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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.

Recipe Calls for a Broad Commodities Rally in 2018
January 16, 2018

At the beginning of every year, we update what’s typically one of our most popular pages, the Periodic Table of Commodity Returns. I encourage you to explore 10 years’ worth of data on basic materials such as aluminum, zinc and everything in between. A word of warning, though—the interactive feature makes the table highly addictive. Please feel free to share it with friends and family!

best of the year top 5 frank talk posts of 2017

It was a photo finish for commodities in 2017. The group, as measured by the Bloomberg Commodity Index, barely eked out a win for the second straight year, edging up 0.7 percent. Spurred by a weaker U.S. dollar and strengthening materials demand from factories, the index headed higher thanks to a breathtaking rally late in the year that lasted a record 14 consecutive days.

The annual return might not look too impressive, but I believe the economic conditions are ripe for a broad commodities rally in 2018. I’m not alone in predicting they’ll be among the best performing asset classes by year end, perhaps even beating domestic equities as quantitative tightening threatens to put a damper on the nine-year bull run.

Analysts at Goldman Sachs, for instance, are overly bullish on commodities, recommending an overweight position for the next 12 months. Bank of America Merrill Lynch is calling for a $7,700-a-tonne copper price target by mid-2018, up from $7,140 today. In last Friday’s technical market outlook, Bloomberg Intelligence commodity strategist Mike McGlone writes that the “technical setup for metals is similar to the early days of the 2002-08 bull market.” Hedge fund managers are currently building never-before-seen long positions in heating oil and Brent crude oil, which broke above $70 a barrel in intraday trading Thursday for the first time since December 2014. It’s now up close to 160 percent since its recent low of $27 a barrel at the beginning of 2016.

Few have taken such a bullish position, though, as billionaire founder of DoubleLine Capital Jeffrey Gundlach, whose thoughts are always worth considering.

Commodities Ready for Mean Reversion?

Last month I shared with you a chart, courtesy of DoubleLine, that makes the case we could be entering an attractive entry point for commodities, based on previous booms and busts. The S&P GSCI Total Return Index-to-S&P 500 Index ratio is now at its lowest point since the dotcom bubble, meaning commodities and mining companies are highly undervalued relative to large-cap stocks. We could see mean reversion begin to happen as soon as this year, triggering a commodities super-cycle the likes of which we haven’t seen since the 2000s.

the new periodic table of commodity returns 2017
click to enlarge

Gundlach has more to say on this subject. During his annual “Just Markets” webcast, he told investors that “commodities will outperform in 2018” because they “always rally sharply—much more sharply than they have so far—late in the business cycle as we head into a recession.”

Speaking to CNBC, he added that the S&P 500 “may go up 15 percent in the first part of the year, but I believe, when it falls, it will wipe out the entire gain of the first part of the year with a negative sign in front of it.”

Gundlach might be in the minority here, but it’s hard to ignore the tell-tale signs that we’re approaching the end of the business cycle, as I’ve pointed out before. We’ve begun a new interest rate hike cycle, both here in the U.S. and the United Kingdom. The Federal Reserve has started to unwind its massive balance sheet. The Treasury yield curve continues to flatten. And the S&P 500 just had its least volatile year on record.

All of these indicators, among others, have historically preceded a substantial market correction.

In his 2018 outlook, David Rosenberg, chief economist and strategist at Canadian wealth management firm Gluskin Sheff, makes similar observations, writing that “it is safe to say that we are pretty late in the game.”

the equities bull market is 90% through, or past the seventh inning stretch.

How late? After looking at a number of market and macro variables, Rosenberg and his team concluded that we’re about “90 percent through, which means we are somewhere past the seventh inning stretch in baseball parlance but not yet at the bottom of the ninth.”

Look for mean reversion this year, Rosenberg adds, “which would be a good thing in terms of opening up some buying opportunities.”

Resource stocks, I believe, could be an attractive place to look, as they’ve traditionally outperformed in the last phase of an economic cycle.

