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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.

How Gold Got Its Groove Back
January 11, 2016

Gold begins 2016 with the right moves

Who says gold lost its appeal as a safe haven asset?

After five straight positive trading sessions last week, the yellow metal climbed above $1,100, its highest level in nine weeks, on a weaker U.S. dollar.. The rally proves that gold still retains its status as a safe haven among investors, who were motivated by a rocky Chinese stock market, North Korea’s announcement that it detonated a hydrogen bomb last Wednesday and rising tensions between Saudi Arabia and Iran.

Here in the U.S., gold finished 2015 down 10.42 percent, its third straight negative year. Until the new year, sentiment appeared poor, and many gold bulls were finding it hard to stay optimistic.

But after the price jump last week, large exchange-traded gold funds saw massive inflows, confirming a shift in investors’ attitude toward the precious metal.

It’s worth remembering that about 90 percent of physical demand comes from outside the U.S., mostly in emerging markets such as China and India. In many non-dollar economies, buyers are actually seeing either a steady or even rising gold price. The metal is up in Russia, Peru, South Africa, Canada, Mexico, Brazil and many more.

Note the differences in returns between gold priced in U.S. dollars and gold priced in the Brazilian real, Turkish lira, Canadian dollar, Russian ruble and Indonesian rupiah.

In 2015, Gold Performed Better in Non-Dollar Currencies
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Gold demand in China was very robust last year. A record 2,596.4 tonnes of the yellow metal, or a whopping 80 percent of total global output for 2015, were withdrawn from the Shanghai Gold Exchange. As for the Chinese central bank, it reported adding 19 more tonnes in December, bringing the total to over 1,762 tonnes. Precious metals commentator Lawrie Williams points out, though, that China’s total reserve figure is widely believed to be “hugely understated,” meaning the central bank might very well have much more than we’re being told.

Forget Interest Rates—Real Rates Are the Key Drivers of Gold

Despite all the talk of rising interest rates in connection to gold, they’re not a dominant driver of prices. Sure, rising nominal rates have tended to make the metal less attractive, since it doesn’t pay an income, but the larger driver by far are real interest rates. When real rates drop into negative territory, gold has historically done well.

As a reminder, real rates, important for the Fear Trade, are what you get when you subtract the consumer price index (CPI), or inflation, from the 10-year Treasury yield. As of January 6, the 10-year yield was 2.18 percent, while the 12-month CPI for November—December data will be released later this month—came in at a barely-there 0.50 percent. Real rates, therefore, are running at a positive 1.68 percent, which is a headwind for gold.

That’s why we need inflation to pick up, because then gold would be more likely to rally.

Regardless, the World Gold Council (WGC) writes in its 2016 outlook that gold’s role as a diversifier remains “particularly relevant”:

Research shows that, over the long run, holding 2 percent to 10 percent of an investor’s portfolio in gold can improve portfolio performance.

The reason for this is that gold has tended to have a low correlation to many other asset classes, making it a valuable diversifier. During economic contractions, for example, gold’s correlation to stocks actually decreased, according to data between 1987 and 2015.

Since 1987, Gold Has Had a Low Correlation to Other Assets
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For the last three years, gold has disappointed many because other investments, specifically equities, have seen such huge gains. But with global markets hitting turbulence, the yellow metal is looking more attractive as insurance against the currency wars.

I always recommend 10 percent in gold: 5 percent in gold stocks or an actively-managed gold fund, 5 percent in bullion and/or jewelry. It’s also important to rebalance every year.

This should be the case in both good times and bad, whether gold is rising or falling. As highly influential investment expert Ray Dalio said last year: “If you don’t own gold, you know neither history nor economics.”

USGI Among the First to Discuss the Significance of PMI as a Forward-Looking Indicator

Aside from real interest rates, gold prices are being challenged by weak manufacturing data around the world. China’s purchasing managers’ index (PMI) fell to 48.2 last month, down 0.4 points from the November reading. The Asian giant’s manufacturing sector spent a majority of 2015 in contraction mode, managing to rise above the key 50.0 level only once last year, in February.

