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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.

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.

 

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.

 

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
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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.

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
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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
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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
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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
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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. 

 

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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Gold Spending in India Is Set to Get a Boost from a Strong Monsoon Season
August 18, 2016

Since before recorded human history, the people of India have had an insatiable appetite for gold, treasuring it not only for its flawless natural beauty and religious significance but also as a superb store of value. This tradition carries on today, with India’s demand for gold jewelry in 2015 reaching more than 668 tonnes, nearly a third of total global demand and second in size only to China.

India and China Dominate Global Gold Jewelry Market
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I’ve pointed out many times before that the price of gold is largely driven by the Love Trade in India. Demand fluctuates year-to-year depending on several factors, the two most significant being the number of Indian weddings held in the fourth quarter and the amount of crop revenue that’s generated as a result of the summer monsoon season.

The wedding season is still three months away, but the June to September monsoon season is currently in full swing. It’s impossible to overstate just how crucial this period is to India’s important agriculture sector. During an average monsoon season, the Indian subcontinent can receive close to 80 percent of its total annual precipitation.

Most reports so far this year indicate surplus rainfall, with 12 inches being dumped nationwide last month alone, the fifth best month since the 1990s. This should come as welcome relief to Indian farmers, whose incomes have been squeezed by two long years of drought.

It’s also good news for gold consumption.

Converting Crops into Gold

Because of the above-average monsoon, gold spending in India is expected to increase 11 percent in 2016/2017 over the previous September to August crop season, according to Thomson Reuters. This would help reverse weak second-quarter jewelry demand in India due to a gold jewelers’ strike that closed the market for six weeks early in the quarter, a new 1 percent excise duty on jewelry and rising prices.

Gold has Rallied 26% Year-to-Date
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About a third of Indian gold demand comes from rural farmers, who have traditionally converted a percentage of all crop revenue into the precious metal to be held as insurance and sold in times of dire need. A GFMS/Thomson Reuters study conducted last year found that, between 1985 and 2014, there was a strong positive correlation between Indian crop revenue and spending on gold.

Following the crop season, we have Diwali and the Indian wedding season to look forward to.

Diwali, also known as the Festival of Lights, is arguably the most sacred holiday in Hinduism, celebrated by millions of people all over the globe. Much like Christmas, it serves as a major shopping season. Families splurge on expensive items such as cars, appliances, clothes—and gold jewelry. You can see how, in past years, the price of gold has ramped up in August and September as Indian merchants and jewelers restock inventories in preparation for the fall festival.  

Gold has Rallied 26% Year-to-Date
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150 Million Indian Weddings Between Now and 2021?

The largest owners of gold in Indian are women, as it is auspicious to give them gifts of gold jewelry before their weddings. Because India lacks a formal social security system, it’s vital for women in particular to have some form of wealth preservation in the event of divorce or widowhood. This is what’s known as stridhan—a portion of a married couple’s wealth that is controlled exclusively by the wife and to which she is entitled, even after separation from her husband.

As World Gold Council CEO Aram Shishmanian put it during our joint webcast in June: “In India, a marriage is not a marriage without gold.”  

Indian Weddings and Gold Infographic

So how many weddings are we talking about, and how much gold? Let’s look at the numbers. According to the Indian government, there are 300 million Indians between the ages of 25 and 29 from now until 2021. During this period, a projected 150 million weddings will take place. And for each wedding, roughly 35 percent to 40 percent of total expenses will be devoted to gold in the form of bullion, coins and jewelry.     

Put another way, it’s estimated that the amount of gold purchased for a typical Indian wedding ranges between 20 and 2,000 grams—equivalent to a little over 70.5 ounces, or $95,457 at today’s prices. The wealthier the family, of course, the more gold they can afford to buy.

But gold is just as popular and valued—if not more so—among lower income families, many of whom depend on monsoon rains to nourish their crops. Here’s to a bountiful yield!

 

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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Why Gold, Why Now?
June 21, 2016

During my most recent webcast a couple of weeks ago, I had the pleasure of being joined by the CEO of the World Gold Council (WGC), Aram Shishmanian. As expected of someone of his stature, Aram brought another level of insight and expertise to our discussion of gold’s Love Trade and Fear Trade.

You might wonder what the WGC does exactly. In Aram’s words, it focuses on “innovation and integration to create the gold market” around the world. Among other important endeavors, the group “lobbies governments to make their countries appropriately pro-gold” and is the only agency in the world to “train central bankers in the use of gold.” 

