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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.

With Rollback, Dodd-Frank Is Now Officially a Dud
March 19, 2018

With Rollback, Dodd-Frank Is Now Officially a Dud

I often remind investors to look past the negative and find the positive. Last week provided no shortage of big splashy headline stories, from yet another high-profile personnel shakeup at the White House to a nail-biter special election in Pennsylvania’s 18th Congressional District, from Russia’s alleged nerve agent attack on a former double-agent spy to a tragic bridge collapse in Miami.

If this is all you were focused on, you might have missed what I believe was the most significant development of the past few days. Last Wednesday, the Senate, in a bipartisan vote, quietly approved plans to roll back key banking rules in 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

If the House also approves the bill, President Donald Trump is expected to sign it into law, thereby providing much-needed relief to smaller lenders and community banks that millions of rural Americans and small businesses depend on. Aside from tax reform, I think the relaxation of Dodd-Frank will be seen as Trump’s crowning fiscal achievement so far, as it has the potential to contribute greatly toward his goal of at least 3 percent economic growth.

Investors piled into an ETF that holds small to midsize banks following the news last week. The SPDR S&P Regional Banking ETF attracted $606 million in daily inflows, a record for the fund, according to Bloomberg.

Dodd-Frank rollback optimism fueled regional banking ETF record daily inflows
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The most sweeping and complex financial reform package since the Great Depression, Dodd-Frank was drafted in response to the financial crisis—yet few believe it would do much in the way of preventing another such crisis. Last year, the Treasury Department declared that the law, despite its ambitious scale and scope, has “failed to address many drivers of the financial crisis, while adding new regulatory burdens.” As such, the agency recommended a number of changes, including improving efficiency and decreasing unnecessary complexity.

Among the likely changes to Dodd-Frank: raising the threshold for tougher oversight from the current $50 billion in assets to $250 billion; exempting small banks from the so-called Volcker rule, which currently bars them from speculative trading; reducing the amount of financial reporting, particularly racial and income data on mortgage holders; lowering the frequency of regulatory exams; and easing the conditions of stress tests.

Community Banks Are Vital to the U.S. Economy

The cumulative effect of the rollback will be to lower compliance costs and allow banks to better service clients and shareholders alike. I can’t stress enough how important this is. Small community banks—those with under $10 billion in assets—are tremendously vital to the U.S. economy. According to the American Enterprise Institute (AEI), they provide a substantial percentage of lending to U.S. farms—about 44 percent. Nearly half of all small business loans in the U.S., and more than 15 percent of all residential mortgages, are issued by small banks.

16 year of small u.s. bank failures
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Last year, I included Dodd-Frank in a list of the five costliest financial regulations of the past 20 years. Since 2010, the legislation has undeniably had a negative effect on the banking industry, driving dozens of institutions to ruin and giving borrowers far fewer options. Between the year of its signing and 2014, the U.S. lost more than 14 percent of its small community banks, while the number of large banks rose 6.3 percent, according to the Mercatus Center at George Mason University.

Dodd-Frank Falling out of Favor

Support for Dodd-Frank is waning more and more. Both former Federal Reserve chair Alan Greenspan and billionaire investor Warren Buffett have come out strongly against it, with Greenspan saying he’d love to see the 2010 law “disappear.” For his part, Buffett believes that, as a result of the law, the U.S. is less well equipped to handle another financial crisis, as Dodd-Frank stripped the Fed of its ability to act.

Case in point: When now-defunct investment bank Bear Stearns was headed for failure 10 years ago this week, the Fed arranged an emergency loan of nearly $13 billion routed through JPMorgan. It also agreed to purchase $30 billion in Bear assets. But now, because of Dodd-Frank, such assistance is illegal since the law stipulates Fed lending must be broad-based and not directed toward a single institution.

Pres. Trump “cutting the red tape” in the Roosevelt Room, December 2017

Possibly the most telling sign that the 2010 law is losing favor among proponents is that Barney Frank himself, the former chairman of the House Financial Services Committee and one of Dodd-Frank’s chief architects, recently acknowledged he “sees areas where the law could be eased,” according to the Financial Times.

Speaking at this month’s annual Futures Industry Association meeting in Boca Raton, Florida, Frank said he “supports regulating banks differently based on their size” and sees the need to make it “easier for smaller banks to make loans such as mortgages.”

