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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.

Commodities Halftime Report: Separating the Wheat from the Chaff
July 10, 2017

amber waves of grain wheat is the best performing commodity of 2017

Of the 14 commodities we track closely at U.S. Global Investors, wheat rose to take the top spot for the first half of 2017, returning more than 25 percent. The grain was followed closely by palladium—used primarily in the production of catalytic converters—which gained 24 percent.

seperating the wheat from the chaff
click to enlarge

To view our ever-popular, interactive Periodic Table of Commodity Returns, click here.

Between the start of the year and June 30, the Bloomberg Commodity Index contracted 4.03 percent, with energy weighing down on the mostly strong performances of precious and industrial metals and agriculturals.

Contributing to metals’ gains was U.S. dollar weakness. During the first six months, the greenback lost 7.54 percent, responding partially to President Donald Trump’s comment in April that the dollar was “getting too strong.”

More recently, the president tweeted his thoughts on gas prices, which he pointed out were “the lowest in the U.S. in over ten years” for the July Fourth holiday. “I would like to see them go even lower,” he added.

Trump Goes to Warsaw

Speaking of Trump, I feel as if he has represented the U.S. and its values admirably during his visit to Europe last week. His speech in Warsaw sought to strengthen ties between America and Poland, which the New York Times just named the “next economic powerhouse.”

ahead of the g20 meeting this week, Presidend Trump and First Lady Melania arrived in Poland, greeted by Polish President Adrezej Duda and wife Agata.

Trump drew attention to a danger that’s “invisible” yet every bit as dangerous as terrorism and extremism—namely, “the steady creep of government bureaucracy that drains the vitality and wealth of the people.”

The U.S. and Poland “became great not because of paperwork and regulations,” the president said, “but because people were allowed to chase their dreams and pursue their destinies.”

This is the Trump I believe voters elected last November. If he were only able to stay on message and give his Twitter account a rest, he might more easily help engender and inspire an environment that better reflects the vision he described to his Polish audience.

I’m also encouraged by his first one-on-one meeting with Russian President Vladimir Putin. From what I’ve read, it sounds as if the two leaders managed to make some progress on Syria, with both sides agreeing to cooperate in maintaining “safe zones.”

Oil Embroiled

Regarding lower gas prices, Trump just might get his wish. Having fallen 14.30 percent in the first six months, oil is currently underperforming its price action of the past four years.

2017 oil underperforming the past four years
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Much of the thanks for oil’s slump goes to U.S. shale producers, which were quick to reactivate dormant rigs following the Organization of Petroleum Exporting Countries’ (OPEC) December announcement that it would be cutting production. As a result, the market is awash in black gold. In May, the Energy Information Administration (EIA) estimated that domestic output should average 9.3 million barrels a day this year and nearly 10 million in 2018, a level unseen in the U.S. since 1970.

West Texas Intermediate (WTI) popped above $47 a barrel last week, however, on news that oil and gas inventories in the U.S. dropped sharply the previous week. What’s more, the number of active North American oil rigs fell by two in the week ended June 30, from 758 to 756 rigs, the first such contraction since January, according to the Baker Hughes Rig Count.

Although constructive, there’s still quite a bit of terrain to cover before oil reaches the low- to mid-$50s we saw at the start of the year.

Where’s the Wheat?

As I told you back in May, the U.S. reclaimed its longstanding title as the world’s number one wheat exporter this year, displacing Russia, whose weak currency gave the Eastern European country a competitive advantage.

We might soon slip to second place yet again, for two primary reasons: 1) low U.S. wheat plantings and 2) severe droughts and unexpectedly hot weather conditions in the Northern Plains.

According to a March report from the U.S. Department of Agriculture (USDA), American farmers just aren’t planting wheat like they used to. Not only are we seeing shrinkage in the acreage devoted to the amber grain—more and more farmers are switching to soybeans—but wheat seedings are down for a second straight year. The USDA, in fact, estimates them to be at their lowest level ever since records began nearly 100 years ago in 1919.