Below, I’ve selected a few key moments from the webcast to share with you. You can hear the full replay and follow along with the slide deck at usfunds.com.

A Stellar First Quarter

Aram: It’s an understatement to say that gold had a good quarter. It increased over 16 percent in the first quarter, the fastest it’s done so in 30 years, overtaken only by the Iranian oil crisis in the 80s.

The story is not just about the gold price. The gold ETF industry has increased by over 50 percent worldwide.  In addition to that, we’ve seen the market capitalization of members of the World Gold Council—which represents the majority of the gold mining companies in the world—increase 70 to 80 percent in the past four months alone.


click to enlarge

Rise of the Global Middle Class

Frank: The growth of gold’s Love Trade depends on rising global GDP per capita, and last year there was a tipping point in China. For the first time, the size of China’s middle class reached 109 million people, overtaking the U.S. middle class. This group gets lost in the sea of 1.4 billion people, but these 109 million people—a third the size of America—want to travel and buy higher quantities of gold for gift giving.

The same goes for India, where 600 million people are under the age of 25. That’s two times the size of the population in the U.S. They’re all wired. They’re all connected. They’re driven for education. Their affinity for gold is not going away.

If you look at China, the U.S. and India, there’s a significant portion of GDP growth, which is so important for the gold market.

China to Become a Gold Price-Maker

Aram: Today, China and India represent over 70 percent of world demand, driven by hundreds of millions of people and supported by pro-gold government policy. The U.S., by comparison, is 6 percent of world demand, yet price discovery on the COMEX (Commodity Exchange) in London is somewhat overweight because it is U.S. or Western economy-centric.

The Shanghai Gold Exchange was established 13 years ago and today is the largest gold exchange in the world, not to mention the most sophisticated. In April this year, it launched the Shanghai gold benchmark, which parallels that of the London benchmark price of physical gold. Last year, trading volumes in Shanghai were over 10 trillion renminbi.

China launched its yuan-denominated fix price for gold on Tuesday, April 19, with a gram set at 256.92 yuan ($39.69) equivalent to $1,234.50 an ounce

I think for those who haven’t had the opportunity to visit China, you have to go to understand that China is the biggest producer and consumer of gold. It imports over 600 tonnes a year and is driven by highly diverse demands by hundreds of millions of people. Three hundred million Chinese households will become middle class in the next two years, and they have a higher savings ratio than anyone in the world.

Gold Jewelry and Financial Security

Frank: Jewelry ends up becoming money whenever there’s a crisis in a country’s currency. Right now, it’s not so much a crisis as gold is an important asset class, in a world where we have zero interest rates.

Aram: Jewelry demand is still 45 percent of the gold market, and in Asian societies—India, China, Southwest Asia—it’s about wealth preservation. In India, a marriage is not a marriage without gold. It’s crucial to their belief system. The husband owns the land and the farm and other assets, but the wife owns the gold. It’s her security blanket. It’s not just about adornment, it is about financial security. That’s quite often misunderstood in the West where we think of jewelry as discretionary adornment.

In India, a marriage is not a marriage without gold

Frank: You can buy the most incredible gold jewelry, but it is 24 carat.

Aram: Yes, Chinese gold demand is purely 24 carat gold, which is 100 percent. In North America, 18 carats is the norm, but in India it’s 22 carats. During Diwali, it is auspicious to buy gold, and at certain festivals in India throughout the year, it is an auspicious time to marry and then you see peaks that are highly predictable.

Strong Gold Positions in Global Pension Funds

Frank: It’s unprecedented that a third of all global government debt has negative yields.

Aram: Which drives gold demand. Effectively what we’re seeing is people’s pensions being decimated because the policymakers have had very few if any alternatives left. It is in this environment that gold will help satisfy need.
Take the Japanese economy. Today, over 200 pension funds allocated about 2 percent to gold. It’s not only about wealth creation like the model in the Western world, where we generated 7 percent returns on investment for pension funds. That is gone in Japan, and therefore it’s more about protection of wealth rather than creation. That’s where gold plays.

Frank: In the state of Texas, where we’re based, Shayne McGuire, portfolio manager of the Gold Fund for the Teacher Retirement System (TRS) of Texas, is doing a great job. They’ve taken up a real strong position.

Aram: They took a strong position quite a few years ago. The TRS has been one of the forerunners of U.S. pension funds holding gold. 