China Manufacturing Still in Contraction Mode
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Although fears of a Chinese slowdown are real, they’re largely overdone. Consulting firm McKinsey & Company’s Gordon Orr calls these fears a distraction, writing that “the country’s economy is still massive—as are its potentional opportunities.”

Something to keep in mind is that China recently approved a new five-year plan, its 13th since 1953. Although we won’t know exactly what’s in it until March, we do know that these plans have been good for economic growth in the past. It’s likely that interest rates will be trimmed even more to stimulate business, with more funding diverted to infrastructure and “green” initiatives.

Manufacturing around the world showed signs of deterioration in December as well. The JP Morgan Global Manufacturing PMI declined to 50.9 from 51.2 in November. The sector is still in expansion mode, but just barely.

Global Manufacturing Cools in December
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The reading also fell below its three-month moving average in December, which, as I’ve shown many times before, can have a huge effect on materials and energy three to six months out.

We were one of the earliest investment firms to monitor this important economic indicator closely and bring it into public, everyday discourse. (From what I can find, the first time we wrote about it was in January 2009, as it applied—wouldn’t you know?—to China.) Today, I hear and read about the PMI on the radio and in newspapers as often as I do more common economic indicators such as GDP and unemployment rates.

That’s a testament to the sort of cutting-edge analysis we do and pride ourselves on here at U.S. Global Investors.

Looking Ahead in the New Year

Until we see global synchronized growth with rising PMIs, we remain cautious going forward. A constant source of hope is the Trans-Pacific Partnership (TPP), which, when ratified sometime this year, will eliminate 18,000 tariffs for 25 percent of global trade.

We also anticipate more stimulus programs this year around the world. Lately we’ve experienced strong fiscal drag as more and more regulations and taxes impede progress that not even cheap money has been able to offset. A 2014 report by the National Association of Manufacturers (NAM) revealed that federal regulations in the U.S. alone cost businesses more than $2 trillion a year. To ignite growth, G20 nations should commit themselves to cutting red tape.

Burdensome regulations around the globe have led to massive fiscal drag

A good model for such a task is Canada’s “One-for-One Rule,” introduced in April 2012 during former Prime Minister Stephen Harper’s administration. The rule mandates that when a new or amended regulation is introduced, another must be removed.

However it’s accomplished, regulatory burdens placed on businesses must be reduced.

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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 Report on General Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 420 manufacturing companies. 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 article references the investment theory of an investment as insurance against a separate market event that could negatively affect performance of an investment. The reference does not guarantee performance or a safeguard from loss of principal by investing in that asset.

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Hope for the New Year: 3 Asset Classes for 2016
January 4, 2016

Earlier, I reflected back on 2015 by revisiting the 10 most popular posts of the year. Today I’d like to look ahead to 2016 by pinpointing three asset classes that I believe hold opportunities for investors.

Three Asset Classes and Airlines

Gold

Going forward, gold prices will largely be affected by U.S. monetary policy. The Federal Reserve began its interest rate-normalization process with a small but significant 0.25 percent increase, and unless the Fed has reason to mark time or reverse course in 2016, rates should continue to rise steadily.

This will bump up not just the U.S. dollar—which historically shares an inverse relationship with gold, since it’s priced in dollars—but also real interest rates. As I’ve discussed many times before, real rates have a huge effect on the yellow metal.

Real interest rates are what you get when you deduct the rate of inflation from the 10-year Treasury yield. For example, if Treasury yields were at 2 percent and inflation was also at 2 percent, you wouldn’t really be earning anything. But if inflation was at 3 percent, you’d see negative real rates.

When gold hit its all-time high of $1,900 per ounce in August 2011, real interest rates were sitting at negative 3 percent. In other words, if you bought the 10-year, you essentially lost 3 percent a year on your “safe” Treasury investment. Since gold doesn’t cost anything to hold, it became more attractive, and the metal’s price soared.

But today, the U.S. has virtually no inflation—the November reading was 0.5 percent—so real rates are running at less than 2 percent.

Across the Atlantic, many investors are now realizing that Europe’s quantitative easing (QE) programs have failed to improve market performance in any substantial way. Earnings per share growth estimates in the European stock market have not budged. The lack of real growth in this market is a compelling argument for global investors to own gold for the long term.