As to the second point, severe to extreme hot and dry weather conditions in the Northern Plains—specifically in areas of Montana and the Dakotas—are putting wheat (and corn) on the defensive. According to the U.S. Drought Monitor, parts of Montana just experienced their driest May and June in 99 years and the driest January through June since 1983. Last week alone, temperatures in the region surged into the 90s and 100s, about 15 to 20 degrees above the norm. These conditions are expected to persist for several more weeks.

drought in the northern plains has impacted spring wheat conditions
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Supply constraints have pushed the grain up 25 percent so far this year to a nearly two-year high. A bushel now costs a little over $5, but some analysts see it rising above $6 and $7.

Precious Metals Continue to Shine

Also benefiting from limited supply is silver, which climbed nearly 4.5 percent as of June 30. The Silver Institute reported in May that global silver mine production in 2016 declined for the first time in 14 years on lower-than-expected output from lead, zinc and gold projects. World supply decreased 0.6 percent year-over-year, or about 32.6 million ounces.

Meanwhile, silver’s use in solar photovoltaic (PV) cells hit a new record high last year, further boosting demand. As I shared with you in May, solar ranked as the number one source of new electric generating capacity in the U.S. in 2016, followed by natural gas and wind.

In the first half of 2017, palladium, the silvery-white metal used in the production of catalytic converters, has surged to a 16-year high on speculative demand.

palladium price closing in on 16 year high
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At first blush, this trade might seem counterintuitive. After all, gas-powered vehicles, which use catalytic converters to control emissions, are expected to be surpassed in sales by electric vehicles, which do not require palladium, as early as 2040. Volvo just announced that it would completely phase out gas-only vehicles by 2019. Meanwhile, Tesla’s first mass-market battery electric vehicle (BEV) finally hit production last week.

Driving palladium’s rally this year, though, are bets that European car buyers will soon be switching from diesel-burning to gas-burning cars because of emissions concerns.

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

Palladium—one of the rarest elements on earth and mined almost exclusively in Russia and South Africa—is the smallest precious metals market, making its prices particularly vulnerable to such speculative trading. It’s achieved near-price parity with its sister metal, platinum, for the first time in two decades.  

On the other end of the spectrum is gold, whose market is larger than many major global stock and bond markets. Those include U.K. gilts, German bunds, the FTSE 100 Index, the Hang Seng Index and others.

Up 7.75 percent in the first six months, gold was supported largely by strong demand in India as consumers made their purchases ahead of the government’s Goods and Services Tax (GST), in effect since July 1, which levies a 3 percent tax on gold.

The impact of the country’s demonetization in December is also still being felt, with Indians’ confidence in fiat currencies tested. I believe Prime Minister Narendra Modi’s scheme to combat black money and public corruption, while admirable, has only reinforced Indians’ faith in the yellow metal as a store of value.

With consumer prices in the U.S. possibly set to begin rising on President Trump’s more protectionist policies—once he can get them enacted—gold priced in dollars could also be headed higher.

The Road Ahead

There’s a lot we’ll be keeping our eyes on in the second half of the year. For one, look to India’s upcoming Diwali holiday and fourth-quarter wedding season, during which gold gift-giving is considered auspicious.

Earlier in the year, I was excited about Trump’s ambitious infrastructure agenda, which would have greatly boosted domestic demand for base metals and energy. But with the Senate still locked in negotiations over what to do about Obamacare, an infrastructure deal looks as if it’s months if not years away.

Finally, I think with Tesla firing up its Nevada-based Gigafactory, investors would be prudent to keep their eyes on aluminum, cobalt, nickel and especially copper, as electric vehicles use around three times as much of the red metal as conventional vehicles. Lithium, which I featured back in March, is also expected to be a beneficiary of the move to BEVs.

 

 

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 is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
The FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong.

The Baker Hughes North American rig count is released weekly at noon central time on the last day of the work week. 

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 3/31/2017.

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Investor Beware! What Does the Illinois Budget Crisis Mean for Your Bond Fund?
July 6, 2017

L-Train Tracks, Pilsen Neighborhood Chicago Illinois

A recent Capital Economics (CE) report shines an unforgiving light on Illinois’ ongoing budget woes—and what it finds isn’t pretty. The crisis, which has affected every level of government in the state, is a cautionary tale for not only public spending run amok but also independent investors taking too large of a risk by seeking high yields.

