Share this page with your friends:

Print

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.

Christmas Comes Early for This Precious Metals Streaming Company
December 17, 2018

Gold mining investors and Canadian capital markets received an early Christmas gift last Friday. Wheaton Precious Metals, one of the largest precious metals streaming companies in the world, announced that it reached a settlement with the Canadian Revenue Agency (CRA), the equivalent of the IRS. Before now, Wheaton had been in an ongoing legal feud with the agency over international transactions between 2005 and 2010.

According to the agreement, income generated through Wheaton’s foreign subsidiaries will not be subject to Canadian taxes. The company, however, will need to mark-up the cost of service provided to foreign subsidiaries, from 20 percent to 30 percent.

“The settlement removes uncertainty with the use of our business model going forward and puts the tax issue behind us so that we can continue to focus on what we do best: building and managing our high-quality portfolio both organically and by accretive acquisitions,” commented Randy Smallwood, Wheaton president and CEO.

“We expect the stock to react positively to the news given the tax dispute was an overhang,” Credit Suisse analysts shared in a note to investors today. Indeed, Wheaton stock was trading up as much as 12.4 percent in New York following the news, hitting a four-month high of $19.63 a share.

wheaton precious metals stock jumped after tax settlement news
click to enlarge

I want to congratulate everyone at Wheaton, particularly Randy for his resilience and strong leadership. He’s always offered invaluable insights to our team and investors. I encourage interested registered investment advisors (RIAs) to check out the July 2018 webcast I did with Randy, where we discussed our seven top reasons to invest in gold. You can listen to the replay by clicking here.

congrats Wheaton Precious Metals Randy Smallwood CEO

Monetary and Fiscal Risks Boost Gold’s Investment Case

The investment case for gold and other precious metals got a boost last week in light of news that might concern some equity investors. The European Central Bank (ECB) announced that it would be drawing quantitative easing (QE) measures to a close by halting its 2.6 trillion-euro bond-purchasing program, begun four years ago as a means to provide liquidity to the eurozone economy after the financial crisis. Interest rates, however, will be kept at historically low levels for the time being.

The ECB, then, will become the next big central bank, after the Federal Reserve, to end QE and normalize monetary policy. Although it’s steadily been tapering its own purchases of bonds, the Bank of Japan (BOJ) is still committed to providing liquidity at this point. Assets in the Japanese bank now stand north of 553.6 trillion yen ($4.86 trillion)—which, amazingly, is more than 100 percent of the country’s entire gross domestic product (GDP). Holdings, in fact, are larger than the combined economies of India, Turkey, Argentina, Indonesia and South Africa.

Major Central Banks' Total Assets
click to enlarge

In the past, I’ve discussed the economic and financial risks when central banks begin to unwind their balance sheets. The Fed has reduced its assets six times separate occassions before now, and all but one of those times ended in recession, according to research firm MKM Partners.

“Business cycles don’t just end accidentally,” MKM Chief Economist Mike Darda said in 2017. “They are killed by the Fed.”

We can now add the ECB and, at some point, the BOJ to this list. The three top central banks control approximately $14 trillion in assets, a mind-boggling sum, and it’s unclear at this point what the ramifications might be once these assets are allowed to roll over.

The Widest November Budget Deficit on Record

In addition, the Treasury Department revealed last week that the U.S. posted its widest budget deficit in the nation’s history for the month of November, as spending was double the amount of revenue the government brought in. The budget shortfall, then, came in at a record $205 billion, almost 50 percent over the spending gap from a year ago.

This follows news that U.S. government debt is on pace to expand this year at its fastest pace since 2012. Total public debt has jumped by $1.36 trillion, or 6.6 percent, since the start of 2018, making it the biggest expansion in percentage terms since the last year of President Barack Obama’s first term, Bloomberg reports.

As of last Monday, the national debt stood at just under $22 trillion, and by as soon as 2022, it could top $25 trillion, according to estimates.

U.S. Debt Projected to Jump by $7.5 trillion from 2016 to 2023
click to enlarge

As I shared with you in November, the government could very well be in a “debt spiral” right now, in the words of Black Swan author Nassim Taleb. This means it must borrow to repay its creditors. And with rates on the rise, servicing all this debt will continue to get more and more expensive.

