered both operating and drilling results very consistently” and being disciplined when it comes to raising money.

The company just reported strong first quarter results, including revenue of CA$32.5 million – a 24 percent increase from a year earlier. Plus, its gold production increased 6 percent from a year earlier to 19,010 ounces. Wesdome operates two gold mining operations in Ontario and Quebec and trades on the Toronto Stock Exchange under the ticker symbol WDO.

As you can see in the chart below, the company has seen massive growth in the last 12 months with a total return nearly exceeding 100 percent. We believe it’s a good candidate for a takeover by a larger miner due to its strong drilling results, competent management team and safe jurisdiction in Canada.

In fact, Wesdome was the top holding in UNWPX as of the most recent quarter end. View all fund holdings here.

Wesdome gold mines up significantly in the last 12 months
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K92 Mining Inc.

Perhaps a less well-known name, K92 Mining is based in Vancouver and operates solely in Papua New Guinea. Ralph sums up why he likes the company: “I think K92 is another one that has a great deposit, high grade. The CEO spends time at the mine site. It's off on the other side of the world, but he goes and spends a week there every month working, so it's very much a hands-on management style.”

Strong management is an important factor for us when looking at companies. It’s one of our “5 Ms” for picking gold mining stocks: market capitalization, management, money, minerals and mine life cycle.

K92 has broken out so far in 2019 and could have further to go after reporting strong first quarter results. The company reported 19,125 gold ounces produced from its Kainantu mine in Papua New Guinea.

K92 Mining has broken out so far in 2019
click to enlarge

Wheaton Precious Metals Corp.

Although not technically mining stocks, royalty and streaming companies are a way to gain exposure to miners. These companies own streams on the production of precious metals, in exchange for helping finance the projects and providing upfront capital. One of our favorites is Wheaton Precious Metals Corp.

Wheaton Precious Metals CEO Randy Smallwood with USGI porfolio manager Ralph ALdis

In 2018 Wheaton faced a tax dispute with the Canada Revenue Agency (CRA) over income generated by foreign owned subsidiaries. The CRA claimed that the company owed back taxes and fines that could have been as high as $1 billion. Fortunately, an agreement was reached, and although Wheaton will face higher taxes, the company can now focus attention on operations and put the issue behind it.

Ralph is in close contact with much of senior management: “In fact, Chief Financial Officer Gary Brown was at our office in San Antonio a few weeks ago and explained to our team that the tax issue has been resolved, but that investors still haven’t woken up to the good news. That’s why we believe right now could be a good time to pick up this name before word spreads.”

Wheaton trades in both New York and Toronto, making it easier for investors to buy. The company focuses on silver – in addition to gold, copper and other metals – and currently has streaming agreements for 19 operating mines and nine development stage projects. We like to look at the price-to-book ratio, and based on that, Wheaton looks undervalued relative to some of its royalty and streaming peers, including Franco-Nevada Corp. and Royal Gold Inc.

Wheaton Precious Metals looks undervalued compared to peers
click to enlarge

A consolidation bug hit senior miners late last year and early this year. When Barrick Gold bought Randgold Resources, then Newmont merged with Goldcorp, many analysts suspected there would be a selloff of assets and a flood of acquisitions and deals in the small- and mid-cap producer space.  

As Ralph puts it: “I do think a wave of consolidation is going to come because we know a lot of the seniors are going to try to spin assets off.  That could create a lot of interesting opportunities for smaller mining companies.”

Interested in adding to your gold exposure through an actively-managed mutual fund? Learn more about the World Precious Minerals Fund (UNWPX) by clicking here.

 

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.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the World Precious Minerals Fund as a percentage of net assets as of 3/31/2019: Wesdome Gold Mines Ltd. 5.65%, K92 Mining Inc. 1.89%, Wheaton Precious Metals Corp. 0.30%, Franco-Nevada Corp. 0.54%, Royal Gold Inc. 0.00%, Barrick Gold Corp. 0.13%, Randgold Resources 0.00%, Newmont Mining Corp. 0.03%, Goldcorp 0.00%.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.

The price to book ratio, also called the P/B or market to book ratio, is a financial valuation tool used to evaluate whether the stock a company is over or undervalued by comparing the price of all outstanding shares with the net assets of the company.