Low interest rates, higher taxes and tariffs and more labyrinthine global regulations since 2011 are all contributing to the global slowdown. Neither QE3 in Europe nor QE3 in the U.S. has led to a marked improvement in growth. What markets need now to ignite growth are fewer taxes, tariffs and regulations and smarter fiscal policies.

European Earnings per Share (EPS) Growth Estimates Not Responding to ECB QE
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The chart below, courtesy of Evercore ISI, helps to illustrate some of the challenges we’ve faced in 2015 in terms of the investments we manage. Growth remains scarce globally. M2 money supply in the U.S. also looks dim.

Global Trade Volumes Are Declining
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Looking forward, we’re hopeful that these two indicators—global trade volume and money supply—will turn up. Both are necessary to improve commodity and emerging market investments.

On the upside, gold demand in China remains strong. It’s important to remember that more than 90 percent of demand comes from outside the U.S., in China and India in particular. Precious metals commentator Lawrie Williams reports that Chinese gold withdrawals from the Shanghai Gold Exchange (SGE) crossed above 51 tonnes for the week ended December 18.

Already Chinese demand is higher than the previous annual record set in 2013, and if total withdrawals for 2015 climb above 2,500 tonnes, as Lawrie expects, this will be “equivalent to around 80 percent of total global annual new mined gold production.” We expect demand to rise even more as we approach the Chinese New Year—historically a key driver for gold’s Love Trade—which falls on February 8 in 2016.

Gold: 24 Hour Composite Historical Patterns
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Oil

BCA Research believes oil markets will rebalance in 2016, not because of a price collapse but because production will continue to slide and consumption, grow. Most of these adjustments are being made in nonmembers of the Organization of Petroleum Exporting Countries (OPEC). In the U.S. alone, over 600,000 barrels per day have fallen out of the market as the rig count falls.

Oil Production Falling in Non-OPEC Nations, Helping to Rebalance Markets
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Russia, however, is unwilling to cut its production in a bid to compete with OPEC. In November, the country hit a post-Soviet record of 10.8 million barrels produced per day. And even more oil is expected to come out of Iran in 2016 once international sanctions are lifted.

For these reasons, Moody’s recently trimmed its 2016 oil forecast. West Texas Intermediate (WTI) crude will average $40 per barrel, down from $48, according to the ratings agency. The projection for Brent was slashed even more significantly, from $53 to $43.

To put this in perspective, oil averaged $55 per barrel in 2015, compared to $85 in 2014.

In all likelihood, then, oil prices probably need to remain lower for longer in order to rebalance the market.

Airlines

Last month I shared the latest report from the International Air Transport Association (IATA), which states that global airlines will post record net profits of $33 billion for 2015. Because fuel prices are expected to stay low, airlines could very well hit another record at the end of 2016—$36.3 billion, according to the IATA.

Savings from lower fuel prices are partially to thank for these profits. Goldman Sachs points out, however, that we shouldn’t expect prices to fall at the same magnitude as they did in 2014 and 2015.

Fuel Price Windfalls Tightening Up
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As a result of lower fuel prices and airlines’ improved discipline in capacity growth and capex spending, the group is poised to see increased operating margins in the coming years, according to Morgan Stanley.

U.S. Airline Industry Operating Margins Are Expected to Rise in 2016
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In short, operating margin tells you what percentage of every dollar made the company keeps as revenue before taxes. The higher the operating margin, the better off the company is.

Ancillary revenue is also contributing more to airlines’ bottom line. Such revenue comes from non-ticket fees such as baggage and handling, cancellations, seat upgrades, meals and the like. According to ancillary revenue expert IdeaWorks, the total global amount generated from these fees is estimated to rise to a whopping $59.2 billion in 2015, up from $49.9 billion in 2014. That accounts for 7.8 percent of global airline revenue, an improvement from the 6.7 percent in 2014.

Global Ancillary Revenue From $2.5 Billion in 2007 to $59 Billion Estimated in 2015

The increased revenue is helping to boost domestic airlines’ free cash flow. Bank of America Merrill Lynch has forecast that airlines will see the highest free cash flow in years, one of the best indications of a company’s ability to generate cash.

