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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.

Manufacturing Activity in China Just Shifted into Overdrive
November 7, 2016

Nanpu Bridge  

A wave of positive economic data suggests the Chinese economy is stabilizing and that business confidence is improving. The country’s purchasing managers’ index (PMI), which measures the health of its manufacturing industry, rose to 51.2 in October, handily beating economists’ estimates of 50.3.

Chinese Manufacturing Beats Expectations
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Expanding at its fastest pace since July 2014, the industry was stimulated by a strong rebound in new orders and higher commodity prices. Output rose to an incredible five-and-a-half-year high. And with backlogs of work beginning to pile up, manufacturers trimmed employees at the slowest pace in 17 months.

I’ve previously written about the importance of tracking the PMI, which you can read here.

Also encouraging is the country’s third-quarter gross domestic product growth, which came in at 6.7 percent for the third straight quarter, all but assuring investors that the economy can achieve the government’s earlier guidance of between 6.5 percent and 7 percent. Higher business confidence helped maintain steady growth, “as proved by the rebound of medium to long-term corporate loans and reacceleration of private investment growth,” according to Singapore-based OCBC Bank.

Consumer spending appears to be robust. In the first nine months of the year, consumption contributed nearly 60 percent to GDP growth, with significant demand gains made in health care, education, financial products and entertainment.

Automobile sales jumped a phenomenal 32 percent year-over-year in September, the fourth straight month of growth exceeding 20 percent. Sales have been so robust—reflecting a rush to purchase new cars before the government’s reduction in sales tax on small vehicles expires at year-end—that new vehicle purchases in China are expected to surpass sales in North America for the first time ever this year.

China Expected Surpass North America Automobile Sales
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Such a great number of cars on the road has resulted in famously massive traffic jams that turned miles of highways into parking lots. Some as many as 50 lanes wide, the very worst incidents in Beijing found hundreds of drivers stuck in lines for days. Beijing officials have recently proposed stopgap measures, but the nightmare congestion underscores the need for greater capacity, which will require even more investment from the Chinese government, not to mention untold amounts of cement, asphalt, steel and other materials.

But really, these are traffic jams you have to see to believe.

China Attracting Assets

The market seems to like what it sees. The Shanghai Composite Index is back up to levels last seen in January, fueled by not only encouraging manufacturing data but also hopes the government will make good on its promises to support infrastructure spending and restructure state-run enterprises. Stocks recently signaled a bullish “golden cross,” when the shorter-term moving average crosses above the longer-term average. 

Chinas Golden Cross
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In a note last week, Goldman Sachs analysts reported they expect reforms to accelerate in the next few years as China transitions from a middle-income country to an advanced economy. Reforms include efforts to restructure or eliminate “zombie” state-owned enterprises and remove marginal capacity. New policies on how to address public corruption have also been floated.

Among ETFs focused on a single emerging market, China funds attracted the largest inflows in the month of October, with new money totaling $275 million, according to Citi Research data.

Inflows into Mexico-focused ETFs were a distant second, at $133 million, indicating a surplus of bets on a Hillary Clinton presidential win this week.

Who Will Lead the SEC in a Clinton Administration?

SEC Chair Elizabeth Warren

SEC Chair Elizabeth Warren
Photo by Tim Pierce / CC-BY

While I’m on the topic of the election, I find it worth sharing that a shake-up at the very top of the Securities and Exchange Commission (SEC) could be unfolding in front of our eyes—with some potentially serious ramifications.

Massachusetts Sen. Elizabeth Warren, one of the most outspoken critics of Wall Street serving in Congress today, recently urged President Barack Obama to remove Mary Jo White as head of the SEC for, among other things, failure to fully implement the Dodd-Frank financial reforms.

The White House flatly rejected Warren’s request, but it raises a few questions: Is she positioning herself to run the SEC herself? Could Sen. Warren, a strong supporter of Clinton, be appointed as the new SEC chair if Clinton were to win? What effect would that have on capital markets?

Although pure speculation, the scenario is worth pondering.

Another Infrastructure Boom Ahead?

Much has been made of the Chinese economy’s transition from one driven by industrial production to one supported by consumption and services. While this shift is indeed taking place, China still remains the world’s largest engine for energy and materials demand, with support from a growing population and rising household income.

The country imported a record amount of crude oil in September, up 18 percent year-over-year, surpassing the U.S. for the second time in 2016. Averaging 8 million barrels a day, imports came close to the 8.6 million daily barrels the U.S. produces on average.

