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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.

An Olympian's Guide to the Market Selloff: Seeking Rewards In High-Risk Situations
February 12, 2018

Frank Holmes Robert Friedland

Today I’d like to share a few words about the Olympics, but first, two words: Don’t panic.

The stock selloffs last Monday and Thursday were the two biggest daily point drops in the history of the Dow Jones Industrial Average, but in terms of percentage point losses, they don’t even come close to cracking the top 10 worst days in the past 10 years alone.

After a year of record closing highs and little to no volatility, it was expected that the stock market would need to blow off some steam. Last Monday, the CBOE Volatility Index, or VIX, surged nearly 116 percent, its biggest one-day increase since at least 2000.

volatility returns to the markets
click to enlarge

As I explained last week, the selloff appears to have been triggered by a number of things, including the positive wage growth report. This stoked fears of higher inflation, which in turn raised the likelihood that the Federal Reserve, now under control of newcomer Jerome Powell, will raise borrowing costs more aggressively than expected to prevent the economy from overheating.

Also contributing to the uncertainty was news from the Treasury Department that the U.S. government plans to borrow nearly $1 trillion this year, compared to almost half that last year. In the first quarter alone, the Donald Trump administration will issue $66 billion in long-term debt, the first such boost in borrowing since 2009, as the U.S. Treasury seeks to cover budget deficits brought on by higher entitlement spending, not to mention the recently passed tax overhaul.

On Friday, the S&P 500 Index briefly plunged below its 200-day moving average before rebounding in volatile trading.  

stocks plunge below their 200-day moving average
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With stocks down more than 8 percent from its closing high on January 26, we're closing to entering correction territory. Historically, it’s taken four months for stocks to recover from a correction, according to Goldman Sachs analysis. By comparison, a bear market, which is generally defined as more than a 20 percent drop, can take up to two years.

I’m not saying a bear market is imminent—only that it might be time to reevaluate your tolerance for risk and, if appropriate, act accordingly. It’s times like these that highlight how important it is to be diversified in a number of asset classes such as gold, commodities, municipal bonds and international stocks.

Diversity Is Key in Volatile Times

I remain bullish on the U.S. market, but there will always be risk—even in a booming economy. This is one of the biggest reasons why I recommend a 10 percent weighting in gold and gold stocks, with additional diversification in commodities, international stocks and other asset classes.

But to get the greatest benefits, it’s important to rebalance at least once a year, based on your risk tolerance.

Last week, gold was under pressure from surging Treasury yields. Since its 52-week low in September, the 10-year yield has increased almost 40 percent. Not only is it at a four-year high but it’s also above its five-year average of 2.1 percent.

north american shale activity expected to drive global well demand
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Keep in mind that fundamentals remain robust. The U.S. economy is humming along. Unemployment is at a 17-year low, and wage growth is finally bouncing back after the financial crisis. The global manufacturing sector began 2018 on strong footing, with the purchasing manager’s index (PMI) registering 54.4 in January.

Like an Olympic cross-country skier, take the long-term approach and keep your eyes on the prize.

A Year for Olympic Record-Breaking

Before it even began, this year’s Winter Olympics was breaking records. A historic number of athletes, around 3,000, qualified to compete for an unprecedented 102 medals. For the first time ever, an African country—Nigeria—will be represented in the bobsled category, making this also the country’s first visit to the Winter Games. And not only is this South Korea’s first go-round hosting the Winter Olympics, but PyeongChang could be among the coldest host cities ever, with wind chills in some cases dropping temperatures to an arctic negative 25 degrees Celsius, or negative 13 degrees Fahrenheit.

pyeongchang winter olympics 2018

One record that won’t be broken, though, is the cost to host the Games. South Korea spent an estimated $13 billion to bring the rugged, mountainous ski destination up to Olympic standards, building not just stadiums and arenas but also rail, roads, energy infrastructure and more. Amazingly, newly-constructed wind farms in Gangwon Province will generate more than enough energy to power the 16-day event, according to Hyeona Kim, a project manager with the PyeongChang Organizing Committee for the 2018 Olympic Games (POCOG).

