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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.

Is the Fed Done Hiking Rates? Watch the Price of Gold
January 7, 2019

Is the Fed Done Hiking Rates? Watch the Price of Gold

King Dollar was on top in 2018, one of the few major assets to close the year in the black on steady interest rate hikes and robust economic growth in the U.S. But greenback strength is a double-edged sword, as you know. Although good for U.S. consumers, it can hamper exporters, commodities, oil, gold and more.

So will rates continue to rise in 2019? If so, the dollar will follow suit, putting additional pressure on other assets. I think there are a number of signs that the rate hike we saw in December could be the last one this cycle. Just this past Friday, Federal Reserve Chairman Jerome Powell commented that “we will be patient” with further rate hikes, which I believe is good news.

I’ll have more to say on rates in a second.

Under the circumstances, I’m very pleased with how well gold performed last year. It’s doing what it’s supposed to do. Stocks began to sell off late in the year, boosting investor demand for safe haven assets. As I explained in a Frank Talk last week, the yellow metal beat the S&P 500 Index for the month of December, the fourth quarter and the year. It’s also outperforming the market so far in the 21st century.

Gold was one of the top performing assets of 2018
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Gold was also one of the most liquid assets of 2018, with daily trading volumes in the same neighborhood as S&P 500 companies, according to the World Gold Council (WGC). I can’t stress enough how important this is, as it underscores the maturity and trustworthiness of the gold market. The WGC puts it well: “Clarity and transparency in financial markets is beneficial to investors as it increases their level of comfort and their understanding of an asset.”

gold was the sixth most liquid asset class of 2018
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Investors Are Betting That the Fed Hits the Pause Button

Back to interest rate policy. Again, I think Powell’s pledge to “be patient” is good news and shows that he’s willing to listen to those who have very publicly expressed their objection to further rate increases, including investing heavyweights such as Jeffrey Gundlach and Stanley Druckenmiller. Last Thursday, the Dallas Fed president, Robert Kaplan, said he supported putting additional rate hikes on hold to see how the global economy plays out.

“I would be an advocate of taking no action… in the first couple of quarters this year,” Kaplan told Bloomberg.

Investors seem to agree. Last month, the CME Group’s FedWatch Tool showed an 87 percent probability that the fed funds rate would either stay where it is now or be lowered by the end of 2019. That’s up dramatically from less than 10 percent in October. Meanwhile, bets that the rate would rise in 12 months’ time have dropped to around 12 percent.

most investors believe that rates will stay steady or be lowered next year
click to enlarge

In a note to investors last week, Stifel shared its belief that the Fed “has reached historical maximum tightness,” arguing that the central bank must “wait for the neutral rate to rise” before tightening again, or else risk “credit deterioration, recession and a deep bear market.” (The “neutral rate” is not set by the Fed but a reflection of the fed funds rate that “keeps output growing around its potential rate in an environment of full employment and stable inflation,” in the words of Fed Board Governor Lael Brainard.) According to the investment bank, we’re right at the peak of the interest rate cycle, somewhere between phase two (characterized by tightening) and phase three (characterized by easing).

the U.S. may have reached maximum monetary tightness
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“The Fed has taken restrictive policy to its very limits, and we see further S&P 500 downside if they do not stop tightening for most (or all) of 2019,” writes Stifel strategist Barry Bannister. “There are signs the Fed may stand down and wait for the neutral rate to rise.”

Possible Implication? A Weaker U.S. Dollar

One of the possible implications of a less aggressive Fed in 2019 is a weaker dollar—especially if the European Central Bank (ECB) begins tightening later this year, as some analysts predict. As I’ve explained before, once the dollar starts to lose ground relative to other world currencies, gold could rocket up to as much as $1,500 in the blink of an eye.

Among those that are bearish on the greenback is Citi, which wrote in a note last week that the greenback “may more than reverse [2018’s] rally over the medium term.” The bank predicts 12 percent downside versus other major currencies, citing the flattening (and, in one case, already inverted) yield curve as a signal of weaker economic growth.