Manufacturing and Construction Booms Underway

You don’t have to bet on a recession to be bullish on commodities. The dollar appears to have peaked, making materials less expensive for overseas markets, and the Global Manufacturing Purchasing Manager’s Index (PMI) ended 2017 at 54.5, close to a seven-year high. The sector has been in expansion mode now for the past 22 months, with the eurozone signaling its fastest growth in the series’ two-decade history.  

Global PMI Ended 2017 at Near Seven-Year High
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That’s not the only constructive news out of Europe. The European Commission’s headline economic sentiment indicator jumped more than economists had anticipated in December, ending the year at a 17-year high. Construction confidence in the eurozone also looks as if it’s fully recovered and is trending in positive territory for the first time since the financial crisis.

Strong eurozone economy a tailwind for commodities demand (Dec. 1997 - Dec. 2017)
click to enlarge

Strong manufacturing and construction expansion here in the U.S. is likewise supportive of commodity prices. December’s ISM Manufacturing PMI clocked in at a historically high 59.7. New orders grew 5.4 percent from the precious month to 59.4, its highest reading since January 2004. What’s more, U.S. construction spending in November rose to an all-time high of $1.257 trillion, according to this month’s report from the Census Bureau.  

Strong eurozone economy a tailwind for commodities demand (Dec. 1997 - Dec. 2017)
click to enlarge

Which Commodities Are Set to Rally the Most?

Palladium was the best performing commodity of 2017, climbing more than 56 percent on a weaker dollar, concerns of a supply crunch and a robust global auto market. Along with its sister metal, platinum, palladium is used primarily in the production of catalytic converters, which curb emissions from gasoline-powered vehicles.

For the first time since 2001, palladium traded higher than platinum beginning in September, and the week before last it hit an all-time intraday high of $1,099 an ounce. A healthy correction at this point wouldn’t be surprising, as the metal’s looking overbought compared to platinum.  

Palladium looks overheated compared to platinum
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“Pressured by diesel-emission scandals, platinum appears too low vs. palladium,” writes Bloomberg’s Mike McGlone. We might be in for another price reversal this year.

As I wrote recently, gold’s Fear Trade growth drivers are firmly in place. If a “Fed rally” occurs similar to the past two rallies, we could see gold climb to as high as $1,500 an ounce by summer. We also have the Chinese New Year to look forward to, which falls on February 16.

I believe 2018 could also be silver’s year to shine. The white metal rose 6.42 percent in 2017, with Indian silver bullion imports jumping an amazing 90 percent compared to imports the previous year, according to Metals Focus. Goldman Sachs analysts point out that silver has historically fared better than gold near the end of the business cycle, “as it is more strongly leveraged to global growth, given its significant industry use.”

A recent online survey conducted by Kitco News found that nearly 40 percent of respondents believed silver would outperform in 2018, compared to four other metals. Twenty-seven percent of readers said gold would outperform, followed by a quarter for copper. About 10 percent were most bullish on either platinum or palladium.

 

HIVE Blockchain Technologies Gets a New Ticker: HVBTF

Investors should be aware that HIVE Blockchain Technologies, the blockchain infrastructure company that U.S. Global Investors made a strategic investment in last year, recently got approval to change its ticker on the OTC Markets. HIVE will now trade under the stock symbol HVBTF. It was previously trading under the symbol PRELF. No action is required by current shareholders, but I thought they should be made aware nonetheless.

 

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 Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones-UBS Commodity Index (DJ-UBSCI) in 2009, when UBS acquired the index from AIG.

The S&P GSCI (formerly the Goldman Sachs Commodity Index) 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 Standard & Poor's 500 Index, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly.

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2018 Could be Another Knockout Year for Emerging Europe
January 9, 2018

A market square in Warsaw Poland

Domestic stocks were a great place to invest in 2017, but hopefully you didn’t overlook opportunities overseas. Emerging markets had a gangbusters year, surging more than 37.5 percent with dividends reinvested, as measured by the MSCI Emerging Markets Index. A combination of rising PMIs—or the purchasing manager’s index I talk so often about—and a steadily declining U.S. dollar helped emerging economies in Asia, Latin America, Europe and elsewhere eke out their best year since 2010.

