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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.

Russia Is Defying Expectations
June 25, 2018

Russian president Vladimir Putin holding the FIFA world cup trophy at a pre tournament ceremony in Moscover in September 2017

 

Before being defeated today by Uruguay at the 2018 FIFA World Cup, Russia surprised experts and fans alike. Expectations were low at best. Because of recent setbacks, including a disastrous performance at the 2016 UEFA European Championship and injuries sustained by key players, the federation ranked a dismal 66th place among Fédération Internationale de Football Association teams—its lowest position ever. The only reason it didn’t have to qualify to compete was because Russia is the host nation. (This is the first time in its 88-year history, by the way, that the World Cup has been held in Eastern Europe.)

And yet Russia has defied predictions that the federation would be eliminated right out of the gate.

It’s managed to advance to the knockout stage, but that’s likely as far as it will get when it goes up against either Spain or Portugal on July 1. As for which team might win the Cup, sophisticated predictive models using portfolio theory and the historical performance of players are pointing to France beating Spain in the final.

Russian Airports Could Be Biggest Beneficiaries of Hosting World Cup

This is the second time in the past five years that Russia has hosted a major international sports tournament, and questions have surfaced about what economic benefits, if any, doing so affords.

As I shared with you back in February, the Eastern European country spent as much as $50 billion, a record-breaking sum, to host the 2014 Winter Olympics in Sochi. It seems insurmountable, but Fitch Ratings concluded that the debt was “manageable,” citing the reduction of interest rates to 0.5 percent and noting that the cost is less than 2.5 percent of Russia’s gross domestic product (GDP).

There’s also evidence that the investment had been well made. Four years later, Sochi is still full of tourists, and locals even have a nickname for the old Olympic Park, now a resort town: “Sochifornia.”

Hosting the World Cup has set Russia back an estimated $14 billion—again, a record amount for the competition. And like the Olympics, the Cup could produce some modest net economic benefits—in the short-term, at least—according to experts.

Back in April, tournament organizers predicted that, as a result of increased tourism and large-scale spending on infrastructure, the competition would add nearly $31 billion to Russia’s economy in the 10 years between 2013 and 2023. (FIFA selected Russia as the host nation in 2010.)

Russian airports such as Moscow Domodedovo Airport are among the biggest long-term beneficiaries of World Cup-related capital spending.
"Moscou" by OliBac Licensed under a Creative Commons Attribution 2.0 Generic (CC-BY2.0). https://flic.kr/p/ovkQad

Analysts with Moody’s Investors Service were slightly less upbeat, writing that they see “very limited economic impact at the national level.” Among the beneficiaries are food retailers, hotels, telecommunications firms and transportation, as “better public infrastructure will likely generate additional tax revenue and reduce capital spending needs for the hosting regions in the coming years.” But the greatest long-term beneficiary, Moody’s says, are Moscow-based international airports, since “upgraded facilities will support higher passenger flow, even after the event.”

Watch this brief video on opportunities in the global airline and airport industries by clicking here!

Russia’s Recovery Gathering Pace

Besides its soccer prowess, Russia is defying expectations in other ways—and equity investors should be taking notice.

Having emerged last year from a two-year recession that was triggered by the collapse in oil prices and imposition of sanctions following its annexation of Crimea, the country is now in full-on recovery mode. In a note to investors last week, Capital Economics senior emerging markets economist William Jackson says that GDP growth in May picked up to more than 2 percent year-over-year, up from 1.3 percent in the first quarter. Most of the changes, according to Jackson, came in manufacturing, which he estimates to be growing by more than 5 percent year-over-year, compared with only 1 percent previously.

“This all supports the point we’ve been making for some time,” he writes, “that Russia’s recovery was likely to resume and gather pace this year.”

Once almost entirely reliant on oil exports, the government of the world’s leading oil producer has lowered the structure of exports from 70 percent energy in 2013 to 59 percent last year, according to the World Bank. Today, the budget is back in surplus, and government debt stands at a remarkable 33 percent of GDP, the lowest among G20 nations.