The Power of Scarcity

Aram: An important aspect of gold is its scarcity value. The total amount of gold produced in the history of mankind is about 170,000 tonnes. That’s the size of two Olympic-size swimming pools and it is still in use.

The amount of gold discoveries are very, very few now. Gold production at the moment is pretty constant. As you’ve seen with mining equities, huge capital investments were made in the last few years, but very little new supply came forward because the mining companies had to invest huge amounts of money to get licenses to operate and to find new discoveries and increasingly more complex mining conditions. In terms of supply, it is virtually constant. It goes up and down 1 or 2 percent per year, but it is constant.

Gold’s Timeless Allure

Aram: Producing gold iPhones has increased sales dramatically. It goes back to the idea that gold is integral to our belief system. It’s integral to our language. Not just in the DNA of far-flung countries but in our Western society.

Frank: And then talk about extravagant wealth in the Middle East, where some of these princes have their cars gold-plated. It’s extravagant, but I’m trying to highlight the allure of gold, which can be found everywhere, from the iPhone to buying 24 carat gold jewelry. I think this is important for investors to realize.

 

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 COMEX is a commodity exchange in New York City formed by the merger of four past exchanges. The exchange trades futures in sugar, coffee, petroleum, metals and financial instruments.

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Is India the New China?
June 6, 2016

Global slowdown worries high Indias booming economy

A “slow-growth trap.” That’s how the Organization for Economic Cooperation and Development (OECD) described the global economy last week in its latest Global Economic Outlook. The group sees world GDP advancing only 3 percent in 2016, the same as last year, with a slight bump up to 3.3 percent in 2017.

Catherine Mann, the OECD’s chief economist, urged policymakers around the world to prioritize structural reforms that “enhance market competition, innovation and dynamism,” as monetary policy has been used alone as the main tool for far too long. The longer the global economy remains in this “slow-growth trap,” Mann said, the harder it will become to revive market forces.

This is precisely in-line with what I, and many of my colleagues, have stressed for months now. To push the economy on a high-growth path, we need structural fiscal reforms, both here and abroad. One need only look at the global purchasing managers’ index (PMI) to see that manufacturing conditions have been slowing for the past several years since the financial crisis. The PMI in May registered a 50.0, which Markit Economics describes as “lethargic” and “low gear.”

Global Manufacturing Sector Stagnates May
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U.S. manufacturing also saw further weakness in May, with its PMI reading falling to 50.7, more than a six-year low. The eurozone’s PMI fell to 51.5, a three-month low. Meanwhile, the Caixin China General Manufacturing PMI came in at 49.2, still below the neutral 50 threshold.

It’s clear that policymakers need to address slow growth with smarter fiscal policies, lower taxes and streamlined regulations. Zero and negative interest rate policies are taking their final gasp as far as what they can accomplish.

Indian Prime Minister Narendra Modi

One of the bright spots continues to be India, whose own manufacturing sector expanded for the fifth straight month in May. The country’s GDP advanced an impressive 7.9 percent in the first quarter, following 7.3 percent year-over-year growth in 2015. This helps it retain its position as the world’s fastest growing major economy. Credit Suisse ranked India first in April’s Emerging Consumer Survey 2016, noting that “Indian consumers stand out among their emerging market peers with higher confidence about their current and future finances and relatively lower inflation expectations.”

Many analysts are referring to this as the “Modi effect,” in honor of Prime Minister Narendra Modi, elected two years ago on promises to reinvigorate business growth by cutting red tape and increasing infrastructure spending. Modi, who is scheduled to visit Washington this week, has had limited success at this point. But to be fair, India’s challenges run deep, and it will take quite a bit longer to make substantial changes to the country’s notorious regulations and corruption.

India’s Oil Demand Ready for Takeoff

Make no mistake, China’s oil demand is still massive, second only to the U.S. But it has begun to contract in recent months, and there to offset the difference is India, who is expected to have the fastest growing demand for crude between now and 2040, according to the International Energy Agency (IEA). India’s consumption stood at 4.5 million barrels a day in March, which is up considerably from an average of 4 million barrels a day in 2015. The Asian country represented a whopping 30 percent of total global consumption growth in the first quarter. This makes it the world’s “star performer” growth market, a role occupied until recently by China. India is now poised to overtake Japan as the second largest oil consumer in Asia, if this hasn’t already happened.