Will there be a fed rally in 2018
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This was a boon for our Emerging Europe Fund (EUROX), which crushed its benchmark in 2017.

EUROX, which invests in companies domiciled in Central and Eastern Europe (CEE) economies, beat its benchmark, the MSCI EM Europe 10/40 Index, by 2.4 percent and outperformed its main competitor, the T. Rowe Price Emerging Europe Fund (TREMX), by 4.7 percent. Throughout 2017, the fund traded consistently above its 200-day moving averages and ended the year at a three-year high.

Will there be a fed rally in 2018
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I’m optimistic this upswing can be sustained this year, supported by low unemployment, low inflation and record manufacturing growth. The European Central Bank (ECB) has indicated that it will continue its accommodative monetary policy by keeping rates low and expanding its balance sheet some 270 billion euros ($326 billion) through the first three quarters of 2018.

EUROX Outperformed, Thanks Largely to Active Management

I can’t stress enough the role active management played here. Using financial indicators such as cash flow return on invested capital (CFROIC) and low debt-to-equity, we managed to outperform the fund’s benchmark and its main competitor.  

Two positive contributors to fund performance last year were an overweight in Turkish stocks and underweight in Russian stocks. When screening for CFROIC, our model pointed to Turkey as having the most attractive companies on a relative basis. Our allocation was well-made, as Turkey far outperformed its CEE peers. The Borsa Istanbul 100 Index ended the year up close to 48 percent in local currency, followed by Poland’s  WIG20, which advanced more than 26 percent.

Will there be a fed rally in 2018
click to enlarge

Again, we underweighted Russia based on our model and after factoring in overall negative investor sentiment, which really began in earnest in 2014 after the country annexed Crimea, inviting international sanctions. The ill will only intensified during and after the 2016 U.S. presidential election, and today, we see Russian stocks, as measured by the MOEX Russia Index, decoupling from Brent crude oil prices.

Will there be a fed rally in 2018
click to enlarge

Historically, Russian stocks have closely tracked Brent prices, which accounted for nearly 50 percent of the federation’s exports in 2016. But it seems now as if a selloff is underway as new details continue to emerge from the investigation into Russia’s meddling in the U.S. election. It appears markets have mostly soured on Vladimir Putin, with the MOEC ending the year down 5.5 percent.

A good illustration of our attentive stock selection in Russian equities was our exit out of Magnit, the country’s largest retailer. We dumped the stock in April after it had lost around 9 percent for the year. By the end of 2017, it had fallen a further 25 percent.

Meanwhile, we remained long Sberbank, the number one holding in EUROX. In the third quarter of 2017, the Russian bank posted a record 224.1 billion rubles (approximately $4 billion) in net profit, an amazing 64 percent increase from the same three-month period in 2016. Sberbank ended the year up more than 46 percent.

A European Manufacturing Boom Could Be Constructive in 2018

Besides a weak U.S. dollar, the real catalyst for growth in emerging European markets last year was a reenergized manufacturing sector. Take a look at the PMIs in the CEE area. All of the major economies that EUROX invests in saw manufacturing expand strongly throughout most of 2017—and that includes debt-ridden Greece, which had been a laggard in this area until recently. In December, the Mediterranean country’s manufacturing sector rose the fastest since 2008. (Anything above 50 indicates expansion; anything below, deterioration.)

Will there be a fed rally in 2018
click to enlarge

The PMI, unlike gross domestic product (GDP), is a forward-looking indicator. That all CEE countries are in expansion mode is good news, I believe, for the next six months at least, if not the rest of 2018.

The eurozone as a whole knocked it out of the park in December, posting a 60.6, the highest PMI reading ever in the series’ two-decade history. Germany, Austria, the Netherlands and Ireland all ended the year at record-high levels, while Italy and France had their best showing since 2000.

As I’ve shared with you before, CEE countries have tended to benefit greatly from strong economic growth in its western neighbors, and last year was no exception. The Czech Republic and Hungary were standouts, their manufacturing sectors growing at the fastest rates on improved output, new orders and job creation. Brexit has also been a windfall for the CEE regions, as companies have moved high-quality jobs out of the United Kingdom and into Poland and other central and eastern European Union nations.