It’s for this reason, among others, that I recommend a 10 percent weighting in gold, with 5 percent in bullion and gold jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

Will There Be a Santa Claus Rally?

U.S. Debt Projected to Jump by $7.5 trillion from 2016 to 2023

On a final note, there are only a few more trading days left to 2018. Will we see a Santa Claus rally? Last week I had the opportunity to speak with CNBC Asia’s Akiko Fujita on this very topic. To watch the interview and hear my thoughts, click 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.

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: Wheaton Precious Metals Corp.

Share “Christmas Comes Early for This Precious Metals Streaming Company”

No One Ever Said Brexit Was Going to Be Easy
December 11, 2018

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

If you followed some of my posts from two years ago, you might recall that I was in favor of Brexit. I still am. One of British voters’ main grievances was the heavy burden of European Union (EU) regulations, many of which are decided by unelected bureaucrats in Brussels. Altogether, these regulations cost U.K. businesses an estimated 33.3 billion pounds every year. Voters should have the right to decide whether to abide by these rules, which hamper business, or choose a different path.

At the same time, I was realistic about the huge, unprecedented challenges this divorce presented—to the United Kingdom, but also to the EU and its main trading partners. “Global growth is unstable, especially in the EU, and Brexit will only add to the instability,” I wrote. “This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.”

No one said it was going to be easy.

Today was supposed to be the day when U.K. Members of Parliament (MPs) voted on Prime Minister Theresa May’s Brexit deal with the EU, capping off two and a half years since Britons elected to leave the 28-member bloc.

Yesterday, however, May postponed the vote in the face of certain defeat, thanks largely to disagreement over how best to deal with the border between Northern Ireland (part of the U.K.) and the Republic of Ireland (part of the EU).

The British pound sterling promptly lost as much as 1.25 percent against the U.S. dollar, falling to its lowest level in more than a year and a half as foreign investors halted nearly all trading of the currency, according to the Financial Times.

British stocks, as measured by the FTSE 100 Index, extended losses for the fourth time out of the past five trading days. Telescoping their uncertainty of May’s deal, investors sent London-listed stocks plummeting 3.15 percent last Thursday in the worst session since the day after the Brexit referendum in June 2016.

British pound and stocks slipped after delay of Brexit vote
click to enlarge

The question on everyone’s mind is: What happens now? 

Between a Rock and a Hard Place

As I see it, there are three main options: 1) leave the EU without a deal (the “hard” Brexit); 2) halt the entire Brexit process, leaving open the possibility of another referendum; and 3) go back to the drawing board and renegotiate.

By any measure, a hard Brexit would be disastrous. Thomas Verbraken, executive director of risk management research at MSCI, estimates that U.K. stocks could fall as much as 25 percent, European stocks at least 10 percent, if either Parliament rejects the deal or a “disorderly Brexit” is triggered. In such a scenario, according to Morningstar’s Alex Morozov, the British auto industry would fare the worst since its entire supply chain is highly integrated with the EU, including parts manufacturing and vehicle production. U.K. and EU aerospace and defense companies such as Airbus, Rolls-Royce and Meggitt are also highly exposed to Brexit risks.

As for the second option, May has already nixed the idea of bringing a halt to Brexit, even though the European Court of Justice (ECJ) just ruled that the U.K. can “unilaterally withdraw its notification to leave the European Union without the permission of other EU countries,” according to Politico.

May’s job may be in peril because of her handling of Brexit—Jeremy Corbyn, leader of U.K.’s Labour Party, could push for a vote of no confidence at some point—but here I think she made the right decision. The people of the United Kingdom spoke. Even though Britons’ approval of EU leadership has improved since the 2016 referendum, disapproval is still above 50 percent.  

More than half of britons still disapprove of european union leadership
click to enlarge

That brings us to option number three. The problem here is that the nearly-600-page agreement already required a year’s worth of back-and-forth. European Commission President Jean-Claude Juncker made clear today that Brussels will not reopen negotiations. “The deal we have achieved is the best deal possible—it’s the only deal possible,” Juncker said. “So there is no room whatsoever for renegotiation.”

