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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.

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.


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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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Can the TPP Save the Global Economy?
May 31, 2016

TPP Trans-Pacific Partnership

Last week, President Barack Obama was in Vietnam and Japan drumming up additional support for the Trans-Pacific Partnership (TPP), and meanwhile I was in the U.K., where Brexit drama is dominating headlines and airwaves. Only a month remains before voters decide whether the country will stay in or leave the European Union. As I said before, an exit could trigger a currency crisis with both the euro and pound, in which case owning gold might be a good idea.

Speaking of the yellow metal, I had the opportunity to meet with the World Gold Council (WGC) while I was in London. It’s a pleasure to share with you that the group’s CEO, Aram Shishmanian, has agreed to join me as a special guest during our next webcast, scheduled for Wednesday, June 8. We’ll be discussing gold, specifically the reasons behind its rally this year and the pullback we’re seeing this month. I highly urge you to register for the webcast because you won’t want to miss Aram’s rich insights into gold.

Aram Shishmanian, CEO of the world council

As Oil Hits $50 a Barrel, Americans Hit the Road

I was disappointed to see that U.S. manufacturing activity showed more signs of slowing growth, according to preliminary purchasing managers’ index (PMI) data. The PMI posted a 50.8, just above the neutral 50.0 threshold separating expansion and deterioration. What’s more, the index fell below its three-month moving average, which we’ve found to be a headwind for commodities and energy three to six months out.

Markit Flash US Composite PMI Falls below Three-Month Moving Average

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This could threaten additional recovery in the oil and gas industry. For the first time this year, West Texas Intermediate crude briefly touched $50 a barrel on Thursday last week. Prices between $50 and $60 are widely seen as a “goldilocks” scenario: high enough for oil companies to stay profitable yet low enough for consumers.

Gas prices, in fact, were expected to be the lowest in 10 years this Memorial Day weekend, according to the American Automobile Association (AAA). The motor club estimated prices would average around $2.26 a gallon, or 45 cents less than last year. More than 38 million Americans were expected to travel this past weekend, AAA says, the second-highest volume on record. If you’re one of them, I wish you happy, safe travels! But however you plan on spending the weekend, remember to honor those who bravely served the U.S. and gave the ultimate sacrifice.

The U.S. Can Now Export Weapons to Vietnam

Last Monday, Obama lifted the 40-year-old weapons embargo against Vietnam, ending what many see as the last vestige of the U.S. and Southeast Asian country’s former animosity. It was also part of his administration’s “pivot” to Asia to deepen relations with countries in the fastest growing region of the world.

Indeed, Vietnam is in an exciting position right now. In the fourth quarter of 2015, its gross domestic product (GDP) growth rate expanded an impressive 7.01 percent, and Goldman Sachs predicts its economy will become the 17th largest by 2025, up from 55th today. The most populous city, Ho Chi Minh City, commonly known as Saigon, has blossomed into one of the world’s premier manufacturing and tech startup hubs, with huge investments flowing in from companies such as Samsung and Intel.

Vietnam’s defense spending has also been growing rapidly in recent years, and today a lot of business is up for grabs. Between 2011 and 2015, the country was the world’s eighth largest arms importer, just one rung above the U.S., according to the Stockholm International Peace Research Institute (SIPRI). This year it’s expected to spend $5 billion, a dramatic increase from the estimated $1 billion it spent in 2005.

With the embargo out of the way, American aerospace and defense contractors such as Lockheed Martin and Raytheon have the opportunity to move into this new Asian market. Boosted by recent geopolitical fears and terrorist activity, both companies are trending near their all-time highs.

Lockheed Martin Raytheon Trending Near All Time Highs

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They also provide attractive dividends, which are increasingly sought-after in a world that’s seen a third of all government bond yields around the world turn negative.

Read how negative interest rates are also pushing foreign investors into American muni bonds!

Selling the TPP

One of Obama’s main objectives in visiting Vietnam and Japan was to shore up support for the TPP, the historic trade agreement that, if ratified by all 12 participating countries, is designed to eliminate as many as 18,000 tariffs. Sixteen to 30 years after ratification, 99 percent of all goods trade among these countries will be entirely liberalized.

In the map below, you can see the massive scale of who’s involved. TPP countries have a combined GDP of $28 trillion, close to 40 percent of world GDP, and they account for almost a quarter of total world exports.

The United States Total Trade with TPP Countries

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Vietnam has the most to gain from the TPP Eliminating thousands of tariffs should allow its important apparel and textile industry to export even more goods to the U.S. In turn, the U.S. would have the opportunity to sell more vehicles in the Asian country. The World Bank estimates a 10 percent bump in Vietnam’s economy over a decade as a result of the deal.