Mike McGlone, commodity strategist at Bloomberg Intelligence, believes dollar mean reversion will be the theme in 2019, which would favor gold and commodities. “It’s unlikely for 2019 that the dollar will remain atop the list of best-performing assets,” according to McGlone, who adds that “markets appear in the transition phase of passing the bull market baton from U.S. stocks to commodities.”

Manufacturing Expansion Continues to Slow

Besides a strong dollar, the big risk to commodities right now is weaker demand from factories, which is turning up in the purchasing manager’s index (PMI).

The JPMorgan Global Manufacturing PMI fell to a 27-month low of 51.5 in December, down from 52.0 a month earlier. Amazingly, business confidence among global manufacturers dropped to its lowest level in the series history, according to David Hensley, JPMorgan’s director of global economic coordination.

China’s manufacturing sector, meanwhile, contracted last month. Its official PMI reading fell slightly, from a neutral 50.0 in November to 49.4, as declining domestic demand and U.S. trade tariffs are squeezing the world’s second-largest economy. The price of copper hit a three-and-a-half-month low this week on the news.

China's manufacturing sector deteriorated for first time since July 2016
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U.S. factories also slowed in December, down sharply from 59.3 in November to 54.1 in December. That’s the most the gauge has fallen, in percentage-point terms, since the Great Recession.

Because the PMI is a forward-looking indicator of economic health, I urge investors to be cautious. And keep your eyes on the yield curve. The spread between the 10-year Treasury yield and three-month Treasury yield narrowed to only 15 basis points last Thursday, its lowest level since September 2007—just a couple of months before the start of the financial crisis. An inverted yield curve, remember, is a sign that investors believe economic trouble could be near at hand.

The dollar looks positioned to revert back to its mean, and that’s when you want to have some exposure to gold. Keep in mind the 10 Percent Golden Rule—5 percent in gold bullion, the other 5 percent in well-managed gold mutual funds and ETFs.

Peak gold could be a major tailwind for the price of the yellow metal. Listen to my interview with Bloomberg Radio 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 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 Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

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

The FedWatch Tool calculates unconditional probabilities of Federal Open Market Committee (FOMC) meeting outcomes to generate a binary probability tree. CME Group lists 30-Day Federal Funds Futures (FF) futures, prices of which incorporate market expectations of average daily Federal Funds Effective Rate (FFER) levels during futures contract months. The FFER is published by the Federal Reserve Bank of New York each day, and is calculated as a transaction-volume weighted average of the previous day’s rates on trades arranged by major brokers in the market for overnight unsecured loans between depository institutions.

In finance, mean reversion is the assumption that a stock's price will tend to move to the average price over time.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

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Gold Has Beaten the Market Over Multiple Time Periods
January 2, 2019

gold has beaten the S&P 500 Index so far this century
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Global uncertainty made gold a holiday winner for investors seeking a relatively safe haven. U.S. stocks just logged their worst year since 2008—their worst December since 1931—as fears over global trade, ballooning debt, the end of accommodative central bank policy and a U.S. government shutdown unsettled investors. Against this backdrop, the price of gold rallied late in 2018, reversing a trend of negative returns and weak investor demand that prevailed for most of the year.

The yellow metal, after all, has historically had a strong negative correlation with the market. I’m pleased to report that this inverse relationship held firm in 2018, proving again that investors continue to see gold as a valuable asset in times of financial instability. As you can see in the charts below, gold beat the S&P 500 Index for the month of December, the fourth quarter and the year.

gold beat the S&P 500 Index for the Month of December
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gold beat the S&P 500 index for the fourth quarter
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gold beat the S&P 500 Index for the year
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With stocks down, gold’s outperformance shouldn’t come as such a shock to most readers.

What might surprise you is that the precious metal has also beaten the market for the century, 345.39 percent versus 70.62 percent, since December 31, 1999.