The Land of Lincoln’s credit is already the lowest-rated in the union and, until recently, its debt came precariously close to being downgraded to “junk.” Were this to happen, it would become the first state ever to receive such an ignoble rating.

The state’s 10-year bond yield has soared in recent months, which might attract certain unwary speculators. It’s our belief, however, that such debt should generally be avoided, as the risks are especially high.

Illinois 10-Year Bond Yield Soared as State Flirted with "Junk" Status
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As I write this, a state budget could possibly be successfully negotiated, making it the first time in over two years that Illinois has operated with a budget. Republican Gov. Bruce Rauner already vetoed the first bill that reached his desk, which includes tax hikes, but the veto was immediately overridden by the State Senate and is now headed for the House.

No matter the outcome, the point here is that political dysfunction is unfavorable—to put it lightly—and muni investors should remain cautious.

Illinois isn’t the only state facing problems. Connecticut, Delaware, Maine, Massachusetts, New Jersey, Oregon, Rhode Island and Wisconsin are all (or were) mired in similar budgetary impasses. New Jersey public beaches reopened just in time for July 4 celebrations after a high-profile government shutdown closed them down.

For many muni investors, navigating around these numerous pitfalls might seem overwhelming. That’s why I believe an actively-managed municipal bond fund such as our Near-Term Tax Free Fund (NEARX) could be the solution.

More than 95 percent of NEARX is invested in munis that hold between an A and AAA investment-grade rating as of March 31. What this means is we’ve historically avoided exposure to debt issued by poorly-managed municipalities.

We also like to stay on the short end of the yield curve, especially now that the Federal Reserve has begun a new interest rate cycle. When rates rise, bond prices fall, and short- and intermediate-term munis are less sensitive to rate increases than longer-term munis whose maturities are further out.

To learn more about how rates affect municipal bonds, read our whitepaper.

On the Brink of Bankruptcy

Illinois’ total debt currently stands at about $60 billion, according to Capital Economics, which is above Detroit’s $20 billion bankruptcy in 2013 and just below Puerto Rico’s $70 billion debt. The state’s unfunded pensions—for teachers, professors, state employees, judges, emergency personnel and more—could be as high as $250 billion. That puts each Illinoisan on the hook for an estimated $56,000.

Political dysfunction and mismanagement are bad enough, but the state’s adverse demographics make matters even worse.

Illinois is one of only four states whose populations shrank over the past five years, the others being Connecticut, Vermont and West Virginia. CE estimates that over the next decade, the state’s population could grow only 2.2 percent, far below the national average. The number of retirees, meanwhile, could surge 34 percent.

Bottom 10 State Percent Changes in U.S. Population, 2010-2016
click to enlarge

That means fewer working-age Illinoisans are expected to be counted on to support retirees in the coming years, driving up the amount of unfunded pensions even higher.

So even if the Illinois government can resolve its budget soon, we see this as only a short-term fix. The state has even larger obstacles emerging on the horizon.

Our Solution

Again, this is why I think an actively-managed muni fund like NEARX is an attractive solution. Whereas other muni funds might accumulate Illinois debt based on its high yield, regardless of risk, we generally have stuck to investment-grade munis.

It must be said that if you look at NEARX’s holdings today, you’ll see that Illinois is one of its top issuers. The bonds were purchased at an earlier time, before the state’s budgetary problems really began to worsen. We haven’t accumulated any more since it became clear to us that the risks were too great.

We continue to hold the debt because we’re confident the state’s government can successfully unravel the political gridlock and arrive at a short-term resolution. It’s the state’s long-term demographic risks that investors should especially worry about. Our longest Illinois bonds mature in 2021, and as long as the state doesn’t default in the next four years—which, in our opinion, is highly unlikely—we should get a good return on the bonds based on their yield when they were purchased.

 

 

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.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

A bond’s credit quality is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C).