Poland Now a “Developed Economy”

On a final note, Poland was recently upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September of this year. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany and Singapore. The country is the first in the CEE region to receive “developed” status, and I believe the news will attract even more inflows from foreign investors.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank forecasts its economy in 2018 to grow 3.3 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

 

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.

 

Total Annualized Returns as of 9/30/2017:
Fund One-Year Five-year Ten-Year Gross Expense Ratio
Emerging Europe Fund (EUROX) 26.83% -3.85% -6.96% 2.33%
MSCI EM Europe 10/40 Index 25.42% -11.03% -34.91% n/a
T. Rowe Price Emerging Europe Fund 22.59% -2.21% -6.00% 1.75%

Expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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 concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The MSCI Emerging Markets (EM) Europe 10/40 Index is designed to measure the performance of the large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. The Borsa Istanbul 100 Index is a capitalization-weighted index composed of National Market companies except investment trusts. The WIG20 is a capitalization-weighted stock market index of the twenty largest companies on the Warsaw Stock Exchange. The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange. The index was developed with a base value of 100 as of December 31, 1980. The Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price only performance of large, actively traded shares on the Budapest Stock Exchange. The index has a base value of 1000 points as of January 2, 1991 and is a Total Return index. The PX index is the official price index of the Prague Stock Exchange. It is a free float weighted price index made up of the most liquid stocks and it is calculated in real time. The MOEX Russia Index (formerly MICEX Index) is the main ruble-denominated benchmark of the Russian stock market. 

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Cash flow return on invested capital (CFROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Magnit 0.00%, Sberbank of Russia PJSC 10.71%. Holdings by region in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Russian Federation 34.55%, Turkey 15.37%, Poland 14.5%, Greece 6.98%, Austria 4.6%, Hungary 3.3%, Germany 2.7%, Cyprus 2.25%, Czech Republic 1.38%, Canada 1.25%.

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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It's Time for the Fear Trade to Move Gold Prices
January 8, 2018

best of the year top 5 frank talk posts of 2017

The price of gold and gold mining stocks were very competitive in 2017. The yellow metal ended the year up a little more than 13 percent—its best year since 2010—while gold stocks, as measured by the NYSE Arca Gold Miners Index, gained more than 11 percent. All of this occurred even as large-cap stocks regularly closed at all-time highs and cryptocurrencies invited massive speculation.

We can thank the Fear Trade for much of gold’s performance last year. The Fear Trade, of course, is driven by low to negative real interest rates—when inflation erodes away at government bond yields—deficit spending, a weaker U.S. dollar and geopolitical uncertainty.

I believe these forces will only intensify in 2018. With inflation finally showing green shoots and President Donald Trump’s $1.5 trillion tax reform law expected to increase deficit spending, this year could provide the right conditions to spur gold prices higher.

The risks inherent in the Federal Reserve’s monetary policy tightening is a good place to start.

Beware the Rate Hike Cycle?

Since the Fed lifted rates last month, gold has behaved just as it did following the last two December rate hikes—that is, it’s begun to appreciate. On the final trading day of 2017, gold broke above $1,300 an ounce, a psychologically important level, and has since climbed an additional 1 percent. This is the first year since 2013, in fact, that gold has started the year above $1,300.  

We’ve seen this movie before. In July 2016, the yellow metal peaked close to $1,370 an ounce, a 29 percent surge since the December 2015 rate hike. (If you remember, this represented gold’s best first half of the year since 1974.) And in September 2017, it topped out around $1,360, up close to 18 percent since the December 2016 rate hike.


Will there be a fed rally in 2018
click to enlarge

So will we see a “Fed rally” in 2018 as well? Obviously nothing is guaranteed, but let’s say gold were to follow a similar trajectory this year as it did in 2016 and 2017. That would put gold somewhere between $1,460 and $1,600 an ounce by summer. These are prices we haven’t seen in four years.

I think it’s also worth pointing out in the chart above that support looks good for gold. For the past couple of years, it’s steadily posted higher lows.