If you recall, lending procedures became so restrictive following Dodd-Frank that Ben Bernanke himself, Fed chair from 2006 to 2014, had trouble refinancing his home.

“I think it's entirely possible [lenders] may have gone a little bit too far on mortgage credit conditions,“ Bernanke remarked during a 2014 conference on housing.

More recently, President Trump claimed he had friends with “nice businesses” who couldn’t borrow money because of Dodd-Frank.

The easing of banking restrictions is just the latest in Trump’s ongoing effort to cut red tape that has stymied economic growth and disrupted the creation of capital. For many voters, his pledge to push for deregulation tops the list of reasons why he was elected, and I’m happy to see that he’s making good on this promise.

10 Years Since the Demise of Bear Stearns

The Senate’s approval to weaken Dodd-Frank came, appropriately enough, on the 10-year anniversary of Bear Stearns’ stunning collapse. The once-powerful institution—in 2007 it was the fifth largest U.S. bank, with $400 billion in assets—was among the earliest warning signs of a broad economic meltdown that would ultimately result in the stock market losing nearly half its value. Below is just a sampling of headlines from 10 years ago last week:

headlines from 10 years ago this week

As you’re no doubt aware, Bear Stearns’ demise was fueled primarily by excessive leveraging and overweight exposure to junk mortgage-backed securities. In an attempt to prevent the pathogen from spreading further, the Fed, as I mentioned earlier, brokered a deal for financial giant JPMorgan to buy Bear for as little as $2 a share.

We now know that the bailout provided only temporary relief. Six months later, Lehman Brothers, then valued at $691 billion, also fell victim to the subprime mortgage crisis. Today Lehman’s remains the largest bankruptcy filing in U.S. history.

So what lessons can we take away from Bear? Countless articles and thought pieces have been written on this topic over the years, including an excellent one by Justin Baer and Ryan Tracy that appeared last week in the Wall Street Journal.

Two lessons in particular stand out to me.

One, Bear showed us the painful consequences of failing to diversify. The bank had historically been known for its aggressive and risky investment strategies, but it was finally done in by its heavily concentrated position in bad mortgages. According to an analysis by former Lehman CFO Erin Callan, mortgage-backed securities accounted for a whopping 71 percent of Bear’s Level 3 assets—defined as those that are hard to value.

“Our liquidity position in the last 24 hours had significantly deteriorated,” announced Bear Stearns CEO Alan Schwartz, explaining to shareholders why he had no other choice than to accept an emergency bailout.

This is one of the many reasons why I recommend a 10 percent weighting in gold, one of the most liquid assets in the world. With 5 percent in gold bullion and 5 percent in gold mining stocks, along with an annual rebalancing, investors could potentially offset their losses in other holdings.

The second takeaway I’d like to point out is to focus on well-managed companies with healthy balance sheets. Near the end of its life, Bear Stearns was leveraged about 36-to-1, according to some estimates. For most firms, this is unsustainable.

Gold and the Global Ticking Debt Bomb

Unfortunately, corporate debt relative to U.S. GDP has now returned to prerecession levels, a risk made even riskier by rising interest rates. U.S. household debt, meanwhile, hit a new high of $13.15 trillion in the final quarter of 2017.

It’s for this reason that, when evaluating gold mining firms, we prefer those that do not rely primarily on debt to finance their operations. This recipe doesn’t always guarantee success, but should another financial meltdown occur, such companies will be in a much better position, financially, to weather the storm. 

To learn more about what we look for in mining firms, click here!



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.

Diversification does not protect an investor from market risks and does not assure a profit.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2017.

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The Historic Bull Market Faces Off Against Steel Tariffs
March 12, 2018

the historic bull market faces off against steel tariffs

Friday marked the ninth anniversary of the stock bull market, the second longest since World War II following the spectacular run in the 1990s that finally met its match when the tech bubble burst in March 2000. The current expansion, which some consider the “most hated bull market in history,” has largely been fueled by extraordinarily accommodative monetary policy in the form of massive money printing and near-zero interest rates. It’s withstood a number of significant headwinds, including a relatively slow economic recovery, the collapse in the price of oil and other commodities, ongoing conflict in the Middle East and an especially nasty presidential campaign cycle. If it can avoid dropping more than 20 percent in the next six months, it will become the longest-lasting ever.

can this bull market become the largest in history
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No doubt you’ve heard before that bull markets don’t die of old age. I can’t say for sure what will end this particular business cycle—no one can—but we’re seeing huge shifts in monetary and fiscal policy right now that investors can’t afford to ignore. As I often say, government policy is a precursor to change.

