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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.

Yes, Gold Is Being Manipulated. But to What Extent?
May 20, 2019

Gold is being suppressed but to what extent

Another day, another banking scandal.

Last week the European Commission announced that it’s fining five big banks for rigging the international foreign exchange (forex) market. As many as 11 world currencies—including the euro, British pound, Japanese yen and U.S. dollar—were allegedly manipulated by traders working at Barclays, the Royal Bank of Scotland (RBS), Citigroup, JPMorgan and Japan’s MUFG Bank.

Altogether, the fines come out to a whopping 1.07 billion euros ($1.2 billion).

According to the press release dated May 16, the infringements took place between December 2007 and January 2013. Traders working on behalf of the offending banks secretly shared sensitive trading information. This enabled the traders—who were direct competitors—to “make informed market decisions on whether to sell or buy the currencies they had in their portfolios and when.”

Financial services is already the least trusted sector among seven others worldwide, according to the 2019 Edelman Trust Barometer. News of the coordinated forex rigging—which follows other high-profile scandals such as the Libor scandal, Wells Fargo fake account scandal, gold fixing scandal (which I’ll get to later), among many more—is unlikely to improve public sentiment.

As I’ve said before, I believe that strong distrust in traditional financial services, especially among millennials, greatly contributed to early bitcoin adoption. With bitcoin, there’s no third-party risk. Transactions are peer-to-peer. Users of the digital coin find this sort of freedom very attractive, and because it’s built on top of blockchain technology, price manipulation is much more difficult to pull off.

That’s not to say that bitcoin hasn’t been, or isn’t still being, manipulated. There are those who argue that the cryptocurrency’s meteoric rise to nearly $20,000 in late 2017 was at least in part due to coordinated price manipulation. And early Friday morning, its price dramatically lost as much as $1,702, its worst intraday drop since January 2018, after breaching $8,300 on Thursday.

Bitcoin price sharply plunged friday morning
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Bitcoin Seen as a Threat to Global Fiat Currencies

None of this should come as a surprise to anyone who’s been paying attention, of course. I’ve seen and heard the aggressive stance bankers have taken against bitcoin and other cryptocurrencies, as I’m sure you have.

Quite simply, banks don’t want the competition. If you recall, JPMorgan CEO Jamie Dimon called people who buy bitcoin “stupid” and said he’d fire any trader caught trading it. (And then in an amazing about-face, his bank announced in February the rollout of its own digital coin, the “JPM Coin.”)

Also consider the comments made by Agustín Carstens, general manager of the Bank of International Settlements (BIS). The BIS, in case you’re unfamiliar, is often called the “central bank of central banks.” That’s because it provides banking services to as many as 60 financial institutions from all over the world, including heavyweights such as the Federal Reserve, Bank of England (BoE), European Central Bank (ECB) and Bank of Japan (BoJ). Its influence on global monetary and financial policy, in other words, is monolithic.

Ever since bitcoin hit $4,000 or so, General Manager Carstens has been on a global PR campaign to stop its momentum—because, again, it’s seen as a threat to sovereign currencies. As recently as November of last year, he laid out 10 reasons why central banks should discourage the use of digital coins.

Among them: “Cryptocurrencies are highly conducive to illegal activities.”

Anyone else see the irony? Fiat currencies are still very much used to conduct illegal activities, despite the enactment of anti-money laundering (AML) and know your customer (KYC) laws. In November 2017, Jennifer Fowler, deputy assistant secretary for the Office of Terrorist Financing and Financial Crimes (TFFC), testified before the Senate Judiciary Committee that the U.S. dollar “continues to be a popular and persistent method of illicit commerce and money laundering,” and that, although virtual currencies are also used, “the volume is small compared to the volume of illicit activity through traditional financial services.”

The BIS doesn’t stop at bitcoin, though. It’s also put gold in its crosshairs.