This tells me that, even though gold is still down from its 2011 peak, investors continue to value it as an attractive store of value.

Strong Gold Investment on Heightened Stock Volatility

Indeed, gold bulls added substantial positions to ETFs backed by bullion in December as the metal headed for its biggest monthly advance in two years. Gold-backed ETF holdings surged by more than 100 tons between October and December, helping to boost prices even further. During last Thursday’s trading session, ETFs bought 662,080 troy ounces of gold, the biggest one-day increase in at least 12 months, according to Bloomberg.

gold is on track for its biggest monthly advance since January 2017
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Quincy Krosby, chief market strategist at Prudential Financial, explains why this buying is no fluke. Speaking to Bloomberg, she said that “the market is questioning whether the [Federal Reserve] is making a policy mistake, and that could not only lead to slower growth, but perhaps to a recession.” Krosby went on to say that when you see this heavy selling in equities, “it’s indicative of fear, and gold [historically] becomes [favored as a relatively] safe-haven allocation.”

Gold Miners Ended the Year on a High Note

It wasn’t just bullion that had a good quarter. Precious metal miners, as measured by the FTSE Gold Mines Index, gained a remarkable 15.85 percent in the three months ended December 31. Among the leaders in 2018 were Nevsun Resources, up 106 percent for the 12-month period; Kirkland Lake Gold, up 81 percent; SSR Mining, up 45 percent; and North American Palladium, up 38 percent.

So should you consider exposure to the gold market?

I believe a good way to participate is with our gold fund, the Gold and Precious Metals Fund (USERX), which provides access to producers with well-established mines. I’m thrilled to tell you that the fund, managed by precious metals expert Ralph Aldis, holds a four-star rating overall from Morningstar as of September 30, 2018. USERX also holds a four-star rating for the three-year, five-year and 10-year periods.  

Curious to learn more? Explore the Gold and Precious Metals Fund (USERX) overview page 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.

Morningstar Rating

Overall/67
3-Year/67
5-Year/65
10-Year/46

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 9/30/2018

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The FTSE Gold Mines Index encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings by region in the Gold and Precious Metals Fund as a percentage of net assets as of 9/30/2018: Nevsun Resources Ltd. 0.82%, Kirkland Lake Gold Ltd. 0.00%, SSR Mining Inc. 1.07%, North American Palladium Ltd. 0.00%.

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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Revisit My 5 Most Popular Posts of 2018
December 31, 2018

Revisit My 5 Most Popular Posts of 2018

Looking back over the past 12 months, I’m not surprised to see that my five most popular and widely shared posts of 2018 involve gold (with one exception). With many stocks falling into correction territory or worse, the yellow metal emerged as a standout asset in the fourth quarter on safe haven demand. Senior gold miners, as measured by the NYSE Arca Gold Miners Index, also performed well, rising more than 13 percent in the December quarter.

That said, below I count down my five most popular posts, beginning with a story about Texas, the home state of U.S. Global Investors.

5. Texas Gold Investors Just Got Their Own Fort Knox

The Texas Bullion Depository, the first of its kind in the U.S., officially opened to the public in Austin in early June, capping three years of planning and construction. At the time, Texans were able to deposit their gold and other precious metals at an already-existing facility. Earlier this month, though, officials broke ground on a new, state-of-the-art, 40,000-square-foot facility in Leander, Texas, just north of Austin.

The Texas bullion depository is the first in the nation

This is wonderful news. Because Texas is such a trend-setting state, it might encourage other states to look into creating their own depositories. It also has the potential to attract even more investors to precious metals, which I believe are crucial components of any well-diversified portfolio.

4. It’s Time for Contrarians to Get Bullish on Gold

For most of 2018, the gold bears were large and in charge, with hedge funds shorting the yellow metal in record numbers this past summer. A major contributor to this is gold’s negative correlation to the U.S. dollar, which was strong relative to other major world currencies throughout the year.