Thirteen billion dollars sounds like a lot, but it pales in comparison to the record-breaking $50-55 billion Russia spent to host the Sochi Olympics in 2014.

Sochi Gets Soaked in Debt

Sochi is the most expensive Olympics ever—Winter or Summer. But because Russia’s original price bid was $16 billion, it’s also among the most expensive in terms of cost overruns, according to a 2016 report by the University of Oxford. Looking just at Winter Games, only Lake Placid in 1980 has a bigger cost increase. (The 1976 Summer Olympics in Montreal is biggest of all at 720 percent over budget.)

five most expensive winter olympics by cost overruns
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To put Sochi’s overrun in perspective, the average cost per event is now estimated at $223 million, or a mind-boggling $8 million per athlete.

Contributing to the budget bust was Russia’s need to boost the region’s electricity capacity by as much as 800 percent, leading to the construction of 49 new energy projects. As one deputy minister put it, the undertaking was the country’s largest since Stalin’s time.

Of course, this all raises the question of what economic benefits, if any, hosting the Olympics brings to a city. It took Montreal 30 years to pay off its debt. The 2004 Summer Games in Athens—the birthplace of the Olympics—is now partially blamed for triggering the Greek debt crisis. And in Rio de Janeiro, Brazil, host of the 2016 Summer Games, a number of multimillion-dollar stadiums and arenas sit unused and have become eyesores. (PyeongChang, by contrast, plans to raze the stadium it built for opening and closing ceremonies after the Games are complete.)

Like any other type of investing, there’s no reward without some risk—and, as last week has proven, it’s all about how you manage it.

A Case Study in Good Financial Planning

One city that got it right was Los Angeles.

For many of you, California might not immediately come to mind as a shining example of good fiscal management. But when the city was awarded the Olympics for 1984, the reins were turned over to Major League Baseball (MLB) commissioner Peter Ueberroth, who had previously founded and run a successful travel company. Under his leadership, the 1984 Summer Olympics became the first privately financed Games. A committee was set up that operated more like a corporation. Financing came from private fundraising, corporate sponsorships, TV deals and more.

It certainly didn’t hurt that L.A. was already a highly developed metropolitan area with world-class infrastructure, but Ueberroth urged fiscal restraint and rationality. The results were better than anyone could have anticipated. Remember Sochi’s $8 million price tag per athlete? L.A. ended up spending only around $100,000 per competitor (in 2015 dollars), among the best records ever in Olympic history.

What’s more, the L.A. Games turned a tidy profit, netting the city more than $225 million, all of which was plowed back into the U.S. Olympic Committee. As recently as 2016, those profits were still helping athletes gear up for Olympic glory, according to Ueberroth himself.  

In 1984, Ueberroth was selected as TIME’s Person of the Year for developing “a new model for the Games” and proving that “in a free society, anything is possible.”

Last week I had the chance to speak with Peter Smyrniotis of Market One Media Group about cryptocurrencies, blockchain technology and initial coin offerings (ICOs). Watch the interview 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 Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.

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

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.

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Fear Creeps Back into Stocks, Shining a Light on Gold
February 6, 2018

Gold is a hedge against inflation

Monday’s monster stock selloff is exhibit A for why I frequently recommend a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

What began on Friday after the positive wage growth report extended into Monday, with all major averages dipping into negative territory for the year. The Dow Jones Industrial Average saw its steepest intraday point drop in history, losing nearly 1,600 points at its low, while the CBOE Volatility Index, widely known as the “fear index,” spiked almost 100 percent to hit its highest point ever recorded.

Gold bullion and a number of gold stocks, however, did precisely as expected, holding up well against the rout and helping savvy investors ward off even more catastrophic losses. Klondex Mines and Harmony Gold Mining, among our favorite small-cap names in the space, ended the day up 4.6 percent and 4.8 percent, respectively. Royalty company Sandstorm Gold added 1.4 percent.

The research backs up my 10 percent weighting recommendation. The following chart, courtesy of BCA Research, shows that gold has historically outperformed other assets in times of geopolitical crisis and recession. Granted, the selloff was not triggered specifically by geopolitics or recessionary fears, but it’s an effective reminder of the low to negative correlation between gold and other assets such as equities, cash and Treasuries.