What there is room for, according to Juncker, is clarification and reinterpretation of the deal.

So Where Does This Leave Things?

I don’t believe anyone knows the answer to this question. As of now, the U.K. is scheduled to leave the 28-member bloc on March 29 of next year. I hope that before that time, MPs can be convinced that the package May has delivered is the best possible solution to an impossible situation.

I urge investors to be cautious. Brexit isn’t the only geopolitical risk to stocks right now. Here in the U.S., Democrats will take control of the House in about a month, and although talk of impeaching President Donald Trump is premature, it’s certain we’ll see innumerable new investigations into this administration.

With a new year about to begin, it might be a good time to rebalance your portfolio and make sure you have a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks, mutual funds and ETFs. I also recommend short-term, tax-free municipal bonds, as they’ve performed well even in times of economic pullbacks and bear markets.

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 FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

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 9/30/2018.

 

Share “No One Ever Said Brexit Was Going to Be Easy”

A New Wrinkle in the U.S.-China Trade Dispute
December 10, 2018

Frank in Washington at the Senate Press room

Last week I had the opportunity to attend the Young Presidents Organization (YPO) parliamentary intelligence forum in Washington, D.C. More than 200 members of parliaments from as many as 60 European countries joined us to hear from such dignitaries as Congressmen Robert Pittenger (R-NC) and Mike McCaul (R-TX), chairman of the Homeland Security Committee.

While in D.C., I was very honored to be invited into the epicenter of power and decision-making. That includes the Senate Press Office, pictured above, and the west front of the U.S. Capital facing the National Mall, where every president since Ronald Reagan in 1981 has been inaugurated.

It was there that George H.W. Bush took the oath of office, exactly 200 years after George Washington did. Newly arrived to Texas from Canada, I remember watching Bush’s inauguration on TV and being moved by his testament to freedom: “We know how to secure a more just and prosperous life for man on Earth,” he said, “through free markets, free speech, free elections and the exercise of free will unhampered by the state.”

The memory was made all the most poignant by the flags flying at half-staff, and the fact that I was standing in the same building where, just 24 hours earlier, the former president’s remains lied in state.

Remembering the 41st President

President George HW Bush 1924-2018

The life of George Bush, son of a U.S. senator and father of two governors and a president, stands as a case study in sacrifice and service. On the same day that he graduated from high school in 1942, he enlisted in the United States Navy. The country’s youngest Navy pilot at the time, Bush went on to receive the Distinguished Flying Cross after completing a bombing mission despite his plane being engulfed in flames from Japanese fire.

And from there it only gets more interesting.

Founder of a successful oil and gas company, congressman in the House of Representatives, ambassador to the United Nations, special envoy to the People’s Republic of China (before the U.S. had diplomatic relations with the Asian country), director of the Central Intelligence Agency (CIA), two-term vice president—Bush was and remains to this day perhaps the most qualified and well-equipped chief executive ever to set foot in the Oval Office.

As the 41st president, he oversaw the collapse of the Soviet Union and reunification of Germany, putting him at odds with U.K. Prime Minister Margaret Thatcher and French President Francois Mitterrand, who favored a divided Germany. His decision to push back Iraqi forces from Kuwait, arguably the greatest defining moment of his one-term presidency, was both a military and political success.  

American voters ultimately denied him a second term, however, once they felt his pledge to create “no new taxes” went unfulfilled. As part of a compromise with the Democratic-controlled Congress, Bush agreed to raise taxes to help reduce the national deficit. The episode is a reminder of a time when politicians’ duty to country trumped duty to party, even if it jeopardized reelection.

That deep sense of duty sustained him for the rest of his 94 years. Bush was involved in a number of charities and humanitarian efforts, most notably the Bush Clinton Coastal Recovery Fund. The fund— spearheaded in cooperation with his former political rival and, some might say, unlikely friend Bill Clinton—raised tens of millions of dollars for families impacted by 2005’s Hurricane Katrina.

On behalf of everyone at U.S. Global Investors, I extend my gratitude and sympathy to the Bush family. May George Herbert Walker rest in peace and remain firmly in our memory.