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These 3 Charts Will Convince Investors That Time May Be Running Out
May 13, 2019

These 3 Charts Will Convince Investors That Time May Be Running Out

Before we get to looking at those three charts, I want to talk about trade for a moment. On Friday the Trump administration made good on its threat to raise tariffs on as much as $200 billion worth of Chinese imports to 25 percent from the previous 10 percent. The president also said that a decision could be made soon on whether to impose the same 25 percent rate on an additional $325 billion of Chinese goods, which, all told, would cover approximately the total amount of goods the U.S. imported from China in 2018.

So what does this mean? As I’ve made clear here, here and elsewhere, a tariff—beside being a strain on international relations—is essentially a tax that must be paid to the U.S. government before a shipment can clear customs. But here’s the kicker: Tariffs are typically paid not by the exporting company but by the importer. In other words, it’s U.S.-based companies that are picking up the tab—then passing the extra expense on to American consumers.

With the exception of the U.S. Treasury, which collects the tariff payments, few stand to benefit here. A February study by Washington, D.C.-based Trade Partnership Worldwide (TPW) estimated that 25 percent tariffs on Chinese goods cost families of four close to $2,300 extra on average per year. They also have the potential to impact upwards of 2.2 million American jobs as well as risk diverting trade to other markets.

“By any measure, the imposition of tariffs by the United States and U.S. imports of steel, aluminum, motor vehicles and parts… is a net loss for the U.S. economy and U.S. workers,” the report reads. Workers “experience greater losses than gains,” and in many cases, according to TPW, “the tariff actions erase all of the anticipated gains from tax reform.”  

Market Sentiment at Its Lowest in 10 Months

Stocks sold off last week on the tariff news and plunged even further Monday after China announced that it would retaliate.

Equities are now officially in oversold territory. Our own U.S. Global Sentiment Indicator, which tracks as many as 126 commodities, indices, sectors, currencies and international markets, calculates the percentage of positions whose five-day moving averages are above or below their 20-day moving averages. Then we compare the data to the S&P 500 Index. Last week the sentiment indicator fell to 20 percent, showing that the market is at its most oversold since July 2018. Statistically, we should expect to see a bounce.

U.S. Global Sentiment Indicator Is Showing That the Market is Oversold
click to enlarge

Stocks may still have further to slide before a resolution to the trade dispute is reached. But for now this could be a good opportunity for investors to pick up some distressed stocks as we await mean reversion. In a Frank Talk post last week, I recommended that investors who seek to get access to the robust U.S. economy but limit their exposure to international trade would do well to look at high-quality small and mid-cap equities. Smaller firms, those with market caps between $1 billion and $10 billion, have the potential to outperform right now because they rely much less on trade than their larger multinational peers. They’re also supported by a stronger U.S. dollar.

I would also recommend considering government and investment-grade municipal bonds, which historically have helped investors improve their risk-adjusted returns in times of economic uncertainty. And of course there’s always exposure to gold and other metals that are expected to be in greater demand in the coming years, copper chief among them.

This leads us to the main event. Below are three charts that I think will convince investors that time is running out to prepare for the next major downturn. All charts and data were brought to my attention by Michael Kantrowitz, head of portfolio strategy at market research firm Cornerstone Macro, who visited our office last week.

1. Is U.S. Manufacturing Growth Projected to Stall?

I recently reported that the ISM Manufacturing Index for the U.S. fell sharply in April to 52.8, down from 55.3 in March. This means that although the manufacturing sector is still expanding, it’s doing so at a much slower pace. What’s more, the manufacturing index could soon fall below 50.0, indicating a slowdown. For this we’d largely have the Federal Reserve to thank.

Every Fed Tightening Cycle Has Preceded a Slowdown in U.S. Manufacturing
click to enlarge

That’s according to Michael, who pointed out to us that every Fed tightening cycle going back to the 1950s has preceded a pullback in the ISM Manufacturing Index. And each of these pullbacks coincided with an economic recession and/or market selloff. (One notable exception was 1995, when the market continued to rally despite manufacturing weakness.)

So will this time be different?