The Near-Term Tax Free Fund invests at least 80 percent of its net assets in investment-grade municipal securities. At the time of purchase for the fund's portfolio, the ratings on the bonds must be one of the four highest ratings by Moody's Investors Services (Aaa, Aa, A, Baa) or Standard & Poor's Corporation (AAA, AA, A, BBB). Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C). In the event a bond is rated by more than one of the ratings organizations, the highest rating is shown.

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The Top Six Things You Should Know About Royalty Companies Now
July 3, 2017

franco nevada royalty companies big truck

This past week was an exciting one for U.S. Global Investors. If you haven’t heard, my team and I had the distinct honor of ringing the closing bell at the New York Stock Exchange on Thursday to mark the launch of our latest ETF.

While in New York last week, I had the privilege of seeing many colleagues face-to-face. It’s always a pleasure for me to be able to talk gold with industry friends and experts. One stop during my trip that I thoroughly enjoyed was to chat with Pimm Fox and Lisa Abramowicz on Bloomberg Radio. Our discussion was dynamic as always and I shared with them my outlook for gold in the second half of the year, along with the opportunities I continue to see with royalty names.

discussing gold with lisa abramowicz and pimm fox at bloomberg radio

I still find it curious that many investors don’t realize what a significant role royalty and streaming companies play in the mining business.

Last year I wrote about some of my favorite royalty names, and how I came to know about this business model in the gold mining industry early in my career. If you haven’t read that blog post, I encourage you to go back and explore the groundbreaking work done by Seymour Schulich and Pierre Lassonde, the two founders of Franco-Nevada.

I think that now is a good time to take another look at royalty companies. Here are the top six things I believe investors should know about this specialized sector.

1. What Is a Royalty Company?

Royalty companies, sometimes called streaming companies, serve a special role in the mining industry. Developing a mine property to start producing gold or other precious metal is an expensive, often time-consuming process. Infrastructure needs to be built out, permits applied for, laborers hired and more.

A royalty company serves as a specialized financier that helps fund exploration and production projects for cash-strapped mining companies. In return, it receives royalties on whatever the project produces, or rights to a “stream,” an agreed-upon amount of gold, silver or other precious metal.

bhow does the royalty and streaming financial work
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2. Many Gold Royalty Companies Have Still Been Outperforming Gold

When looking over the last 12 months, many of the royalty companies have outperformed gold. While this is indeed remarkable, it is important to remember that royalty companies do have a robust business model. Their ability to generate revenue in times when the gold (or other precious metal) price is both rising and falling is what makes them attractive.

royalty companies outperformed gold
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3. Remember Real Interest Rates

There’s no question that the gold price is volatile, and in any given 12-month rolling period, historically it’s not unusual for the price of the yellow metal to fluctuate up or down by 20 percent. It’s important for investors to remember that gold historically shares a strong inverse relationship with real interest rates. You can see in the chart that as rates rise, the price of gold falls, and vice versa.

gold historically shares an inverse relationship with real rates
click to enlarge

This is another reason why I like the royalty model. Since royalty companies set fixed, lower-than-market prices for mining output, they can better manage the volatility that is inherent in the gold market. For example, Wheaton Precious Metals’ 19 agreements in 2016 entitled the company to buy silver at an average price of $4.42 an ounce and gold at $391 an ounce.

4. Speaking of Revenue

Last time I wrote about these companies, I shared with you that the three big royalty names boast impressive sales per employee. This is still true. Take a look at the 12-month revenue per employee of Franco-Nevada, Royal Gold and Wheaton Precious Metals. Wheaton has only around 30 employees, but has one of the highest rates in the world, generating $25.8 million per employee. By comparison, Newmont, which employs around 30,000 people, generated $310,000 per employee during the same period. Barrick also falls short by comparison.

royalty companies have greater revenue per employee model than procedures
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5. Friendly to Shareholders

Paying dividends is important to investors, as it reflects the health of a company in terms of its cash flow and profits. Even more favorable in the eyes of investors is a company that is growing its dividends. Between 2012 and 2017, royalty companies had a combined annual dividend growth rate of 17 percent. Compare that to 11 percent growth for the S&P 500 Index, and as low as negative 23 and negative 32 percent for global and North American precious metal miners.

royalty companies dividend rates have been growing
click to enlarge

In fact, 2017 marks Franco-Nevada’s 10th straight year of dividend increases since the company went public in 2007.

