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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.

Gobble, Gobble: Thanksgiving Dinners Stuffed with Savings Despite Rising Fuel Costs
November 27, 2017

Live turkeys

I spend a lot of time writing and talking about inflation, especially as it affects the price of gold, oil and other commodities and raw materials. The year-over-year percent change in the cost of living has been reasonably low for the past five years, averaging about 1.3 percent on a monthly basis. For commodities, the average change has been even lower at negative 0.9 percent, as measured by the producer price index (PPI). This hasn’t been too constructive for gold and oil producers, but it’s been a windfall for American consumers and manufacturers.

A helpful way to look at inflation is the changing cost of a typical Thanksgiving dinner for 10 people. For the second straight year, the cost actually declined from the previous year’s holiday, according to the American Farm Bureau Federation (AFBF). This year’s feast, including staples such as turkey, rolls, sweet potatoes and more, fell $0.75 to a five-year low of $49.12. On an inflation-adjusted basis, that’s down more than $10 from 30 years ago. The turkey alone cost about 1.6 percent less than last year.

Cost of Thanksgiving dinner for 10 people 1986 to 2017
click to enlarge

So why’s this happening? Obviously there’s no shortage in demand for turkey, with an estimated 88 percent of American households enjoying it during last week’s Thanksgiving feast. U.S. turkey consumption, in fact, has nearly doubled over the past 25 years, according to the National Turkey Federation (NTF). As you might expect, this has led to an explosion in production over the same period, which has helped keep costs relatively stable for a generation.

On Friday, shares of Tyson Foods, one of the top processors of the poultry, were trading above $80, up more than 30 percent year-to-date.

Again, this is good news for consumers. Also good? Multiple studies have found that Americans gain only about a pound in weight as a result of engorging themselves on Thanksgiving Day. So don’t feel so guilty about having helped yourself to that extra slice of pumpkin pie.

Record Number of Americans Hit the Road and Take to the Skies

Holiday gasoline prices, however, are on the rise, with the cost per gallon rising to its highest level since 2014. A trip to the pump this past Thanksgiving will cost motorists an extra 18 percent compared to last year and nearly 25 percent more compared to 2015. 

Thanksgiving gas prices
click to enlarge

As I shared with you earlier this month, oil prices climbed to two-year highs following Saudi Arabia’s purge of princes and ministers. Markets also appear to be pricing in expectations that the Organization of Petroleum Exporting Countries (OPEC) will extend production cuts to the end of 2018.

West Texas Intermediate (WTI) was trading on Friday at a 52-week high of $59 a barrel. The next stop is $60, a level we haven’t seen since May 2015. In a strategy report last week, BCA Research recommended an overweight position in energy.

Higher fuel costs aren’t expected to discourage domestic travel, though. This Thanksgiving season, approximately 51 million Americans were projected to travel 50 miles or more from home on U.S. roads, highways, airlines, rails and waterways, according to the American Automobile Association (AAA). That’s up 3.3 percent from last year and the highest volume since 2005. President Donald Trump mentioned the impressive figure in a tweet last week, adding that “traffic and airports are running very smoothly!”

Trump tweets about travel

Looking at air travel alone, a record 28.5 million passengers were estimated to take to the skies this year during the 12-day Thanksgiving period, according to Airlines for America (A4A). That equates to an additional 2.38 million passengers a day.

Record number of passengers expected to fly on US carriers this Thanksgiving
click to enlarge

With the economy improving, incomes on the rise and consumer confidence at multiyear highs, airline executives expressed optimism in continued flight demand growth and profitability. According to October’s Airline Business Confidence Survey, conducted by the International Air Transport Association (IATA), 80 percent of airline chief financial officers (CFOs) said profits improved in the third quarter compared to the same three-month period in 2016. An overwhelming 87 percent were confident such profitability would persist or improve over the next 12 months. Eighty-six percent of CFOs reported increased passenger demand year-over-year in the third quarter, while 71 percent expected traffic volumes to rise a year from now.

 

Holiday Shopping Sales Could Exceed $107 Billion

On a final note, retailers were bracing for a blowout holiday shopping season. Earlier this month, Adobe Analytics released its forecast that U.S. sales during the Thanksgiving weekend and Cyber Monday could climb above $107 billion, a year-over-year increase of 13.8 percent. Cyber Monday alone might generate as much as $6.6 billion, 16.5 percent more than last year, making it the largest online sales day in history. Among the most hotly anticipated gift items this year are Apple Air Pods, home assistants (Amazon Echo and Google Home) and Sony PlayStation virtual reality (VR) headsets.