I’ll let my friend Bob Moriarty—whose excellent book Basic Investing in Resource StocksI reviewed earlier this month—tackles this one: “The most dangerous words in investing are ‘This time it’s different.’ It’s never different.”

2. Trying to Predict Future Earnings Per Share Growth? Monitor Lumber Prices

One of the most eye-opening charts Michael shared illustrates the close relationship between lumber prices and future earnings per share (EPS) growth. “Believe it or not,” he told us, “lumber prices are among the most reliable leading indicators available.”

I believe it. Housing is a massive part of the U.S. economy, contributing between 15 percent and 18 percent to gross domestic product (GDP), according to the National Association of Home Builders (NAHB). Housing also has an extremely high multiplier effect. Every 100 homes in the U.S. can support up to 70 jobs on average and generate as much as $4.1 million in local income on an ongoing annual basis.

So it stands to reason that lumber prices can give us an incredibly accurate forecast of where the market is headed. In the chart below, lumber prices have been advanced forward six months to illustrate the lag time between changes in price and EPS estimates. When lumber tanked over the 12-month period, EPS followed around six months later. And when lumber soared, EPS estimates shot up.

Timber! A Sign of Earnings Weakness Ahead? Lumber Price Change
click to enlarge

You may have already detected the warning signal that lumber’s flashing right now. From its high in May of last year, the lumber price has plunged almost 50 percent. That’s the commodity’s sharpest 12-month decline on record. Going forward, then, keep your eyes on earnings, which are a central driver of stock prices.

3. New York Fed on Recession Watch

Every month, the New York Fed updates its probability of an economic recession in the next 12 months. Probabilities are calculated using the spread between the 10-year and three-month Treasury yield—which inverted again last week for the first time since March.

According to the Fed’s most recent report, the probability that a recession will make landfall between now and April 2020 rose to 27.49 percent, its highest reading since January 2007 (as it was ascending, not falling), and before that, September 1999.

Probability of a U.S. recession in the next 12 months has surged to pre crisis levels
click to enlarge

Past performance does not guarantee future results, of course, but the point I’m trying to make by sharing these charts is that it might be time to consider making some adjustments to your portfolio. That doesn’t mean rotating entirely into safe havens, especially since the market is so oversold right now.

When Picking Gold Stocks, Be Sure to Focus on Quality

But if you’re concerned about what the data suggests, it might be prudent to ensure you have exposure to fixed income, specifically tax-free muni bonds, as well as gold and gold stocks. One of our favorite gold names, Franco-Nevada, just reported record net revenue of $179.8 million and record net income of $65.2 million in the March quarter. But when selecting gold stocks, it’s important to stick with quality companies that have competent management, little to no debt and a portfolio of high-grade mines. Go gold!

Is the eurozone slowdown over? In case you missed last week’s commentary from European research analyst Joanna Sawicka, watch it now by clicking here!

 

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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Mean reversion is a theory used in finance that suggests that asset prices and historical returns eventually return back to the long-run mean or average level of the entire data set.

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 3/31/2019: Franco-Nevada Corp.

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How to Limit Your Exposure to the U.S.-China Trade War
May 9, 2019

How to Limit Your Exposure to the U.S.-China Trade War

The U.S. economy is growing at one of the fastest rates in the developed world right now, and unemployment hit a nearly 50-year low of 3.6 percent in April. Under normal circumstances, this should boost demand for domestic equities. Some investors, however, are hesitant to participate due to escalating trade tensions between the U.S. and China, among other factors. The latest fund flows report from Morningstar shows that investor appetite for equities has declined so far this year in favor of asset classes that are perceived to have less risk, including government and municipal bonds.

What’s more, economic data points to a slowdown in parts of Europe and Asia. The Eurozone Manufacturing PMI registered a six-year low of 47.5 in March, while China’s manufacturing sector is expanding only marginally.

This is expected to impact large U.S.-based multinationals that do a significant percentage of their business overseas. (In 2017, Intel topped the list with foreign sales accounting for 80 percent of total sales, followed by food and beverage maker Mondelez (76 percent) and Coca-Cola (70 percent).)