Key inflation is currently running at a record low of 2.4 percent year-over-year, well below the Central Bank of Russia’s (CBR) target of 4 percent. Food inflation, in particular, is near zero percent.

russian inflation is at a record low level below central banks target
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Unemployment continues to decline. In May it fell to 4.7 percent, a record low since the collapse of the Soviet Union in 1991.

unemployment in Russia fell to a record low in May
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Because of low inflation and a near-full employment jobs market, real wages are expanding healthily across all sectors. This is helping to drive stronger private consumption and investment. In May, retail sales grew 2.4 percent compared to the same month last year.

real wages in Russia are growing across all sectors
click to enlarge

Government Policy Supportive of Future Growth

The Russian government is currently enacting or considering policy that should help sustain the economy’s recovery. For one, it recently moved to raise the retirement age to reduce the cost to the state budget on an aging population, the Financial Times reports. (The median age in Russia is nearly 40, compared to around 30 for the entire world.) The pension age for men will increase from 60 years to 65 years in 2028, while for women it will increase from 55 years to 63 years in 2034.

The reform could help the government save an estimated $27.3 billion a year, according to a Russian think tank.

The government is also reportedly working on a plan to invest more in infrastructure and reduce “unnecessary regulation that is holding back private investment.” That’s according to Morgan Stanley’s Clemens Grafe, who adds that plans for “national projects” will be drawn up by October “that should help Russia to become one of the five largest economies in the world.”

Time to Consider Investing in Moscow?

Some might consider that fanciful thinking, but it doesn’t take away from the fact that Russia is an attractive place to invest right now, especially compared to the U.S. market.

Besides an economy in recovery, consider the following: Whereas the S&P 500 Index is up a little more than 13 percent for the 12-month period, the MOEX Russia Index has seen gains closer to 22 percent. That comes with an appealing 6.46 percent dividend yield, compared to 1.94 percent for U.S. stocks.

The price is right too. Russia trades at an inexpensive 6.39 times earnings, the U.S. at 21.08 times earnings, according to Bloomberg data.

Interested in learning more about emerging Europe? Watch this brief video featuring U.S. Global research analyst Joanna Sawicka as she describes her favorite three countries in this fast-growing region.

 

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

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. The MOEX Russia Index  is the main ruble-denominated benchmark of the Russian stock market.

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.

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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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5 Reasons to Consider Investing During This Summer Travel Season
June 1, 2017

The busy summer travel season is here yet again, and according to forecasts, this year could set a number of new records for airlines and highways. Thanks to a steadily improving economy, rising gross domestic product (GDP), strong consumer confidence and affordable airfare and fuel costs, more people than ever before are expected to fly on U.S. airlines and drive on the nation’s highways this summer.

Below are five reasons why this summer travel season could be a favorable one for investors.

1. Millions Leaving on a Jet Plane

a record 234.1 million passengers are expected to fly on U.S. airlines this summer

Airlines for America (A4A), the main airline industry trade group, projects a record 234.1 million people flying worldwide on U.S. carriers between June 1 and August 31. That figure’s up a healthy 4 percent from last summer.

To accommodate the 2.54 million expected daily passengers—100,000 more than normal—airlines will need to add an extra 123,000 seats a day.

2. Consumer Confidence and Satisfaction Up

The surge in air travel demand is a reflection of an improving domestic economy. Consumers are happy to spend their money right now, with the Consumer Confidence Index posting a 117.9 in May. Even though this is a couple of points below the April reading, optimism still stands at a historically high level.

U.S. Consumer Confidence Near All-Time High in May
click to enlarge

It doesn’t hurt that airfare is relatively affordable at the moment. According to big data firm Hopper, airfare to Europe should be a huge bargain this summer, down an expected 18 percent from last year on average.

Glowing customer satisfaction is another contributing factor to increased demand. The just-released J.D. Power 2017 North America Airline Satisfaction Study shows that passengers are more satisfied with their service than at any other time in the study’s 10-year history. Despite the regretful United Airlines incident in April, when a man was dragged from a Chicago flight bound for Louisville, overall satisfactory rose for a fifth consecutive year, reaching its highest level ever. For the 10th straight year, Alaska Airlines was ranked first among traditional carriers. Delta Air Lines, which we own in our All American Equity Fund (GBTFX), came in a close second.  

3. Rockin’ Down the Highway

Airline passengers won’t be the only ones enjoying an improved economy and low fuel costs this summer. More motorists than ever before are expected to make use of U.S. roads and highways, with 56 percent of Americans saying they plan on traveling more than 500 miles round trip, a 10 percent increase over last summer, according to GasBuddy.