Domestic Airlines are Forecasted to See Greatest Free Cash Flow in Years
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Managing Expectations in 2016, a Presidential Election Year

As we reflect back on 2015, it’s important to remember that everything happens in cycles—from the presidential election cycle to the gold seasonality cycle and even to weather patterns. Similarly, every asset class has its own DNA of volatility.

By recognizing these cycles and patterns, it becomes easier to manage your expectations and become more proactive than reactive. With that in mind, I’d like to focus specifically on opportunities and threats for the coming year. 

1. 2016 is the fourth year of the presidential election cycle. According to research by market historian Yale Hirsh—and later his son Jeffrey—markets have tended to perform well in presidential election years. Between 1833 and 2012, the Dow Jones Industrial Average rose on average 5.8 percent during election years.

2. After a flat year, 2015 being one of them, the market has historically been up, as you can see in the table below:

The S&P 500 Has Rallied in Years after a Flat Year
  Following Year
Flat Year S&P Earnings
1970 +11% +25%
1978 +12% +6%
1984 +26% +5%
1987 +12% +16%
1994 +34% +11%
2005 +14% +9%
2011 +13% +9%
Average +17% +12%
Source: Evercore ISI, U.S. Global Investors

3. The Trans-Pacific Partnership (TPP) should help spark a light under global trade by eliminating thousands of tariffs and other barriers that currently stand in the way of foreign investment.

4. China, an essential market for commodities demand growth, continues to stimulate its economy with low interest rates and financial stimulus.

5. As for potential threats, the biggest one in the new year continues to be global terrorism. Aside from the fact that it has increasingly made society feel less safe, terrorism reportedly cost the world $53 billion in 2014 alone, according to the latest data from the Institute for Economics and Peace. That’s the highest amount since 9/11.

I want to wish all of our readers and shareholders the very best in 2016! I would also like to invite each of you to subscribe to our free, award-winning Investor Alert newsletter and share it with family and friends.

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.

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.

The Dow Jones STOXX 600 Index is an index of 600 stocks representing large-, mid- and small-capitalization companies in the developed countries of Europe. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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Christmas Edition: 2015 in Review
December 28, 2015

Wishing you robust health, buckets of wealth, and tons of happiness

Christmas is my favorite holiday, as I’m sure it is for many of you reading this. We probably all agree that 2015 had more than its fair share of pain and tragedy around the world. But during Christmas, love and charity triumph—if only for a day—helping us recharge as we approach the new year.

I remember accompanying my mum, who was a social worker in downtown Toronto, as she delivered what we call “Star boxes” to needy children on Christmas Eve. Named after the Toronto Daily Star, which still operates the Santa Claus Fund that started in 1906, the purpose of the gift parcels remains the same:  to make sure that no child in Toronto under 13 is overlooked by Santa Claus.

Delivering these packages was more instructive than any textbook. It helped me keep my own family’s financial struggles in perspective and encouraged me to count my blessings. Although we didn’t have much, things could have been many times more challenging. I was grateful to have lots of love and plenty to eat when so many had neither during the cold, snowy Canadian winters.

The experience also showed me that love, family and friends should all be cherished much more highly than any material things. Having money is important, but real happiness can be found only in helping to spread happiness to others.

Merry Christmas: President Signs $680 Billion Business Investment Deal

President Obama signing the $1.1 trillion spending bill

Before we reach 2016, I want to reflect back on 2015. Everyone is talking about interest rates and monetary policy right now, but the role fiscal policy plays is just as important—if not more so. As I always say, government policy is a precursor to change, and very recently we saw this firsthand.

Only a day after President Barack Obama signed the spending deal Tuesday that lifted the oil export restriction that’s been in place since the mid-1970s, West Texas Intermediate (WTI) crude oil rallied $2 and is now trading higher than its European counterpart, Brent, oil for the first time since 2010.

WTI Crude Oil Cross Above Brent Crude
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Time and again, when regulations are rolled back and markets are allowed to act freely, we see constructive moves such as the WTI rally. It’s much more significant than a 0.25 percent rate hike.