Looked at another way, more than 164 million consumers, or nearly 70 percent of all Americans, planned to shop during the Thanksgiving weekend and Cyber Monday, according to a survey conducted by the National Retail Federation (NRF). Today, Black Friday might have seen the largest volume of potential shoppers at 115 million, or 70 percent of those polled, followed by 78 million on Cyber Monday.  

More than 164 million consumers plan to shop during Thanksgiving weekend and cyber Monday
click to enlarge

So how could investors take advantage of these findings? According to a recent report from LPL Financial, since 2009 the S&P Retail Select Industry Index has seen the strongest gains during the months of February and March, after companies report sales for the fourth quarter. Retailers are actually down about 6 percent year-to-date, and LPL Financial adds that “it is likely that the performance of individual company stocks be more dispersed than they have been historically, which may favor active management in the sector moving forward.” I agree with this assessment, as we’ve seen quite a lot of volatility in the space.

I want to wish everyone a blessed week! I often say that having gratitude improves your altitude in life. It’s important that we take stock not only in our finances but also the people who matter most, from family and friends to coworkers and business associates.  

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 Producer Price Index (PPI) is a weighted index of prices measured at the wholesale, or producer level. A monthly release from the Bureau of Labor Statistics (BLS), the PPI shows trends within the wholesale markets, manufacturing industries and commodities markets.

The S&P Retail Select Industry Index represents the retail sub-industry portion of the S&P Total Market Index (TMI). The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges. The Retail Index is a modified equal weight index.

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 (09/30/2017): Tyson Foods Inc.

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Synchronized Global Growth May Have Arrived
November 20, 2017

Synchronized global growth may have arrived

Nearly 10 years after the financial crisis brought the global economy to its knees, conditions have finally improved enough to crystallize my conviction that synchronized global growth is currently underway. Revenue and earnings growth are up year-over-year, not just in the U.S. but worldwide. Despite President Donald Trump threatening to raise tariffs and tear up trade deals, global trade is accelerating. World manufacturing activity expanded to a 78-month high of 53.5 in October, with faster rates recorded in new orders, exports, employment and input prices.

Global manufacturing PMI at 78 month high in October
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Additional trends and indicators support my bullishness. Worldwide business optimism, as recorded by October’s IHS Markit Global Business Outlook survey, climbed to its highest level in three years, with profits growth and hiring plans continuing to hit multiyear highs. Optimism among U.S. firms was at its highest since 2014, with sentiment above the global average for the second straight survey period.

Small business owners’ optimism remained at historically high levels in October, according to the latest survey conducted by the National Federation of Independent Business (NFIB). Its Small Business Optimism Index came in at 103.8, up slightly from September and extending the trend we’ve seen since the November 2016 election.

Small business owner optimism remained at historically high levels in October
click to enlarge

As I told CNBC Asia anchor Bernie Lo last week, U.S., Europe and China’s economies are strong, which is igniting the rest of the world. The eurozone purchasing manager’s index (PMI), in particular—rising to 58.5 in October, an 80-month high—is very constructive for world economic growth in the next six months.

Synchronized global growth may have arrived

Fewest Number of Countries in Recession

Speaking on CNBC’s “Trading Nation” recently, Deutsche Bank chief international economist Torsten Slok made the case that global economic health “has never been more robust,” citing the fact that the number of countries in recession has dropped to its lowest level in decades.

“We have never seen a smaller number of countries in recession as we do at the moment,” Slok said. “And if you look ahead to the next few years… we are going to see that fall even lower.”

The Organization for Economic Cooperation and Development (OECD) backs up this claim in its quarterly economic outlook. According to the Paris-based group, synchronized global growth is finally within sight, with no major economy in contraction mode for the first time since 2008. World GDP is expected to advance 3.5 percent in 2017—its best year since 2011—and 3.7 percent in 2018.

Taken together, this should help boost exports and global trade even further as more countries have the capital and demand to make purchases on the world market.

Exposure to Foreign Markets Boosted Companies’ Bottom Line

Bolstered by a weaker U.S. dollar, exports by American firms hit a three-year high in August, the Commerce Department reported this month. Exports rose to nearly $200 billion, the highest level since December 2014.