Also pushing up travel expectations is what GasBuddy calls “a feat never before seen.” For the first time in recent memory, the price of gasoline at the beginning of the summer is nearly the same as it was at the beginning of the year. We normally see gas rise about 50 cents during the first five months of the year, but in 2017 it’s risen only 1.5 cents ($2.28 per gallon in January versus $2.30 in May). This should help encourage more Americans to splurge on a longer summer road trip.  

The Great American Summer Road Trip Getting Longer
click to enlarge

4. Appetite for Production

As a result, we expect to see another new high in gasoline consumption. During the summer months of 2016, gas consumption in the U.S. reached an average of 9.62 million barrels a day, surpassing the previous record of 9.57 million barrels a day set in the summer of 2007. With even more motorists taking longer road trips this year compared to last summer, we could see the amount edge closer to 10 million barrels a day.

This bodes well for oil and gas companies such as Phillips 66, Exxon Mobil and Valero, all held in our All American Equity Fund (GBTFX).

5. Vacation Had to Get Away

These airline and highway projections become even more likely to happen when we factor in that Americans are reportedly using more of their vacation time. According to Project: Time Off, an advocacy research initiative run by the U.S. Travel Association, American workers took an average 16.8 days off in 2016, up slightly from 16.2 days the previous year. Though the difference seems marginal, the additional 0.6 days added an extra $37 billion to the U.S. economy in 2016, creating an estimated 278,000 jobs.

So whether you plan on traveling by road or air this summer, you can probably expect to be accompanied by more people than in years past. This might lead to congestion and packed airports, but ultimately it’s a good opportunity for investors.

Seeking investment opportunities in domestic travel and consumer spending? Explore the All American Equity Fund (GBTFX) today!

 

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.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund (GBTFX) as a percentage of net assets as of 3/31/2017: United Continental Holdings Inc. 0.00%, Delta Air Lines Inc. 1.40%, Phillips 66 1.75%, Exxon Mobil Corp. 2.17%, Valero Energy Corp. 2.23%.

Administered by the Conference Board, the Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are with respect to the economy in the near future. The idea behind the Index is that if consumers are optimistic, they tend to purchase more goods and services.

The J.D. Power 2017 North America Airline Satisfaction Study measures passenger satisfaction among both business and leisure travelers, and is based on responses from 11,015 passengers who flew on a major North American airline between March 2016 and March 2017. The study was fielded between April 2016 and March 2017.

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

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Gold Gets a Shot in the Arm from Inflation and China
February 21, 2017

buffett buys more airlines

Inflation just got another jolt, rising as much as 2.5 percent year-over-year in January, the highest such rate since March 2012. Led by higher gasoline, rent and health care costs, consumer prices have now advanced for the sixth straight month. In addition, January is the second straight month for rates to be above the Federal Reserve’s target of 2 percent.

Air fares are also climbing, and speaking of air fares, billionaire investor Warren Buffett added to his domestic airline holdings, we learned last week. Buffett’s holding company, Berkshire Hathaway, is now the second-largest holder of American Airlines, with an 8.79 percent share of the company. It also increased its holdings in Delta Air Lines by over 800 percent, to 60 million shares. The company now owns 43.2 million shares of Southwest Airlines, and it increased its stake in United Continental to about 28 million shares.

What else is driving the airline industry?

 

A March rate hike now looks all but imminent. Many economists—including the Goldman Sachs economists I had the pleasure to hear speak this week—expect to see at least three such hikes this year alone.

US Inflation Zooms up 5 Year High
click to enlarge

Gold responded accordingly, closing above $1,240 for the first time since soon after the November election. Below you can see the gold price charted against the inflation-adjusted 10-year Treasury yield, which is now in subzero territory.


US Inflation Zooms up 5 Year High
click to enlarge

The question I have is: Why would an investor deliberately choose to lose money? But that’s precisely what’s happening now with inflation where it is.

  2-Year 3-Year 10-Year
Treasury Yield 1.22% 1.95% 2.45%
Consumer Price Index 2.50% 2.50% 2.50%
Real Yield -1.28% -0.55% -0.05%
As of February 16
Source: Federal Reserve, U.S. Global Investors

These were among some of the topics addressed by former Fed Chair Alan Greenspan, who spoke with the World Gold Council (WGC) for the winter edition of its “Gold Investor.”

Gold primary global currency

"Significant increases in inflation will ultimately increase the price of gold,” Greenspan said. “Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.”