Gold has historically outperformed during geopolitical crises and recessions
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“We expect gold will provide a good hedge against a likely equity downturn, as the bull market turns into a bear market” in the second half of 2019, BCA analysts write in their February 1 report.

The reemergence of volatility and fear raises the question of whether we could find ourselves in a bear market much sooner than that.

So how did we get here, and what can we expect in the days and weeks to come?

Gold Has Helped Preserve and Grow Capital in Times of Rising Inflation

It’s important to point out that the U.S. economy is strong right now, so the selloff likely had little to do with concerns that a recession is near or that fundamentals are breaking down. The Atlanta Federal Reserve is forecasting first-quarter GDP growth at 5.4 percent—something we haven’t seen since 2006. And FactSet reports that S&P 500 earnings per share (EPS) estimates for the first quarter are presently at a record high. A correction after last year’s phenomenal run-up is healthy.

Several factors could have been at work, including algorithmic and high-frequency quant trading systems that appear to have made the call Monday that it was a good time to take profits. Other investors seemed to have responded to Friday’s report from the Labor Department, which showed that wages in December grew nearly 3 percent year-over-year, their fastest pace since the financial crisis. This is a clear sign that inflationary pressure is building, raising the likelihood that the Federal Reserve will hike borrowing costs more aggressively than some investors had anticipated.

Wages grew at their fastest pace since june 2009
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As I’ve explained many times before, gold has historically performed very well in climates of rising inflation. When the cost of living heats up, it eats away at not only cash but also Treasury yields, making them less attractive as safe havens. Gold demand, then, has surged in response. This is the Fear Trade I talk so often about.

But which measure of inflation is most accurate? The Fed’s preferred gauge, the consumer price index (CPI), rose 2.1 percent year-over-year in December. Then there’s the New York Fed’s recently launched Underlying Inflation Gauge (UIG), which claims to forecast inflation better than the CPI by taking into consideration a “broad data set that extends beyond price series to include the specific and time-varying persistence of individual subcomponents of an inflation series.” The UIG rose nearly 3 percent in December. And finally, the alternate CPI estimate, which uses the official methodology before it was revised in 1990, shows that inflation could be closer to 10 percent.

Whichever one you choose to look at, though, they all indicate that inflation is trending up.

No matter which gauge you look at inflation is trending up
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Making predictions is often a fool’s game, but I believe that after lying dormant for most of this decade, inflation could be gearing up for a resurgence on higher wages and borrowing costs. Now might be a good time to rebalance your gold holdings to ensure a 10 percent weighting.

“This pick-up in inflation and inflation expectations is positive for gold,” says BCA, “which we’ve shown to be an attractive hedge against rising prices.”

Long-Standing History of Performance

Besides being favored as a safe haven in times of crisis, gold has a history of  attractive performance over the long term. Compared to many other asset classes, the yellow metal has been very competitive in multiple time periods.

No matter which gauge you look at inflation is trending up
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Since 1971, when President Richard Nixon finally took the U.S. off the gold standard, gold has outperformed all asset classes except domestic and international equities, as of December 31, 2017. In the 20-year period, gold crushed domestic and foreign stocks, bonds, cash and commodities. Most impressive is that, in every period measured above, the precious metal has beaten cash, bonds and commodities.

Having a 5 to 10 percent weighting in gold and gold stocks during these periods could have helped investors minimize their losses in other asset classes.

To learn more about gold’s role in times of rising inflation, 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.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE). It is colloquially referred to as the fear index or the fear gauge. The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The Bloomberg Barclays Short Treasury Bill Index tracks the market for Treasury bills issued by the U.S. government. U.S. Treasury bills are issued in fixed maturity terms of 4-, 13-, 26- and 52-weeks. The Bloomberg Barclays US Aggregate Bond Index, which until August 24, 2016 was called the Barclays Capital Aggregate Bond Index, and which until November 3, 2008 was called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Bloomberg L.P. since August 24, 2016, and prior to then by Barclays which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. The MSCI USA Net Total Return Index is a market capitalization weighted index designed to measure the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the United States. The MSCI EAFE Net Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East. The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones-UBS Commodity Index (DJ-UBSCI) in 2009, when UBS acquired the index from AIG. The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.