US exports up as dollar weakened
click to enlarge

As further proof that the global economy is humming along, S&P 500 Index companies with greater exposure to foreign markets, especially Europe, saw higher revenue and earnings growth in the third quarter than those companies whose business is more focused domestically.

According to FacSet data, revenue grew 10 percent year-over-year for firms that generated 50 percent or more of their sales outside the U.S., compared to only 4.2 percent for firms whose sales were conducted mostly within the U.S. The difference was even greater for earnings growth—13.4 percent for S&P 500 companies with strong foreign exposure, 2.3 percent for companies with less exposure.

US companies with more Global exposure reported higher earnings growth
click to enlarge

We saw similarly impressive results with Dow Jones Industrial Average (DJIA) companies. According to FactSet’s November 17 Earnings Insight :

Overall, 11 of the 30 companies in the DJIA provided revenue growth numbers for Europe for the third quarter. Of these 11 companies, nine reported year-over-year growth in revenues. This number was the highest number of Dow 30 companies… to report revenue growth in Europe on a quarter basis since Q2 2014. Of these nine companies, five reported double-digit revenue growth in Europe for the third quarter.

FactSet adds that Nike reported its seventh straight quarter of year-over-year revenue growth in European markets, Apple its fifth straight quarter.

As of Friday, 95 percent of S&P 500 companies have reported earnings for the third quarter, and of those, nearly three quarters have logged earnings per share (EPS) that are above the five-year average.

The U.S. isn’t the only economy that’s had a standout quarter. According to Thomson Reuters data, 65 percent of companies in the MSCI Europe Index have beaten third-quarter expectations, with overall year-over-year earnings growth standing at nearly 10 percent.

Enthusiasm Over Corporate Tax Cuts Drive Stock Prices Higher

As you’re likely aware, it’s been one year since the U.S. election, and since then the market has surged more than 21 percent on improved global growth, higher corporate earnings and hopes that President Trump’s pro-growth agenda of tax reform and deregulation will improve business conditions in the U.S. In the past 12 months, there have been nearly three times as many weeks posting market gains above 1 percent than those with losses below negative 1 percent. This makes it one of the most profitable markets to have invested in for many years.

US stocks were a profitable place to invest in year following November 2016 election
click to enlarge

So where does the Trump rally rank? Looking at the 12 months following every November presidential election since 1950, LPL Research found that the bull run we’ve seen under Trump ranks fifth place, following Presidents Bush Sr. in 1988; Obama in 2012; Kennedy in 1960 and, in first place, Clinton in 1996, with gains climbing to nearly 32 percent.


Where Does the Trump Rally Rank?
Since 1950

Election Date Winning President S&P 500 Return One Year Later Rank
11/05/1996 Clinton 31.7% 1
11/08/1960 Kennedy 28.4% 2
11/06/1912 Obama 23.9% 3
11/08/1988 Bush Sr. 21.7% 4
11/08/2016 Trump 21.1% 5
Past performance does not guarantee future results.
Source: LPL Research, FactSet, U.S. Global Investors

Before year’s end, we could see prices appreciate even more as investors act on enthusiasm over tax reform. Last week the House approved $1.5 trillion in tax cuts that, if signed into law, would slash corporate taxes down from 35 percent to a much more competitive 20 percent. The bill is now in the Senate’s court where hopefully it doesn’t suffer the same fate as the failed Obamacare repeal-and-replace efforts. Goldman Sachs analysts place the chances of tax reform being completed by early 2018 at 80 percent—encouraging for sure, but there are some tough challenges ahead. A handful of Republican Senators, including Jeff Flake (AZ) and Ron Johnson (WI), have already said they will not vote for the Senate bill as it’s currently written.

Despite the bill’s uncertain future, markets responded very favorably to the House news. The S&P 500 Index closed up 0.82 percent on Thursday, its best one-day move since June, with gains led by retailers such as Foot Locker, Ross Stores and Gap.

This week I’ll have more to add on consumer spending forecasts for the upcoming holiday shopping season. This Black Friday is expected to be the largest-ever for online shopping. In the meantime, explore investment opportunities in domestic companies with exposure to foreign markets by clicking here!

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

The Business Outlook Survey for Global Manufacturing and Services is based on a survey of around 11,000 manufacturers and service providers that are asked to give their thoughts on future business conditions. The reports are produced on a tri-annual basis, with data collected in February, June and October.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

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

The 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 MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe. With 445 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the articles were held by one or more accounts managed by U.S. Global Investors as of 9/30/2017: NIKE Inc. 2.87%, Foot Locker Inc. 1.99%.