He also reiterated his view, which I share, that gold is much more than just a metal but a currency:

I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.

Although major stock indices continue to hit fresh all-time highs on hopes of tax reform and fiscal stimulus, it’s important to temper the exuberance with a little prudence. The bull market, currently in its eighth year, is facing some significant geopolitical and macroeconomic uncertainty, and we could be getting late in the economic cycle. This makes gold’s investment case even more attractive. For the 10-year period, the yellow metal has shown an inverse correlation to risk assets such as stocks and high-yield bonds. It might be time to ensure that your portfolio has the recommended 10 percent in gold—that includes 5 percent in gold coins and jewelry, the other 5 percent in quality gold equities and mutual funds.

China and India to Lead World Economy by 2050

The long-term investment case for gold looks just as compelling following bullish reports last week from PricewaterhouseCoopers (PwC) and Morgan Stanley. China and India are the world’s top two consumers of gold, and both countries are expected to make huge economic gains in the next few decades. This is likely to boost gold demand even more, which has a high correlation with discretionary income growth.

China alone consumed approximately 2,000 metric tons in 2016, or roughly 60 percent of all the new gold that was mined during the year, according to veteran mining commentator Lawrie Williams, who based his estimates on calculations made by BullionStar’s Koos Jansen. The 2,000 metric tons is a much higher figure than what analysts and the media have been telling us, but I’ve always suspected China’s annual consumption to run higher than “official” numbers. 

According to PwC’s models, China and India should become the world’s number one and number two largest economies by 2050 based on purchasing power parity (PPP). China, of course, is already the largest economy by that measure, but PwC sees the Asian giant surpassing the U.S. economy on an absolute basis by as early as 2030.


Top 10 Economies Dominated Emerging Markets 2050
click to enlarge

As for India, it “currently comprises 7 percent of world GDP at PPP, which we project to rise steadily to over 15 percent by 2050,” PwC writes. “This is a remarkable increase of 8 percentage points, gaining the most ground of any of the countries we modeled.”

I think it’s also worth highlighting Indonesia, which is expected to replace Japan as the fourth-largest economy by midcentury. E7 economies, in fact, could end up dominating the top 10, with Mexico moving up to number seven and France dropping off. You can see the full list on PwC’s site.

China Set to Become High Income by 2027

Then there’s Morgan Stanley’s 118-page report, “Why we are bullish on China.” The investment bank sees a number of dramatic changes over the coming years, the most significant being China’s transition from a middle-income nation to a prosperous, high-income nation sometime between 2024 and 2027. (The high-income threshold is a gross national income (GNI) of around $12,500 per capita.) This would make China one of only three countries with populations over 20 million that have managed to accomplish this feat in the past 30 years, the other two being South Korea and Poland.


Top 10 Economies Dominated Emerging Markets 2050
click to enlarge

This trajectory is supported by a number of expectations, including, most importantly, Morgan Stanley’s confidence that China will manage to avoid a debt-related financial crisis, as some investors might now believe is forthcoming. The bank’s view is that the Chinese government will successfully provide “adequate policy buffers and deft management of the policy cycle” to ensure the growth of per capita incomes.

Other key transitions will additionally need to take place for the country to reach high-income status by 2027, including transitioning from a high investment economic model to high consumption and implementing meaningful state-owned enterprise reform. Although China is currently transitioning from a manufacturing economy to one that’s focused on consumption and services, the country will also need to emphasize high value-added manufacturing.

chineseshoppers

   In addition, since President Donald Trump has officially withdrawn the U.S. from the Trans-Pacific Partnership (TPP), China could very well use this as an opportunity to take the lead in global trade, Morgan Stanley writes. This view aligns with comments I’ve previously made. China is already reportedly weighing its options with two alternative free-trade agreements (FTAs), one that includes the U.S. (the Free Trade Area of the Asia Pacific) and one that does not (the Regional Comprehensive Economic Partnership). It’s probably safe to say, however, that given Trump’s opposition to FTAs, trade negotiations involving the U.S. are unlikely to happen anytime soon.

Investors Underweight China

Taken together, this is all good news for gold. Again, when incomes rise in China and India, gold demand has historically benefited.

But it also makes China a compelling place to invest in. And yet investors have tended to be shy, underweighting the country for at least a decade in relation to the broader emerging markets universe.     