Indias oil consumption poised to overtake Japan
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Contributing to India’s oil binge are policy changes that make its economy resemble China’s in the late 1990s, soon before its industrial boom. Compared to other major economies, India’s per capita consumption of oil is relatively low, as ownership of automobiles and motorcycles—many Indians’ preferred mode of personal transportation—is still developing, with penetration at merely 144 per 1,000 people. If we look just at passenger cars, the rate is closer to 17 per 1,000 people. (In the U.S., the figure is 850 per 1,000 people.)

Vehicle ownership in india has been steadily rising
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This is the exciting part, of course. A couple of months ago I shared with you a factoid from my friend Gianni Kovacevic’s book “My Electrician Drives a Porsche?”, that in 1979 there were only 60 privately-owned automobiles in China. Today, it’s the world’s largest auto market.

India’s rise appears to be similarly dramatic. In the chart above, courtesy of a March report from theOxford Institute for Energy Studies, you can see that the number of vehicles driving on Indian roads doubled between 2007 and 2014, thanks not only to an exploding population but also the rise of India’s “spending class,” as Gianni calls it. More than 600 million Indians are under the age of 25, based on 2014 data, and many in this cohort aspire to have social mobility and the American Dream. The country is now on track to become the third largest auto market by 2020, behind China and the U.S., and obviously this has huge implications for oil consumption.

Did you know India has 600 million people under 25

Oil at $60 by the End of Summer?

Despite OPEC’s failure to agree on a production cap, global oil markets are rebalancing faster than expected. U.S. producers, reacting to low prices, continue to trim exploration and production spending, leading to fewer active rigs and, consequently, less output over the past 12 months.

U.S. oil production down as number of active rigs continues to drop
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Meanwhile, demand remains strong, not only in India but around the world. The IEA, in fact, expects global demand to outpace supply in mid to late 2017. What’s more, analysts with Bank of America Merrill Lynch believe that oil demand will peak sometime after 2050, “as long as we remain in a relatively low oil price environment of $55-75 per barrel in real terms.”

Global oil demand expected to outpace supply in 2017

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Many prominent analysts, including British financials firm Standard Chartered’s chief economist, now see oil climbing above $60 by the end of the summer. Goldman Sachs also appears to have turned bullish, noting that global storage levels are heading into a deficit “much earlier than we expected.” 

Helping to turn sentiment around is the arrival of the busy summer travel season, as I told CNBC’s Pauline Chiou last week. This year in particular is expected to be one for the history books—not just on roads but also by air. With fares down throughout 2015 and the first half of 2016, industry trade groupAirlines for America estimates 231.1 million passengers will fly on U.S. airlines during the months of June, July and August. This would mark a record high, up from the 222.3 million that flew over the same period last year.

All Eyes on Gold

Frank Holmes CNBC Fear Trade sees gold as store of value

I’d like to thank Verizon union members for the strong pop in gold prices on Friday last week. As you might already know, thousands of Verizon workers were on strike during the month of May and consequently were counted as unemployed. This contributed to the weakest jobs report since 2010—only 38,000 new jobs were created in May, a dramatic dive from March’s 180,000—adding to speculation that an interest rate hike this month will once again be delayed. This bodes well for gold, which had its strongest daily gain since March Friday, soaring up more than $33 an ounce.

More than that, though, gold is up on Fear Trade worries, with negative interest rates draining yield around the world.

With this in mind, I want to remind everyone to register for our next webcast, “All Eyes on Gold: What’s Attracting Investors to the Yellow Metal,” scheduled for this Wednesday at 4:15 P.M. Eastern time. I’m thrilled to be joined by World Gold Council CEO Aram Shishmanian, and you won’t want to miss his deep insights into the yellow metal.

Register now by clicking below!

All Eyes on Gold: What's Attracting Investors to the Yellow Metal - webcast

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. The Caixin China General Manufacturing PMI is a composite indicator designed to provide an overall view of activity in the manufacturing sector and acts as an leading indicator for the whole economy. When the PMI is below 50.0 this indicates that the manufacturing economy is declining and a value above 50.0 indicates an expansion of the manufacturing economy.

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 3/31/2016.

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Net Asset Value
as of 02/19/2019

Global Resources Fund PSPFX $4.63 0.04 Gold and Precious Metals Fund USERX $7.81 0.30 World Precious Minerals Fund UNWPX $3.01 0.07 China Region Fund USCOX $8.15 0.04 Emerging Europe Fund EUROX $6.49 0.01 All American Equity Fund GBTFX $24.05 0.02 Holmes Macro Trends Fund MEGAX $16.83 0.03 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change