Unintended Consequences of Steel Tariffs

For one, the decade-long era of easy money is coming to an end. The Federal Reserve is unwinding its enormous balance sheet, its enormous balance sheet, which carries some risk.

us steel demand by industry

Meanwhile, the Trump administration is ratcheting up its protectionist trade policies. After surprising markets in recent days with plans to impose tariffs on steel and aluminum imports, President Trump signed the authorization Thursday afternoon, applying taxes broadly to all countries except Canada and Mexico. It was greatly feared that Canada, the number one supplier of steel and aluminum to the U.S., would be included, but it appears someone managed to change the president’s mind. When former President George W. Bush imposed a steep 30 percent tariff on steel imports in 2002, Canada was likewise spared.

The 2002 tariff, by the way, had some serious unintended consequences that critics of Trump’s policy hope are not repeated. A report put out by the Consuming Industries Trade Action Coalition (CITAC) found that about 200,000 Americans, in every U.S. state, lost their jobs in 2002 as a result of higher steel prices, representing some $4 billion in lost wages. More people, in fact, lost their jobs than the total number of people working in the domestic steel industry itself. Not surprisingly, a quarter of lost jobs occurred in steel-consuming industries such as machinery and equipment, automotive and parts manufacturers.

To be clear, U.S. steel companies did benefit from the tariffs, with profits in the first three quarters of 2002 rising $2.1 billion. This growth was offset, though, by a $15 billion decline in profits for steel-consuming companies.

Today, representatives of those same industries warn that the current tariffs could do more harm than good.

Roy Hardy, president of the Precision Metalforming Association, claims that they “will damage downstream U.S. steel and aluminum consuming companies.” Hardy estimates the tariffs could cost the U.S. economy 146,000 jobs this year alone, a figure that—as was the case in 2002—outnumbers the 140,000 Americans currently employed by the domestic steel industry.

As many as 107 House Republicans expressed deep concerns last week, writing in an open letter to the president that the “new taxes in the form of broad tariffs would undermine” the “remarkable progress” made by the tax overhaul. Meanwhile, outgoing Republican Senator Jeff Flake of Arizona said he would introduce a bill that would block Trump’s tariffs.

The tariffs come at a time when domestic steel producers’ balance sheets are steadily improving. According to Bloomberg data, the industry posted net profits totaling $2.5 billion in 2017, up from $60 million in 2016. The group lost a whopping $2.5 billion in 2015, with Pittsburgh-based U.S. Steel contributing the heaviest losses at $1.6 billion. 

domestic steel industry has seen three straight years of rising profits
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In the coming days and weeks, the tariffs should serve to boost domestic steel production and employment. The Wall Street Journal reports that U.S. Steel has plans to reopen a blast furnace in Granite City, Illinois, and call back 500 workers. This follows an announcement by Century Aluminum that it will double its workforce to 600 at a Kentucky smelter.

I’m pleased to hear this news but remain skeptical on the long-term impact. The U.S. now faces retaliation from its trading partners, from China to the European Union.

A Recession in the Near Term Doesn’t Look Likely

Despite some of the negativity, I see no cause for alarm with regard to the U.S. economy. The country added a whopping 313,000 jobs in February, the most since July 2016 and the 89th straight month of gains—a new record. Economists had anticipated only 200,000. Earlier, Moody’s chief economist Mark Zandi called the job market “red hot,” adding that with “government spending increases and tax cuts, growth is set to accelerate” even more.

One of the most historically reliable economic indicators currently looks very healthy. The Conference Board Leading Economic Index (LEI) opened 2018 on sure footing, posting a 108.1 in January, up a full percent from the previous month. The reading reflects “an economy with widespread strengths coming from financial conditions, manufacturing, residential construction, and labor markets,” the Conference Board writes.  

According to FactSet, a record number of S&P 500 companies have issued positive earnings per share (EPS) guidance for 2018. The financial data firm classifies positive guidance as an EPS estimate that’s higher than the mean estimate before the guidance was issued. As many as 127 companies shared positive EPS guidance for the year, more than double the 10-year average of 49 companies for the same period. FactSet attributes this optimism to tax reform, an improving global economy and weaker U.S. dollar.

record number of s and p 500 companies issued positive guidance for 2018
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And it’s not just large S&P 500 companies that are feeling confident. January’s Small Business Optimism Index found that a record percentage of small business owners are eager to expand. Thirty-two percent of owners said that “now is a good time to expand,” the highest such reading in the survey’s 45-year history.