The consumer price index (CPI) is an index of the variation in prices paid by typical consumers for retail goods and other items. The Underlying Price Gauge (UIG) captures sustained movements in inflation from information contained in a broad set of price, real activity, and financial data. 

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 12/31/2017: Klondex Mines Ltd., Kirkland Lake Gold Ltd., Sandstorm Gold Ltd.

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A $1.5 Trillion Opportunity You Wouldn't Want to Miss!
February 5, 2018

Frank Holmes Robert Friedland

On the campaign trail, then-presidential candidate Donald Trump pledged to invest as much as $1 trillion in U.S. infrastructure if he were elected. Last week during his first State of the Union address, now-President Trump added half a trillion dollars more to that figure.

The hefty price tag likely raised some eyebrows among Congress members, but Trump is right in aiming high to fix the country’s “crumbling infrastructure,” as he calls it. According to the American Society of Civil Engineers (ASCE), the U.S. faces an infrastructure funding gap of more than $2 trillion between now and 2025, resulting in potential losses of nearly $4 trillion in gross domestic product (GDP), or $34,000 per household.

Public Infrastructure in the U.S. Has Been Neglected
click to enlarge

Take a look at public spending on U.S. streets and highways as a percent of GDP. Since the financial crisis a decade ago, investment has tanked, and anyone who regularly drives can see firsthand the consequences of this negligence. Americans spend 42 hours on average sitting in congestion every year, costing each driver roughly $1,400, and last week the American Roads & Transportation Builders Association (ARTBA) reported that more than 54,000 of the country’s 612,677 bridges are rated “structurally deficient.”

Public Spending on U.S. Streets and Highways Has Plummeted Since Financial Crisis
click to enlarge

Anticipating a shift in priority toward infrastructure, contractors and construction firms are gearing up to take on new projects, with a whopping 75 percent of them planning to expand their headcount this year. This comes after an estimated 192,000 new construction jobs opened up every month in 2017, a figure that’s significantly up from the 88,000 new positions that came online every month only five years ago.

But contractors shouldn’t be the only ones getting ready for a new American construction boom. As I shared with you last month, the recipe calls for a broad commodities rally this year, and I would hate for investors to miss out. With global synchronized growth underway and demand outstripping supply in a number of cases, not to mention the U.S. dollar in decline and inflation on the rise, commodities are poised to be among the best performing asset classes in 2018.

Commodities as Cheap as (or Cheaper Than) They’ve Ever Been

Pay close attention to where commodities are relative to equities right now. Compared to the S&P 500 Index, materials are extremely undervalued, the most since at least 1970. This makes now a very attractive entry point—or as natural resource investors Goehring & Rozencwajg Associates writes in its quarterly report, there could be “a proverbial fortune to be made” if investors take advantage of this once-in-a-generation opportunity.

Commodities are as cheap as they've ever been relative to equities
click to enlarge

“When commodities are this cheap relative to stocks, the returns accruing to commodity investors have been spectacular,” the firm continues:

For example, had an investor bought the Goldman Sachs Commodity Index (or something equivalent) in 1970, by 1974 he would have compounded his money at 50 percent per year. From 1970 to 1980, commodities compounded annually in price by 20 percent. If that same investor had bought commodities in 2000, he would have also compounded his money at 20 percent for the next 10 years.

Past performance doesn’t guarantee future results, of course, but the implications here are very compelling if mean reversion takes place. There have been few times that I can remember when an asset class looked as favorable as commodities do now. If you agree, it might be time to consider adding exposure to materials, energy and mining to your portfolio.

Oil Just Had Its Best January Since 2006—Further Gains Ahead?