Among the TPP countries, the U.S. runs the largest trade deficit, which widened to $57.5 billion in April. As you can see, the U.S. has an unfavorable (and worsening) trade gap with Vietnam (-$2.7 billion in March) and Japan (-$6.7 billion). The TPP could help rebalance this.

Americas Ever Widening Trade Deficit with Vietnam

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Americas Ever Widening Trade Deficit with Vietnam

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According to the Peterson Institute for International Economics (PIIE), the TPP “will increase annual real incomes in the United States by $131 billion, or 0.5 percent of GDP, and annual exports by $357 billion, or 9.1 percent of exports, by 2030.” For all member nations, the deal is expected to add $492 billion in real income.

Challenges Ahead

Of course, none of this will come to pass if the TPP can’t be ratified. The PIIE warns that delaying the TPP’s launch by even a year could lead to a permanent opportunity loss of between $77 billion and $123 billion for the U.S. Obama has repeatedly said he wants to see it passed by the end of 2016.

But a delay at this point appears highly possible, with both major U.S. presidential candidates opposing it. Support in Congress is muted. Of the 12 TPP countries, only Malaysia has ratified it.

There’s still strong support for the deal. The U.S. Conference of Mayors, responding to recent positive findings by the International Trade Commission, wrote an open letter asserting its support, stating that passage of the TPP is critical for the U.S. to remain a leader in the global marketplace.

I agree. The deal is far from perfect, but it’s what we need now to help reignite global growth.

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 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. Composite PMIs are published monthly by Markit Economics in conjunction with sponsors, and are based on surveys of over 400 executives in private sector service companies. The surveys cover transport and communication, financial intermediaries, business and personal services, computing & IT and hotels and restaurants.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 3/31/2016: Lockheed Martin Corp., Raytheon Co.

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China: Still the World’s Number One Heavy Metal Rock Star
April 26, 2016

I want to begin with a quote from a recent Cornerstone Macro report that succinctly summarizes the research firm’s view on growth prospects in emerging markets and China specifically. Emphasis is my own:

Our most out-of-consensus call this year is the belief that China, and by extension many emerging markets, will see a cyclical recovery in 2016. We understand the bearish case for emerging markets on a multiyear basis quite well, but we also recognize that in a given year, any stock, sector or region can have a cyclical rebound if the conditions are right. In fact, we’ve already seen leading indicators of economic activity and earnings perk up in 2016 as PMIs have rebounded in many areas of the world. That is all it takes for markets, from equities to CDS, to respond more favorably as overly pessimistic views get rerated. And like in most cyclical recoveries that take place in a regime of structural headwinds, we don’t expect it to last beyond a few quarters.

There’s a lot to unpack here, but I’ll say upfront that Cornerstone’s analysis is directly in line with our own, especially where the purchasing managers’ index (PMI) is concerned. China’s March PMI reading, at 49.7, was not only at its highest since February 2015 but it also crossed above its three-month moving average—a clear bullish signal, as I explained in-depth in January.

I spend a lot of time talking about the PMI as a forward-looking indicator of commodity prices and economic activity. As money managers, we find it to be far superior to GDP in forecasting market conditions three and six months out. In the past I’ve likened it to the high beams on your car.

GDP and PMI

We were one of the earliest shops to make the connection between PMIs and future conditions, and we continue to be validated. Just last week, J.P.Morgan admitted in its morning note that “stocks are taking their cues from the monthly PMIs,” the manufacturing surveys in particular, as opposed to GDP.

We eagerly await China’s April PMI reading and are optimistic that this cyclical recovery has legs.

Cornerstone’s outlook is supported by a recent study conducted by CLSA, which found that 73 percent of “Mr. and Mrs. China” expect to be better off three years from now, while only 3 percent expect to be worse off:

Optimism is strongest among those in higher-tier cities, reflecting the disparity in economic vibrancy across tiers: as many as 80 percent of families in first-tier cities have optimistic outlook. The figure is lower, albeit still strong, at 68 percent among families in the third tier.

More than half of those surveyed said they expected to be driving a nicer car and living in a bigger home in the next few years, which is a boon for materials and metals such as platinum and palladium, used in catalytic converters.

As a reflection of growing demand for new homes, house prices in China are climbing right now in first-tier and, to a lesser extent, lower-tier cities, a sign that more and more citizens are seeking the “Chinese dream.”

Housing Prices Rising in China, Year-over-Year Growth
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China’s Insatiable Appetite for Metals

China’s appetite for metals—gold, silver, copper, iron ore and more—is growing, another sign that the Asian giant is in turnaround mode.

China is the world’s largest importer, consumer and producer of gold. Last year, physical delivery from the Shanghai Gold Exchange (SGE) reached a record number of tonnes, more than 90 percent of total global output for 2015. Meanwhile, the People’s Bank of China continues to add to its reserves nearly every month and is now the sixth largest holder of gold—the fifth largest if we don’t include the International Monetary Fund (IMF). As of this month, the bank holds 1,788 tonnes (63 million ounces) of the yellow metal, which amounts to only 2.2 percent of its total foreign reserves, according to calculations by the World Gold Council.