Time Reverse Course China Stocks 2050
click to enlarge

This, despite the fact that China has largely outperformed emerging markets for the last 15 years. According to Morgan Stanley, the MSCI China Index has delivered a compound annual growth rate (CAGR) of 13 percent for the 15-year period, versus the MSCI Emerging Markets Index’s CAGR of 10 percent over the same period.

 

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

The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 150 constituents, the index covers about 85% of this China equity universe. The MSCI Emerging Markets Index captures large and mid-cap representation across 23 Emerging Markets (EM) countries. With 832 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

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 12/31/2016: American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co.

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Investors Brace for a Storm of Uncertainty with Gold
February 13, 2017

As Winter Storm Niko blanketed the Northeast in snow last week, disrupting scores of flights in the U.S., airline executives convened in Washington to talk shop with President Donald Trump.

Back in November, I wrote that domestic carriers are likely to see the new president—himself the former owner of the now-defunct Trump Airlines—as a strong partner in several key areas. Although a couple of airline CEOs have recently expressed strong opposition to some of Trump’s protectionist immigration policies, Thursday ’s meeting appeared to be constructive, with the president telling the group he would soon be announcing something “phenomenal in terms of tax and developing our aviation infrastructure.”

Details of the tax plan, he said, would likely be announced sometime in the next two or three weeks. This rejuvenated some of the spirit that swept through the market soon after his election, reassuring investors that reform would come sooner than expected.

Among other topics discussed at the meeting were the need for airport infrastructure improvements, industry deregulation, air traffic  control and U.S. carriers’ competitive disadvantage to heavily-subsidized Persian Gulf carriers. Three state-owned Gulf carriers in particular have received as much as $50 billion in subsidies from Middle Eastern governments since 2004, which allow them “to operate without concern for turning a profit,” according to a letter addressed to Rex Tillerson, the new Secretary of State, and signed by three U.S. airline CEOs, including Doug Parker of American Airlines, Edward Bastian of Delta Air Lines and Oscar Munoz of United Airlines. U.S. airlines, obviously, do not have the same privilege, putting them at a competitive disadvantage in the international market. Encouraging the Gulf states to end subsidization, as the CEOs hope, would be a huge win for domestic carriers and their workers.

The market seemed to like what it heard, as the NYSE Arca Airline Index rallied close to 2.3 percent Thursday. This was the biggest one-day move for the group in about a month, during which Trump’s executive immigration ban grounded airline stocks.

Immigration Policy Grounded International Carriers
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The selloff following the executive order was overdone, I think, but it gave airline investors such as Warren Buffett an attractive buying opportunity.

Speaking of which, we learned last week that Buffett was convinced to bet big on the industry, reversing his famously negative opinion of the group, after being in attendance at one of Doug Parker’s investor presentations last March. Parker told attendees that consolidation had fundamentally transformed the industry, making it efficient and focused on demand.  

What else is driving the airline industry?

 

Teaching an Old Dog New Tricks

Airlines got another boost last week after a federal appeals court, in a unanimous decision, struck down Trump’s travel ban. This prompted the president to tweet “SEE YOU IN COURT,” presumably meaning the Supreme Court.

With respect to Trump, I’m reminded of a statement former president George W. Bush made back in 2010, less than a year after leaving office. “Here’s what you learn,” he said. “You realize you’re not it. You’re part of something bigger than yourself.” The buck might stop with the president, but the office is so much greater than one man.

George W. Bush speaking on the Office of the President October 2010

Trump, the art of the deal

This point was made by David Gergen, former advisor and senior official to a number of presidents, including Nixon, Ford and Reagan. He’s now a CNN political analyst, and it was my pleasure to hear him speak at Harvard recently. Trump is learning the hard way, Gergen said, that the Office of the President cannot be run like the Trump Organization, or any other private company. In public office, there are checks and balances, and there’s blindingly harsh transparency—all of which the billionaire president, aged 70, has never had to deal with.

Trump ran largely on his dealmaking expertise, and I’m still willing to give him the benefit of the doubt that he can negotiate good deals for the U.S. But it’s important to remember that successful deals, in business and in government, often can’t occur without a judicious amount of compromise. If he truly believes in the value and necessity of imposing a temporary immigration ban on seven mostly-Muslim countries, his administration will need to go about it in a way that pleases the courts.

But then, none of us should be surprised if he insists on the ban in its current form. “My style of dealmaking is quite simple and straightforward,” he wrote 30 years ago in Art of the Deal. “I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after.”