But wait—shouldn’t rate hikes put a damper on gold prices? Gold, as I’ve discussed many times before, has typically thrived in a low-rate environment since it’s a non-yielding asset. What’s really happening here?

I’ll let Jim Rickards, editor of Strategic Intelligence, field this question. In a recent Daily Reckoning article titled “The Next Great Bull Market in Gold Has Begun,” Jim explains that the market is looking beyond the rate hike and “asking what comes next.”

After all, the December rate hikes in 2015, 2016 and 2017 were all advertised well in advance by the Fed and were fully discounted by the market. This means that the rate hike was a nonevent, because gold was already priced for it.

Yet the rate hike itself and the Fed’s commentary suggest both a headwind for economic growth and possible Fed ease in the form of future inaction and forward guidance relative to expectations.

Gold markets, in other words, could be forecasting slower economic growth as a result of higher borrowing costs. You might not agree with Jim here, and I’m not asking you to. After all, the U.S. economy is humming right now. Consumer spending is up, optimism is high and we have a robust labor market with unemployment at a 17-year low of 4.1 percent. Many people expect the Trump tax cuts to prompt multinational corporations to bring home cash that’s been held overseas, lift wages and boost capex spending.

At the same time, we can’t ignore the historical implications of past rate hike cycles. I shared with you last month that in the past 100 years, only three such cycles out of at least 18 didn’t end in a recession.The current cycle could turn out to be just as benign, but that would make it a huge exception, not the norm.

U.S. Yield Curve Flattens to Level Not Seen Since 2007

Then there’s the flattening yield curve. The yield curve is said to “flatten” when the difference between the two-year Treasury yield and 10-year Treasury yield starts to tighten. As of today, that spread drew up to around 0.496 percentage points, its flattest level since October 2007.

This measure is worth watching because it’s often seen as one of the most reliable “canary in the coal mine” predictors of recession. The past seven U.S. recessions were directly preceded by an inverted yield curve—that is, when short-term yields rose above long-term yields.


An inverted 10 year minus 2 year treasury yeild spread has historcially preceeded a recession
click to enlarge

To be clear, we still have a way to go before the yield spread inverts. But if this observation concerns you—if you believe the business cycle is in fact getting a little long in the tooth—it might make sense to ensure you have a 10 percent weighting in gold bullion and high-quality gold mutual funds and ETFs.

Inflation Could Be a Lot Hotter Than We Realize

Another factor that’s driven gold prices in the past is inflation. When the cost of living has eaten away at government bond yields, investors have tended to seek more attractive stores of value, including gold. This is at the heart of gold’s Fear Trade.

The problem is that inflation has been sluggish lately—if we’re using the official consumer price index (CPI). In 2017, the CPI just barely met the Fed’s 2 percent target rate. Many economists had expected prices to start creeping up last year in response to President Trump’s nationalist “America first” agenda, complete with new tariffs, strong crackdown on illegal immigration, cancellation of U.S. participation in the Trans-Pacific Partnership (TPP) and a renegotiation of the North American Free Trade Agreement (NAFTA). So far these policies haven’t had much effect on inflation.

But what’s the “real” inflation? Which gauge should we be looking at? Again, the CPI doesn’t show much movement.

The underlying inflation gauge (UIG), however, tells a different story.

The UIG, introduced only last year by the New York Fed, is a much broader measure of inflation than the CPI. It includes not just consumer prices but also producer prices, commodity prices and financial asset prices.

When we use this dataset, we find that—surprise!—inflation is not as subdued as we initially thought. Whereas the November CPI came in at 2.2 percent, the UIG heated up to 3 percent, its highest reading since August 2006.


Would the real inflation metric please stand up
click to enlarge

The implications here are huge. Three percent is higher than the five-year Treasury yield, currently around 2.3 percent, and the 10-year yield, about 2.5 percent. It’s even higher than the 30-year Treasury yield at 2.8 percent!