Gold Suppression: It’s Not a Question of IF but to WHAT EXTENT

First of all, let me say that gold price suppression (“fixing,” “rigging,” “manipulating” or however else you want to think about it) is not just a conspiracy theory. It’s a well-documented phenomenon, with real actors and real ramifications. In 2014, Barclays was fined nearly $44 million for failing to prevent traders from manipulating the London gold “fix.” Late last year, a former JPMorgan trader pleaded guilty to manipulating the U.S. metals markets. Remember the gold futures “flash crash” of 2014?

The best people to speak to about this subject are the folks at the Gold Anti-Trust Action Committee, or GATA. For 20 years now, Chris Powell and others at GATA have made it their mission to expose collusion by international financial institutions to control the price and supply of gold.

Last week I had the chance to sit down with Chris, GATA’s secretary/treasurer. I asked him how institutions manage to manipulate the price of gold on such a global scale.

“It’s done largely in the futures markets,” Chris told me. “It’s also done in the London over-the-counter (OTC) market. The mechanisms are gold swaps and leases between central banks and bullion banks, and through the sale of futures contracts.”

GATA’s Robert Lambourne reported on this in March of this year. As you can see in the chart below, gold rallied between November 2018 and February, when it peaked at around $1,343 an ounce. Ordinarily, you could expect inventory in the bullion-backed SPDR Gold Shares ETF (GLD) to continue to climb at least until then. But that’s not at all what happened. Three weeks before the price of gold peaked, the holdings in the GLD curiously began to fall, and by March 4, the ETF had lost approximately 57.8 metric tonnes. And because the GLD is the largest gold ETF in the world—its value stands at $30.2 billion, as of this week—such selling will naturally impact the price of gold. Sure enough, the yellow metal soon fell below $1,300. What gives?

Is the Bank for International Settlemenst BIS suppressing teh price of gold?
click to enlarge

The answer to that question may lie in the BIS’ monthly statement of account for February. According to Robert’s reporting, the BIS was still actively trading gold swaps, which it uses to gain access to the metal held by commercial banks. Specifically, the bank placed as much as 56 metric tonnes of gold swaps into the market in February.

If you ask me, that amount is remarkably close to the 57.8 tonnes that fled the GLD in the first quarter of this year.

Hard to believe? This is only scratching the surface. I’ll let Chris Powell be the one to elaborate, but it will have to wait until a Frank Talk later this week. Trust me when I say this is an interview you don’t want to miss! Make sure you’re subscribed to Frank Talk so you can be one of the first to read it.

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2019.

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These 3 Charts Will Convince Investors That Time May Be Running Out
May 13, 2019

These 3 Charts Will Convince Investors That Time May Be Running Out

Before we get to looking at those three charts, I want to talk about trade for a moment. On Friday the Trump administration made good on its threat to raise tariffs on as much as $200 billion worth of Chinese imports to 25 percent from the previous 10 percent. The president also said that a decision could be made soon on whether to impose the same 25 percent rate on an additional $325 billion of Chinese goods, which, all told, would cover approximately the total amount of goods the U.S. imported from China in 2018.

So what does this mean? As I’ve made clear here, here and elsewhere, a tariff—beside being a strain on international relations—is essentially a tax that must be paid to the U.S. government before a shipment can clear customs. But here’s the kicker: Tariffs are typically paid not by the exporting company but by the importer. In other words, it’s U.S.-based companies that are picking up the tab—then passing the extra expense on to American consumers.

With the exception of the U.S. Treasury, which collects the tariff payments, few stand to benefit here. A February study by Washington, D.C.-based Trade Partnership Worldwide (TPW) estimated that 25 percent tariffs on Chinese goods cost families of four close to $2,300 extra on average per year. They also have the potential to impact upwards of 2.2 million American jobs as well as risk diverting trade to other markets.

“By any measure, the imposition of tariffs by the United States and U.S. imports of steel, aluminum, motor vehicles and parts… is a net loss for the U.S. economy and U.S. workers,” the report reads. Workers “experience greater losses than gains,” and in many cases, according to TPW, “the tariff actions erase all of the anticipated gains from tax reform.”  