Many investors may wonder, then, how they can get access to the robust U.S. economy and strengthening dollar while limiting their exposure to shrinking global trade and a potentially slowing economy outside of the U.S.

world trade volume shrank in January 2019
click to enlarge

Time to Rotate Into Small-Cap and Mid-Cap Stocks?

A possible option could be small to mid-cap stocks, which are generally tied more closely to the domestic market than their blue-chip peers.

Not only are small and mid-caps more insulated from protectionist policies such as tariffs and stricter trade barriers, but they’re also supported by a stronger U.S. dollar. This week, the dollar tested its 52-week high, set in late April, and is currently trading above its 50-day and 200-day moving averages.

a strengthening U.S. dollar favors smaller, more domestic-focused companies
click to enlarge

A strong greenback acts as a headwind to multinationals that do a lot of exporting, the reason being that American goods and services become more expensive to international markets.

Conversely, a stronger dollar supports smaller but high-quality, dividend-paying firms whose revenues are more likely to come from inside the U.S. than overseas. Think companies like Pool Corporation, the Clorox Company, PetMed Express, Hawaiian Holdings and more—all of which were held in our Holmes Macro Trends Fund (MEGAX) as of March 31.

A recent Wall Street Journal article supports this strategy.

“A resurgence in the dollar potentially bodes well for one group that has struggled to reclaim record territory after last year’s rout: small-cap stocks,” the article reads. It also adds that smaller companies likely stand to benefit from the Federal Reserve’s freeze on additional interest rate hikes.

We Believe Smaller Domestic Companies Look Undervalued

Indeed, small-cap stocks have not fully recovered from the market selloff in the fourth quarter, unlike S&P 500 companies. As of May 8, the Russell 2000 Index was still around 9 percent lower than its all-time high in late August. The S&P, meanwhile, rocketed back up to record levels before hitting resistance from President Donald Trump’s recent announcement that he was considering raising tariffs even higher on China-made goods.  

small-cap stocks still haven't recovered after the selloff
click to enlarge

I think this creates an attractive buying opportunity for small and mid-caps. Dollar strength and trade friction could very well prompt investors to rotate out of large-cap multinationals in favor of their smaller peers, which have a performative advantage over blue-chips anyway.

They’ve also historically outperformed large-cap stocks in most rolling 20-year periods, according to legendary investor James O’Shaughnessy, author of the essential What Works on Wall Street and The New Rules for Investing Now.

In New Rules, O’Shaughnessy writes that “a company with $200 million in revenues is far more likely to be able to double those revenues than a company with $200 billion in revenues. With large companies, each increase in revenues becomes a smaller and smaller percentage of overall revenues. Small stocks, on the other hand, have a much easier time delivering great percentage growth in revenues and earnings.”

Looking for a way to invest in high-quality small and mid-cap stocks? Our Holmes Macro Trends Fund (MEGAX) is indexed to the S&P Composite 1500 Index, which covers about 90 percent of U.S. equity market capitalization, but we favor smaller firms for the reasons I explained. As of March 31, the fund had a 58.0 percent weighting in mid-cap stocks (those with market caps between $1 billion and $10 billion) and a 17.5 percent weighting in small-cap stocks (those under $1 billion in market capitalization).

To learn more and to request literature on MEGAX, click here!

 

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.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus. Historically, investing in small-cap and mid-cap stocks has been more volatile than investing in large-cap stocks.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.

The U.S. dollar index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600.  The index was developed with a base value of 100 as of December 30, 1994.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund as a percentage of net assets as of 3/31/2019: Intel Corporation 0.00%, Mondelez International Inc. 0.00%, The Coca-Cola Co. 0.00%, Pool Corp. 4.80%, The Clorox Co. 3.17%, PetMed Express Inc. 2.16%, Hawaiian Holdings Inc. 1.06%.

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.

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Net Asset Value
as of 05/24/2019

Global Resources Fund PSPFX $4.31 0.05 Gold and Precious Metals Fund USERX $6.53 0.04 World Precious Minerals Fund UNWPX $2.51 0.01 China Region Fund USCOX $7.91 0.05 Emerging Europe Fund EUROX $6.53 0.05 All American Equity Fund GBTFX $23.95 -0.02 Holmes Macro Trends Fund MEGAX $16.43 0.14 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change