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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.

(VIDEO) What Drives the Price of Gold?
March 9, 2017

In my more than 35 years of investing in hard assets, precious metals and mining, I’ve learned to manage my expectations of gold’s short-term price action. Sure, there have been surprises along the way, but generally, the yellow metal has behaved relatively predictably to two macro drivers, the Fear Trade and Love Trade.

Last year, gold had its best first half of the year in decades, all in response to Fear Trade factors such as low to negative global government bonds and geopolitical risks, specifically Brexit and the upcoming U.S. election.

But the Love Trade failed to lift gold in the fourth quarter mainly because Indian Prime Minister Narendra Modi’s demonetization efforts to combat dark money and tax evasion left many low and middle-income Indians without the cash to purchase gold jewelry for weddings and investment purposes.

Investing, like life, is all about managing expectations. But if you don’t know what to look for, this can be difficult to do. That’s why we put together this video to help educate investors like you on what we believe are the top five drivers of gold. I hope you find it helpful in informing your investment decisions. If you find any value in it, I invite you to pass it along to your friends and colleagues.

Happy investing!    

 

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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Why Commodities Could Be on the Verge of a Massive Surge
March 8, 2017

After finishing 2016 up 25 percent, commodities are getting another boost from bullish investors. Investment bank Citigroup forecasts commodity prices will increase this year on strengthening demand in China and mounting inflation inspired by President Donald Trump’s “America First” policies. Commodity assets under management globally stood at $391 billion in January, up 50 percent from the same time the previous year, according to Citigroup.

Meanwhile, hedge fund managers significantly raised their bets that copper and oil prices have much further to climb, Bloomberg reported, with net-long positions in the Comex and Nymex markets surging to all-time highs.

Bets on Rising Crude Oil and Copper Prices Surged to Record Highs
click to enlarge

In addition, global manufacturing activity has expanded for the past six straight months, a good sign for commodities demand going forward. As I shared with you earlier in the week, the global purchasing managers’ index (PMI) advanced to a 69-month high of 52.9 in February, with strong showings from the U.S. and eurozone.

JP Morgan Global Manufacturing PMI at 69-Month High in February
click to enlarge

Asia Looking for $26 Trillion: Asian Development Bank

As for China and the rest of Asia, a recent special report from the Asian Development Bank (ADB) calculates the cost to modernize the region’s infrastructure at between $22.6 trillion and $26 trillion from 2016 to 2030. This comes out to about $1.7 trillion a year in global investment that’s required to maintain Asia’s growth momentum, deliver power and safe drinking water to millions, connect towns and cities, improve sanitation and more.

Asia and Pacific Region Needs $26 Trillion Through 2030 for InfrastructureAs you can see in the chart below, the bulk of the infrastructure need is in East Asia, which is seeking more than $16 trillion between now and 2030.

Governments have devoted funds to support only some of the projects. Currently, 25 economies in the region are spending a combined $881 billion annually on such projects, leaving a substantial spending gap for global investors to fill. This is an unprecedentedly huge opportunity for commodity and materials investors.

To make investment more attractive, however, regulatory and institutional reforms will need to be made in the region.

China, for instance, announced plans to curb aluminum, steel and coal production in an effort to combat air pollution. According to the Financial Times, as many as 30 northern Chinese cities are expected to cut aluminum capacity by more than 30 percent, a move that’s seen as very favorable to the rally that’s already helped the base metal gain over 11 percent so far in 2017.

Aluminum Could Benefit Even More from China Production Curb
click to enlarge

In the past five trading days, shares in leading aluminum producer Alcoa have surged on the news, jumping as much as 9.8 percent on March 1 alone. Since the November election, in fact, the company has gained more than 44 percent on optimism over President Trump’s pledge to spend $1 trillion on U.S. infrastructure.

China's aluminum capacity cuts should help support prices even more this year.

$3.9 Trillion Still Needed in the U.S.

One trillion dollars sounds like a lot, but it falls remarkably short of the $3.9 trillion the U.S. needs by 2025 to rebuild its own aging infrastructure. That’s the estimate of the American Society of Civil Engineers (ASCE), which gave the nation’s overall infrastructure a D+ in 2013, with “poor” scores given to levees, roads, inland waterways, drinking water and more.

One of the most urgent areas for investment is the nation’s crumbling dams. According to energy news outlet E&E, about 70 percent of America’s 90,000 dams will be at least 50 years old by 2025, putting them near the end of their engineering lifespans. An estimated 15,500 American dams are now considered “high hazard,” meaning their failure could cause fatalities.

An estimated 70% of American dams will be over 50 years old in 2025.