Market Sentiment at Its Lowest in 10 Months

Stocks sold off last week on the tariff news and plunged even further Monday after China announced that it would retaliate.

Equities are now officially in oversold territory. Our own U.S. Global Sentiment Indicator, which tracks as many as 126 commodities, indices, sectors, currencies and international markets, calculates the percentage of positions whose five-day moving averages are above or below their 20-day moving averages. Then we compare the data to the S&P 500 Index. Last week the sentiment indicator fell to 20 percent, showing that the market is at its most oversold since July 2018. Statistically, we should expect to see a bounce.

U.S. Global Sentiment Indicator Is Showing That the Market is Oversold
click to enlarge

Stocks may still have further to slide before a resolution to the trade dispute is reached. But for now this could be a good opportunity for investors to pick up some distressed stocks as we await mean reversion. In a Frank Talk post last week, I recommended that investors who seek to get access to the robust U.S. economy but limit their exposure to international trade would do well to look at high-quality small and mid-cap equities. Smaller firms, those with market caps between $1 billion and $10 billion, have the potential to outperform right now because they rely much less on trade than their larger multinational peers. They’re also supported by a stronger U.S. dollar.

I would also recommend considering government and investment-grade municipal bonds, which historically have helped investors improve their risk-adjusted returns in times of economic uncertainty. And of course there’s always exposure to gold and other metals that are expected to be in greater demand in the coming years, copper chief among them.

This leads us to the main event. Below are three charts that I think will convince investors that time is running out to prepare for the next major downturn. All charts and data were brought to my attention by Michael Kantrowitz, head of portfolio strategy at market research firm Cornerstone Macro, who visited our office last week.

1. Is U.S. Manufacturing Growth Projected to Stall?

I recently reported that the ISM Manufacturing Index for the U.S. fell sharply in April to 52.8, down from 55.3 in March. This means that although the manufacturing sector is still expanding, it’s doing so at a much slower pace. What’s more, the manufacturing index could soon fall below 50.0, indicating a slowdown. For this we’d largely have the Federal Reserve to thank.

Every Fed Tightening Cycle Has Preceded a Slowdown in U.S. Manufacturing
click to enlarge

That’s according to Michael, who pointed out to us that every Fed tightening cycle going back to the 1950s has preceded a pullback in the ISM Manufacturing Index. And each of these pullbacks coincided with an economic recession and/or market selloff. (One notable exception was 1995, when the market continued to rally despite manufacturing weakness.)

So will this time be different?

I’ll let my friend Bob Moriarty—whose excellent book Basic Investing in Resource StocksI reviewed earlier this month—tackles this one: “The most dangerous words in investing are ‘This time it’s different.’ It’s never different.”

2. Trying to Predict Future Earnings Per Share Growth? Monitor Lumber Prices

One of the most eye-opening charts Michael shared illustrates the close relationship between lumber prices and future earnings per share (EPS) growth. “Believe it or not,” he told us, “lumber prices are among the most reliable leading indicators available.”

I believe it. Housing is a massive part of the U.S. economy, contributing between 15 percent and 18 percent to gross domestic product (GDP), according to the National Association of Home Builders (NAHB). Housing also has an extremely high multiplier effect. Every 100 homes in the U.S. can support up to 70 jobs on average and generate as much as $4.1 million in local income on an ongoing annual basis.

So it stands to reason that lumber prices can give us an incredibly accurate forecast of where the market is headed. In the chart below, lumber prices have been advanced forward six months to illustrate the lag time between changes in price and EPS estimates. When lumber tanked over the 12-month period, EPS followed around six months later. And when lumber soared, EPS estimates shot up.

Timber! A Sign of Earnings Weakness Ahead? Lumber Price Change
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You may have already detected the warning signal that lumber’s flashing right now. From its high in May of last year, the lumber price has plunged almost 50 percent. That’s the commodity’s sharpest 12-month decline on record. Going forward, then, keep your eyes on earnings, which are a central driver of stock prices.