A bottom in gold prices looked especially likely after Vanguard, the world’s largest mutual fund company, announced it was closing its precious metals and mining fund. Back in 2001, when gold had similarly found a bottom, Vanguard dropped the word “gold” from what was then the Gold and Precious Metals Fund, and the change coincided with a decade-long precious metals bull run.

Does Vanguards latest fund name change mean gold has found a bottom
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So could this mean another bull run is in the works? No one can say for sure, of course, but the timing of Vanguard’s announcement was certainly interesting. Now that gold is trading above $1,280 again for the first time since June, my confidence that the metal is set for a huge breakout has only grown stronger.

3. Here’s How We Discovered This Disruptive Gold Stock Before It Went Public

Mene jewelry
Photo courtesy of Menē

In November I shared with you one of my favorite new precious metal jewelry companies—Menē. You might not be familiar with the name yet, but you could be soon enough. In its first 10 months of operation, Menē did as much as $7 million in sales, and in more than 53 countries, as of October.

Founded in 2017, the company’s mission is to disrupt the gold jewelry market. It aims to do this by making its pieces strictly from 24-karat gold or platinum, selling directly to the consumer and pricing its merchandise fairly and transparently. Unlike traditional sellers, Menē prices its jewelry based on the changing value of gold, then charges a 15 percent to 20 percent design and production fee on top of that.

Here at U.S. Global Investors, we believe gold is money and a timeless investment. Menē , which takes its name from the Aramaic word for “money,” has clearly run with that idea, going so far as to trademark the phrase “investment jewelry.” We see the company as an attractive way to invest in gold’s Love Trade.

2. Which Has the Biggest Economy: Texas or Russia?

With Russia in the news almost daily this year, thanks mostly to the investigation into the 2016 U.S. presidential election, I wanted to know which had the larger economy—Russia or Texas. (Spoiler alert: It’s Texas, by about $400 billion.)

December 21, 2017 Signing of the Tax Cuts and Jobs Act (TCJA)

At the time of my writing this, Russia was ranked as the number one oil producer in the world. In September, however, the U.S. regained the title after pumping out nearly 11 million barrels per day late in the summer, a feat the American industry has never before achieved. Today, the U.S. produces between 11.60 and 11.70 million barrels per day, whereas Russia averages around 11.37 million barrels.

On a similar note, the International Energy Agency (IEA) just issued its prediction that, by 2025, the total amount of U.S. oil production would equal that of Russia and Saudi Arabia combined.

1. It’s Time for the Fear Trade to Move Gold Prices

My post popular post of 2018 was, coincidentally, also the very first thing I wrote this year. The yellow metal had ended 2017 up more than 13 percent, its best year since 2010, while senior gold miners gained more than 11 percent. All of this occurred even as the stock market closed regularly at all-time highs and the price of bitcoin was rising by leaps and bounds.

I attributed gold’s strong 2017 performance mainly to the Fear Trade, specifically to concerns over inflation. Interestingly, inflation never really materialized this year—the year-over-year percent change in the consumer price index (CPI) didn’t even breach 3 percent. Most forecasts for 2019 are just as mild.

However, there are other things to keep an eye on in the new year—namely, the ballooning U.S. deficit; growing debt at the consumer, corporate and government levels; rising interest rates; and signs of a global economic slowdown. What’s more, Democrats take control of the U.S. House of Representatives next month. We can probably expect to see multiple investigations into the Trump administration, which could possibly slow the progress of additional pro-growth, pro-business policies.

Taken together, these risks burnish the investment case of gold’s Fear Trade. I remain bullish on the metal for 2019 and recommend a 10 percent portfolio weighting: 5 percent in bullion and jewelry and the other 5 percent in well-managed gold mining stocks, mutual funds and ETFs.

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

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 index benchmark value was 500.0 at the close of trading on December 20, 2002.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

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 9/30/2018: Menē Inc.