But there are even more ways to measure inflation, and some show it being higher than the UIG. Economist John Williams runs a website called Shadow Government Statistics, where you can find, among other “alternate” datasets, current inflation rates as is they were calculated the way the U.S. government did pre-1980. Note the huge bifurcation between the official CPI and alternate 1980-based CPI. According to the alternate gauge, consumer prices in November rose close to 10 percent year-over-year, or 7.75 percentage points more than the CPI.


US consumer inflation official vs shadowstats 1980 based alternative
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“In general terms,” Williams writes, “methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”

So which metric do you believe? The official CPI? The 1980-based CPI? The broader UIG? If it’s one of the last two, you have to ask yourself why you would lock your money up for five years, 10 years or even 30 years in a government bond that fails to keep up with real inflation. The investment case for gold suddenly becomes very attractive.

 Interested in learning more? Be sure to check out these 10 charts that show why I think gold is undervalued right now!

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 NYSE Arca Gold Miners Index (GDM) is a modified market capitalization weighted index comprised of publicly traded companies primarily involved in the mining of gold and silver in locations around the world.

The consumer price index (CPI) is a measure of the variation in prices paid by typical consumers for retail goods and other items.

The underlying inflation gauge (UIG) captures sustained movements in inflation from information contained in a broad set of price, real activity, and financial data.

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Best of the Year: Top 5 Frank Talk Posts of 2017
January 2, 2018

best of the year top 5 frank talk posts of 2017

As we begin a New Year, I want to share with you the five most popular Frank Talk posts of 2017. One common theme you’ll see in these posts is they all center on the topic of gold. Although we specialize in educating investors about gold and managing gold funds, it’s worth noting that our gold posts garnered more interest than our bitcoin and blockchain posts in this year of cryptocurrency craze.

Cryptocurrencies hogged the spotlight in 2017, and some might say this attention drove investors away from traditional assets such as gold; however, I disagree, as I believe gold and bitcoin serve different purposes. While many might think gold underperformed in 2017, it actually finished the year strong. The precious metal ended the year up approximately 13 percent.

2017 In Review: The Top 5 Posts

1. 5 Things You Need to Know from last Week (Look What Gold Just Did!)

The last week of May was particularly bullish for gold after a “golden cross”—the 50-day moving average climbing above the 200-day moving average—occurred for the first time in over a year. A report released that same week from the Wall Street Journal confirmed my suspicion that Wall Street is run by quantitative analysts, or quants, whereby traders and fund managers make their instincts based on oceans of data rather than gut instinct. Other highlights from the week included the U.S. bouncing back as the top wheat producer and bitcoin trading around $2,700, double that of an ounce of gold. (By the end of this year, bitcoin, of course, hit a peak of over $19,000 then lost 30 percent of its value shortly thereafter.)


gold posts a golden cross
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2. “Mother of All Bubbles” Keeps Gold in Focus

While many write of the potential bubble of bitcoin, I wrote earlier this year of the “mother of all bubbles”: total global debt. Global debt levels are rising each year with the U.S. alone adding $3 trillion every year to the pension deficit. People are living longer while near-zero interest rates are encouraging heavy levels of borrowing. In preparation for a possible burst, investors might consider placing some of their wealth in a hard asset such as gold.


total global debt stands at all time high
click to enlarge

3. Gold Gets a Shot in the Arm from Inflation and China

In January we saw a rate hike of 0.25 percent and the gold market responded favorably after the Federal Reserve took a dovish tone regarding future rate hikes. Gold has historically been an attractive hedge against inflation. The bull market, currently in its eighth year, is facing some significant geopolitical and macroeconomic uncertainty, and we could be getting late in the economic cycle. For the 10-year period, the yellow metal has shown an inverse correlation to risk assets such as stocks and high-yield bonds. 