Hedge Fund Managers Sound Off

Meanwhile, the president’s unpredictability and Twitter outbursts have inevitably engendered quite a lot of market uncertainty, which, as you know, investors don’t like. This has prompted several big-name hedge fund managers to weigh in.

One such manager is value investor Seth Klarman, who oversees $30 billion as head of Boston-based Baupost Group. He tends to be media-shy, but Klarman is no slouch. In the last 34 years, he’s lost money in only three. He’s one of the very few money managers to receive open praise from Buffett himself.

Anyway, in his annual letter to investors, Klarman raised concerns that Trump’s protectionist policies and deep tax cuts could seriously hamper economic growth, both domestically and abroad, by isolating the U.S. from global trade and adding significantly to the already-bloated national debt.    

“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” he wrote. You can read more of Klarman’s letter over at Andrew Ross Sorkin’s DealBook.

Managers at hedge fund firm Carlson Capital, which controls over $8 billion, share many of the same concerns, telling investors recently that Trump’s trade policies could “cause a global depression and a major equity market decline.”

Even for some money managers who were initially excited by Trump—Ray Dalio and Jeff Gundlach among them—reality is beginning to set in.

Gold Gains on Uncertainty

Trump, the art of the deal

Last year, central bank policy and negative real interest rates drove the gold rally. This year, it seems to be uncertainty over Trump and other antiestablishment leaders, which is convincing the smart money to make wagers on the yellow metal, often seen as a safe haven during shaky times. So far in 2017, it’s up close to 7 percent, compared to the S&P 500’s 2.6 percent. In fact, if you compare this year’s price action to last year’s, they look remarkably the same, with a dip in December before the Federal Reserve raised rates. Although past performance is no guarantee of future results, gold could gain another $100 an ounce this year if it continues to follow the same trajectory.

Gold Continues to Mirror Price Action from Last Year
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Among those who are bullish on the yellow metal is Stanley Druckenmiller, the legendary hedge fund manager who dumped his gold the same day he learned Trump had been elected. Before that, it was the number one holding in his family office account. Now he’s back, telling Bloomberg he “wanted to own some currency and no country wants its currency to strengthen. Gold was down a lot, so I bought it.”

Higher demand has been good for both junior and senior gold miners, which recently crossed above their 200-day moving averages.

Junior and Senior Gold Miners Above Their 200-Day Moving Averages
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The NYSE Arca Gold Miners Index was up for an incredible seven straight days ended Monday, while the MVIS Global Junior Gold Miners has made positive gains in eight of the nine previous days.

Germany Brings Home More of Its Gold

Hedge fund managers aren’t the only ones whose demand for gold is strong. For the sixth straight year, central banks continued to be net importers of the metal in 2016, with China, Russia and Kazakhstan leading world consumption.

Germany repatriated 216 metric tons of gold in 2016

Although it might not have purchased any gold in 2016, the Deutsche Bundesbank, Germany’s central bank, ramped up its repatriation program, bringing home some 216 metric tons from vaults in New York, according to the Wall Street Journal. In 2011, former Fed Chair Ben Bernanke said central banks held gold simply because it’s tradition. I think the reason goes much deeper than that. Gold is money—it has been ever since the first gold currency appeared in China more than 3,000 years ago—and Germany’s efforts are proof of that.    

 

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

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.  The index benchmark value was 500.0 at the close of trading on December 20, 2002. The MVIS Global Junior Gold Miners Index includes companies that generate at least 50% of their revenues from (or, in certain circumstances, have at least 50% of their assets related to) gold mining and/or silver mining or have mining projects with the potential to generate at least 50% of their revenues from gold and/or silver when developed. Such companies may include micro- and small-capitalization companies and foreign issuers.

The NYSE Arca Airline Index (XAL) is an equal dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines.

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 12/31/2016: Delta Air Lines Inc., American Airlines Group Inc., United Continental Holdings Inc.

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Net Asset Value
as of 09/18/2018

Global Resources Fund PSPFX $5.37 0.05 Gold and Precious Metals Fund USERX $6.57 No Change World Precious Minerals Fund UNWPX $3.49 0.06 China Region Fund USCOX $9.02 0.15 Emerging Europe Fund EUROX $6.36 0.09 All American Equity Fund GBTFX $26.52 0.12 Holmes Macro Trends Fund MEGAX $20.20 0.08 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change