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Gold Miners Are Crushing the Market in the Face of Higher Rates
December 24, 2018

Summary:

  • Anticipating trouble ahead, fund managers make a historic rotation out of equities into bonds.
  • Gold and gold mining stocks have been the one bright spot this quarter.
  • Tax reform turns one year old. Has it achieved what was expected?

Gold Miners Are Crushing the Market in the Face of Higher Rates

Disregarding strong opposition from the likes of DoubleLine Capital founder Jeffrey Gundlach, legendary hedge fund manager Stanley Druckenmiller, “Mad Money” host Jim Cramer, President Donald Trump and others, Federal Reserve Chairman Jerome Powell hiked rates last Wednesday for the fourth time in 2018.

Markets responded negatively, with the Dow Jones Industrial Average jumping around in a nearly 890-point range before closing at its lowest level in more than a year. By the end of the week, both the small-cap Russell 2000 Index and tech-heavy Nasdaq Composite Index had entered a bear market, while the S&P 500 Index was on track for not only its worst year since 2008, but also its worst month since 1931.

Among the sectors now in a bear market is financials, down around 20 percent since its peak in January. Regional banks, as measured by the KBW Regional Bank Index, have been banged up even worse, having fallen close to 30 percent since their all-time high in early June.

Canary in the Coal Mine? U.S. Financials Are Now in a Bear Market
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I bring up financials here because the sector is sometimes considered to be the “canary in the coal mine,” for the very good reason that financial institutions are highly exposed to the performance of the broader market.

What’s more, we learned last week that lenders are starting to pull back from riskier loans, a sign that they’re getting more cautious as recession fears loom. According to the New York Fed, the credit card rejection rate in October climbed to 21.2 percent, well above the year-ago rate of 15.7 percent. Banks also cut off credit from 7 percent of customers, the highest rate since 2013.

Fund Managers De-Risk in Favor of Bonds and Cash

Against this backdrop, fund managers have turned incredibly bearish on risk assets and bullish on defensive positions such as bonds, staples and cash. According to Zero Hedge’s analysis of a Bank of America Merrill Lynch report, this December represents “the biggest ever one-month rotation into bonds class as investors dumped equities around the globe while bond allocations rose 23 percentage points to net 35 percent underweight.” Fund managers’ average cash levels stood at 4.7 percent in November, above the 10-year average, according to Morningstar data.

Investors Just Poured a Record Amount of Money Into Bonds
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Equity outflows have been particularly pronounced. Lipper data shows that, in the week ended December 13, as much as $46 billion fled U.S. stock mutual funds and ETFs. That’s the most ever for a one-week period. It’s very possible that the selling is related to end-of-year tax-loss harvesting, but again, we’ve never seen outflows of this magnitude.

As such, I highly encourage investors to heed the recent advice from Goldman Sachs: Get defensive by positioning yourself in “high-quality” stocks. This probably isn’t the time to speculate.

Gold Has Been the One Bright Spot

I would also recommend gold and gold stocks. The yellow metal, as expected, is performing well at the moment, and commodity traders have taken a net bullish position for the first time since July. So far this quarter, gold has crushed the market, returning around 6 percent as of December 21, compared to negative 15 percent for the S&P 500 Index. Gold miners, though, as measured by the NYSE Arca Gold Miners Index, have been the top performer, climbing a phenomenal 12.3 percent.

Gold Miners Have Been the Standout Performer This Quarter
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On a recent episode of “Mad Money,” Jim Cramer aired his frustration with the Fed’s decision to move ahead with another rate hike, predicting that the central bank will “have to reverse course, maybe in the next four months.” When and if that happens, “you’ll regret selling because the market will rebound so fast.”

But in the meantime, Cramer says, investors should consider buying into the “bull market” in gold. He added that he likes Randgold Resources.

You can read more of my thoughts on gold and gold mining stocks by clicking here.

Is It Time for the Fed to Take a Breather?