Could Fertility Be a Leading Economic Indicator?

On a final note, a new study lends additional credibility to the theory of “wisdom of crowds,” which states that large groups of people are smarter and better at analyzing data than an elite few. In one recent example, I showed you how investors accurately predicted the election of Donald Trump as far back as July 2016.

But could declining fertility rates predict the next recession? A team of researchers from the University of Notre Dame thinks so, and they have some compelling evidence to support their idea.

Granted, there's nothing unique about the idea that birth rates drop during and after economic downturns. Married couples have tended to put off expanding their families when they see friends and neighbors being laid off and a greater number of foreclosed homes in their neighborhoods.

What makes this study worth discussing is that it suggests conceptions, those that result in live births, noticeably begin to drop months before a recession strikes. This pattern, according to the study’s authors, can be observed in recessions beginning in 1990 and 2001, as well as the Great Recession.

united states conception rates began to fall months before a recession
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Above, you can see the percent change in conception rates tumbled sharply sometime before GDP growth began to stall or even reverse course. Conception, then, could be used to anticipate recessions just as well as any other economic indicator.

In fact, conception rates could end up being even more accurate “in situations where employment significantly lags the overall economy, and where conceptions lead the economy,” the authors write.

So how are families able to anticipate and act on economic trends more reliably than professional economists? Again, the wisdom of crowds prevails. Everyday people no doubt sense the tremors before the earthquake by hearing things in their firms and comparing observations with friends and acquaintances. There’s no way to quantify this, of course, but live birth records in the U.S. are readily available.

You might be wondering what the data tells us about the economy’s health in the near term. Sadly, the study makes no mention of this. But in January, the Pew Research Center reported that U.S. fertility rates fell to 62 births per 1,000 women of childbearing age in 2017—a new all-time low.

Before you begin to panic, though, it’s important to know that there are different ways to measure fertility, which could skew the data. Also, the drop in fertility could just be further evidence that young adults are choosing to delay starting a family.

Regardless of the rate, people will continue to have babies, increasing the need for even more raw materials and resources.

Craving even more expert insight on global markets, gold, cryptocurrencies and behavioral finance? Join thousands of other curious investors like you and sign up to receive my award-winning CEO blog, Frank Talk! It's FREE!



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 S&P 500 Index is a stock market index that tracks the 500 most widely held stocks on the New York Stock Exchange or NASDAQ.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2017.

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Are Trump's Steel and Aluminum Tariffs Good for America?
March 5, 2018

Gold and the ticking time bomb of debt

President Donald Trump’s proposed tariff on imported steel and aluminum, at 25 percent and 10 percent, is much more than a shot across the bow. Indeed, this could be the official kickoff of the trade war we all anticipated. The protectionist trade policy, announced last week as the president met with metals executives, raised fresh inflation worries and had an immediate impact on capital markets.

As expected, the winners were domestic steelmakers. AK Steel, the only manufacturer in North America that produces carbon, stainless and electrical steels, rose as much as 9.5 percent Thursday.

US steelmakers surged on Trump tariff news
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AK Steel CEO Roger Newport praised Trump’s decision, saying he fully supports “the actions he plans to take to stem the tide of unfairly traded steel imports that threaten the national security of our country.”

Newport wasn’t alone. Drew Wilcox, vice president of steel giant Nucor, called the tariffs “a clear message to foreign competitors that dumping steel products into our market will no longer be tolerated.”

Among the biggest losers from the news were automakers, which account for a little more than a quarter of steel demand in the U.S., according to the American Iron and Steel Institute (AISI). That makes the industry the second-largest consumer following construction. Ford, General Motors and Fiat Chrysler all fell more than 2 percent Thursday, and losses extended into Friday.

Get Ready for Higher Consumer Prices

Foreign trading partners could target American made goods such as bourbon after Trump imposes tariffs on steel and aluminum

To be clear, this is a huge deal, with serious inflationary implications. The U.S. is the world's largest steel importer, so it's very possible we could see retaliation from multiple trading partners on exports ranging from Florida orange juice to Kentucky bourbon to Wisconsin cheese. It's hard to imagine a scenario where this is not passed on to consumers.