Energy in particular looks very attractive. West Texas Intermediate (WTI) crude oil, the American benchmark, logged its best January since 2006, gaining more than 7 percent on scorching hot demand, sustained production cuts by the Organization of Petroleum Exporting Countries (OPEC), deteriorating output from Venezuela and a record-setting stockpile drawdown. U.S. oil inventories declined for 10 straight weeks as of January 24, the longest stretch ever recorded, before jumping again in the week ended January 31.

What’s more, the U.S. Energy Information Administration (EIA) just reported that, thanks to the revitalized shale revolution, the U.S. produced over 10 million barrels of oil per day in November, the first time it’s done so since 1970. This puts the country on a path to catch up with and possibly exceed Russia, which produced an average 11 million barrels a day in 2017, and world leader Saudi Arabia, whose energy behemoth Saudi Aramco produces around 12.5 million barrels a day.

U.S. produced 10 millino barrels of oil a day in November the most in 47 years
click to enlarge

As I’ve written many times before, the American fracking industry is largely responsible for keeping global oil prices low, which has been a huge windfall to the world economy. In its coverage of the news that U.S. output topped 10 million barrels, the Financial Times put it best, writing that American frackers have “boosted the U.S. economy, creating tens of thousands of jobs, bolstered its energy security, created new international relationships and given Washington new freedom to use sanctions as a tool for strategic influence.”

But shouldn’t all this extra supply halt the oil rally and put a damper on producer and explorer stocks? Not so fast.

Companies Just as Profitable with $65 Oil as They Were with $100 Oil

In the years since oil prices cratered—and subsequently began to rise—energy companies have become much more efficient and have learned to do more with less. As the Financial Times notes, U.S. frackers are producing what they are today while employing only three quarters of the workforce they had in the days of $100-a-barrel oil. ExxonMobil, the largest American producer, is in expansion mode, with plans to ramp up its shale mining in the Permian Basin to 500,000 barrels a day by 2025.  

It’s not just American companies that have grown lean and mean in this climate of lower oil prices. Says the chief financial officer of Royal Dutch Shell: “We are able to do the same for less.” 

Europe’s largest producer last week reported that profits tripled in 2017, generating nearly as much cash flow as when oil prices hovered around $100.

According to the Wall Street Journal, the company has “fundamentally revamped the way it designs and executes projects and is working to deliver another $9 billion to $10 billion of savings in the coming years” through restructuring and by paying down loads of debt.

As a result, Shell has rewarded its shareholders well, delivering a dividend yield of nearly 6 percent, among the highest in the entire industry.

These rewards could continue, as Goldman Sachs now sees Brent jumping to $82.50 within the next six months, up from just under $70 today. Hedge funds’ net long position on Brent hit an all-time high of more than 584,000 contracts recently, according to ICE Futures Europe and reported by Bloomberg. WTI net long positions also surged, according to the U.S. Commodity Futures Trading Commission, to nearly 500,000 contracts, the most since 2006.

To learn more about energy and commodities, click here!

Boeing Now the Largest U.S. Industrial Firm by Market Cap

On a final note, Boeing—the world’s largest aircraft manufacturer—hit fresh new highs last week after the company crushed Wall Street expectations, reporting record operating cash flow of $13.4 billion for 2017, up more than a quarter percent from $10.5 billion in 2016. The company now forecasts operating cash flow of $15 billion by the end of 2018.

Boeing Hit a Fresh All-Time High on Record Earnings and Deliveries
click to enlarge

Core earnings per share (EPS) for the fourth quarter came in at $4.80, an incredible 94 percent increase from $2.47 during the same quarter in 2016. In 2017, Boeing delivered a record 763 commercial jets, and its backlog of orders stands at close to 6,000 aircraft, valued at $488 billion.

Boeing was the best performing stock in the Dow Jones Industrial Average last year, a trend that has continued into the new year.

As the Chicago Tribune reports, company stock has “more than doubled since the start of 2017 as Boeing surpassed General Electric to become the largest U.S. industrial company by market value.”

In my view, Boeing’s meteoric success is indicative of the overall health of the airline industry. That the company delivered so many new aircraft in 2017 and logged a high number of new orders suggests international carriers are optimistic about long-term air passenger and cargo demand.