Stocks Hit on Renewed U.S.-China Trade Concerns

On a very different note, global stocks last week plunged on concerns that trade negotiations between the U.S. and China are not running as smoothly as initially thought. The S&P 500 Index is not only having one of its worst quarters in years, but it could also end up in the red for the year for the first time since 2008.

Adding to the uncertainty was news of the arrest in Canada of the chief financial officer (CFO) of Chinese tech giant Huawei. Although no charges have been filed yet, the company has long been investigated by U.S. authorities, and more recently it’s been suspected of violating economic sanctions against Iran. The CFO, Meng Wanzhou, faces extradition to the U.S.

A Huawei smartphone

The name might not be known to most Americans, but Huawei is the world’s second-largest manufacturer of smartphones following Samsung, and the largest supplier of telecommunications equipment. Meng is not only a top executive but also the daughter of the company’s founder, Ren Zhengfei, a former officer in the People’s Liberation Army who has close ties to the Communist Party of China.

Imagine a foreign power arresting the daughter of Steve Jobs, and you might get some idea of how big a deal this is.

President Donald Trump has levied much of his criticism on China for “unfair” trade practices and stealing intellectual property from the U.S. As I told you back in March, China’s J-31 stealth fighter jet is believed to be a knockoff of Lockheed Martin’s F-35. (A 2014 whitepaper on Huawei, in fact, states that the tech firm got its start in 1987 by “reverse-engineering foreign products and using that as the foundation to develop more complex technologies.”) But America’s beef with Huawei, and its Hong Kong-listed rival ZTE, go back further than the start of this administration and rest on suspicions their phones and other telecomm products might be used for espionage.

In 2012, after investigating Huawei and ZTE, the House Permanent Select Committee on Intelligence concluded that the two firms could be seeking to “undermine core U.S. national-security interest.” Committee members recommended that the U.S. block any mergers and acquisitions involving the companies and that all U.S. governmental agencies not use their equipment. Earlier this year, officials with the CIA, National Security Agency (NSA), Federal Bureau of Investigation (FBI) and Defense Intelligence Agency (DIA) testified before the Senate Intelligence Committee that Huawei and ZTE’s phones posed a security risk to American consumers.       

In any case, Meng’s arrest last week rattled investors, convincing many of them that U.S.-China trade talks are deteriorating rather than improving. We saw a knock-on effect among a number of Huawei’s suppliers, including lens-maker Sunny Optical (down almost 5.5 percent last Thursday), data networking firm Inphi (off 9.25 percent) and California-based NeoPhotonics (down more than 16 percent).

U.S. Trade Deficit Just Widened Even More

Speaking of trade, the U.S. deficit with the rest of the world tumbled to a 10-year low in October. According to Zero Hedge, the “trade deficit was $55.5 billion in October (worse than the $55.0 billion expected and well down from the $54.6 billion revised print for September)… underscoring continued fallout from the trade dispute with China.”

As for the U.S.-China trade deficit—the difference between exports and imports—that measure widened to a new all-time low of $43.1 billion in October, down from $40.2 billion a month earlier. The fall in net exports is expected to weigh heavily on fourth-quarter gross domestic product (GDP) growth.

US trade deficit with China fell to a record low in October
click to enlarge

The trade report comes at a time when additional tariffs on goods coming into the U.S. are increasingly to blame for stock volatility this year. A new analysis by Bank of America Merrill Lynch suggests that worries about tariffs have trimmed some 6 percent off domestic stocks in 2018 alone.

What’s more, tariffs could be costing American households more than most realize. Last month a study conducted by consulting firm ImpactECON and commissioned by Koch Industries—an opponent of Trump’s trade policies despite its billionaire chief executive brothers, Charles and David, being top Republican donors—estimated that tariffs would cost each U.S. household nearly $2,400 in 2019, or $915 per person. GDP growth could be reduced 1.78 percent next year, with losses close to $2.8 trillion between now and 2030, if current trade actions were allowed to stay in place, the study says. As many as 2.75 million American workers “are likely to become unemployed” in 2019 “if all trade actions are implemented concurrently.”