Speaker of the House Paul Ryan was Instrumental in Passing the Spending Bill

Along with $1.1 trillion, the bipartisan deal includes $680 billion in tax cuts over the next decade, which should help accelerate the velocity of money and lead to the creation of new jobs. This is a positive development that wouldn’t have happened without the much-needed leadership of the new Speaker of the House, Paul Ryan.

It’s important for investors to follow the money in this case, just as it was important in February 2009 when the $800 billion stimulus package was signed into law. House Speaker Ryan was able to negotiate a reasonable extension to government spending and usher in a substantive tax incentive program as we head into 2016, an election year.

Top 10 Frank Talk Posts of 2015

As we head into the final days of 2015, I want to share with you the 10 most popular Frank Talks of the year. Among other things, they tell the story that gold, despite being oversold, managed to hold its value better than many other investments deemed “safe.” I’m optimistic to see what 2016 has in store for the yellow metal.

10. Show Me the Stocks, Not the Cash, Say Optimistic CEOs (May 4)

A growing trend among chief executives of successful companies is to be compensated in company stock rather than cash. In May we learned that American Airlines CEO Doug Parker elected to do just that.
“This is the right way for my compensation to be set,” Parker wrote, “at risk, based entirely on the results achieved.”

9. How These 12 TPP Nations Could Forever Change Global Growth (October 12)

One of the most significant news stories to come out of 2015 was the signing of the Trans-Pacific Partnership (TPP) by 12 participating Pacific Rim nations, the United States among them. Many analysts believe that Vietnam is poised to see the biggest upside potential, as precipitously high tariffs on its important textiles, apparel and footwear exports will vanish.  

Vietnam Poised to Benefit Most From Trans-Pacific Partnership Agreement
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8. China to Take Reins in Funding Regional Infrastructure Projects (March 31)

A similar development that’s likely to have huge global consequences is the establishment of the China-led Asian Infrastructure Investment Bank (AIIB), designed as a competitor to the U.S.-led International Monetary Fund (IMF), World Bank and Asian Development Bank (ADB).

Part of the reasoning behind China’s creation of the bank was to firm up the renminbi as a preferred global reserve currency on par with the U.S. dollar. And indeed, in late November the IMF voted to include the renminbi, also known as the yuan, in its Special Drawing Rights (SDR) currency basket.

7. Gold Holds Its Own Against These Media Darlings (August 10)

July 2015 was the seventh-worst-performing month for commodities going back to January 1970. Gold in particular was hit hard. But then in the week ended August 7, U.S. media companies took a huge dive, losing $60 billion for shareholders. Compared to that amount, gold managed to hold up well.

Media Stocks Collapse, Gold Hold Its Own
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6. Currency Wars Heat up as Central Banks Race to Cut Rates (February 2)

After Switzerland unexpectedly unpegged its currency from the euro in mid-January, it became clear that 2015 would be the year of the central banks. In that month alone, 14 countries cut interest rates and loosened borrowing standards. The U.S. stands as the only major economy, in fact, that has started to tighten its monetary policy.

5. Why We Invest in Royalty Companies (February 26)

One reason gold royalty companies have outperformed over the years is because, simply put, they’re not the ones getting their hands dirty. Their only obligation is to lend capital to the producers. Since its initial public offering (IPO) in 2007, Franco-Nevada, the world’s largest gold royalty company, has torn past both spot gold and most gold equity benchmarks.

Gold is Second Best Performing Currency of 2014
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4. Gold on Sale, Says the Rational Investor (August 3)

In late July, gold experienced its first “flash crash” in 18 months after five tonnes of the metal appeared on the Shanghai market. In what many called a “bear raid,” gold fell through its key support of around $1,150 and began to look extremely oversold.

Gold Price Falls Through Key Support Level
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3. Will Gold Finish 2015 with a Gain? (October 19)

In October, two events occurred almost simultaneously: The U.S. dollar signaled a “death cross”—meaning its 50-day moving average fell below its 200-day moving average—while gold broke above its 200-day moving average. At the time, it appeared as if gold might have a chance at doing something it hasn’t done since 2012—end the year in positive territory.