Trump was reportedly advised to exempt select allies, but it appears he's chosen a no-exemptions option. Canada, the top supplier of steel and aluminum to the U.S., was spared in 2002 when former President George W. Bush imposed tariffs as high as 30 percent on steel.

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win, President Trump tweeted Friday morning.

The country with which the U.S. has the biggest trade deficit is China. In 2017, the deficit stood at $375 billion, which accounts for about 65 percent of the total U.S. trade deficit. The tariff on steel and aluminum should have a negligible impact, however, as the U.S. imports a relatively small percent of those metals from China.

Gold Has Done Well in Times of High Inflation

As I’ve explained numerous times before, one of the most prudent ways investors have positioned their portfolios in times of rising inflation is by adding to their gold exposure.

The chart below, courtesy of the World Gold Council (WGC), shows that annual gold returns were around 15 percent on average in years when inflation was 3 percent or higher year-over-year, between 1970 and 2017. In real, or inflation-adjusted, terms, returns were closer to 8 percent. This is still higher, though, than average returns in years when inflation was lower.

Gold has historically rallied in periods of high inflation
click to enlarge

According to the WGC, "gold returns have outpaced the U.S. consumer price index (CPI) over the long run, due to its many sources of demand. Gold has not just preserved capital, it has helped it grow."

The most recent report from the Bureau of Labor Statistics (BLS) shows that consumer prices rose 2.1 percent year-over-year in January, but as I said earlier, real inflation could be grossly understated. 

To learn more about how gold could be the solution to high inflation, click here!

My Journey Through the Blockchain and Cryptocurrencies

Gold and metals were definitely top of mind last week at BMO Capital Markets Global Metals & Mining Conference, held in sunny Hollywood, Florida. I had the pleasure to be on a panel at the four-day event, which was attended by more than 1,500 curious investors and advisors, representing approximately 500 different organizations from 35 countries.

The panel I was on focused on blockchain technology and cryptocurrencies, which are reshaping how transactions are made and how companies raise funds across the globe. Startups raised more than $1.5 billion in February, the third straight month for initial coin offerings (ICOs) to generate over $1 billion.

ICOs have raised more than 1 billion for past three months
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Last year, $6.5 billion was raised through ICOs, according to Token Report, and it looks as if that amount will be exceeded in just the first few months of 2018. As I wrote back in October, more and more companies are opting to raise funds through ICOs instead of going public to bypass many of the restrictive rules and costs associated with getting listed on an exchange. And unlike with private equity, smaller retail investors can participate, though I must stress that this is a very speculative trade.

The head of the Securities and Exchange Commission (SEC), Jay Clayton, strongly agrees with that last point. In December, he issued a statement explaining why he believes certain ICOs should fall under the jurisdiction of federal securities law and, as such, be filed beforehand.

Up until this point, the agency has taken few actions, but it appears it’s ready to start getting more aggressive against fraud. The Wall Street Journal reported last week that the SEC has issued “dozens” of subpoenas and information requests to cryptocurrency firms and advisors.

You might think this would hurt cryptocurrencies, but the prices of a number of them were up following the news. Bitcoin jumped nearly 6 percent on Thursday, as the token has often been seen as a "safe haven" in the cryptocurrency market.

HIVE Involved in Minting Virgin Coins

As many of you reading this know, U.S. Global Investors made a strategic investment in HIVE Blockchain Technologies in September, and as of today, it remains the only publicly-listed company that’s engaged in the mining of virgin tokens. HIVE and its partner Genesis Mining—the world’s largest cloud bitcoin mining company—are the leading miners and owners of Ether, the “crypto-fuel” for the Ethereum network. None of these assets has been used in any transaction, just as a newly-minted U.S. dollar, hot off the press, has never been used.

I continue to be optimistic about cryptocurrencies and see a very bright future for blockchain technology. The sentiment was similarly good among many of the attendees of last week's conference. It's only just the beginning.

For timely, expert commentary on metals and mining, gold, cryptocurrencies and more, subscribe to our award-winning Investor Alert by clicking here!


The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Frank Holmes has been appointed non-executive chairman of the Board of Directors ofHIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2017.

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An Olympian's Guide to the Market Selloff: Seeking Rewards In High-Risk Situations
February 12, 2018

Frank Holmes Robert Friedland

Today I’d like to share a few words about the Olympics, but first, two words: Don’t panic.