3. New York Fed on Recession Watch

Every month, the New York Fed updates its probability of an economic recession in the next 12 months. Probabilities are calculated using the spread between the 10-year and three-month Treasury yield—which inverted again last week for the first time since March.

According to the Fed’s most recent report, the probability that a recession will make landfall between now and April 2020 rose to 27.49 percent, its highest reading since January 2007 (as it was ascending, not falling), and before that, September 1999.

Probability of a U.S. recession in the next 12 months has surged to pre crisis levels
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Past performance does not guarantee future results, of course, but the point I’m trying to make by sharing these charts is that it might be time to consider making some adjustments to your portfolio. That doesn’t mean rotating entirely into safe havens, especially since the market is so oversold right now.

When Picking Gold Stocks, Be Sure to Focus on Quality

But if you’re concerned about what the data suggests, it might be prudent to ensure you have exposure to fixed income, specifically tax-free muni bonds, as well as gold and gold stocks. One of our favorite gold names, Franco-Nevada, just reported record net revenue of $179.8 million and record net income of $65.2 million in the March quarter. But when selecting gold stocks, it’s important to stick with quality companies that have competent management, little to no debt and a portfolio of high-grade mines. Go gold!

Is the eurozone slowdown over? In case you missed last week’s commentary from European research analyst Joanna Sawicka, watch it now 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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

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

Mean reversion is a theory used in finance that suggests that asset prices and historical returns eventually return back to the long-run mean or average level of the entire data set.

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 3/31/2019: Franco-Nevada Corp.

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How to Limit Your Exposure to the U.S.-China Trade War
May 9, 2019

How to Limit Your Exposure to the U.S.-China Trade War

The U.S. economy is growing at one of the fastest rates in the developed world right now, and unemployment hit a nearly 50-year low of 3.6 percent in April. Under normal circumstances, this should boost demand for domestic equities. Some investors, however, are hesitant to participate due to escalating trade tensions between the U.S. and China, among other factors. The latest fund flows report from Morningstar shows that investor appetite for equities has declined so far this year in favor of asset classes that are perceived to have less risk, including government and municipal bonds.

What’s more, economic data points to a slowdown in parts of Europe and Asia. The Eurozone Manufacturing PMI registered a six-year low of 47.5 in March, while China’s manufacturing sector is expanding only marginally.

This is expected to impact large U.S.-based multinationals that do a significant percentage of their business overseas. (In 2017, Intel topped the list with foreign sales accounting for 80 percent of total sales, followed by food and beverage maker Mondelez (76 percent) and Coca-Cola (70 percent).)

Many investors may wonder, then, how they can get access to the robust U.S. economy and strengthening dollar while limiting their exposure to shrinking global trade and a potentially slowing economy outside of the U.S.

world trade volume shrank in January 2019
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Time to Rotate Into Small-Cap and Mid-Cap Stocks?

A possible option could be small to mid-cap stocks, which are generally tied more closely to the domestic market than their blue-chip peers.

Not only are small and mid-caps more insulated from protectionist policies such as tariffs and stricter trade barriers, but they’re also supported by a stronger U.S. dollar. This week, the dollar tested its 52-week high, set in late April, and is currently trading above its 50-day and 200-day moving averages.

a strengthening U.S. dollar favors smaller, more domestic-focused companies
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A strong greenback acts as a headwind to multinationals that do a lot of exporting, the reason being that American goods and services become more expensive to international markets.

Conversely, a stronger dollar supports smaller but high-quality, dividend-paying firms whose revenues are more likely to come from inside the U.S. than overseas. Think companies like Pool Corporation, the Clorox Company, PetMed Express, Hawaiian Holdings and more—all of which were held in our Holmes Macro Trends Fund (MEGAX) as of March 31.

A recent Wall Street Journal article supports this strategy.