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.

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Solar Energy Boom Could Heat Up the Global Energy Sector
November 16, 2017

Solar expected to be the fastest growing source of energy between now and 2040

By 2040, the world will need to add the equivalent of India and China’s current energy system to meet the demands of a surging global population and rising incomes. Among all other forms of energy, solar PV (photovoltaic system) is forecasted to see the largest and fastest growth in new capacity additions as prices continue to plummet and world governments enact policy favoring renewables.

The claims above, which come from the International Energy Agency’s (IEA) just-released World Energy Outlook 2017, is constructive for one of our favorite stocks, SolarEdge Technologies, held in our Global Resources Fund (PSPFX). The company was up more than 202 percent in 2017 as of November 13, jumping nearly 20 percent in a single day last week after record revenues and profitability were announced for the third quarter. The S&P 500 Energy Index, by comparison, has delivered negative returns for the year. 

As I told you back in May, we managed to buy shares of SolarEdge and other renewable names after they contracted last November on fears that the incoming Donald Trump administration would curtail incentives for “green” energy capacity additions. We saw the correction as a prime buying opportunity, a move that helped drive performance in PSPFX, which was up 13.6 percent as of November 13.

SolarEdge at the Cutting Edge of the Solar Market

Our bet on SolarEdge—which made up 1.39 percent of PSPFX as of September 30—continued to pay off as the company just closed out a stellar third quarter. During the earnings call last week, founder and CEO Guy Sella reported record revenue of $166.6 million, up 30 percent from the same quarter last year; record cash flow generation of $33.6 million; and net income of $28 million, with diluted earnings per share at $0.61. This beat consensus estimates by 11 cents. Gross margins stood at 35 percent for the quarter. Oh, and the company has carried absolutely no debt for at least the past year.

There isn’t much about SolarEdge, in other words, that I can find fault with.

Some investors might believe that after such a phenomenal run, SolarEdge is due for a correction. Obviously I can’t predict the future, but for whatever it’s worth, the company’s own guidance for the fourth quarter has revenues reaching between $175 million and $185 million—which, if achieved, would set another fresh record.

So who are SolarEdge’s customers? According to Sella, the U.S. accounted for a little less than half of the Israeli company’s quarterly sales, with market share in Europe climbing. Australia, India and Japan are also “beginning to bear fruit.”

“We remain confident in our technology leadership, innovation and intellectual property we have to defend it,” Sella said, adding that consumers can expect to see a new product line soon that will add to its residential power optimizers, solar inverters and more.

China and India Driving Renewables Adoption

SolarEdge’s success is emblematic of the impressive growth we’ve been seeing in the broader renewables space. As I’ve shared with you before, new solar PV capacity additions were the largest of any other form of energy in 2016. Since 2010, according to the IEA, costs have come down approximately 70 percent, making solar more affordable for everyday consumers and businesses.

This trend could continue, as shown below. Solar PV has been forecasted to represent the largest share of all new energy capacity additions between 2017 and 2040. As you can see, new coal capacity growth is forecast to shrink dramatically compared to the 2010-2016 period. Natural gas should remain about the same. New nuclear power capacity additions, meanwhile, are expected to be negligibly higher.

Solar PV expected to forge ahead in the Global Power Mix
click to enlarge

According to the IEA, China and India will make up the lion’s share of renewable energy demand, solar PV especially, as the two governments are committed to improving their air quality and lowering costs.

“To meet rising demand, China needs to add the equivalent of today’s United States power system to its electricity infrastructure by 2040,” the IEA writes, “and India needs to add a power system the size of today’s European Union.”

Electricity generation requirements by selected region
click to enlarge

In its September briefing paper, Asia Europe Clean Energy (Solar) Advisory (AECEA), a Hong Kong-based advisory company, reported that China was on track to add 50 gigawatts (GW) of new solar PV capacity this year, a new annual record anywhere around the world. This comes after the Asian country added 34.54 GW in 2016, itself a 128 percent increase from 2015.

As for India, the country just opened the bidding process to install as much as 20 GW of new solar capacity—the most ever for a single deal, according to Indian business newspaper Mint.