The cost of repairing and upgrading these structures is estimated to be around $54 billion.

According to E&E, 80 dams failed in South Carolina in the past two years alone, causing millions of dollars’ worth of property damage.  And just last month in a high-profile case, more than 188,000 Californians had to be evacuated to avoid the collapse of the Oroville Dam, the nation’s tallest dam.

Like the ADB’s Asian infrastructure estimate, this has massive market potential. More than 80 percent of U.S. infrastructure, from schools to streets to sanitation, is in either private or municipal ownership. This means commodity and municipal bond investors will need to pick up where federal dollars leave off.

Curious about investing opportunities in commodities and resources?

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2016.

 

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Disrupt... Or Get Disrupted
March 6, 2017

disrupt or get disrupted

Last week I was in Vancouver attending YPO EDGE, the annual summit for business executives from more than 130 countries. YPO, which stands for Young Presidents’ Organization, has roughly 24,000 members worldwide. Together, they employ 15 million people and generate a massive $6 trillion in revenue annually.

What I appreciate about YPO is that it stresses peer-to-peer learning. Those who think it’s all about networking and cutting deals are missing the point.

The theme this year was disruption—how innovative breakthroughs in technology, medicine, transportation, machine learning and more have transformed, and will continue to transform, the world we live and work in.

Moneyball movie poster

“Disrupt, or get disrupted,” John Chambers, executive chairman and former CEO of Cisco, said during his conversation with CNBC’s Tyler Mathisen.

Chambers was speaking specifically of what he calls the “digital era,” which will soon replace the information age. The internet of things is expanding very aggressively right now, but it’s still in its infancy. In 10 to 15 years, Chambers says, more than 500 billion devices worldwide will be connected to the internet. This will irrevocably change how we live our daily lives, conduct business, deploy health care, invest and more.

So what does this mean? For one thing, Chambers estimates that as much as 40 percent of companies now in operation around the world will not exist “in a meaningful way” sometime within the next two decades. To survive, companies will need to reinvent themselves by integrating digitization into the fabric of their business strategy. In the world Chambers imagines, every company will be, at its core, a technology company, and data will become the new oil.

After his presentation, I had the pleasure to share a few words with Chambers in private. I was amazed to hear that, during his tenure as CEO in the 1990s, Cisco had an unbelievable compound annual growth rate (CAGR) of 65 percent. I was even more amazed to hear that he managed to turn 10,000 of his employees into millionaires. I don’t know if that’s a record, but it wouldn’t surprise me if it was. He told me that he wouldn’t be able to do the same today because of our current tax laws. In any case, Chambers embodies all that makes America great—curious, innovative, forward-thinking and willing to share his share his success with his employees.

How to Pick Home Run Stocks, According to Moneyball

A lot of what Chambers talked about during his presentation reminded me of one such disruptor, Billy Beane, the former general manager of the Oakland A’s and subject of Michael Lewis’ 2003 bestseller Moneyball: The Art of Winning an Unfair Game, which was later turned into a 2011 film starring Brad Pitt. Despite being about baseball, it’s one of the best books on stock-picking ever written.

Moneyball movie poster

For those unfamiliar, Moneyball tells the story of the A’s’ famous 2002 season and Beane’s efforts to build a competitive team despite a lack of revenue and the recent loss of several key players, among other disadvantages. Making matters worse, conventional factors for selecting new players—long perpetuated by the “wisdom” of industry insiders—had grown stale, antiquated… and just plain wrong. Appearance, personality and other biased perceptions were still very much part of the selection process.

With little else left to lose, Beane focused on what he felt were better indicators of offensive performance, including on-base percentage and slugging percentage. This allowed him to cut through the biases and find overlooked, undervalued, inexpensive players. “An island of misfit toys,” as Jonah Hill’s character Peter Brand puts it in the movie.

Beane, in other words, became a value investor—one who depended not on emotion or “instinct” but empiricism and quantitative analysis. All of the picks who fell into his model were mathematically justified.

The strategy worked better than anyone expected. Although the A’s had one of the lowest combined salaries in Major League Baseball, they finished the year first in the American League West. Their winning streak of 20 consecutive wins that season remains the longest in American League history.

Longest Winning Streaks in American League Baseball History
Team Number of Wins Season
A’s 20 2002
White Sox (tie) 19 1906
Yankees (tie) 19 1947
Royals 16 1977
Mariners (tie) 15 2001
Red Sox (tie) 15 1946
Twins (tie) 15 1991
Source: MLB, U.S. Global Investors

Beane changed the game—literally. Today, nearly every club in the MLB relies on “sabermetrics,” or baseball statistics, to select players. This helps them develop a “portfolio” of constituents whose overlooked potential gives the club the greatest odds possible of outperforming the “market.”