Although there’s more to the selloff than higher interest rates, industry leaders have been quick to point fingers at the Fed’s long-term accommodative policy. Speaking to CNBC last week, Jeffrey Gundlach commented that the problem isn’t so much that the Fed is currently hiking rates. The problem, he says, “is that the Fed shouldn’t have kept them so low for so long.”

Stanley Druckenmiller made a similar argument, writing in a Wall Street Journal op-ed that, in a best-case scenario, “the Fed would have stopped [quantitative easing] in 2010” when the recession ended. Doing so, he says, would have helped mitigate a number of problems, including “asset-price inflation, a government-debt explosion, a boom in covenant-free corporate debt and unearned-wealth inequality.” Too late now.

Other analysts have highlighted the untimeliness of this month’s rate hike. According to Bloomberg’s Lu Wang, rate hikes are “exceedingly rare” when “stocks are behaving this badly.” Not since 1994, Lu says, has the Fed decided to tighten in such a volatile market. Nor has it ever tightened like this when the budget deficit was expanding, as it is right now. (I’ll have more to say on the deficit later.)

Then again, there’s a case to be made that, should another recession strike, the Fed needs the ammunition to stanch further losses. If it doesn’t hike now, it won’t have the option to lower rates later. That’s the argument made by Axios’ Felix Salmon, who believes “the only way to prevent another catastrophic asset bubble is to allow interest rates to revert to something much more normal.”

Federal Funds Rate Turns Positive for the First Time in 10 Years
click to enlarge

Salmon points out that, when adjusted for personal consumption expenditures (PCE)—the Fed’s preferred measure of inflation—the federal funds rate is now positive for the first time in over a decade. That’s “something to be welcomed,” he says.

Deficit Is “Unprecedented” in Such a Strong Economy

There are other worrisome economic signs, including the ballooning deficit. I was surprised to learn last week that, outside of a war or recession, the U.S. deficit has never been as high as it is now. That’s according to the Committee for a Responsible Federal Budget (CRFB), which reports that the budget deficit in 2018 is projected to total around $970 billion, up more than 45 percent from $666 billion last year.

“This borrowing,” says the CRFB, “is virtually unprecedented in current economic conditions.”

Normally, deficits expand during recessions and shrink during times of economic growth. But because of increased entitlement spending and other obligations, not to mention higher debt service on interest payments, the government’s outlays are far outpacing revenues.

The Tax Cuts and Jobs Act Turns One Year Old

That brings me to the issue of corporate taxes. One year ago past weekend, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), which, among other things, cut the corporate income tax rate from 35 percent to 21 percent. It was initially estimated that as much as $4 trillion would be repatriated back to the U.S. by multinational corporations that have long held hordes of cash overseas in more tax-friendly jurisdictions. So, has this happened?

December 21, 2017 Signing of the Tax Cuts and Jobs Act (TCJA)

I’m pleased to see the tax law working. Companies are indeed bringing funds back, though admittedly at much lower rates than was anticipated. According to data released last week by the Commerce Department, only $92.7 billion in offshore cash was repatriated during the September quarter. That’s the lowest quarterly amount this year and 50 percent down from the second quarter. All combined, a little more than half a trillion dollars have returned to the U.S. It’s a good start, even if it falls short of expectations.

Another projection was that companies would plow their tax savings back into employees, new equipment and overall expansion. Here the outcome is more mixed. Wages jumped 3.1 percent in the third quarter, the fastest rate in over a decade, which I believe can be directly attributed to the tax law.

But the biggest consequence of the tax law by far has been corporations’ historic buybacks of their own stock. For the first time ever, $1 trillion was spent this year on stock repurchases. That beats the prior record of $781 billion set in 2015.

Stock Buybacks Hit a Record $1 Trillion in 2018 After Tax Reform
click to enlarge

These buybacks helped stocks head higher this year—until they didn’t—but they’ve been strongly criticized for a number of reasons. One criticism is that aggressive buyback programs are often launched when stock prices are elevated, rather than when they’re on sale.