 

Managing Expectations

Whatever your position is on renewables, it’s important as serious investors to recognize where the trend appears to be headed. The tailwinds are undeniably at renewables’ backs at the moment and potentially for the next couple of decades at least.

We’ll continue to monitor the situation, but in the meantime, our Global Resources Fund (PSPFX)maintains an overweight position in renewables that includes not just SolarEdge but also InterAmerican Energy, Vestas Wind Systems and more.


I urge you to visit the PSPFX fund page today and explore its top 10 holdings.

 

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.

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

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My Conviction in Gold Royalty Companies and Bitcoin
November 13, 2017

Bitcoin

Some of you reading this might already be familiar with the “Parable of the Talents,” but it’s worth a brief retelling. The story, which appears in the gospels of Matthew and Mark, involves a master who entrusts three servants with some of his “talents,” or gold coins, while he’s away on business. Two of the servants take a risk by putting the money to work and end up doubling their master’s wealth. The third servant, however, buries his share to “keep it safe” and so doesn’t generate any returns. (Indeed it likely loses value because of inflation.)

When the master returns, he’s so pleased at how the first two servants grew his wealth that he puts them in charge of “many things” and invites them to share in his own success.

The third servant, though, he calls “wicked and lazy” and says he might as well have deposited the money in a bank while he was away—at least then he would have received a little interest. The servant is punished by having his share of the talents given to the two who faithfully grew their master’s money, leaving him with nothing.

The lesson here should be plainly obvious, and we can express it in a number of different ways: There can be no reward without risk. You must spend money to make money. You reap what you sow. This should resonate with investors, entrepreneurs and any true believer in the power of capitalism.

Jesus’ parable applies not just to individuals but to corporations as well. Companies must grow to keep up with the rising cost of labor and materials and to stay competitive. To do that, they must put their money to work just as the two servants do.

And just as the two servants were invited to share in their master’s success, corporate growth has a multiplier effect—for the company’s employees and their families, shareholders, the local economy, strategic partners, companies up and down the supply chain and much more.

A Bonanza for Precious Metal Royalty Companies as Exploration Budgets Have Declined

I think the business model that best illustrates the meaning of the “Parable of the Talents” is the one practiced by gold and precious metal royalty companies. As much as I write and talk about royalty companies, I still encounter investors who aren’t aware of how significant a role they play in the mining space.

As a refresher, these firms help finance explorers and producers’ operations by buying royalties or rights to a stream. Because miners have had to slash exploration budgets since the decline in metal prices, the kind of financing royalty companies provide has only grown in demand—as evidenced by the mostly positive earnings reports last week.

Chief among them is Franco-Nevada, which had a very strong third quarter, reporting earnings of $55.3 million, or $0.30 a share, up 3.4 percent from the same three-month period last year. The Toronto-based company, having also recently diversified into the oil royalties space, closed its purchase of an oil royalty for C$92.5 million, bringing the number of its oil and gas assets up to 82. Including precious metals and other minerals, the total number of assets Franco-Nevada had in its diverse portfolio as of the end of the quarter stood at 341.

Here’s the multiplier effect: Not only do the miners benefit from the deals, allowing them to continue exploration and other operations, but shareholders are also rewarded handsomely. Since the company went public nearly 10 years ago, it’s raised its dividend each year and its share price has outperformed both gold and relevant gold equity benchmarks. After its earnings announcement last Monday, Franco-Nevada stock closed up more than 6 percent on the New York Stock Exchange (NYSE), its best one-day performance in nearly a year and a half. Shares hit a fresh all-time high last week.   

Precious metal royalty names have outperformed gold and gold producers
click to enlarge

Other royalty companies’ reports were just as impressive and show the rewards of putting your “talents” to work. Sandstorm Gold, reporting higher operating cash flow of $11.9 million, has acquired as many as 10 separate royalties since the end of September on properties in Peru, Botswana and South Africa that collectively cover more than 2.4 million acres.

Osisko Gold Royalties bought a $1.1 billion portfolio of 74 precious mineral royalties, including a 9.6 percent diamond stream. The company reported record quarterly gold equivalent ounces (GEOs) of 16,664, up 65 percent from the same quarter last year, and record quarterly revenues from royalties and streams of $26.1 million, up 48 percent.

Royal Gold also had a strong quarter, reporting operating cash flow of $72 million, an increase of 30 percent from last year, and returned as much as $16 million to shareholders in dividends.