2. A Tale of Two Economies: Singapore and Cuba (March 28)

It’s almost impossible to believe now, but Cuba was once a wealthier nation than Singapore. But in 1959, Fidel Castro and Lee Kuan Yew both assumed power and took their countries in very different ideological and economic directions.

Yew, who passed away in March 2015, emphasizes free trade and competitive tax rates, which helped transform Singapore from an impoverished third world country into a bustling metropolis and leading global financial hub.

Lee Kuan Yew's Singapore Flourished while Fidel CAstro's Cuba Floundered
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1. Gold in the Age of Soaring Debt (June 18)

The world now sits beneath a mountain of debt worth an astonishing $200 trillion. That’s greater than twice the global GDP, which is currently $75 trillion. If we were to distribute this amount equally to every man, woman and child on the face of the earth, we would each owe around $28,000.

More surprising is that if gold—at its June 2015 price level—backed total global debt 100 percent, it would be valued at $33,900 per ounce.

Make sure to check out our most popular interactive favorites from 2015:

To all of our readers around the world, to our investors and shareholders, and to our friends and family, I wish you happiness and good health in the new year!

 

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

Past performance does not guarantee future results.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 09/30/2015: American Airlines Group Inc., Franco-Nevada Corp, Time Warner Cable Inc.

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Chinese Railway Stays On Track
December 16, 2015

Frank Holmes Hi-Speed Train, ChinaThe Chinese railway system has changed dramatically since I last visited the Asian nation. I can remember taking the high-speed train from Shanghai to Beijing during a visit in 2011; at the time it was a fresh, dedicated line covering 819 miles in a little less than five hours.

In December of last year I wrote about China’s announcement for a proposed $230 billion high-speed rail system linking Beijing to Moscow. Its estimated distance was 4,350 miles and it would replace the Trans-Siberian Railway, cutting down travel time dramatically.

So how is this sector of the market holding up?

China continues to be a compelling, long-term growth opportunity and the government is focused on strengthening its economy. Fixed-asset investment (FAI) is considered a key driver of economic growth. According to UBS’ 2016 China Rail Outlook report, things look encouraging.

Rail Is Relevant to China’s 13th Five-Year Plan

UBS has a positive outlook on rail FAI in China next year. The group forecasts that FAI could reach RMB 840 billion, citing its relevance to China’s 13th Five-Year Plan.

2016 marks the beginning of the first year of the 13th Five-Year Plan (FYP), which goes through 2020, and is particularly significant when it comes to spending on urban rail transit and public-private partnerships, according to UBS. Urban rail transit is forecasted at an average annual investment of RMB 701 billion from 2016 through 2020.

The group expects the Chinese government to announce a higher FAI target for the 13th FYP, although it will likely be a conservative projection. As you can see in the chart below, FAI has historically risen above the estimated numbers, causing the need for upward revisions. Even then, actual FAI comes in higher still.

Railway Fixed-Asset Investment During China's Five-Year Plans (FYP)
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How Many Miles Exactly?

Total railroad operating length in China is expected to reach 118,000 kilometers, over 73,000 miles, by the end of this year according to UBS’ 2015 Outlook. Of those, the group believes high-speed rail passenger-dedicated lines could surpass 20,000 kilometers (12,427 miles).

China's Total Railway Operating Length
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UBS estimates that total operating length for urban rail systems specifically (mostly subways), can reach more than 9,400 kilometers by the year 2020. More subway project approvals and more tram systems leave room for this upside potential.

Exporting Rail Expertise

While UBS makes a strong case that domestic rail investment is poised to accelerate over the next five years, when it comes to overseas order growth, Xi Jinping’s "One Belt, One Road" economic project is another important driver.

The One Belt, One Road strategy is one of the most monumental initiatives among China’s various infrastructure programs. As I wrote earlier this year, it harkens back to the famed Silk Road and is intended to open up new trade routes to Southeast Asia, the Middle East and Eastern Europe.

It’s important to note that this project also promotes Chinese rail expertise to the broader Asian, European and even American markets.  Leading railroad infrastructure and equipment makers in China should continue to benefit from the initiative.