Gold Price Rises on Weaker-Than-Expected Jobs Report

Speaking of employment, the U.S. added 155,000 jobs in November, falling far short of expectations. The U.S. dollar pulled back slightly as a result, prompting gold to trade at a five-month high of more than $1,255 per ounce. Earlier in the week, the price of palladium briefly overtook gold’s on tightening supply and increased automobile demand. (The silvery white metal is used to manufacture catalytic converters). But if economic uncertainty continues to weigh on the dollar, we could see gold lift even higher and safely retain its spot as the most valuable precious metal.

Palladium briefly became most precious metal for first time in 16 years
click to enlarge

As I reminder, I recommend that investors maintain a 10 percent exposure to gold in their portfolio—half of that in gold coins, bars and jewelry; the other half in high-quality gold mining stocks, mutual funds and ETFs. Remember to rebalance at least once a year.

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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

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 09/30/2018: Sunny Optical Technology Group Co.

Share “A New Wrinkle in the U.S.-China Trade Dispute”

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?
December 5, 2018

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

One of the most reliable indicators of an economic slowdown just flashed a warning sign this week. On Monday, the yield curve between the five-year Treasury yield and three-year Treasury yield inverted, or turned negative, for the first time since 2007. What this means is the shorter-maturity bond now pays more than the longer-maturity bond, suggesting investors believe the government is less likely to service the debt it owes in three years than in five years. Such an inversion has historically portended a recession sometime in the next six to 24 months.

Spread Between 5-Year and 3-Year Treasury Yield Turned Negative for First Time Since 2007
click to enlarge

Meanwhile, the more closely watched spread between the 10-year yield and two-year yield, though positive, sat at a lowly 15 basis points on Monday, the flattest it’s been in more than 11 years. All nine recessions since 1955 have been preceded by an inversion of the 10-year and two-year Treasury yields.

I believe the flattening yield curve is just one among a number of signs that we’re entering a more risk-off investing environment (one in which investor appetite for riskier assets, such as stocks, decreases). The recent trade war ceasefire between the U.S. and China is encouraging, but challenges still persist, including rising U.S. interest rates, Brexit, skyrocketing debt and a purchasing manager’s index (PMI) that’s steadily weakened over the past eight months.

All things considered, I think it might be time for investors to consider getting more defensive as we proceed further into the later stages of this business cycle, one of the longest in U.S. history. That means making sure you have exposure to assets that have historically done well during slowdowns in the economy and capital markets. Among my favorite are precious metals, particularly gold, and short-term, tax-free municipal bonds.

Municipal Bonds Have Outperformed Higher-Risk Corporate Bonds

Municipal bonds might have a reputation for being “boring,” but personally I don’t find anything boring about potentially limiting losses in my portfolio. That’s precisely what munis managed to do lately as stocks tumbled, many of them entering correction and even bear market territory. Short-term state and local debt, as measured by the Barclays Capital 3-Year Municipal Bond Index, delivered 0.3 percent in the two months ended November 30, while high-yield and investment-grade corporate debt lost 0.2 percent and 0.4 percent, respectively. Even the riskiest munis gained, according to Bloomberg data, helping investors staunch some of the declines they might have felt in their equity allocation.

Muni Bonds Outperformed Corporate Debt on Stock Volatility
click to enlarge

Speaking of risk, munis have historically had a much lower rate of default than corporate bonds. Between 1986 and 2016, the muni default rate was only 0.04 percent, whereas corporates had one 50 times higher at 2.03 percent, according to Moody’s. On top of that, munis provide income that’s tax-free at the federal and often state levels, unlike corporate securities, which are subject to taxes.

Consider the Near-Term Tax Free Fund (NEARX)

Two months is admittedly a small sample size, so let’s take a longer view of munis’ performance using our Near-Term Tax Free Fund (NEARX). As you can see below, if you had invested $100,000 in NEARX and in an S&P 500 Index fund back in 1999, it would have taken more than 13 years for the S&P fund to catch up to and surpass NEARX.

U.S. Global Investors Near-Term Tax Free Fund vs. S and P 500 Index
click to enlarge

See standardized performance by clicking here.