China Imported Record Volumes Crude September
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I also would like to point out that China remains the world’s number one generator of electricity. The chart below shows just how dramatic capacity growth was in the first decade of the century. In 1990, the country’s electricity needs were equivalent to Latin America’s, but as its government pushed ahead with fiscal spending for huge infrastructure projects, demand blew past the continents of Europe and North America.

China Leads World Electricity Generation
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Although infrastructure investment has declined overall from this period, there’s still plenty to get excited about. In the first eight months of 2016, infrastructure spending rose an impressive 19.7 percent over the same period last year, and in May, the government announced it would be pumping more than $721 billion into as many as 303 transportation projects over the next three years.

Two projects in particular are worth noting here. Construction on what will eventually be the world’s largest airport by surface area is currently underway in Beijing. Upon completion in 2019, the $12 billion airport, to be called Beijing Daxing International Airport, will serve as many as 100 million passengers a year, roughly in line with the world’s busiest airport, Hartsfield-Jackson Atlanta International Airport.

Then there’s the ongoing Belt and Road Initiative (BRI), one of the most ambitious undertakings in human history. With total infrastructure costs estimated at $5 trillion, the biblical-size trading endeavor—a sort of 21st century Silk Road—will cost 12 times as much as what the U.S. spent on the Marshall Plan to rebuild Europe following World War II. The initiative has the participation of 65 countries from Asia, Africa and Europe, and is poised to raise the living standards for more than half of the world’s population.

Chinas multi trillion dollar belt and road initiative
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“Though China’s pace of expansion has slowed from the double-digit rates seen in the first decade of the century,” writes HSBC’s Noel Quinn, Chief Executive of Global Commercial Banking, “its global influence—as the world’s second-largest economy and a trading powerhouse—is far greater than 10 or even five years ago. The country’s overseas investments are only likely to increase, further underlining its pivotal role.”

HSBC: Your Candidate’s Win Could Reward Gold Investors

With the U.S. presidential election upon us, London-based HSBC says gold investors should see a significant bump in price no matter who wins.

The bank sees a Trump victory more supportive of gold as a potential “protection against protectionism”—the New York businessman has been very critical of trade deals, including the North American Free Trade Agreement (NAFTA) and the proposed Trans-Pacific Partnership (TPP)—but a Clinton win could also help boost prices to as high as $1,400 by year end, HSBC says.

As always, I recommend a 10 percent weighting in gold—5 percent in bullion and coins, 5 percent in gold stocks. Rebalance every year.

 

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

The Caixin China Report on General Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 420 manufacturing companies. The panel is stratified by company size and Standard Industrial Classification (SIC) group, based on industry contribution to Chinese GDP. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month.

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.

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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Indian Gold Jewelry Sales Set to Hit a Four-Year High
October 17, 2016

Indian households have the world's largest private gold holdings at 23,000 tonnes

Just as April showers bring May flowers, plentiful monsoon rains in India tend to drive up demand for gold jewelry among rural, income-flush farmers, who make up a third of the country’s consumption of the yellow metal.

It’s a relief to hear, then, that India just had its best monsoon season in three years, with heavy rains washing away people’s fears of yet another drought.

Add to that the fact that the yellow metal is now trading in the affordable $1,250 to $1,260 range—a sizeable discount from only a month ago—and gold jewelry sales are expected to surge as much as 60 percent over last year, according to the India Bullion and Jewellers Association.

That would take sales to a four-year high as we near Diwali—traditionally a time when gold-buying is considered auspicious—which would help support prices.

Following Diwali comes the important Indian wedding season. It’s almost impossible to exaggerate how massive this industry is, with one India-based research firm expecting it to hit 1.6 trillion rupees ($24 billion) by 2020.

I’ve shared with you before that between 35 percent and 40 percent of a typical Indian wedding’s expenses is devoted to gold jewelry. If we use the higher estimate, that means close to $10 billion could be spent on gold alone.

But for spending like this to happen, a strong monsoon is needed, which farmers in many parts of India got this year.

A Longstanding History of Driving the World Gold Market

For millennia, gold has played a key role in Indian culture, valued not only for its beauty and durability but also as financial security. That’s no less true today. A 2013 survey conducted by the Federation of Indian Chambers of Commerce & Industry (FICCI) found that more than three quarters of Indians view the precious metal as a “safe investment.”

The same FICCI study also found that gold is a regular line item in most Indian households’ budgets, comparable to what they spend every year on medical expenses and clothing.

Gold is Among Indian Households Regular Expenditures
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It should come as little surprise, then, that Indian households have the largest private gold holdings in the world. Standing at an estimated 23,000 tonnes, and worth close to a whopping $1 trillion, the amount surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

Analysts: Gold Is Setting Up for a Big Comeback

After logging its best first half of the year in 40 years, gold is now trading range-bound while we await the Federal Reserve’s decision to raise rates in December. Most, but certainly not all, of the recent economic data seems to be pointing in this direction, with initial jobless claims at a four-decade low, voluntary quits at pre-recession levels and household income finally on the rise.