Finding Frugal Miners

As active managers, we try to do the same. Like Beane, we use a host of quantitative, top-down and bottom-up factors to help us find the most undervalued precious metals and resource stocks.

One such factor, low SG&A-to-revenue, I shared with you back in September. “SG&A” stands for “selling, general and administrative expenses” and refers to the daily operational costs of running a company that are not related to making a product. It stands to reason that a company with lower-than-average expenses relative to its revenue might have wider margins than a company with oversized expenses, but few investors look at this metric outside of quants.

Using this factor, we found 10 names whose average returns in the first quarter of 2016 amounted to a phenomenal 88 percent—nearly double what the Market Vectors Gold Miners ETF (GDX) returned over the same three-month period.

Top 10 Gold Names Based on SG&A-to-Revenue
click to enlarge

Of course, a company must meet several other factors before it qualifies for our models, but this is just one example of the type of rigorous quantitative analysis we conduct.

Probability Is in the Pudding

In Moneyball, Lewis quotes Dick Cramer, cofounder of STATS, a sports statistics company: “Baseball is a soap opera that lends itself to probabilistic thinking.”

The world of investing is the same, and lately there’s been no better soap opera than watching the major indices hit near-daily all-time highs on hopes that President Donald Trump and the Republican-controlled Congress can lower taxes, slash regulations and find the money to invest in the military and infrastructure. On Monday last week, the Dow Jones Industrial Average posted its 12th straight day of gains, a winning streak we haven’t seen in 30 years. And on Wednesday, it tied a previous record, set in 1987, for the fastest 1,000-point move. It took only 24 trading days for the Dow to surge from 20,000 to 21,000. (Since then it’s fallen below that mark.)

Dow Jones Industrial Average Ties Record for Fastest 1,000-Point MOve
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But like baseball, investing lends itself to probability thinking, and here we have experience as well.

As I’ve said a number of times before, we closely monitor the monthly Global Manufacturing Purchasing Managers’ Index (PMI) because it’s forward-looking rather than backward-looking, like gross domestic product (GDP). As such, we’ve found a high correlation between the PMI reading and the performance of commodities and energy one, three and six months out. When a “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has historically signaled a possible uptrend in crude oil, copper and other commodities. Our research shows that between February 2007 and February 2017, the S&P 500 Energy Index rose 10.2 percent, 79 percent of the time after a “cross-above,” while the S&P 500 Materials Index rose 7.2 percent, 86 percent of the time. Knowing this helps us anticipate the opportunities ahead.

Commodities and Commodity Stocks Historically Rose Three Months After PMI Cross-Above
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In February, the global PMI rose to 52.9, a 69-month high. It was also the sixth straight month of manufacturing expansion, which bodes well for commodities, materials, miners and other key assets we invest in.

Individual PMI readings for the U.S., eurozone and China—which together make up about 60 percent of global GDP—all advanced in February. 

Manufacturing Activity Accelerates in U.S., Eurozone and China
click to enlarge

The eurozone’s reading of 55.4 was its highest since April 2011, with expansion being led by the Netherlands, Austria and Germany. The region is more optimistic about the future than at any time since the debt crisis, and the weakened euro has provided a welcome tailwind to help boost sales and exports.

China’s PMI held above 50.0, indicating industry expansion, for the seventh straight month in February on improved new order inflows, higher demand and greater optimism.

The U.S., meanwhile, ended the month with an impressive 57.7, its highest reading since August 2014. Of the 18 manufacturing industries that are tracked, 17 reported growth, including machinery, computer and electronic products, metals, chemical products and others. New orders rose significantly, from 60.4 in January to 65.1 in February, as did backlog of orders, which advanced a whopping 7.5 percent.

Mark Your Calendars!

Join me later this month in St. Petersburg, Florida, for the 19th Anniversary Investment U conference! I’ll be speaking on gold, airlines and infrastructure. Tickets are now available. I hope to see you there!

 

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

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: Harmony Gold Mining, Northern Star Resources, Regis Resources, Sibanye Gold.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

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

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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
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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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American Small Businesses Party Like It's 2004
January 17, 2017

France reported last week that its summer hosting of Euro 2016, Europe’s soccer championships, added $1.26 billion to its economy.

This is good news, for sure, and worth celebrating.

But here’s the thing: Why doesn’t France put as much effort into supporting its businesses and markets as it does its soccer franchises?

After all, the country has an entrepreneurship problem—as in, business growth and its labor market are struggling.