Wheaton Precious Metals, the world’s largest precious metal streaming company, showed a sizeable decline in profits in the third quarter, but it continued to generate strong cash flow and looks poised to meet its end-of-year production guidance.

Although some investors might not realize how important these companies are to the industry, many other investors are opting to place their bets on royalty names, seeing them as having ample exposure to precious metals without some of the risks associated with producers. In its review of the third quarter, the World Gold Council (WGC) reported that global gold demand fell to an eight-year low as investment in gold ETFs slowed to 18.9 metric tons, down from 144.3 metric tons in last year’s September quarter. This could be a consequence of the media’s continued negative coverage of gold, despite its competitive performance against the S&P 500 Index. Whatever the cause, in this environment, there was no lack of love for royalty names, as you can see in the chart above.

A Changing Financial Landscape

We were one of Wheaton Precious Metals’ seed investors in 2004, when it was then known as Silver Wheaton. Because Franco-Nevada wouldn’t be spun off from Newmont Mining for another three years, Wheaton had first-mover advantage. It was something new, something different. This, coupled with what I recognized as a superior business model, gave me the conviction to allocate capital into the fledgling company, a move that turned out to be highly profitable.

Today I have the same conviction in blockchain technology and digital currencies. As of the end of October, the initial coin offering (ICO) market had raised $3 billion so far this year. That’s more than seven times the amount generated in crowdfunding in all of the previous years before 2017. And Bloomberg just reported that Google searches for “buy bitcoin” recently surpassed searches for “buy gold.”

Search queries for buy bitcoin surged past buy gold
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With bitcoin’s market cap having grown past that of Goldman Sachs and Morgan Stanley, cryptocurrencies can no longer be written off as a curiosity. Major financial institutions have become bullish, having filed approximately 2,700 patents in blockchain technology.

Abigail Johnson, the youthful chairman of Fidelity, was quoted as saying, “Blockchain technology isn’t just a more efficient way to settle securities, it will fundamentally change market structures, and maybe even the architecture of the internet itself.” Johnson allegedly has a crypto-mining computer rig in her office, and Fidelity accountholders are now able to see their bitcoin holdings on the brokerage firm’s online platform. USAA, the massive financial firm used by millions of U.S. military personnel and their families worldwide, provides a similar service.

Bitcoin

This all comes as Coinbase, a leading digital currency broker, saw a record number of people opening new accounts on its platform recently, doubling the number of accounts from the beginning of the year. In one 24-hour period, 100,000 new accounts were opened.

Millennials Driving Interest in Blockchain Technology and Cryptocurrencies

A lot of this growth in demand is thanks to millennials, the largest U.S. generation. Forget the stereotype of the “entitled” millennial in the workplace and the misconception that they’re all wasting their money on $10 avocado toast. Consulting firm Deloitte estimates that by 2020, millennials will make up 50 percent of the workforce and control between $19 trillion and $24 trillion. Many are savvy investors and were found to be more likely to be aware of their brokerage account fees than older generations, according to Charles Schwab’s Modern Wealth index.

In some ways, millennials are reshaping our living habits. Many of them choose to rent instead of own to stay mobile. They’re more likely to get their news from Twitter than from TV. Online dating apps have helped foster today’s hookup culture, but while young people now might have more sex partners than before, they’re having less sex overall than their parents or grandparents might have had at their age.

It’s little surprise, then, that millennials are among the earliest and most enthusiastic adopters of blockchain technology, bitcoin and digital currencies in general—none of which existed even 10 years ago. A poll conducted by Blockchain Capital found that large percentages of millennials would prefer $1,000 in bitcoin to $1,000 in other assets. More than a quarter said they would prefer bitcoin to stocks, while nearly a third preferred it to bonds.

Percent of millenials who would prefer 1000 in botcoin to 1000 in
click to enlarge

What I find especially encouraging is that only 4 percent of those who took the poll owned or had owned bitcoins. I say encouraging because this suggests there’s quite a lot of upside potential for bitcoin ownership, which in turn could raise prices further. As I shared with you recently, Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes. Consider Facebook. The social media giant has more than 2 billion active users. That’s 2 billion pairs of eyes Facebook is able to charge top dollar for advertisers to reach, helping it deliver record profits in the third quarter.

We could see the same thing happen across the blockchain and cryptocurrency network as more and more businesses and people embrace this new form of exchange.