The week before last was especially brutal. With markets in China, the world’s largest consumer, closed in observance of Golden Week, the short sellers had free rein, driving the price down more than 3 percent on Tuesday alone.

Despite the weakness, inflows into gold ETFs continue to pour in, as savvy investors recognize that real, or inflation-adjusted, Treasury yields are still in negative territory. I use the 2-year yield here because it’s what many currency traders look at.

Low to Negative Treasury Yields Have Helped Drive Up Gold
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But now some analysts see gold ready to turn again, perhaps prefacing a rally that could carry the metal to an all-time high.

In a note last week, UBS said that as long as the Fed doesn’t hike rates too quickly, gold should resume its upward momentum. And remember, the bull market was triggered last December after the Fed raised rates for the first time in nearly a decade.

Gold Performance Around September FOMC Meetings, 2015 and 2016
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Meanwhile, London-based investment firm Incrementum suggested last week that gold could reach a new record within the next two years, supported by higher consumer prices, low to negative government bond yields and a lack of confidence in central bank policy.

“In this uncharted territory, with big monetary experiments going on, it just makes sense” to hold bullion, Ronald Stoeferle, a managing director at Incrementum, told Bloomberg.

Peak Platinum and Palladium Demand?

Consensus suggests gold has a positive long-term outlook, but platinum and palladium might be looking at an uncertain future.

Platinum and Palladium Under Pressure
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As you probably know, the platinum-group metals (PGM) are used predominantly in the fabrication of automobile catalytic converters, which are responsible for reducing emissions. Platinum is used in diesel-powered engines, palladium in gasoline-powered engines.

With vehicle sales in China rising rapidly, demand for PGMs is still strong. In fact, demand for palladium rose 3 percent this year, hitting a fresh all-time high, according to CPM Group.

Pallladium Usage on a Global Scale

But trouble could be brewing as more and more automakers deepen their shift toward battery-electric vehicles (BEVs) in an effort to comply with international environmental regulations and meet growing consumer demand. Since these vehicles don’t have an internal combustion engine, there are no emissions, meaning PGMs are not needed.

Government policy has largely driven the emphasis on BEVs, with a few nations around the world committed to banning internal combustion engines from roads within the next 10 to 20 years.

Norway was the first, pledging to eliminate them by 2025, less than 10 years from now. The Netherlands is considering a similar ban, effective the same year. And India wants to be the first “100 percent electric vehicle nation” by 2030.

Last week, Germany—the world’s fourth-largest automobile manufacturer, home to Audi, BMW, Mercedes-Benz, Porsche and Volkswagen—voted to do away with all fossil fuel-powered vehicles within 15 years.

Pallladium Usage on a Global Scale

In its platinum and palladium outlook, Metals Focus writes that “for every additional 1 percent of global passenger car production that BEVs claim in 2020, our model suggests a loss of more than 100,000 ounces (3 tonnes) of combined PGMs offtake that year.”

All in all, not good for PGMs.  

However, it is good for copper. As I’ve pointed out before, BEVs use about three times as much copper wiring as traditional combustion engines vehicles.

It’s important to recognize that disruptive technologies have always changed markets. Right now, one of them is battery-electric vehicles. Embrace them or not, the decision is yours. But as investors, we must acknowledge which way the wind is blowing, and adapt—or be left behind.

Don’t Forget to Register for MoneyShow Dallas!

Speaking of disruptive technologies, virtual reality is quickly going mainstream, with Facebook’s Oculus Rift and other VR headsets likely to become one of the next must-have consumer items.

You don’t need one of these pricey rigs to enjoy the MoneyShow Dallas virtual event, though—just an internet connection. This week I’ll be at the MoneyShow, where I’ll be presenting and learning. And if you can’t be there physically, you can always be there virtually to hear from leading economists, premier money managers and top analysts, who will share their best insights, perspectives and strategies to grow your portfolio.

I hope you’ll join me!

 

The French Are at It Again

One final note: Last month, I shared with you the story that European regulators were going after big Americans companies such as Netflix, Facebook, Amazon and more. Their envy policies demand that, if they can’t build their own companies that are just as successful, they’ll tax and regulate them into non-competitiveness.

This socialist mindset is now taking aim at internet content providers.