The stock selloffs last Monday and Thursday were the two biggest daily point drops in the history of the Dow Jones Industrial Average, but in terms of percentage point losses, they don’t even come close to cracking the top 10 worst days in the past 10 years alone.

After a year of record closing highs and little to no volatility, it was expected that the stock market would need to blow off some steam. Last Monday, the CBOE Volatility Index, or VIX, surged nearly 116 percent, its biggest one-day increase since at least 2000.

volatility returns to the markets
click to enlarge

As I explained last week, the selloff appears to have been triggered by a number of things, including the positive wage growth report. This stoked fears of higher inflation, which in turn raised the likelihood that the Federal Reserve, now under control of newcomer Jerome Powell, will raise borrowing costs more aggressively than expected to prevent the economy from overheating.

Also contributing to the uncertainty was news from the Treasury Department that the U.S. government plans to borrow nearly $1 trillion this year, compared to almost half that last year. In the first quarter alone, the Donald Trump administration will issue $66 billion in long-term debt, the first such boost in borrowing since 2009, as the U.S. Treasury seeks to cover budget deficits brought on by higher entitlement spending, not to mention the recently passed tax overhaul.

On Friday, the S&P 500 Index briefly plunged below its 200-day moving average before rebounding in volatile trading.  

stocks plunge below their 200-day moving average
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With stocks down more than 8 percent from its closing high on January 26, we're closing to entering correction territory. Historically, it’s taken four months for stocks to recover from a correction, according to Goldman Sachs analysis. By comparison, a bear market, which is generally defined as more than a 20 percent drop, can take up to two years.

I’m not saying a bear market is imminent—only that it might be time to reevaluate your tolerance for risk and, if appropriate, act accordingly. It’s times like these that highlight how important it is to be diversified in a number of asset classes such as gold, commodities, municipal bonds and international stocks.

Diversity Is Key in Volatile Times

I remain bullish on the U.S. market, but there will always be risk—even in a booming economy. This is one of the biggest reasons why I recommend a 10 percent weighting in gold and gold stocks, with additional diversification in commodities, international stocks and other asset classes.

But to get the greatest benefits, it’s important to rebalance at least once a year, based on your risk tolerance.

Last week, gold was under pressure from surging Treasury yields. Since its 52-week low in September, the 10-year yield has increased almost 40 percent. Not only is it at a four-year high but it’s also above its five-year average of 2.1 percent.

north american shale activity expected to drive global well demand
click to enlarge

Keep in mind that fundamentals remain robust. The U.S. economy is humming along. Unemployment is at a 17-year low, and wage growth is finally bouncing back after the financial crisis. The global manufacturing sector began 2018 on strong footing, with the purchasing manager’s index (PMI) registering 54.4 in January.

Like an Olympic cross-country skier, take the long-term approach and keep your eyes on the prize.

A Year for Olympic Record-Breaking

Before it even began, this year’s Winter Olympics was breaking records. A historic number of athletes, around 3,000, qualified to compete for an unprecedented 102 medals. For the first time ever, an African country—Nigeria—will be represented in the bobsled category, making this also the country’s first visit to the Winter Games. And not only is this South Korea’s first go-round hosting the Winter Olympics, but PyeongChang could be among the coldest host cities ever, with wind chills in some cases dropping temperatures to an arctic negative 25 degrees Celsius, or negative 13 degrees Fahrenheit.

pyeongchang winter olympics 2018

One record that won’t be broken, though, is the cost to host the Games. South Korea spent an estimated $13 billion to bring the rugged, mountainous ski destination up to Olympic standards, building not just stadiums and arenas but also rail, roads, energy infrastructure and more. Amazingly, newly-constructed wind farms in Gangwon Province will generate more than enough energy to power the 16-day event, according to Hyeona Kim, a project manager with the PyeongChang Organizing Committee for the 2018 Olympic Games (POCOG).

Thirteen billion dollars sounds like a lot, but it pales in comparison to the record-breaking $50-55 billion Russia spent to host the Sochi Olympics in 2014.

Sochi Gets Soaked in Debt

Sochi is the most expensive Olympics ever—Winter or Summer. But because Russia’s original price bid was $16 billion, it’s also among the most expensive in terms of cost overruns, according to a 2016 report by the University of Oxford. Looking just at Winter Games, only Lake Placid in 1980 has a bigger cost increase. (The 1976 Summer Olympics in Montreal is biggest of all at 720 percent over budget.)

five most expensive winter olympics by cost overruns
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To put Sochi’s overrun in perspective, the average cost per event is now estimated at $223 million, or a mind-boggling $8 million per athlete.