While the market lost as much as 40 percent on two separate occasions, during the tech bubble and financial crisis, our short-term muni bond fund stayed relatively stable. That’s because munis, unlike stocks, favor safety and liquidity over growth—a strategy I believe investors should really consider now that there are signs of a looming equity slowdown.

I like to call this strategy “no drama” investing.

Even in a rising interest rate environment, I think NEARX can help investors avoid volatility in the stock market. And remember, this allocation should evolve as you age to contain a greater weighting toward bonds and lower weighting toward equities.

Learn more about NEARX and how you might diversify your portfolio with municipal bonds as we approach the late stages of the business cycle.

 

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 advisor.

Past performance does not guarantee future results.

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.

The chart illustrates the performance of a hypothetical $100,000 investment made in the fund during the depicted time frame. Figures include reinvestment of capital gains and dividends, but the perofrmnace does not include the effect of any direct fees described in the fund’s prospectus (e.g. short-term trading fees) which, if applicable, would lower your total returns.

The Barclay’s Capital 3-Year Municipal Bond Index consists of a broad selection of investment grade general obligation and revenue bonds of maturities ranging from one year to four years. The S&P U.S. High Yield Corporate Bond Index is designed to track the performance of U.S. dollar-denominated, high-yield corporate bonds issued by companies whose country of risk use official G-10 currencies, excluding those countries that are members of the United Nations Eastern European Group (EEG). The S&P 500 Investment Grade Corporate Bond Index seeks to measure the performance of U.S. corporate debt issued by constituents in the S&P 500 with an investment-grade rating. The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

The Purchasing Managers' Index (PMI) is an indicator of economic health for manufacturing and service sectors. The purpose of the PMI is to provide information about current business conditions to company decision makers, analysts and purchasing managers.

A basis point is one hundredth of one percent, used chiefly in expressing differences of interest rates.

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

Share “The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?”

This Holiday Season, Make It Silver and Gold
December 3, 2018

 

Yesterday evening marked the beginning of Hanukkah. The Jewish festival of lights commemorates the reclamation of the Holy Temple in Jerusalem from the Syrian-Greeks in the second century BCE. According to accounts, after Judah and his forces liberated the temple, he found only one jar of oil, good for a single day’s lighting at the most. Miraculously, though, the oil lasted for an incredible eight days, which is why Hanukkah is celebrated for eight days and nights to this day. To all of my Jewish friends around the world, I wish you a Hanukkah Sameach!

Among many of the holiday’s well-known traditions, at least here in the U.S., is to give children chocolate coins. This arose from the centuries-old practice of parents giving real coins, or Hanukkah gelt, to their kids, who in turn were expected to give them to their teachers.

I believe this is a beautiful custom. Whether you observe Hanukkah, Christmas, Eid al-Fitr, Diwali or any number of other religious holidays around the world, gifting your children and grandchildren coins of precious metals such as gold or silver could be made into a tradition in your own family. I encourage you to see the unique gifts that Kitco Metals offers in both silver and gold.

Holiday Deals at Your Local Coin Dealer

Take a look at silver. The white metal is on sale right now, trading at a little more than $14 an ounce. That’s the most affordable it’s been in three years. Not only does a silver coin cost quite a bit less than, say, a video game, it lasts much, much longer. And unlike a video game, it has the potential to rise in value.   

Silver at Its Most Affordable in Three Years
click to enlarge

Gold is admittedly more expensive, trading just under $1,240 as of today. But there again, if you’re already planning to go all out on gift shopping this holiday season, you might as well make it something that’s truly memorable, holds it value and lasts forever.

It need not be a coin. Pure, 24-karat gold jewelry holds its value just as well as a coin, and it has the added bonus of being wearable. I’ve told you about Menë, the newcomer that aims to disrupt the fine jewelry industry. The Toronto-based company just announced that it surpassed 10,000 orders from customers in more than 50 countries, all less than a year since going public in January 2018. 

Speaking of holding its value, notice how the price of gold has held up well against stock market volatility this year. Gold sentiment among some investors is room temperature right now, but it’s important to put things in perspective. Compared to some popular internet stocks, the metal’s losses have not been nearly as sharp or deep. From its 2018 peak in early April to today, gold has declined around 10 percent. Facebook, meanwhile, has dropped close to 40 percent since its peak at the end of July; Netflix, as much as 36 percent since June.