Last week, according to Zero Hedge, the French parliament introduced a bill that, if enacted, would levy a 2 percent tax on all ad-generated revenue on sites that distribute free content—sites such as YouTube and Dailymotion (a France-based video-sharing site).

This is just the latest example of how Europe is undermining American companies. Why hasn’t Europe created its own Netflix or Facebook? Where’s its Silicon Valley? The continent’s miles of red tape and envy policies have essentially prohibited entrepreneurism and innovation. And instead of relaxing regulations, it chooses to punish U.S. firms for their success.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2016.

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How Gold Came to South Korea’s Rescue
September 27, 2016

A busy street in Seoul, filled with shoppers.

Nineteen years ago, South Korea came precipitously close to bankruptcy.

The Asian financial crisis had spread like a virus. Thailand, Malaysia, Singapore and other Southeast Asian countries were all affected, inciting fears of a global economic meltdown if the crisis couldn’t be contained.

Before 1997, South Korea had been held up as a textbook example of economic reversal and resilience.

Once a poor colony, the country underwent an unbelievably rapid transformation in the second half of the 20th century, propelled by smart policy reforms and heavy investment in education. Many called it the “Miracle on the Han River.” By the end of the century, Korea had grown to become the world’s 11th largest economy. Residents had the incomes to enjoy comfortable, “Western” lifestyles.

But in the summer of ‘97, the bug arrived in Seoul. Businesses began to fail. Left with nonperforming loans, banks collapsed, while others discontinued fresh lending. The won was in freefall. Liquidity dried up. Foreign investors yanked nearly $18 billion out of the country. Hundreds of thousands lost their jobs.

Korea’s only recourse was to seek help from the International Monetary Fund (IMF), and in December, the lender approved a gargantuan $58 billion bailout package, the largest in history. The deal required Korea to liberalize trade and its capital accounts, reform its labor market, restructure corporate governance and more.

A new crisis emerged, then, which native Koreans still refer to as the “IMF Crisis.”

The government wasted no time in raising the funds to pay back the loan, and on January 5, 1998, a national campaign was launched that today stands as one of the most moving shows of patriotism and self-sacrifice the world has ever known.

In Times of Economic Crisis, People Have Turned to Gold
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The Drive for Gold

At the time, it was estimated that South Korean households held roughly $20 billion in gold, in the form of necklaces, coins, bars, trinkets, statuettes, medals, pendants, military insignias and more. Most of it carried strong personal and familial significance, far beyond its monetary value.

Gold, after all, has typically played an auspicious role in Koreans’ personal milestones. Many families celebrate an infant’s first birthday in a tradition known as doljanchi, during which gifts of 24-karat gold rings are customary. Gold jewelry and watches are routinely given to newlyweds, as we also see in India, Turkey and elsewhere. Companies often award retirees with gold keychains.

This is the Love Trade I speak so frequently about, responsible for driving a huge percentage of the demand and price of gold. In many parts of the world, gold jewelry is more than just beautiful ornamentation—it’s also prized as an important form of financial security.

In Times of Economic Crisis, People Have Turned to GoldKoreans know this all too well. Ninety years earlier, in 1907, the Korean Empire owed Japan 13 million won, equivalent to an entire year’s budget. To help pay it off, men quit smoking while women sold their cherished wedding jewelry.

Gold again came to Korea’s aid in 1998.

Nearly 3.5 million people, almost a quarter of the entire country’s population, voluntarily participated in the campaign. Queues of people—young and old, rich and poor—stretched for blocks outside special donation points, all of them answering the call to help their country. Yellow ribbons proclaiming “Let’s overcome the foreign currency crisis by collecting gold” could be found pinned to people’s shirts.

Big-name Korean corporations, from Samsung to Hyundai to Daewoo, lent their marketing strength to help spread the word, as did celebrities. Lee Jong-beom, a hot young baseball star, drew national attention when he brought in 31.5 ounces of gold, valued at over $9,000, all in the form of trophies and medals he had acquired over his five-year career.

On average, each person donated 65 grams of the yellow metal, or a little over $640 based on prices at the time.

In the Associated Press video below, you can see the various types of items Koreans donated. Please note that the video is Korean, so I can’t attest to what’s being said.

In as little as two months, 226 metric tons, valued at $2.2 billion, were collected, every last scrap of which was melted into ingots and promptly delivered to the IMF.

Although this amount was just a drop in the bucket, the gold collecting campaign served as an important rallying point early on in South Korea’s effort to tackle its debt, not to mention the fact that it demonstrated the deep patriotism and unity of its people. The Love Trade helped the country pay back the $58 billion loan in full by August 2001—nearly three years ahead of schedule.