In September, American Airlines CEO Doug Parker told CNBC he was very bullish on the industry’s ability to stay profitable, saying, “I don’t think we’re ever going to lose money again.”

A little skepticism would be forgiven here, but the sheer volume of new airline orders suggests other carriers feel the same way Parker does.

Read more about Boeing 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 GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts. 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.

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.

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 12/31/2017: Exxon Mobil Corp., Royal Dutch Shell PLC, The Boeing Co., American Airlines Group Inc.

 

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Bitcoin Is Just the Latest in the Trend Toward Decentralization (INFOGRAPHIC)
January 31, 2018

Something Interesting is Happening

It’s been called a number of things: The sharing economy, or “shareconomy.” Peer-to-peer economy. Collaborative consumption. What all of these terms have in common is the idea of decentralization—and blockchain applications, including bitcoin and other cryptocurrencies, are just the latest in a trend toward this new economic paradigm.

If it’s unclear what decentralization means, consider the following visual. You might have seen one like it before. On the left is a representation of a centralized, top-down system. Think of a traditional corporation, one that has only one CEO and one head office.

Are we headed for a new economic paradigm?

Now compare that to the next two visuals depicting decentralized and distributed systems. Instead of being top-down, their infrastructures are more collaborative, helping to prevent systemic failure, collusion and more.

This is the “sharing economy” business model that’s growing in prominence thanks to the internet and practiced by companies such as Facebook, Airbnb, Uber and more. Although these firms have one CEO and headquarters like a more traditional company, their assets are decentralized and widely distributed: Facebook’s content is collaborative among 2 billion users worldwide. Airbnb and Uber’s hotels and cabs are privately owned. Jack Ma’s Alibaba has no inventory of its own, relying instead on a decentralized network of retailers and manufacturers.

Blockchain, and bitcoin specifically, is the logical conclusion to this trend. Bitcoin is completely open-source and peer-to-peer. No one owns it. Unlike fiat currencies, it’s not controlled or regulated by a central authority. This is possible only through the power of blockchain, the decentralized, unmodifiable electronic ledger that records all activity across the entire system.

We’re in the very early stages of this new paradigm, but already much is expected. Mastercard believes the sharing economy will inevitably graduate beyond social media and accommodations, spreading “into new sectors, including insurance, utilities, health and social care.” And UBS estimates that by 2027, blockchain could add between $300 and $400 billion of annual economic value to the global economy.

Indeed, something interesting is happening!

Curious to learn more? Watch my interview with SmallCapPower, where I explain the reasons for my decision to invest in HIVE Blockchain Technologies!

 

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

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly. This interview should not be considered a solicitation or offering of any investment product.

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 12/31/2017.

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What Do Quincy Jones, Serena Williams and Blockchain Have in Common?
January 29, 2018

Frank Holmes Robert Friedland

Two big themes last week at Inside ETFs, the Comic-Con of exchange-traded funds attended by more than 2,300 advisors and investors, were innovation and disruption. Like all other industries, the investing world has seen its fair share of disruption in the past quarter-century—think indexing, passive investing, the rise of robo-allocation and now blockchain and cryptocurrencies. This year marks the 25th anniversary of the first ever ETF, and today total ETF assets top $3 trillion. That’s a far cry from the estimated $40 trillion sitting in mutual funds worldwide, but exchange-traded funds are rapidly catching up as investors seek cheaper, more innovative and tax-efficient instruments.

Consider robo-advisors, which emerged only 10 years ago. Who would have thought in the mid-2000s that so many investors would be comfortable enough with the idea of a machine managing their money? And yet here we are. By 2020, Citi analysts predict, assets controlled by robo-advisors could reach close to $450 billion globally.

Robo advisor  platforms forecast to continue growing around the world
click to enlarge

Disruption was definitely top of mind during many of the presentations and interviews at Inside ETFs, including that of producer and composer Quincy Jones, who was at the conference to promote a new stock index that tracks music and entertainment companies. “Q” is the very definition of a legend, having been at the center of some of the most influential musicians, actors, and artists over the course of his long career. With a record 79 Grammy Award nominations to his name, he’s made an indelible impression on the music, television, and film we all consume and enjoy, whether we’re aware of it or not.