“A resurgence in the dollar potentially bodes well for one group that has struggled to reclaim record territory after last year’s rout: small-cap stocks,” the article reads. It also adds that smaller companies likely stand to benefit from the Federal Reserve’s freeze on additional interest rate hikes.

We Believe Smaller Domestic Companies Look Undervalued

Indeed, small-cap stocks have not fully recovered from the market selloff in the fourth quarter, unlike S&P 500 companies. As of May 8, the Russell 2000 Index was still around 9 percent lower than its all-time high in late August. The S&P, meanwhile, rocketed back up to record levels before hitting resistance from President Donald Trump’s recent announcement that he was considering raising tariffs even higher on China-made goods.  

small-cap stocks still haven't recovered after the selloff
click to enlarge

I think this creates an attractive buying opportunity for small and mid-caps. Dollar strength and trade friction could very well prompt investors to rotate out of large-cap multinationals in favor of their smaller peers, which have a performative advantage over blue-chips anyway.

They’ve also historically outperformed large-cap stocks in most rolling 20-year periods, according to legendary investor James O’Shaughnessy, author of the essential What Works on Wall Street and The New Rules for Investing Now.

In New Rules, O’Shaughnessy writes that “a company with $200 million in revenues is far more likely to be able to double those revenues than a company with $200 billion in revenues. With large companies, each increase in revenues becomes a smaller and smaller percentage of overall revenues. Small stocks, on the other hand, have a much easier time delivering great percentage growth in revenues and earnings.”

Looking for a way to invest in high-quality small and mid-cap stocks? Our Holmes Macro Trends Fund (MEGAX) is indexed to the S&P Composite 1500 Index, which covers about 90 percent of U.S. equity market capitalization, but we favor smaller firms for the reasons I explained. As of March 31, the fund had a 58.0 percent weighting in mid-cap stocks (those with market caps between $1 billion and $10 billion) and a 17.5 percent weighting in small-cap stocks (those under $1 billion in market capitalization).

To learn more and to request literature on MEGAX, click here!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus. Historically, investing in small-cap and mid-cap stocks has been more volatile than investing in large-cap stocks.

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.

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.

The U.S. dollar index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600.  The index was developed with a base value of 100 as of December 30, 1994.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund as a percentage of net assets as of 3/31/2019: Intel Corporation 0.00%, Mondelez International Inc. 0.00%, The Coca-Cola Co. 0.00%, Pool Corp. 4.80%, The Clorox Co. 3.17%, PetMed Express Inc. 2.16%, Hawaiian Holdings Inc. 1.06%.

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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Retire Happy With Dollar Cost Averaging
April 1, 2019

Gold has failed to move above $1,400 since 2013

Last week I had the pleasure of attending and presenting at the Oxford Club’s 21st Annual Investment U Conference in St. Petersburg, Florida. As many as 400 accredited investors were in attendance from all over the U.S.

The main topic was the current retirement crisis, which I wrote about earlier last month. Baby boomers are reaching retirement in worse financial shape than the previous generation—a phenomenon we haven’t seen in at least six decades.

So how can we reverse course and assure future generations are financially prepared to leave the workforce?

A common theme running through many of the Oxford presentations was to start investing early and to take advantage of compound interest.

This is so important. Albert Einstein once described compounding as “the eighth wonder of the world.”

If you’re reading this and have kids or grandkids, I urge you to help them on the path to participating in the market now. It doesn’t require as much capital as you might think—especially if you’re investing with dollar cost averaging.

What it does require, though, is discipline. Put a long-term plan in place and let compound interest work its magic.

I’ve shared this chart with you before, but I think it’s worth sharing again. It shows a hypothetical initial investment of $1,000 in an S&P 500 Index fund in March 2009. Ten years later, after regular monthly contributions of only $100, the value of that initial investment grew at an annualized 12.96 percent to more than $26,385. Investors who had the discipline to stick with this plan and reinvest the dividends were rewarded handsomely.