With most of the S&P 500 now in a bear market, many stocks certainly look like a bargain. I would proceed with caution, however, and make sure that I’m following the 10 percent Golden Rule: 5 percent in physical gold and the other 5 percent in well-managed gold mutual fund and ETFs. Now would be a great time to rebalance.

On a final note, I want to wish all readers and shareholders a very Merry Christmas! May this time bring you comfort and happiness as we head into a new year.

The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The Russell 2000 index is an index measuring the performance of approximately 2,000small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. The KBW Regional Banking index is a modified-capitalization-weighted index, created by Keefe, Bruyette & Woods, designed to effectively represent the performance of the broad and diverse U.S. regional banking industry. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS financials sector. 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 index benchmark value was 500.0 at the close of trading on December 20, 2002.

Personal consumption expenditures (PCE), or the PCE Index, measures price changes in consumer goods and services. Expenditures included in the index are actual U.S. household expenditures. Data that pertains to services, durables and non-durables are measured by the index.

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 09/30/2018.

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The Gold Bulls Just Regained the Upper Hand
December 18, 2018

The Gold Bulls Just Regained the Upper Hand

Commodity traders appear excited about gold again as stocks are on pace for their worst year since 2008, and their worst December since 1931. Bullish bets on the yellow metal outnumbered bearish ones for the week ended December 11, resulting in the first instance of net positive contracts since July, according to Commodity Futures Trading Commission (CFTC) data.

traders make first bullish bet on gold since july as stocks tumble
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As many of you know, December has historically been a strong month for stocks. But fears of a slowdown in global growth, rising interest rates and the U.S.-China trade war have prompted many investors to pare down their stocks in favor of gold, often perceived as a safe haven in times of economic and financial instability.

Now, as we head into 2019, gold “is poised to take the bull-market baton from the dollar and stocks,” writes Bloomberg  Commodity Strategist Mike McGlone. Although the U.S. dollar has been strengthening since September, which would ordinarily dent the price of gold, the yellow metal has shown “divergent strength on the back of increasing equity-market volatility,” McGlone adds.

Gold and Metal Miners Have Crushed the Market

So far this quarter, gold has crushed the market, returning more than 5 percent as of December 18, compared to negative 11.9 percent for the S&P 500 Index. Gold miners, though, as measured by the NYSE Arca Gold Miners Index, have been the top performer, climbing nearly 12 percent.

Gold Miners Have been the standout performer this quarter
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We could see even higher gold and gold equity prices next year and beyond, but the dollar will likely need to come down. For that to happen, the Federal Reserve will need to call time out on its quarterly rate hikes. Many industry leaders now support this idea, including Jeffrey Gundlach and Stanley Druckenmiller, not to mention President Donald Trump.

“I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make another mistake,” Trump warned in a tweet Tuesday morning. “Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

The WSJ editorial Trump refers to makes the case that “economic and financial signals suggest [Fed Chairman Jerome Powell] should pause,” a line the president has been repeating for months now.

Looking ahead five years, the investment case for gold and gold miners gets even more attractive. London-based precious metals consultancy firm Metals Focus projects a gradual increase in gold consumption between now and 2023, supported by strong jewelry demand and physical investment.

gold consumption forecast through 2023
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“From late 2019 onwards,” Metals Focus analysts write, “we expect a bull market in gold to emerge, which in our view will remain in place for the next two to three years.”

Greenspan Urges Investors to “Run for Cover”

In an interview this week with CNN, former Federal Reserve Chairman (and gold fan) Alan Greenspan urged investors to “run for cover,” as he doesn’t see the market moving much higher than they are now.

“It would be very surprising to see it sort of stabilize here, and then take off,” Greenspan said.

I believe the best way to “run for cover” is with gold and short-term, tax-free municipal bonds. As for gold, I always recommend a 10 percent weighting, with 5 percent in bullion, coins and jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

 

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The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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 index benchmark value was 500.0 at the close of trading on December 20, 2002.

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