 

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

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Sweden Declares War on Cash, Punishes Savers with Negative Interest Rates
December 7, 2015

Among the endangered species in Sweden are the gray wolf, European otter—and cash. Back in June, I shared with you the story of how, in 1661, the Scandinavian monarchy became the first country in the world to issue paper money. (It was an unmitigated disaster, by the way.) Now it might be the first to ban it altogether.

All across Sweden, cash—the physical kind, not cash in the bank—is disappearing. Many if not most businesses have stopped accepting it. ATMs are now as uncommon as pay phones. Churchgoers tithe using mobile apps. Fewer and fewer banks even accept or dole out cash.

Here’s the chart showing the decline in the average yearly value of Swedish banknotes in circulation:

Average Value of Swedish Banknotes in Circulation is Rapidly Declining
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So what’s going on?

For one, the Swedish people have enthusiastically embraced mobile payment systems. Even homeless newspaper vendors now carry card scanners.

But that’s not the concerning part.

Cash’s demise appears to be orchestrated by Sweden’s central bank, which of course stands to benefit from the switch. In a purely electronic system, every financial transaction is not only charged a fee but can also be tracked and monitored. Plus, taxes can’t be levied on cash that’s squirreled away in Johan’s sock drawer.

Since July, interest rates in Sweden have lingered in negative territory, at -0.35 percent, forcing accountholders to spend their money or else see their balances slowly melt away. Negative rates can also be found in Denmark and Switzerland, where they’re as low as -1.25 percent. The Swiss 10-year bond yield plummeted to -0.40 percent on Tuesday, which means people are paying the government to hold their “investment.”

Nick Giambruno, senior editor of Casey Research’s International Man, calls negative interest rates in a cashless society a “scam.”  His perspective is worth considering:

If you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates... or you can spend your money. Ultimately, that’s what our Keynesian central planners want. They are using negative interest rates and the “War on Cash” to force you to spend and “stimulate” the economy.

The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

Sovereign Man goes even further, writing:

Financial privacy has been destroyed. Banks are now merely unpaid spies of bankrupt governments, and they will freeze you out of your life’s savings in a heartbeat if some faceless bureaucrat orders them to do so.

Never-ending Regulations Suffocate Small Businesses and Investors

Over the years, we’ve seen corrupt, unbalanced fiscal and monetary policies wreak havoc in socialist countries all around the globe where governments often feel entitled to restrict and even confiscate their citizens’ assets. In 2008, Argentina nationalized approximately $30 billion in private pension funds. A little over two years ago, the Cyprus government ransacked citizens’ bank accounts to “fix” its own mistakes and mismanagement. Last year Venezuela put $700 credit card spending limits on vacationers visiting Florida. Limitations on how much someone can spend and save can be found in many countries, from Italy to Russia to Uruguay.

In example after example, people’s rights to save and freely hold cash have been disrupted, with tragic results—and today we’re seeing these disruptions in first-world countries such as Sweden, Switzerland and Denmark.

I have faith that the dynamic American political system will not allow these things to happen, but we need to be aware of events in other countries and be vigilant in protecting our assets.

At the same time, many poor policies here at home have disrupted how we save and spend. For example, it’s easier to open a credit card account than a savings or investment account—which obviously doesn’t encourage either of those things.

And a recent flood of new regulations passed down from the federal government continues to suffocate small businesses. Since 1960, the Code of Federal Regulations has grown from 22,877 pages to a bloated 175,268 pages in 2014.

Total Number of Pages in Code of Federal REgulations Has Expanded Dramatically
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A 2014 study conducted by the National Association of Manufacturers found that these regulations came with a hefty price tag of $2 trillion in 2012 alone, an amount equal to 12 percent of GDP. The negative effects of these laws trickle down for years through various businesses and industries, costing jobs and opportunities at wealth creation—and ultimately creating a downward multiplier effect on the country’s economy. 

In December 2013, USGI made the decision to exit the expensive money market fund business because of the increasing regulatory cost of anti-money laundering laws and FATCA. It had become too costly to bear the expense of subsidizing yields so they didn’t fall below zero. With zero interest rates and increasing regulatory costs, protecting the integrity of the $1 net asset value (NAV) had cost the money market fund industry nearly $24 billion in waived expenses between 2009 and 2013, according to the Investment Company Institute (ICI).