Gold Has Outperformed FAANG Stocks
click to enlarge

Has the U.S. Dollar Peaked?

With less than a month left to go in 2018, gold is down around 6 percent. If it stays in this range, gold will log its first year of negative returns since 2015. This is largely thanks to the U.S. dollar, which has strengthened on additional interest rate hikes.

Although it’s probably too early to call a peak, there are some indications that the dollar might be set to cool in 2019. This would allow gold, silver and other metals not only to appreciate in price but also potentially outperform stocks.

Among the most compelling signs that the dollar is close to a top comes from Dutch financial services group ING. According to its analysts, the ballooning U.S. twin deficit—which combines the government budget balance and the current account balance—is projected to weaken the U.S. currency as it did in past cycles.

U.S. Dollar Projected to Weaken on Ballooning Deficit
click to enlarge

As I’ve shared with you before, the government is set to run trillion-dollar deficits for the next four years, and this will likely prove to be a heavy burden on the dollar. “Unlike the dollar rally seen in the late-1990s, when a productivity boom helped deliver a budget surplus, this year’s dollar rally has been built on unfunded tax cuts,” ING’s strategists write. The group adds that it “expects funding these deficits to become more difficult.”

ING isn’t alone in its view. Bloomberg Intelligence Commodity Strategist Mike McGlone believes that the “trade-weighted broad dollar is near a peak and silver a bottom… and the potential for mean reversion should outweigh continuing-the-trend risks. Silver, among the most negatively correlated to the dollar and positively to industrial metals, appears ready for a potential longer-term recovery.”

Not One Ivy League Endowment Beat a Simple 60-40 Portfolio Over 10 Years

On a final note, a study last week showed that eight Ivy League endowments were unable to beat the 10-year annualized returns of a simple 60-40 portfolio, with 60 percent in U.S. stocks, 40 percent in bonds.

Markov Processes International (MPI), a quantitative analytics research firm, has been assessing the performance of endowment funds managed by some of the top universities in the U.S. Although all eight funds beat the 60-40 benchmark in fiscal year 2017, none managed to beat it on an annualized basis over the past 10 years. In fact, the 60-40 portfolio—one of the most common asset allocation structures, available to retail investors through a simple S&P 500 Index fund and fixed-income fund—outperformed the bottom university fund, Harvard’s, by 360 basis points.

Ivy League Endowments Were Unable to Beat a Simple 60-40 Portfolio
click to enlarge

The “Ivies” not only lagged the benchmark but were also accompanied by much higher risk. Over the past 10 years, the 60-40 portfolio had a standard deviation of 9.1 percent, whereas the riskier endowment funds had one as high as 13.8 percent (in the case of Yale and Cornell) and 13.6 percent (in the case of Harvard).

The implication, I believe, is you don’t necessarily need access to the fanciest, most sophisticated tools and strategies to maximize your investments. MPI shows that a basic portfolio, composed of high-quality domestic equity funds and short-term Treasury and municipal bond funds—all of which we’re proud to provide, I might add—is suitable for most retail investors seeking attractive risk-adjusted returns.

Curious to learn more? Watch my comprehensive interview with Kitco News’ Daniela Cambone by clicking here!

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Standard deviation is a quantity calculated to indicate the extent of deviation for a group as a whole. A trade-weighted dollar is a measurement of the foreign exchange value of the U.S. dollar compared against certain foreign currencies. A basis point is one hundredth of one percent, used chiefly in expressing different of interest rates.

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

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 09/30/2018: Mene Inc.

Share “This Holiday Season, Make It Silver and Gold”

Net Asset Value
as of 03/22/2019

Global Resources Fund PSPFX $4.51 -0.07 Gold and Precious Metals Fund USERX $7.38 -0.14 World Precious Minerals Fund UNWPX $2.79 -0.04 China Region Fund USCOX $8.50 -0.19 Emerging Europe Fund EUROX $6.59 -0.16 All American Equity Fund GBTFX $23.42 -0.49 Holmes Macro Trends Fund MEGAX $16.70 -0.31 Near-Term Tax Free Fund NEARX $2.21 0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change