A lot of the blame lies at the feet of its labyrinthine web of regulations, which the Organization for Economic Cooperation and Development (OECD) once called “unnecessarily complex.” Barriers to entry in several key industries, including architecture, accounting and legal services, are prohibitively high, which has decimated the country’s labor market in the last few years. More than 25 percent of all working-age French under the age of 25 are unemployed right now, a meaningfully higher rate than for youth in the European Union (18 percent unemployment), United States (10 percent) and Japan (4 percent). Household savings rates are skyrocketing, consumer confidence is on life support and investments growth has been sluggish.

Investments Growth France Among Slowest 2020
click to enlarge

As a result of all this, economic growth in France is among the worst for major EU economies. There it will remain, sadly, unless officials commit to strengthening competition by streamlining its tax system and reforming regulations. But at least it has some great soccer clubs.

Surging Demand for California Munis

By comparison, look at California, whose economy just surpassed France’s in size. Say what you will about the state and some of its colorful residents, it’s successful because it recognizes talent and fosters an environment in which innovation and entrepreneurism can thrive. Silicon Valley is seeing a boom right now, which has helped the state government generate budget surpluses. Debt is being paid down, and the state’s rainy-day savings account is growing. This has contributed to California enjoying its highest credit rating since the turn of the century, Bloomberg reports, and caused demand for its municipal debt to climb.

At the same time, California munis can be volatile because state revenue depends on wealthy taxpayers whose incomes are tied closely to the stock market. According to Bloomberg, the top 1 percent of earners paid half of the state’s income tax revenue in 2014.

It shouldn’t come as a surprise to anyone, then, that California has one of the highest Gini coefficients, a measure of economic inequality, in the nation. Although some might balk at this, I think it’s proof there are huge, life-changing opportunities in California, and in the U.S. in general, that can turn “regular folk” into billionaires almost overnight.

Speaking of which, check out our latest slideshow, “10 Living, Self-Made Billionaires.”

Small Business Optimism in the U.S. Is Soaring Right Now

As further proof that France should do more to open up its economy, look at what President-elect Donald Trump’s pledge to lower taxes and slash regulations is doing to business optimism here in the U.S. Last month, the Index of Small Business Optimism soared a phenomenal 7.4 points to 105.8, its highest reading since 2004. The National Federation of Independent Business (NFIB), which conducts the survey, reported that attitudes toward capital spending and job creation in particular surprised to the upside. Research firm Evercore ISI called it a “blowout report,” and I have to agree.

Gold Should Be Supported by Even Deeper Negative Real Rates
click to enlarge

In their commentary, the NFIB’s William Dunkelberg and Holly Wade expressed cautious optimism that the incoming administration could satisfactorily relax some of the regulatory burden on businesses.

“Politicians say they want to create jobs, but their regulations and laws… only increased the cost of hiring a worker, and that is not good for job creation,” they wrote.

(Consider compliance-related paperwork alone. In fiscal year 2015, Americans spent a jaw-dropping 9.78 billion—yes, billion—hours complying with federal rules and regulations, according to a recent report from the Office of Management and Budget (OMB). That’s up nearly 4 percent from 2014.)

Many chief executives of large multinationals have been very  receptive to Trump’s proposals, taking him at his word that he can succeed at fostering an improved business environment in the U.S. Ford recently scrapped plans for a Mexico factory, while Fiat Chrysler announced a $1 billion investment in Michigan and Ohio, expected to create up to 2,000 new jobs. After meeting with the president-elect this week, Jack Ma, founder and CEO of Chinese ecommerce site Alibaba, said he was committed to adding 1 million U.S. companies to his hugely popular online shopping platform. The chief executive of active wear company Under Armour told CNBC that it would be bringing jobs back to the U.S., specifically Baltimore, where it’s headquartered. And on Thursday, Amazon unveiled plans to grow the number of its full-time, U.S.-based jobs by 100,000—from 180,000 today to over 280,000 by 2018.

As I’ve said many times before, there’s a lot of uncertainty surrounding Trump, who will be sworn into office this Friday. At the same time, businesses and investors clearly like what they’re hearing. Appearing on CNBC last week, legendary economist Robert Shiller perfectly summarized this distinction, saying that “nervousness can go along with optimism.” Although he didn’t vote for Trump, Shiller acknowledges that animal spirits are running high, adding that he sees the Trump equities rally spilling over into the housing market this year.