When CNBC’s Bob Pisani asked Jones if he was ready for the day when robots write and perform music, the 84-year-old Jones said, “You can’t stop the technology,” adding that he was among the earliest experimenters of synthesizers. (Anyone remember the synthy theme song to the old 1960s-1970s detective show, Ironside? That was composed by Quincy Jones.)

“You got to always stay curious. You got to be willing to take a chance,” he said.

Tennis star Serena Williams being interviewed by Barry Ritholtz at Inside ETFs 2018

A similar forward-thinking attitude was expressed by Serena Williams, who was also in attendance. The tennis virtuoso and four-time Olympic gold medal winner, who bagged her 23rd Grand Slam last year while pregnant, is a savvy businesswoman in her own right, sitting on the board of online survey firm SurveyMonkey and Oath, a subsidiary of Verizon that controls a number of media outlets such as HuffPost, Yahoo and Tumblr.

When asked why she was drawn to tech firms in particular—her husband Alexis Ohanian co-founded Reddit—Williams said, “This is a new time, and I don’t want to be left behind.”

I couldn’t agree more with Jones and Williams.

Embracing Disruption with HIVE Blockchain Technologies

Curiosity and a willingness to embrace change and innovation are what led me to invest in HIVE Blockchain Technologies and agree to become its chairman last year. As many of you know, HIVE is the first publicly-traded company engaged in the mining of virgin digital currencies, including bitcoin, Ethereum, Litecoin, Dash, Monero and many more.

I’m thrilled to be at the forefront of this new technology that’s already disrupting our industry and reshaping how transactions are made and companies raise funds across the globe. The year 2017 was the real catalyst, bringing cryptocurrencies into mainstream conversations as bitcoin hit an all-time high of nearly $20,000 apiece in mid-December.

Total crypto market cap briefly cracked $830 billion earlier this month yet has since receded to around $540 billion, with strong pressure being exerted by the global equities bull market. A record $33.2 billion flowed into stocks in the week ended January 24, according to investments data provider EPFR Global. U.S. stocks alone attracted $7 billion, while emerging markets saw inflows reach $8.1 billion, the second-highest amount recorded in a week.

Competition among digital currencies is also heating up. Although bitcoin remains the top dog, it faces tough competition from the likes of Ethereum, Litecoin, Ripple and the other nearly-1,500 coins on the market today. It now accounts for about 40 percent of the entire market, down from almost 100 percent just a few years ago.

Bitcoin is facing gretaer competition from other cryptocurrencies
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What’s important to remember is that digital currencies are, at the moment, highly volatile and speculative. Unlike gold and other hard assets, they haven’t been tested in all economic backdrops. Bitcoin was created only in 2009, after the worst months of the financial crisis, and it’s existed mainly in an environment of rising equity prices and gradually improving economic conditions. How investors might use it in the next recession or major market correction is unknown at this point.

Coinbase Generated $1 Billion in Sales Last Year

Having said that, the crypto space is rapidly maturing in a number of different ways. Every day, more and more businesses accept the currency as a form of payment. Investors can now buy bitcoin futures. Fidelity and USAA both allow account holders to monitor their cryptocurrency holdings. Blockchain ETFs are appearing on the market—though a couple of proposed bitcoin ETFs have hit roadblocks getting approval from the Securities and Exchange Commission (SEC). And I overheard at the Canaccord Genuity Blockchain Conference in Toronto last week that as many as 10,000 millionaires have been created from Ethereum.

Last year, the cryptocurrency trading platform Coinbase booked $1 billion in revenue, almost double what company executives had expected for 2017. Founded only six years ago and boasting more than 13.5 million accounts, Coinbase has recently closed the door on any additional venture capital, leaving investors to hope for an initial public offering (IPO) sometime in the near future.

Coinbase is about to face some serious competition, though, as smartphone-only trading app Robinhood will begin allowing customers to trade bitcoin and Ethereum next month—all commission-free.