Ploughing Capital into Blockchain

It should be clear by now that something is changing in financial markets, and this is what inspired me to make a strategic investment in a company with first-mover advantage in the cryptocurrency space, just as we did with Silver Wheaton years ago. As the “Parable of the Talents” teaches us, no reward can come to you without some risk-taking. Doing nothing is not an option.

That company is HIVE Blockchain Technologies, a blockchain infrastructure company involved in the mining of virgin digital currencies. The first company of its kind to sell shares to the public, HIVE began trading on the TSX Venture Exchange on September 18.

I’m very excited about this new chapter in our company’s history. If you weren’t on today’s earnings call, you can download the slide deck here to learn more about our deal with HIVE and what it means for our investors and shareholders.

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.

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The Modern Wealth Index tracks how well Americans across the wealth spectrum are planning, managing and engaging with their wealth. Developed in partnership with Koski Research and the Schwab Center for Financial Research, the Modern Wealth Index is based on Schwab’s Investing Principles and composed of 60 financial behaviors and attitudes, each assigned a varying amount of points depending on their importance.

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.

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.

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 09/30/2017: Franco-Nevada Corp., Royal Gold Inc., Osisko Gold Royalties Ltd., Sandstorm Gold Ltd., Wheaton Precious Metals Corp., Newmont Mining Corp.

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Oil at Two-Year Highs as Saudi Arabia Engages in Its Own “Game of Thrones”
November 9, 2017

Oil at Two-Year Highs as Saudi Arabia Engages in Its Own “Game of Thrones”

Recently I identified five agents of change that I believe investors should know about right now. I’d like to add one more to the list: Mohammad bin Salman. The crown prince of Saudi Arabia, 32, was little known outside the region before this past weekend when he jailed members of the royal family, presumably in an attempt to consolidate power ahead of taking the throne. Resembling a plotline from an episode of “Game of Thrones,” the mass detentions signal a seismic change in Saudi leadership—which, in turn, is putting upward pressure on global oil prices.

Saudi Arabia is the world’s second-largest oil producer and single biggest oil exporter, so any development that might alert investors that the kingdom’s production levels or oil policy could be disrupted has historically had a profound effect on prices. When the country’s former king, Abdullah bin Abdulaziz Al Saud, passed away in January 2015, oil jumped more than 8.6 percent for the week.

And so was the case on Monday, after news broke of the shakeup. West Texas Intermediate (WTI), the American benchmark for crude, closed above $57 a barrel for the first time since June 2015, adding nearly 35 percent from its summer 2017 low. A weaker U.S. dollar, down about 3.2 percent from the same time last year, is also providing support, as is slower U.S. supply growth following Hurricanes Harvey and Irma.

crude oil trading at more than a two-year high
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Mike McGlone, commodity strategist at Bloomberg Intelligence, points out that 2017 marks the first year since 2013 that the median price of WTI crude is higher than the previous year’s. (This is assuming WTI will trade range bound or higher between now and the end of 2017.)

The last time we saw Brent do this was from 2011 to 2012. On Monday, the European benchmark closed above $64 a barrel, more than a two-year high. As of November 5, Brent crude had made positive weekly gains in 10 out of the past 11 weeks.

is oil staging a turnaround?
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Taken together, this has the bulls excited. Hedge funds are currently building record or near-record net long positions in oil, indicating they’re betting prices will continue to climb. According to Reuters, bullish positions in Brent stood at a record 587 million barrels as of Friday, with a record 530 million of those net long.

“Most investors appear to believe prices are moving into a new and higher trading range and want to ride the rally until the new price ceiling is discovered,” says Reuters.

Saudi “Game of Thrones” Could Be More than Mere Palace Intrigue

But let’s return to Saudi Arabia and Mohammad bin Salman, known to many as “MBS.” The official explanation for the detainments—which involve at least 11 princes, including well-known billionaire investor Prince Alwaleed bin Talal, four ministers and “dozens” of ex-ministers—is that they are part of an ongoing crackdown on corruption. According to the BBC, this is only “phase one,” meaning we can probably expect to see more to this process.

MBS’s fight brings to mind Chinese President Xi Jinping’s anti-corruption efforts, which have been ongoing since Xi assumed power five years ago and have led to the detainment or punishment of an astonishing 1.4 million party members, according to multiple sources.  

The implications of Saudi Arabia’s own sweeping crackdown, unprecedented in the kingdom’s 85-year history, understandably have many investors spooked. Dennis Gartman, editor of the widely-read Gartman Letter, told CNBC this week that he thought MBS’s actions were “terribly detrimental to crude oil prices” in the long run.