So what can we do to protect our wealth? One option is to store a portion of it in gold, which, compared to a basket of 24 commodities, has held on to its reputation as a long-term store of value.

Gold Has Remained Relatively Resilient in Commodities Rout
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American consumers recognize gold’s resilience and took advantage of lower prices in November. The U.S. mint sold 97,000 ounces of gold coins, up 185 percent from October, after selling out. Meanwhile, American Eagle silver coins hit an all-time annual sales record of 44.67 million ounces.

I always recommend having 10 percent of your portfolio in the yellow metal—5 percent in gold stocks, the other 5 percent in coins and bullion.

Gold has two pillars of demand: the Love Trade and the Fear Trade.

the two main drivers of gold demand
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The Love Trade is associated with traditional gift-giving during the Indian festival and wedding seasons, Christmas and the Chinese New Year. The Fear Trade, on the other hand, has to do with what we’re seeing in Sweden and elsewhere. Negative interest rates and poor government policies wipe out citizens’ ability to save. In such scenarios, investors have historically found shelter in gold.

 

The Chinese Renminbi Just Went Mainstream

international monetary fund IMF welcomes chinese Renminbi world currencies

Speaking of currencies, the International Monetary Fund (IMF), as expected, moved to include the Chinese renminbi in its Special Drawing Rights (SDR) currency basket last week, a decision that solidifies the Asian giant’s prominence in the global financial system.

This is indeed an historic milestone, not just for China but also emerging markets in general. The renminbi, also known as the yuan, is the first currency from such a country to join the elite ranks of the U.S. dollar, British pound, euro and Japanese yen. Global intelligence company Stratfor calls this “the start of a new era in the global economic structure” and an acknowledgment of “economic power in new parts of the world.”

It’s worth pointing out that the inclusion is largely symbolic. Many analysts are pointing out that it will have little near-term benefit to China, especially since the change will not go into effect until October 2016.

But according to BCA, among the long-term implications of IMF inclusion is that the “renminbi should eventually claim over 5 percent of global official reserves, or $400 billion, up from about 1 percent.” Currently, the renminbi ranks seventh worldwide as a percentage of global reserves, behind the Australian dollar and Canadian dollar.

Chinese Renminbi Poised to Grow as a Foreign Currency Asset
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To have the renminbi recognized as a reserve currency has been an important fiscal priority for Chinese leadership in recent years. This summer, the country’s central bank announced it had added to its gold reserves substantially, and later it devalued the renminbi 2 percent. That it’s finally been added to the SDR is a huge PR win.

It also means, though, that further economic reforms will need to be made. Country leaders are now charged with ensuring that the renminbi lives up to its status as a high-quality international reserve currency by maintaining its stability and ease of use.  

Global Manufacturing Poised for a Strong 2016

Just as we head into the new year, global growth bounced back a bit, alleviating investors’ fears that we were sliding into a recession. Although the global manufacturing purchasing manager’s index (PMI) cooled somewhat in November, it stayed above the three-month moving average for the second month in a row—something it hasn’t done in a year and a half.

Global Manufacturing PMI Slows in November
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China’s manufacturing stabilized in November after six straight months of declines. The Asian giant posted a 48.6 for the month, up slightly from 48.3 in October. It’s still below the key 50.0 mark but headed in the right direction.

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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 S&P GSCI Enhanced Total Return Index reflects the total return available through an unleveraged investment in specific commodity components of the S&P GSCI.

Share “Sweden Declares War on Cash, Punishes Savers with Negative Interest Rates”

Net Asset Value
as of 02/22/2018

Global Resources Fund PSPFX $6.17 0.01 Gold and Precious Metals Fund USERX $6.94 -0.01 World Precious Minerals Fund UNWPX $4.18 -0.04 China Region Fund USCOX $11.80 -0.07 Emerging Europe Fund EUROX $7.84 0.06 All American Equity Fund GBTFX $25.22 No Change Holmes Macro Trends Fund MEGAX $19.33 -0.19 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change