World Gold Council: Cryptocurrencies Are No Substitute for Gold

Several attendees at Inside ETFs and the blockchain conference raised concerns that cryptocurrencies are on a path to replace gold as a safe haven investment. I’ve mentioned multiple times before that I do not see this to be the case, for a number of reasons. Unlike bitcoin, gold has thousands of years’ worth of history to justify its role as a currency and store of value. Central banks own gold, as do institutional and retail investors. It’s widely used not just as money but also as jewelry and in dentistry and electronics. The metal, in fact, can be found in the very computer hardware used to mine bitcoin.

Now, in a new report, the World Gold Council (WGC) takes the position that, while cryptocurrencies and blockchain technology are attractive, they simply don’t and can’t usurp gold’s place in investors’ portfolios.

What’s more, “there isn’t any quantifiable evidence that gold holdings are directly suffering from competition from cryptocurrencies,” the WGC writes.

Tennis star Serena Williams being interviewed by Barry Ritholtz at Inside ETFs 2018

Need proof? According to the group, bitcoin currently trades around $2 billion a day on average. That’s less than 1 percent of the $250 billion in gold bullion that’s traded every day. Remember, gold is one of the most liquid currencies in the world, with a highly developed and accepted market structure.

There are several other important differences between the two asset classes, and I highly recommend you read the full report. You can do so by clicking here.

Investors Pile into Gold-Backed ETFs Ahead of Potential Jump in Inflation

Coming back full circle to ETFs, Bloomberg reported last week that holdings in gold bullion-backed funds rose to their highest level since 2013 on a weaker U.S. dollar, rising geopolitical risk and growing expectations that inflation could finally heat up in 2018.

Holdings climbed to 2,250 metric tons earlier last week, the highest amount since May 2013, when gold prices were still in the $1,400 to $1,500-an-ounce range.

Holdings in bullion backed ETFs are at their highest since 2013
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The U.S. dollar has plunged in value for the past several weeks, dipping more than 1 percent last Wednesday alone—the biggest one-day pullback in 10 months—following Treasury Secretary Steven Mnuchin’s comment at the World Economic Forum in Davos, Switzerland, that a weaker buck “is good for us as it’s related to trade and opportunities.” The greenback similarly tanked back in April 2017 when President Donald Trump said the dollar is “getting too strong.” Soon after, it fell below its 200-day moving average.

US dollar has lost 12 percent since Trumps inaug
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Last Thursday, however, Trump walked back Mnuchin’s (and his own) comment, telling CNBC that the dollar “is going to get stronger and stronger, and ultimately I want to see a strong dollar.”

In any case, this has all been constructive for the price of gold, which Thomson Reuters GFMS now sees hitting $1,500 an ounce this year. If you remember, $1,500 was approximately my estimate after analyzing gold’s performance in the months following the December rate hikes in 2015 and 2016.

According to Thomson Reuters, the price appreciation could be driven by “concerns that the United States may pull out of NAFTA.”

Doing so, of course, would be highly inflationary—and inflation, as I point out in last week’s episode of Frank Talk Live, has historically been a tailwind for gold. The tax overhaul is already helping to boost wages at Walmart, Starbucks and elsewhere, and the U.S. recently slapped fresh tariffs on imported washing machines and solar cells. In response, South Korea opened two cases against the U.S. at the World Trade Organization (WTO).

And let’s not discount geopolitical noise. Last week, the “Doomsday Clock” was moved 30 seconds closer to midnight and now stands only two minutes away. That’s the closest to midnight the symbolic barometer has come since 1953, when both the U.S. and Russia first began testing thermonuclear weapons—among the most disruptive advancements of the past 100 years.

Curious to learn more about what’s driving gold? 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.

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

The U.S. Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.

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 12/31/2017.

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Net Asset Value
as of 05/18/2018

Global Resources Fund PSPFX $6.18 -0.06 Gold and Precious Metals Fund USERX $7.59 No Change World Precious Minerals Fund UNWPX $4.17 No Change China Region Fund USCOX $11.60 -0.01 Emerging Europe Fund EUROX $7.04 -0.05 All American Equity Fund GBTFX $25.44 -0.01 Holmes Macro Trends Fund MEGAX $19.52 No Change Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change