Gold Recycling up 10 Percent

Korea’s is arguably the best known example of gold recycling, which the World Gold Council defines as gold that is “sold for cash by consumers or other supply-chain players,” including countries.

Of course, it’s not the only example.

Although central banks as a whole have been net buyers of the precious metal since 2010, Venezuela is in liquidation mode, having sold off most of its gold reserves since March 2015 in an effort to offset low oil prices and to pay down debts. Good thing the socialist country had gold to fall back on, as bolivar notes are now so worthless, some Venezuelans have found that it’s cheaper to use the bills as napkins than to buy actual napkins.

Because the precious metal is virtually indestructible, all gold ever mined is still available in some form or another, making recycling an important part of  supply. The rate of recycling has tended to ramp up during times of economic crises, or when gold prices in a country’s currency accelerate. Look at how recycling in the U.S. has correlated to prices.  

Infrastructure Spending Evolves Regions Economic Growth
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With gold having posted its best first half of the year since 1974 and on track for its best full year since 2010, more people are taking their old coins and rings to the pawn shop. In the first six months, the rate of recycling was up 10 percent compared to the same period in 2015, as Bloomberg reports.

 

LEARN WHAT ELSE IS DRIVING 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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article was held by any accounts managed by U.S. Global Investors as of 6/30/2016.

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The War on Cash Is Still Good for Gold
September 19, 2016

Negative Real Rates Real Positive Influence Gold

The consumer price index (CPI), a measure of inflation, came in hotter than expected Friday, registering 2.3 percent year-over-year in August on expectations of 2.0 percent. With the five-year Treasury yielding 1.19 percent, government bond investors are now receiving a negative real rate of return (because 1.19 minus 2.3 comes out to negative 1.11 percent).

This is highly constructive for the price of gold. As I’ve discussed many times before, the yellow metal has benefited when real rates have fallen below zero. This was the case in September 2011 when gold hit its all-time high of $1,900 per ounce. And last year around this time, the opposite was true—positive real rates were a drag on gold.

Although gold sunk to a two-week low on a strong U.S. dollar and fears over this week’s Federal Reserve meeting, the drivers are firmly in place to push prices higher.

LEARN MORE ABOUT WHAT’S DRIVING GOLD

   

Rogoffs new book calls end paper moneyMaybe you’ve heard that a new book out right now is planting propaganda in the war on cash. In “The Curse of Cash,” Harvard economics professor Kenneth Rogoff makes the case that nixing paper money—at the very least, larger-denominated bills—“could help more than you might think” in combating criminal activities such as drug trafficking, corruption, extortion and money laundering. It could even prevent the spread of terrorism and discourage illegal immigration, Rogoff argues.

It gets even worse. Central banks, he adds, should have the latitude to drop interest rates below zero during recessions to spur spending. If the Federal Reserve tried this now, of course, many people would likely convert their savings into paper—which at least yields 0 percent—and hoard it in bedroom safes. This is precisely what many Germans have reportedly done, prompting safe manufacturers to scramble to meet demand

But in a world where nothing larger than a $10 bill exists, hoarding cash would be highly impractical. Better to buy that new boat you don’t need!

While we all agree that corruption and terrorism are things that should be stopped, killing cash is the absolute wrong way to go about it.

Instead, perhaps Rogoff should consider “The Curse of No Cash.” Does he not recall what happened in Cyprus just three years ago? The government ransacked citizens’ bank accounts to “fix” its own mistakes and mismanagement. In example after example, people’s rights to save and freely hold cash have been disrupted, with tragic results.

I’ve written about this topic before. In a cashless society, your economic liberty is forever at risk. Every transaction could be monitored, taxed and charged a fee. Capital controls would be crippling, assets could be seized. Just ask the Colombians and Venezuelans

I’m not the only one who disagrees with the ideas in Rogoff’s polemic against money. As of this writing, nearly three quarters of Amazon customers have given the book a rating of two or fewer stars. And in a scathing Wall Street Journal op-ed, respected financial writer James Grant strips away the book’s “technical pretense” to uncover its true motive. Rogoff, he writes, “wants the government to control your money,” which is the extreme form of Keynesian economics.

Gold Has Shined Brightly During Currency Crises

There’s one area where Rogoff and I both agree, though. “As paper currency is phased out,” he writes, “gold prices will rise.” Were cash eliminated and interest rates plunged underwater, gold’s role as a store of value would become even more apparent and demand for the yellow metal would turn red hot, despite its price appreciation.

This has been the case in countless past examples. Rogoff himself cites Indians’ longstanding love of and cultural affinity to gold jewelry as protection against currency uncertainty. For centuries, inhabitants of the Indian subcontinent saw continuous regime change, not to mention imperialist rule by various European forces. During all this time, the one stable and widely accepted currency was gold.