Contributing to the budget bust was Russia’s need to boost the region’s electricity capacity by as much as 800 percent, leading to the construction of 49 new energy projects. As one deputy minister put it, the undertaking was the country’s largest since Stalin’s time.

Of course, this all raises the question of what economic benefits, if any, hosting the Olympics brings to a city. It took Montreal 30 years to pay off its debt. The 2004 Summer Games in Athens—the birthplace of the Olympics—is now partially blamed for triggering the Greek debt crisis. And in Rio de Janeiro, Brazil, host of the 2016 Summer Games, a number of multimillion-dollar stadiums and arenas sit unused and have become eyesores. (PyeongChang, by contrast, plans to raze the stadium it built for opening and closing ceremonies after the Games are complete.)

Like any other type of investing, there’s no reward without some risk—and, as last week has proven, it’s all about how you manage it.

A Case Study in Good Financial Planning

One city that got it right was Los Angeles.

For many of you, California might not immediately come to mind as a shining example of good fiscal management. But when the city was awarded the Olympics for 1984, the reins were turned over to Major League Baseball (MLB) commissioner Peter Ueberroth, who had previously founded and run a successful travel company. Under his leadership, the 1984 Summer Olympics became the first privately financed Games. A committee was set up that operated more like a corporation. Financing came from private fundraising, corporate sponsorships, TV deals and more.

It certainly didn’t hurt that L.A. was already a highly developed metropolitan area with world-class infrastructure, but Ueberroth urged fiscal restraint and rationality. The results were better than anyone could have anticipated. Remember Sochi’s $8 million price tag per athlete? L.A. ended up spending only around $100,000 per competitor (in 2015 dollars), among the best records ever in Olympic history.

What’s more, the L.A. Games turned a tidy profit, netting the city more than $225 million, all of which was plowed back into the U.S. Olympic Committee. As recently as 2016, those profits were still helping athletes gear up for Olympic glory, according to Ueberroth himself.  

In 1984, Ueberroth was selected as TIME’s Person of the Year for developing “a new model for the Games” and proving that “in a free society, anything is possible.”

Last week I had the chance to speak with Peter Smyrniotis of Market One Media Group about cryptocurrencies, blockchain technology and initial coin offerings (ICOs). Watch the interview by clicking here!


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 Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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

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Fear Creeps Back into Stocks, Shining a Light on Gold
February 6, 2018

Gold is a hedge against inflation

Monday’s monster stock selloff is exhibit A for why I frequently recommend a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

What began on Friday after the positive wage growth report extended into Monday, with all major averages dipping into negative territory for the year. The Dow Jones Industrial Average saw its steepest intraday point drop in history, losing nearly 1,600 points at its low, while the CBOE Volatility Index, widely known as the “fear index,” spiked almost 100 percent to hit its highest point ever recorded.

Gold bullion and a number of gold stocks, however, did precisely as expected, holding up well against the rout and helping savvy investors ward off even more catastrophic losses. Klondex Mines and Harmony Gold Mining, among our favorite small-cap names in the space, ended the day up 4.6 percent and 4.8 percent, respectively. Royalty company Sandstorm Gold added 1.4 percent.

The research backs up my 10 percent weighting recommendation. The following chart, courtesy of BCA Research, shows that gold has historically outperformed other assets in times of geopolitical crisis and recession. Granted, the selloff was not triggered specifically by geopolitics or recessionary fears, but it’s an effective reminder of the low to negative correlation between gold and other assets such as equities, cash and Treasuries.

Gold has historically outperformed during geopolitical crises and recessions
click to enlarge

“We expect gold will provide a good hedge against a likely equity downturn, as the bull market turns into a bear market” in the second half of 2019, BCA analysts write in their February 1 report.

The reemergence of volatility and fear raises the question of whether we could find ourselves in a bear market much sooner than that.

So how did we get here, and what can we expect in the days and weeks to come?

Gold Has Helped Preserve and Grow Capital in Times of Rising Inflation

It’s important to point out that the U.S. economy is strong right now, so the selloff likely had little to do with concerns that a recession is near or that fundamentals are breaking down. The Atlanta Federal Reserve is forecasting first-quarter GDP growth at 5.4 percent—something we haven’t seen since 2006. And FactSet reports that S&P 500 earnings per share (EPS) estimates for the first quarter are presently at a record high. A correction after last year’s phenomenal run-up is healthy.