The Power of Dollar Cost Averaging
click to enlarge

Remember, the illustration above includes only the period during the 10-year bull market, and there’s no guarantee that the good times will continue.

But with dollar cost averaging, some of the guesswork involved in market timing is eliminated. Our own plan, which we call the ABC Investment Plan, automatically lets you purchase more shares when prices are low and fewer shares when they’re high.

The ABC Plan doesn’t assure a profit, of course, or fully protect against losses. No investment plan can guarantee those things.

Nevertheless, because it requires only a small initial investment, I think it’s a great way to get a young person started in today’s market. The Plan is also helpful for people who might be worried about their retirement goals but unsure how to build their wealth.

It’s never too late to start participating. Download an application today by clicking here.

The 10 Percent Golden Rule

I’d like to address a question I received over email last week from an investor. He asked for clarification on my 10 Percent Golden Rule. As you know, I often recommend a 10 percent weighting in gold, with 5 percent in physical gold and 5 percent in gold mining stocks.

“What does ‘weighting in gold’ actually mean?” he wrote. After explaining that he already owns a number of gold and silver coins, he asked how he knows if he has enough.

First of all, I think these are excellent questions.

The best way to show what I mean is with a visual. Below is a hypothetical portfolio of stocks, bonds, real estate, options, hard assets and more. To keep things simple, let’s say the total portfolio value is $1 million.

Using the 10 Percent Gold Rule, your total gold allocation would be valued at approximately $100,000, with $50,000 in physical gold (coins, bars and 24-karat jewelry) and the remaining $50,000 in gold mining equities, including mutual funds and ETFs.

the 10 percent golden rule in action
click to enlarge

Of course, asset prices are always fluctuating, which is why I also remind investors to rebalance their portfolios at least once a year. If gold shoots up in price, it might make sense to take some profits. If it plunges in price, consider it a buying opportunity.

The Fear Trade Is Heating Up Gold Mining Stocks

performance of an institutional portfolio with or without gold

As a reminder, there are a number of important reasons why the 10 percent rule might make sense.

For one, a certain amount of gold has been shown to improve a portfolio’s Sharpe ratio, or its risk-adjusted returns relative to its peers, based on standard deviation. The higher the ratio is over its peers, the better the risk-adjusted returns. One recent study found that an institutional portfolio with a 6 percent weighting in gold had a higher Sharpe ratio than one without any gold exposure.

This means that volatility was reduced without hurting returns.

Last week I gave you another reason.

Yields are sliding all over the world right now on concerns that the global economy is slowing. Here in the U.S., the 10-year Treasury yield ended the week at 2.41 percent, after President Donald Trump’s nominee for the Federal Reserve Board, Stephen Moore, said he was in favor of cutting interest rates half a percentage point.

With regard to our discussion here, gold has historically traded inversely to bond yields. When yields have fallen, the yellow metal has shined.

Gold mining stocks have behaved similarly. Take a look below. What the chart shows is the inverse relationship between gold mining stocks and the real 10-year Treasury yield—“real” meaning inflation-adjusted. As you can see, gold stocks soared in the summer of 2016 as yields deteriorated and finally dipped below zero.

the 10 percent golden rule in action
click to enlarge

Today, yields are similarly on a downward path, boosting gold stocks. From its 2019 low on January 22, the NYSE Arca Gold Miners Index is up more than 14 percent.

For more on gold stocks, watch my recent interview with Kitco News’ Daniela Cambone, live from the New York studio, by clicking here!

 

A program of regular investing doesn’t assure a profit or protect against loss in a declining market. You should evaluate your ability to continue in such a program in view of the possibility that you may have to redeem fund shares in periods of declining share prices as well as in periods of rising prices.

Sharpe ratio is a measure of risk-adjusted performance calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.  The index benchmark value was 500.0 at the close of trading on December 20, 2002.

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.