Alexander Green of The Oxford Club

Joining Shiller in offering a balanced assessment of Trump is my old friend Alexander Green, whose writing skills I admire and opinions I greatly respect. In his most recent blog post, Alex makes a convincing case against Trump’s protectionism, which are “not good for the economy or the market” and “undermines American economic growth.” Although investors have moved billions into the stock market since the election, the Trump rally could easily turn into the Trump correction, Alex says, “unless he changes his tune” on international trade.

“Why does a flat-panel HDTV that cost more than $10,000 in 2003 cost less than $400 today? Globalization,” he writes. “How can you walk into a Marshalls store and buy a fine cashmere sweater for 35 bucks? Globalization. Why does an $8 million supercomputer from 20 years ago sit in your pocket and cost less than $200? Globalization.”

U.S. Economy Could Get a Boost in the Near Term

The World Bank contributed to the wave of good news last week, making encouraging projections for the U.S. economy in light of Trump’s business-friendly policies. In its flagship report on global economics, the financial institution explained that expansionary fiscal policies—including tax cuts and plans to upgrade America’s infrastructure—could boost U.S. economic growth as high as 2.5 percent this year and 2.9 percent in 2018.

This would be a welcome surprise, as growth slowed considerably in 2016 to 1.6 percent, down from 2.6 percent in 2015, according to the World Bank.

 

China Likely to Remain Top Engine of Global Growth

And the good news isn’t limited to the U.S. Across the Pacific Ocean, China saw its producer price index (PPI) in December rise 5.5 percent, its fastest pace in more than five years and fourth consecutive positive reading after 54 straight negative ones.

The country’s PPI, which measures prices received by producers at the first commercial sale, is strengthening on higher commodity prices. What’s more, there’s an 85 percent correlation between China’s PPI and its nominal GDP, according to Evercore ISI, so growth in the world’s second-largest economy should pick up some steam this year.

85 Correlation Chinas Nominal GDP PPI
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“Based on history, the PPI’s increase of +3.3. percent year-over-year (y/y) in the fourth quarter suggests +15 percent y/y nominal GDP growth,” the firm wrote. It estimates fourth-quarter growth to be more than 8.8 percent and more than 9.6 percent in the first quarter of this year.

Meanwhile, the country’s purchasing manager’s index (PMI) has remained at or above 50—indicating manufacturing expansion—for the past six months, which is bullish for commodity prices.

Chinese demand for commodities, which were up 25 percent in 2016, is indeed skyrocketing, with imports of oil, iron ore, copper and soybeans reaching all-time highs last year. This helped solidify the country’s role as the world’s top engine of economic growth once again, contributing an estimated 33.2 percent to global economic expansion, according to China’s National Bureau of Statistics.

China Estimated 33 Global Economy Expansion 2016
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It’s expected we’ll see a repeat of outsize commodity demand this year, which should support prices.

 

Looking at copper, further support should come in the form of market deficits, which are expected to widen until at least 2020. As investment bank Jefferies explained in a note, “unexpected disruptions”—including undercapitalization of mines and the risk of labor strikes at Chile’s Escondida, the world’s largest copper mine—will likely add to supply constraints.

Copper Market Deficit Expected Support Prices 2020
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“From a supply perspective, the outlook for mined commodities is very bullish,” Jefferies added.

That includes gold. As a friend recently reminded me, China’s official gold holdings account for only 2 percent of its foreign reserves. Two percent! That’s remarkably low, far lower than most large economies. (In the U.S., it’s around 75 percent, according to the World Gold Council.) China is obviously interested in supporting its currency, and since it sold off quite a lot of U.S. Treasuries in the past year—Japan is now the top holder of U.S. government debt—it will likely need to substantially build up its gold reserves.

The People’s Bank of China (PBoC) has been accumulating gold, even if the rate has slowed recently, but imagine if it decided to boost holdings up from 2 percent of foreign reserves to 10 percent, which is more in line with other countries. That would have a monumental impact on the price of the yellow metal.

At this point, there’s no evidence the PBoC plans to follow such a route, but the possibility is there, with huge implications for gold.

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 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 Producer Price Index (PPI) measures prices received by producers at the first commercial sale.  The index measures goods at three stages of production:  finished, intermediate and crude. The Purchasing Manager's Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 09/30/2016: Ford Motor Co.

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Net Asset Value
as of 03/24/2017

Global Resources Fund PSPFX $5.42 -0.03 Gold and Precious Metals Fund USERX $7.65 -0.09 World Precious Minerals Fund UNWPX $6.68 -0.11 China Region Fund USCOX $8.58 0.06 Emerging Europe Fund EUROX $6.16 0.01 All American Equity Fund GBTFX $24.34 -0.03 Holmes Macro Trends Fund MEGAX $18.91 -0.01 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change