Now, in a move that’s sure to boost China’s financial clout in global financial markets even more, the country just introduced a new fix price for gold, one that is denominated in Chinese renminbi (also known as the yuan).

Gold is currently priced in U.S. dollars. That’s been the case for a century. But since gold demand has been shifting from West to East, China has desired a larger role in pricing the metal. The Shanghai fix price is designed with that goal in mind.

It’s unlikely that Shanghai will usurp New York and London prices any time soon, but over time it will allow China to exert greater control over the price of the commodity it consumes in vaster quantities than any other country.

China’s gold consumption isn’t the only thing turning heads. I shared with you earlier last week that the country imported 39 percent more copper in March than in the same month last year. (Shipments also rose 18.7 percent in renminbi terms in March year-over-year.)

The heightened copper demand has fueled renewed optimism in the red metal. Prices are up 6 percent month-to-date.

Housing Prices Rising in China, Year-over-Year Growth
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Caixin reports that China’s iron ore imports are surging on lower prices. In the first two months of 2016, the country purchased 86 percent more iron than it needs. What’s more, total imports were up 84 percent from the same time last year.

Steel production, which requires iron ore, is likewise ramping up.  Output is currently at 70.65 million tonnes, an increase of nearly 3 percent year-over-year.

Chinese Steel Production is on the rise
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For reasons unknown, China has also been growing its silver inventories pretty substantially for the past six months, according to an article shared on Zero Hedge. This month, as of April 19, the Shanghai Futures Exchange added a massive 1,706 tonnes, which is a 452 percent increase from the amount it added in April 2015. Shanghai silver inventories are now at their highest level ever.

Silver Mountain
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Though unconfirmed, it’s possible this silver will eventually be used in the production of solar panels, every one of which uses between 15 and 20 grams of the white metal. China is already the world’s largest market for solar energy—it surpassed Germany at the end of last year—with 43.2 gigawatts (GW) of capacity. (By comparison, the U.S. currently has 27.8 GW.) But get this: It plans on adding an additional 143 GW by 2020, which will require a biblical amount of silver.

Not to be outdone, India also plans significant expansion to its solar capacity, with a goal of 100 GW by 2022, according to the Indian government.

Metals Still Have Room to Rock

We know that money supply growth can lead to a rise in commodity prices. Note that Chinese money supply peaked in 2010 and has since fallen, along with commodity prices.

New Loans and M2 Money Supply in China
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New bank loans in China have spiked dramatically this year while money supply has grown more than 13 percent year-over-year, which is good for metals and manufacturing.

The increase in metals demand, not to mention the weakening of the U.S. dollar, has allowed silver to become the top performing commodity of 2016 after overtaking gold.

Metals Make Huge Gains
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Despite the rally, gold doesn’t appear to be overbought at this point, based on an oscillator of the last 10 years. We use the 20-day oscillator to gauge an asset’s short-term sentiment. When the reading crosses above two standard deviations, it’s usually considered time to sell. Conversely, when it crosses below negative two standard deviations, it might be a good idea to buy.

Silver is currently sitting at 1.2 standard deviations, suggesting a minor correction at this point would be normal.

Gold Still Has Plenty of Upside Potential, Silver Long in the Tooth?
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Time to Take Profits in Oil?

The same could be said about Brent oil, which has returned 61 percent since hitting a recent low of $27.88 per barrel in January. This has driven up the Russian ruble and energy stocks. (We’ve recently shown the correlation between world currencies and commodities.)

The rally has been so strong over the past three months that it’s signaling an opportunity to take profits or wait for a correction. Based on the 20-day oscillator, Brent’s up 1.3 standard deviations, which suggests a correction over the next three months.

Brent Crude Oil 20-Day Percent Change Oscillator
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Oil has historically bottomed in January/February. The rally this year has not disappointed. Further, it has helped many domestic banks that have been big lenders to the energy sector. High(er) oil prices translate into stronger cash flows for loans.

 

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The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. 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.

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 100 Cities Index tracks pricing data for 100 Tier 1, Tier 2, and Tier 3 cities in China.

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Net Asset Value
as of 12/12/2018

Global Resources Fund PSPFX $4.59 0.03 Gold and Precious Metals Fund USERX $6.46 -0.01 World Precious Minerals Fund UNWPX $3.03 -0.02 China Region Fund USCOX $7.97 0.06 Emerging Europe Fund EUROX $6.18 -0.01 All American Equity Fund GBTFX $24.18 0.06 Holmes Macro Trends Fund MEGAX $18.17 0.13 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change