Indian Households Own More Gold Than Top Six Central BanksThe tradition carries on today. A third of Indian gold jewelry demand comes from rural farmers, who annually convert a portion of their crop revenues into the yellow metal. Whether this gold is stored or given to a female family member, perhaps a daughter, before her wedding day, its purpose is twofold: one, as a beautiful heirloom to be worn and passed down to the next generation, and two, as a form of financial security.

It’s estimated that Indian households currently hold more than 20,000 tonnes of gold. To put that in perspective, 20,000 tonnes is more than the official gold holdings of the U.S., Germany, Italy, France, China and Russia combined.

With speculation strong that a rupee devaluation is imminent, it makes just as much sense now as ever for Indians to have at least some of their wealth in gold. When the rupee unexpectedly dipped to record lows in August 2013, the wealth that prudent Indians had stored in the precious metal was, for the time being, safe.

Indians Gold Jewelry Protect Wealth Against Currency Devaluation
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Although there’s little fear right now that the U.S. dollar is in trouble, I still recommend that investors maintain a 10 percent weighting in gold—5 percent in gold stocks, 5 percent in gold coins and jewelry.

Is Chicago Next to Declare Bankruptcy?

Is Chicago the next DetroitIt’s not just Indian investors who should be aware of currency fluctuations and imbalances in monetary and fiscal policy. These can happen right here in our own backyards, and investors who aren’t paying attention—specifically municipal bond investors—could pay a steep price.

In the past few years, we’ve seen how financial mismanagement can bring calamity to state and local economies, the most notable example being Detroit’s $18 billion bankruptcy in July 2013, the largest in U.S. history. Right now, the U.S. territory of Puerto Rico is in dire financial straits, owing some $70 billion, more than any state government except California and New York.

And then there’s Chicago, which is looking at $170 billion in unfunded pensions and other costs.

This came to my attention earlier this month when I visited Chicago to attend the Morningstar ETF Conference. While there, I had the opportunity to speak to several locals, who shared with me their frustration of high local tax rates—some of the highest in the country.

Taxes are high, they said, mainly because of outrageous pensions for public and union workers. Entitlement spending has exploded. Now, Chicago, which has the lowest credit rating of any major U.S. city, is edging scarily close to bankruptcy.

Unfortunately, it isn’t hard to see why. For starters, the state has one of the most highly unionized workforces in the country, compared to the national average.

Illinois Has Among Largest Unionized Workforces
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And instead of reining in costs, state and city officials continue to add to the pile of debt. The Land of Lincoln already has the least funded retirement system in the country, according to Bloomberg, and is on track to end the year $7.8 billion in the hole.

Lawmakers and other government workers are among the highest paid in the nation and enjoy “Cadillac” health care benefits and pensions. It’s not uncommon for them to retire in their 50s. The Illinois Policy Institute estimates that the total annual operating cost for each state lawmaker—including salary, insurance and the like—stands at more than $100,000, with private taxpayers footing most of the bill.

“It’s like we work for the government,” one Chicagoan told me. “Everything we make goes to their pensions.”

Conveniently, the state constitution includes a clause that forbids any reduction of public pensions.

For these reasons, Illinois is saddled with some of the highest income and corporate taxes in the United States. Chicago’s sales tax is the highest of any major U.S. city. Despite the revenue this generates, it doesn’t come close to touching what’s been promised.

Look at the chart below. Between 2000 and 2015, Illinois tax revenue increased 57 percent. That’s a significant jump. But over the same period, state-employee insurance and pension benefits skyrocketed—166 and 586 percent respectively—while essential services such as higher education suffered.

Unfunded Promises Illinoiss Runaway Spending Government Workers
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What this means is very little of taxpayers’ money is going toward anything tangible—new schools, new hospitals, new wastewater treatment plants. Nothing that provides jobs or has a multiple effect is being produced.

We’re already seeing serious consequences as a result of the state and city’s fiscal woes. In a recent study of jobs market competitiveness, CareerBuilder found that Chicago is the least competitive metropolitan area in the U.S. in terms of jobs growth. Between 2014 and 2015, the Windy City’s rate of adding jobs was far short of the national average.

Because of this—among other reasons, including crime, unemployment and political infighting—Chicago had the largest population loss of any metro in the U.S last year (6,263). Meanwhile, Illinois was one of only seven states to see a net decline (22,194).

And where are these people going? Where the jobs are, of course. I always say that money flows where it’s most respected. People behave the same way.