With China and India set to become the two largest economies by 2050 and already the top two gold consuming nations, we expect to see demand rise greatly for gold. Historically, when incomes rise in China and India, demand also rises for the yellow metal.


moving on up china and india ascending the income ladder
click to enlarge

4. Gold Was Chemically Destined to Be Money All Along

Mid-year I brushed up on my knowledge of gold’s chemical properties. Gold is unlike any other metal, and the fact that it’s so chemically “boring” is one of the many reasons why it’s so highly valued, even today. The precious yellow metal beats out all other metals and leaves silver in second place to be the best possible candidate for a currency of any value.


gold was chemically destined to be money all along
click to enlarge

In a time of rising global debt and currencies free-floating, I believe gold will remain a strong asset class for storing wealth and hedging against inflation. Early last year, former Fed Chairman Alan Greenspan told the World Gold Council he views gold as the primary global currency. At U.S. Global Investors, we continue our long-standing recommendation to give the metal a 10 percent weighting—5 percent in physical gold and the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

5. The World is Running out of Gold Mines—here’s How Investors Can Play It

In response to lower gold prices, explorers have had to slash their exploration budgets resulting in fewer large mines being discovered. 2016 marked the fourth consecutive year of falling exploration budgets and an 11-year low.


exploration budgets fell to an 11 year low in 2016
click to enlarge

Since all the “low hanging fruit” gold mines have likely already been discovered, explorers now have to dig deeper and venture farther into more extreme environments to find economically viable deposits. This increases the cost of exploration and ultimately production. As costs are rising, many senior gold producers are instead acquiring smaller firms with proven, profitable projects rather than exploring themselves. Investors can use this to their advantage by investing in junior gold companies that look like targets for takeover.

2017 is the eighth year of the S&P 500 Index bull-run, closing at multiple all-time highs this year alone! Test your knowledge of the index’s history or check out other interactive favorites from our Investor Library.

To all of our readers around the world, I wish you robust health, buckets of wealth and tons of happiness in the New Year!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
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.

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10 Charts That Show Why Gold Is Undervalued Right Now
December 26, 2017

gold is undervalued right now

With the year quickly coming to a close, it might be time to start thinking about rebalancing the gold holdings in your portfolio. That includes bullion, jewelry, gold stocks and well-managed gold funds—all of which I recommend giving a collective 10 percent weighting. Because it’s been such a strong year for stocks—they’ve advanced more than 20 percent as of today—it’s likely that most investors will need to add to their gold exposure to meet that 10 percent weighting as we head into 2018.

Some investors might wonder why they need gold in their portfolios right now. The stock market is still chugging along, and the just-passed tax reform bill is likely to help ratchet up share prices even more. Cryptocurrencies have been hogging the spotlight lately, especially after bitcoin tumbled nearly 30 percent last Friday morning.

While I’m on the subject, inflows into cryptocurrencies have totaled more than $500 billion this year alone. To put that in perspective, the total sum of global equity mutual fund and ETF inflows were around $411 billion as of November 29. What’s more, cryptocurrencies are now doing as much daily trading as the New York Stock Exchange (NYSE), according to Business Insider. 

Just think on that. Something is happening here that cannot be ignored or dismissed.

But back to gold. It’s important to remember that the precious metal has historically shared a low-to-negative correlation with many traditional assets such as cash, Treasuries and stocks, both domestic and international. This makes it, I believe, an appealing diversifier in the event of a correction in the capital and forex markets.

Need more reasons to add to your gold holdings? Below are 10 charts that show why the yellow metal is undervalued right now:

1. The gold price has crushed the market so far this century.


gold price has crushed the market 2 to 1 so far this century click to enlarge

Investors are invariably surprised to see this chart whenever I show it at conferences. Believe it or not, since 2000, the gold price has beaten the S&P 500 Index, which has undergone two 40 percent corrections so far this century.

2. Compared to stocks, gold looks like a bargain.


Gold is a bargain right now compared to stocks click to enlarge

As of this month, the gold-to-S&P 500 ratio is at its lowest point in 10 years. For mean reversion to occur, either the gold price needs to appreciate or share prices need to fall. Either way, consider this a once-in-a-decade opportunity.

3. Exploration budgets keep getting slashed.


total nonferrous exploration budgets fell to an 11 year low in 2016 click to enlarge

One of the reasons why gold is so highly valued is for its scarcity. There’s a possibility it could get even scarcer as explorers continue to trim exploration budgets and uncover fewer and fewer large deposits. The time between initial discovery and day one of production is also expanding. This has led many experts in the field to wonder if we’ve finally reached “peak gold.”