6. Less Reliance on Debt

Royalty companies are better allocators of capital than some of the biggest gold miners. Take a look at Newmont Mining, which has a 43 percent debt-to-equity ratio, and Barrick has a massive 91 percent. By comparison, many of the royalty companies have much lower debt, and Franco-Nevada has zero debt. This history of profitability and fiscal discipline is one of the main reasons I find royalty companies so attractive.

royalty companies have less debt
click to enlarge

 

 

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

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 03/31/2017: Barrick Gold Corp, Franco-Nevada, Newmont Mining, Osisko Gold Royalties Ltd., Royal Gold, Inc., Sandstorm Gold Ltd., Wheaton Precious Metals Corp.

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 S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.  The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.

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San Francisco Named a Global Leader in Disruptive Innovation
June 29, 2017

Bay Area Leads the U.S. in Patents

When people think of San Francisco, they might think of the Golden Gate Bridge, cable cars, Chinatown, the 49ers or Giants. I’m a fan of all of those things, but what usually comes to mind when I think of San Francisco is Silicon Valley, the world’s premiere hub for innovation and entrepreneurialism. That makes it, I believe, one of the most attractive places in the world to invest.

Others clearly share this belief.  One consulting firm, in fact, just named San Francisco as having the best long-term outlook in terms of innovation and business.

Since 2008, A.T. Kearney has annually ranked the world’s most innovative cities, and for the second straight year, the City by the Bay topped the group’s list of cities with the greatest outlook “to attract and retain global capital, people and ideas.” Decisive factors included not just innovation but also personal well-being, economics and governance.

Rounding out the top five cities were New York, Paris, London and Boston. But for my money, San Francisco, and indeed the broader Bay Area and Silicon Valley, offers the most attractive investment opportunities, for numerous reasons.

Patents and Venture Capital Galore

San Francisco—and its fellow Bay cities San Jose, Oakland, Mountain View and others—is ground zero for American innovation. Taken as a whole, the Bay Area has far and away the most patents than any other American city, after surpassing New York City in 1995. It grew from contributing only 4 percent of U.S. patents in 1976 to 16 percent by 2008.

Bay Area Leads the U.S. in Patents
click to enlarge

A.T. Kearney’s report cites San Francisco’s strong start-up ecosystem, emphasis on technology and willingness to take risks as contributing factors to the city’s rapid increases in the number of U.S. patents.

The Bay Area also leads the nation in the amount of venture capital that pours in every year. A study conducted in 2012 by the Bay Area Council Economic Institute and Booz & Company found that the region, where most Silicon Valley companies are headquartered, attracted between 35 and 40 percent of all U.S. venture capital investment. Much of the investment focused on information technology, biotechnology, internet, digital entertainment and “cleantech” firms.

Bay Area Captured between 35% and 40% of U.S. Venture Capital Investment
click to enlarge

In 2016, San Francisco ranked 10th in the nation in terms of the number of Fortune 500 companies, or those with the highest gross revenue. With 11 such companies calling San Francisco home, the city is the only one in California, interestingly, that appears in the top 10.

Disruption HQ

Perhaps more so than any other region in the world, the Bay Area produces new companies that disrupt and redefine entire industries. Think Google (Alphabet), Intuit, Netflix, eBay, Tesla Motors, Cisco Systems and others—many of which we’ve owned at one point or another in our two domestic equity funds, the All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX).

John Bardeen, William Shockley and Walter Brattain, inventors of the transitorWe can thank Stanford University for a lot of this innovative spirit. Founded in 1885 by railroad magnate and former California governor Leland Stanford, the school’s mission from the start was to teach not just traditional liberal arts but also technology and engineering.