It’s no wonder, then, that the state that attracts the most Illinois expats is Texas, according to the Chicago Tribune. This falls in line with what I wrote just a couple of weeks ago. Between 2014 and 2015, Texas added more residents than any other state because of its strong economy, abundance of jobs and low taxes. CareerBuilder’s jobs study, I should point out, rated Dallas as the most competitive city. And within the next eight to 10 years, Houston is expected to surpass Chicago to become the nation’s third largest city by population.

I’m not saying this to beat up on Chicago, but to emphasize my earlier point about being aware and prepared—especially, in this case, when it comes to municipal bond investing. Many passive muni funds might hold Chicago debt because it’s high-yielding. But those yields could come at a huge cost. Three years ago, bondholders of Detroit’s bad debt learned the hard way that, in the event of a default, pensioners get paid first, investors last—or worse, not at all.

As active managers we’re well aware of this. We sincerely hope Chicago can straighten out its balance sheet, but in the meantime, we feel it’s not a space to be a buyer right now. Instead, we seek to invest primarily in high-quality, short-term munis.

LEARN MORE ABOUT SHORT-TERM MUNIS

 

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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article was held by any accounts managed by U.S. Global Investors as of 6/30/2016.

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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Look to Chindia for Gold’s Love Trade
September 12, 2016

Diwali trigers gold's love trade in India. The five-day festival of lights kicks off on October 30

A few weeks ago, I shared with you what I brought home from my trip to Toronto, Vancouver and New York City, where I had met with gold fund analysts. The current gold bull run began in January, but as I told you, the general retail investors weren’t buying then. The only people buying that early were quants and huge hedge funds. The question, then, was: What factors or models were the quants using to uncover gold’s meteoric rise this year?

One of the factors they were looking at, I learned, was low SG&A-to-revenue. “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 includes everything from shipping fees to salaries to utilities. SG&A-to-revenue is an unusual factor, not typically used among analysts and fund managers, so we were curious to apply it.

Using this information, we looked just at the first quarter to find the mining companies that spent the least amount of money on these daily operations relative to revenue. Mining companies, after all, have had trouble with expense discipline.

What we discovered was nothing short of astonishing. All combined, the top 10 gold companies for the quarter—led by South Africa-based Harmony Gold—returned a spectacular 88 percent. That’s almost double what the Market Vectors Gold Miners ETF (GDX) returned over the same period (45.5 percent). 

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

As early as January, the drivers were in place to fuel gold’s best first half of the year since 1974. The yellow metal is now in position to have its best year overall since 2010, when it rose 29.5 percent.

 

DISCOVER INVESTMENT OPPORTUNITIES IN THE GOLD SPACE

 

Upcoming Festivals Could Activate Love Trade

I talk a lot about the differences between gold’s Fear Trade and Love Trade. Loyal readers know that the Fear Trade is associated with negative real interest rates and excessive money supply, which triggers an imbalance of monetary and fiscal policies and macroeconomic uncertainty. Historically, investors in the U.S., Japan, Germany and the U.K. have been the main drivers of the global Fear Trade.

The Love Trade, on the other hand, is all about gold’s powerful allure and its timeless role as a gift without peer. It has two significant benefits: one, as beautiful gold jewelry to be worn, and two, as financial security. Although gold jewelry is often given as a special gift in Western countries, it pales in comparison to what takes place in China and India, or “Chindia”—home to about 40 percent of the world’s population, and the two largest gold importers.

The following image, courtesy of Visual Capitalist, shows emphatically just how enormous this region’s population is. More people live inside the green circle—which covers not just India and China but also Japan and some South China Sea countries—than outside it.

More than Half of the World's Population LIves Inside This Circle

As I shared with you last month, the two Asian countries together accounted for more than half of total global gold jewelry demand in 2015. The U.S., by comparison, represented about 5 percent of demand. All of Europe, even less.

Significant to boosting the metal’s price are important cultural events, from India’s upcoming Diwali festival and fourth-quarter wedding season to the Chinese New Year in January. Going back decades, the yellow metal has tended to perform best in September, when jewelry, coin and bullion dealers restock their inventories in preparation for these celebrations.

Also known as the Festival of Lights, Diwali begins October 30 this year, followed by the wedding season. To give you a sense of scale, as many as 150 million Indian weddings will be held between 2011 and 2021, according to the Government of India. For each wedding, between 0.7 and 70 ounces of gold are typically purchased, which is equivalent to 35 percent to 40 percent of total wedding expenses.

Of course, you can’t convert cash into gold if you don’t have the cash. What’s more, gold priced in Indian rupees and Chinese renminbi has really taken off, making it more expensive to Indian and Chinese consumers than America buyers.