4. Gold stocks could be just getting started.


will todays gold stocks track previous bull markets click to enlarge

Last year marked a turnaround in gold prices and gold stocks, and according to analysts at Incrementum Capital Partners, a Swiss financial management firm, they’re just getting warmed up. When charted against past gold bull markets, the present one looks as if it still has a lot of room to run.

5. Is too much money going into equities?


world equities market cap well on its way to 100 trillion dollars click to enlarge

More than $80 trillion sits in global equities right now, a monumental sum that’s likely to surge even more as we venture further into the bull market. Some worry this is a ticking time bomb just waiting to go off. Another correction similar to the one 10 years ago would wipe out trillions of dollars around the world, and it’s then that the investment case for gold would become strongest.

6. Higher debt could mean higher gold prices.


federal debt expected to continue rising click to enlarge

The yellow metal has historically tracked global debt, which stood at $217 trillion as of the first quarter of this year. Looking just at the U.S., debt is expected to continue on an upward trend, driven not just by new, and largely unfunded, spending but also underlying interest. By most estimates, President Donald Trump’s historic tax cuts, although welcome, will contribute to even higher debt as a percent of gross domestic product (GDP).

7. The Fed’s about to take away the punch bowl.


federal reserve has begun the process of unwinding its 4.5 trillion balance sheet click to enlarge

“My opinion is that business cycles don’t just end accidentally. They end by the Fed. If the Fed tightens enough to induce a recession, that’s the end of the business cycle.” That’s according to MKM Partners’ chief economist Mike Darda, who was referring to the Federal Reserve’s efforts to unwind its $4.5 trillion balance sheet after it bought vast quantities of government bonds and mortgage-backed securities to mitigate the effects of the Great Recession. There’s definitely a huge amount of risk here: Five of the previous six times the Fed has similarly reduced its balance sheet, between 1921 and 2000, ended in recession.

8. Rate hike cycles have rarely ended well.


recessions have historically followed us rate hike cycles click to enlarge

Rate hike cycles also have a mixed record. According to Incrementum research, only three such cycles in the past 100 years have not ended in a recession. Obviously there’s no guarantee that this particular round of tightening will have the same outcome, but if you recognize the risk here, it might be prudent to have as much as 10 percent of your wealth in gold bullion and gold stocks.

9. Trillions of dollars of global bonds are guaranteed to lose money right now.


world central banks still holding interest rates in negative territory click to enlarge

As of May of this year, nearly $10 trillion of bonds around the world were guaranteed to cost investors money, as more and more central banks instituted negative interest rate policies (NIRPs) to spur consumer spending. Instead, it encouraged many savers to yank their cash out of banks and convert it into gold. That’s precisely what households in Germany did, and by 2016, the European country became the world’s biggest investor in the yellow metal.

10. The Love Trade is still driving gold demand.


golds 30 year seasonality patterns click to enlarge

The chart above, based on data provided by Moore Research, shows gold’s 30-year seasonal trading pattern. Although it’s changed over the past few years, the pattern reflects the Love Trade in practice. According to the data, the gold price rallies early in the year as we approach the Chinese New Year, then dips in the summer. After that it surges on massive gold-buying in India during Diwali, in late October and early November. Finally, it ends the year at its highest point during the Indian wedding season, when demand is high. The pattern isn’t always observed exactly how I described, but it happens frequently enough for us to make educated, informed decisions on when to trade the precious metal.

Interested in learning more about what drives the price of gold? Find out 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 Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

The Barron’s Gold Mining Index (BGMI) consists of publicly traded companies involved primarily in the mining forgold.

 

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Net Asset Value
as of 01/17/2018

Global Resources Fund PSPFX $6.45 0.02 Gold and Precious Metals Fund USERX $7.92 -0.05 World Precious Minerals Fund UNWPX $4.68 No Change China Region Fund USCOX $12.39 0.12 Emerging Europe Fund EUROX $7.75 0.03 All American Equity Fund GBTFX $25.95 0.26 Holmes Macro Trends Fund MEGAX $20.07 0.11 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change