MBS has a supporter in President Donald Trump, though, who tweeted on Monday that he has “great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing… Some of those they are harshly treating have been ‘milking’ their country for years!”

crown prince mohammad bin Salman visiting President Trump in the Oval Office in march 2017

But there’s more to the story than mere palace intrigue. The richest country in the Middle East is undergoing radical changes as outlined in its “Vision 2030” plan, unveiled in April 2016. Among its goals, headlined by the young MBS, is a push to reform the government’s role in everyday life. Today it’s estimated that around 80 percent of Saudi household income depends on government subsidies, supported by vast oil revenues. The hope is to shrink this dependency, especially now that the price of Brent has fallen significantly since its all-time high of $140 a barrel in 2008. Many state-run industries could be privatized in the coming years, including its behemoth oil industry.

Saudi Arabia is a youthful country—about 70 percent of its citizens are under the age of 30—and so the kingdom is also seeking to modernize its society and relax several restrictions that are believed to have held back economic growth. This past September, the country finally permitted women to drive, and there are targets in place to grow the number of women in the workplace.

Aramco: The IPO of the Century?

But possibly the most significant and ambitious goal in Vision 2030 is to wean the kingdom’s economy off of oil exports, which accounted for roughly 87 percent of total budget revenues as of December 2016. Toward this end, Saudi Arabia plans to privatize a part of the country’s crown jewel, Saudi Aramco, the largest energy company in the world by far. In its 2016 annual review, the state-run company said it produced an average 10.5 million barrels of crude a day. By comparison, the entire U.S. produced 8.6 million barrels a day on average in the same year.

Saudi Aramco Leads the world in oil production
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According to Forbes, Aramco generates more than $1 billion a day in revenues, which is a little difficult to fathom.

In an exclusive interview with Reuters, MBS said that Aramco was on track for a 2018 initial public offering (IPO) and that it could be valued at more than $2 trillion. This would make it the largest IPO in history. By floating only 5 percent of the company, MBS expects to raise as much as $100 billion, which would go into a public investment fund (PIF) to help finance other segments of the economy.

“The government should not be in control of the private sector,” Price Mohammad said. “You create opportunity, you create business, you create development, you hand it to the investor and start creating something new.”  

Not to wade into conspiracy theories, but the crown prince’s anti-corruption campaign and impending Aramco IPO could be related. Saudi Arabia wants oil support at $60 a barrel before the giant energy company goes public, and a royal shakeup of this magnitude could be one way of achieving that.

The Challenges of Getting Listed

As exciting as an Aramco IPO is, I wouldn’t put my full faith in it coming to fruition. For one, the Saudi Stock Exchange in Riyadh is simply too small and undeveloped to handle the massive trading volume the biggest IPO in history would require.

Getting listed in New York has its own challenges. Although President Trump is strongly urging Saudi Arabia to float shares on the New York Stock Exchange (NYSE), the kingdom is concerned that doing so would open itself up to litigation. In 2016, a bill was passed allowing victims of 9/11 or their families to sue the Saudi Arabian government.

On Monday, the Financial Times reported that the London Stock Exchange (LSE) has made a “very strong case” for Aramco to get listed in the U.K. In April, Prime Minister Theresa May visited the kingdom, accompanied by the LSE chief executive, presumably to pitch the idea of a London IPO to Saudi officials. In addition, the LSE has sweetened the deal by announcing it would loosen certain rules and restrictions on Aramco that apply to other companies.

However this plays out, we’ll certainly continue to monitor it, as well as the oil market. Because of the drama in Saudi Arabia and further extended production cuts planned by the Organization of Petroleum Exporting Countries (OPEC), Morgan Stanley just raised its forecast for the price of oil, estimating WTI to average $58 a barrel in the second quarter of 2018. It could be time for investors to consider oil equities again.

 

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Net Asset Value
as of 12/15/2017

Global Resources Fund PSPFX $5.91 -0.03 Gold and Precious Metals Fund USERX $7.27 -0.06 World Precious Minerals Fund UNWPX $5.67 -0.05 China Region Fund USCOX $11.08 -0.09 Emerging Europe Fund EUROX $7.06 -0.01 All American Equity Fund GBTFX $24.78 0.24 Holmes Macro Trends Fund MEGAX $22.12 0.24 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change