Whole books have been devoted to what Stanford—which Reuters named as the world’s most innovative university in 2016—has contributed to our world, from antibody therapies to data analytics to DSL. In 1991, the first websites in North America went online at the school’s National Accelerator Laboratory, paving the way for the Internet Age we live in today.

One of Stanford’s most influential professors, Frederick Terman, was not only renowned for his research in electronics and radio engineering, but he also pushed his students to form their own companies. Known today as the “Father of Silicon Valley,” Terman personally invested in many of these companies, one of which was Hewlett-Packard, founded in Palo Alto in 1939.

The title “Father of Silicon Valley” is also sometimes shared by William Shockley, who came to Stanford in 1963 to teach electrical engineering. Earlier in his career, in 1947, he and his Bell Telephone Laboratories colleagues John Bardeen and Walter Brattain invented the transistor, an achievement that’s absolutely fundamental to modern electronics. The transistor can be found in nearly everything we use and enjoy today, from cars to jets to computers. For this creation, Shockley and his co-inventors were awarded the Nobel Prize in 1956.

Sign of First Silicon DeviceThat same year, Shockley and seven other scientists founded Shockley Semiconductor Laboratory, the “first silicon device and research manufacturing company in Silicon Valley,” as a plaque marking the spot in Mountain View reads today. The work conducted at the laboratory, which closed in 1968, is literally the reason why Silicon Valley is so named. (The building was later used as a furniture store, then a produce market. It was eventually torn down.)

It’s impossible to overemphasize the importance of Stanford’s economic contributions. A 2012 study estimated that the approximately 40,000 companies founded by Stanford alumni since the 1930s generate world revenues in the neighborhood of $2.7 trillion—every year. If they were their own independent nation, they would be the world’s 10th largest economy.

Manifest Destiny

As pleased as I am to see that San Francisco ranked first in the world for its “disruptive innovation,” as A.T. Kearney puts it, I’m not surprised. The city has long been an agent of change and a prime destination for those seeking fortune and glory.

When gold was discovered in California in 1848, San Francisco became an overnight mecca for miners from all corners of the world. Its population swelled from 1,000 in 1848 to 20,000 just two years later. The city grew so rapidly in size and importance, it was eventually selected as the westernmost stop along the first transcontinental railroad.

Today, innovative ideas are sought just as fervently as 49ers sought gold, and it’s precisely those ideas that we invest in. Both the All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX) have a 16 percent to 17 percent exposure to Silicon Valley-type tech firms—firms like Apple, NetApp, Qualcomm, eBay, Interdigital and others. I believe they’re well positioned to continue attracting and retaining capital and talent for many years to come.

 

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund and Holmes Macro Trends Fund as a percentage of net assets as of 3/31/2017: Alphabet Inc. 0.00%; Intuit Inc. 0.00%; Netflix Inc. 0.00%; eBay Inc. 0.00%; Tesla Inc. 0.00%; Cisco Systems Inc. 0.00%; Apple Inc. 0.00%; Qualcomm Inc. 2.72% in All American Equity Fund, 0.00% in Holmes Macro Trends Fund; InterDigital Inc. 0.00%; Hewlett Packard Enterprise Co. 0.00%; NetApp Inc. 3.05% in All American Equity Fund, 0.00% in Holmes Macro Trends Fund.  

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.

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

now the hard work begins

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

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

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

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

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

Where the Rubber Meets the Road

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

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

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

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

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

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

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

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

1. Stocks Head Higher

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

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

2. Gold Profits from Volatile Government Bonds

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

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

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

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

4. But Manufacturing Sees Further Growth

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

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

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

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

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

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

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

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

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

Share “Brexit One Year Later, in Five Charts”

Net Asset Value
as of 10/19/2017

Global Resources Fund PSPFX $5.81 -0.03 Gold and Precious Metals Fund USERX $7.92 -0.01 World Precious Minerals Fund UNWPX $6.33 -0.04 China Region Fund USCOX $11.35 -0.21 Emerging Europe Fund EUROX $7.03 -0.04 All American Equity Fund GBTFX $24.27 -0.02 Holmes Macro Trends Fund MEGAX $20.79 No Change Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change