Gold Priced in U.S. Dollars, Indian Rupees and Chinese Renminbi
click to enlarge

Gold consumption, then, really depends on household income. Fortunately, income growth in Chindia is booming with the rise of the middle class.

Rising Incomes = Golden Opportunity

And just how much income growth are we talking about? According to Boston Consulting Group (BCG) data, consumer spending in both China and India will soon overtake spending in Germany and France, and is on a trajectory to match Japan’s level of consumption.

India and China's affluent class will consume as much as some major countries by 2020
click to enlarge

By 2020, the number of “affluent” households in China—those with annual incomes of at least $20,000—will grow to 280 million, equal to 30 percent of the country’s urban population. That’s quite a leap up from today’s 120 million households labeled as “affluent.” It’s also good news for the Love Trade.

As for India, the number of middle class consumers is expected to triple between now and 2025, eventually reaching 89 million people, according to McKinsey & Company.

What I find even more incredible is that by 2030, the economic output of India’s top five cities is expected to reach the size of five middle-income countries today, according to McKinsey. Mumbai’s massive $245 billion economy, for example, could soon exceed the entire country of Malaysia. Likewise, India’s capital city of New Delhi could one day be bigger than the Philippines.

This presents a huge opportunity for the Love Trade to expand even more, as rising incomes and economic momentum have been a tailwind for gold demand.

I’ve pointed out before the relationship between M2 money supply growth in China and the price of gold. Money supply isn’t the same as income growth, of course. But it serves as further evidence that the more money that’s available—and the more people who have access to that money—the more it can be converted into gold.

Gold Price Has Largely Followed Chinese Money Supply
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Negative real interest rates play an important role as well, as I’ve discussed many times before. The yellow metal shares an inverse relationship with real rates, which is what you get when you subtract inflation from nominal interest rates.

silver is the best performing commodity of the year having returned more than 38 percent as of September 9

Speaking of which, many investors are wondering if rates will rise this year or not. December is still on the table, but the likelihood of a hike this month seems to have been doused by the August jobs report, which came in below expectations. CNBC reports that Goldman Sachs economists walked back their call for a September rate hike when it was revealed the U.S. economy added only 151,000 jobs, 32 percent fewer than the same month a year ago and a whopping 69 percent decrease from July’s payroll additions.

Be that as it may, markets seem to be betting the end of easy money could arrive sooner rather than later. Stocks sold off today in their worst session since June 24, the day after Brexit.

The Friday before last, both gold and silver jumped on the underwhelming jobs numbers. As I told Daniela Cambone during last week’s Gold Game Film, which you can watch here, silver is an important metal to follow because as people develop more confidence in the precious metal area, silver could begin to take center stage.

India Now the Fastest Growing Large Economy

In June, I asked if India is the new China. I think the jury’s still out on that question, but what we do know is that India has pulled ahead of China to become the world’s fastest growing large economy. In its June update to its world economic outlook, the International Monetary Fund (IMF) sees India advancing 7.4 percent this year, compared to China’s 6.6 percent. On a relative basis, these are much stronger growth rates than what we find in advanced economies such as the U.S., European Union and Japan.  

Real GDP Growth Around the World
click to enlarge

India’s manufacturing sector appears to be growing at a faster clip than China’s, when we compare the two Asian giants’ purchasing manager’s indices (PMI). For the month of August, the India PMI rose to 52.6 from 51.8 in July, indicating healthy sector expansion.

China and India Manufacturing Headed in Right Direction
click to enlarge

Meanwhile, China logged a neutral 50, indicating neither expansion nor contraction. But as you can see above, the trend is headed in the right direction and making steady improvements from its recent low of 47.2 in September 2015.

For the one-year period, the First Trust ISE Chindia Index Fund (FNI) is up more than 23 percent, as of September 4, suggesting the bad news we’ve been seeing in the media might be over, and the markets in China and India may have reached a bottom. This is good for global growth and the Love Trade. 

Book Your Flights!

At the end of this month, I will be a speaker and panelist at Mines and Money in Toronto. The conference, one of the biggest and most attended in the world, brings together leading institutional investors, mining developers and sought-after industry experts. It will take place September 26 through 28, so don’t hesitate to book your flights. I hope to see you there!  

 

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 Caixin China Manufacturing PMI, released by Markit Economics, is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.

The Nikkei India Manufacturing Purchasing Managers’ Index, reported by Markit Economics, measures the performance of the manufacturing sector and is derived from a survey of 500 manufacturing companies.

M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

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 6/30/2016: Sibanye Gold Ltd., Northern Star Resources Ltd., Regis Resources Ltd.

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Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change