Several factors could have been at work, including algorithmic and high-frequency quant trading systems that appear to have made the call Monday that it was a good time to take profits. Other investors seemed to have responded to Friday’s report from the Labor Department, which showed that wages in December grew nearly 3 percent year-over-year, their fastest pace since the financial crisis. This is a clear sign that inflationary pressure is building, raising the likelihood that the Federal Reserve will hike borrowing costs more aggressively than some investors had anticipated.

Wages grew at their fastest pace since june 2009
click to enlarge

As I’ve explained many times before, gold has historically performed very well in climates of rising inflation. When the cost of living heats up, it eats away at not only cash but also Treasury yields, making them less attractive as safe havens. Gold demand, then, has surged in response. This is the Fear Trade I talk so often about.

But which measure of inflation is most accurate? The Fed’s preferred gauge, the consumer price index (CPI), rose 2.1 percent year-over-year in December. Then there’s the New York Fed’s recently launched Underlying Inflation Gauge (UIG), which claims to forecast inflation better than the CPI by taking into consideration a “broad data set that extends beyond price series to include the specific and time-varying persistence of individual subcomponents of an inflation series.” The UIG rose nearly 3 percent in December. And finally, the alternate CPI estimate, which uses the official methodology before it was revised in 1990, shows that inflation could be closer to 10 percent.

Whichever one you choose to look at, though, they all indicate that inflation is trending up.

No matter which gauge you look at inflation is trending up
click to enlarge

Making predictions is often a fool’s game, but I believe that after lying dormant for most of this decade, inflation could be gearing up for a resurgence on higher wages and borrowing costs. Now might be a good time to rebalance your gold holdings to ensure a 10 percent weighting.

“This pick-up in inflation and inflation expectations is positive for gold,” says BCA, “which we’ve shown to be an attractive hedge against rising prices.”

Long-Standing History of Performance

Besides being favored as a safe haven in times of crisis, gold has a history of  attractive performance over the long term. Compared to many other asset classes, the yellow metal has been very competitive in multiple time periods.

No matter which gauge you look at inflation is trending up
click to enlarge

Since 1971, when President Richard Nixon finally took the U.S. off the gold standard, gold has outperformed all asset classes except domestic and international equities, as of December 31, 2017. In the 20-year period, gold crushed domestic and foreign stocks, bonds, cash and commodities. Most impressive is that, in every period measured above, the precious metal has beaten cash, bonds and commodities.

Having a 5 to 10 percent weighting in gold and gold stocks during these periods could have helped investors minimize their losses in other asset classes.

To learn more about gold’s role in times of rising inflation, click here.

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 Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE). It is colloquially referred to as the fear index or the fear gauge. The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The Bloomberg Barclays Short Treasury Bill Index tracks the market for Treasury bills issued by the U.S. government. U.S. Treasury bills are issued in fixed maturity terms of 4-, 13-, 26- and 52-weeks. The Bloomberg Barclays US Aggregate Bond Index, which until August 24, 2016 was called the Barclays Capital Aggregate Bond Index, and which until November 3, 2008 was called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Bloomberg L.P. since August 24, 2016, and prior to then by Barclays which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. The MSCI USA Net Total Return Index is a market capitalization weighted index designed to measure the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the United States. The MSCI EAFE Net Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East. The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones-UBS Commodity Index (DJ-UBSCI) in 2009, when UBS acquired the index from AIG. The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.

The consumer price index (CPI) is an index of the variation in prices paid by typical consumers for retail goods and other items. The Underlying Price Gauge (UIG) captures sustained movements in inflation from information contained in a broad set of price, real activity, and financial data. 

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2017: Klondex Mines Ltd., Kirkland Lake Gold Ltd., Sandstorm Gold Ltd.

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Net Asset Value
as of 03/19/2018

Global Resources Fund PSPFX $6.05 -0.04 Gold and Precious Metals Fund USERX $7.17 0.41 World Precious Minerals Fund UNWPX $4.30 0.22 China Region Fund USCOX $12.13 -0.14 Emerging Europe Fund EUROX $7.57 -0.06 All American Equity Fund GBTFX $25.24 -0.24 Holmes Macro Trends Fund MEGAX $19.67 -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