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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Gold Glimmers as the Pool of Negative-Yielding Debt Surges
March 18, 2019

Gold Glimmers as the Pool of Negative-Yielding Debt Surges

It was a tragic week, to say the least. It began with a fluke Ethiopian Airlines crash, which led to the grounding of all Boeing 737 MAX 8 jets worldwide, and ended with a hateful terrorist attack in Christchurch, New Zealand. On behalf of everyone at U.S. Global Investors, I want to extend my deepest sympathies to all those who were affected.

I’ll have more to say on airlines in a moment.

For now, I want to share with you a tweet by Lisa Abramowicz, a reporter for Bloomberg Radio and TV who often comments on the “fear” market.

“The pool of negative yielding debt has risen to a new post-2017 high of $9.2 trillion,” she writes. “Mind boggling at a time when the global economy is supposedly still recovering.”

Since Lisa tweeted this last Wednesday, the value of negative-yielding bonds has ticked up even more, to $9.32 trillion. This is still below the 2016 high of $12.2 trillion, but, as Lisa said, mind-boggling nonetheless. It also indicates that investors fear global economic growth is slowing.

The Pool of Negative-Yielding Bonds Has Climbed to a New High
click to enlarge

The yield on Japan’s 10-year government bond is back in negative territory, trading at negative 3 basis points (bps) today, while Germany’s was trading at a low, low 8 bps.

As I’ve explained to you before, low to negative-yielding debt has historically been constructive for gold prices. The yellow metal doesn’t have a yield, but in the past it’s been a tried-and-true store of value when other safe haven assets, such as government bonds, stopped paying you anything. In the case of Japanese bonds right now, investors are actually paying the government—and that’s before you factor in inflation.

This is just one of many reasons why I recommend a 10 percent weighting in gold, with 5 percent in physical bullion and jewelry, the other 5 percent in high-quality gold stocks and funds. Remember to rebalance at least once a year.

For more on gold, watch my interview last week with Daniela Cambone, live from Kitco’s New York studio! Click here!  

Aircraft Are Safer, Easier to Fly

Back to the Ethiopian flight. I’m confident we’ll soon learn what malfunctioned in the 737 MAX—both last week and in October during Indonesia’s Lion Air flight—so that accidents like this may never happen again.

Having said that, I think it’s important to keep in mind that commercial air travel today has never been safer in its approximately 100-year history. In 2017, the safest year for aviation on record, not a single life was lost in a commercial plane crash, despite more than 4 billion people around the world taking to the skies on scheduled passenger flights. You would be hard-pressed to find another major global industry, one that operates 24/7, with such an impressive safety track record.

Commercial Air Travel Has Never Been Safer
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This is all largely thanks to continuous improvements in aviation technology. Over the decades, aircraft have progressively gotten safer and easier to fly, according to one aeronautics professor at MIT.

“The automation systems that we have on airplanes have demonstrably made airplanes safer,” R. John Hansman, director of MIT’s International Center for Air Transportation, told Boston’s WBUR radio station last week.

And the technological advancements continue today, with artificial intelligence (AI) and the internet of things (IoT) already starting to change the way we fly.

Consider Aireon. Founded in 2011, the aerospace tech firm is responsible for developing a next-generation airline tracking and surveillance system that has the capacity to measure every aircraft’s speed, heading, altitude and position—all in real-time. Using as many as 66 satellites, Aireon’s team gathers data broadcast by tiny transponders, which all U.S. and European planes will be required to carry by next year.

Aireon diagram

It was the company’s data, in fact, that ultimately convinced the Federal Aviation Administration (FAA) to join the rest of the world in temporarily grounding the 737 MAX.

“Take a Ride on the Airline Stocks,” Writes the National Bank of Canada

In light of the accident, a number of research houses and brokerage firms released notes to investors reassuring them that Boeing’s troubles should have only minimal impact on the airline industry as a whole.

Shares of Boeing, the largest company in the Dow Jones Industrial Average by market cap, surged as much as 2.5 percent on Friday after it was announced that the jet manufacturer plans to roll out a software update for the MAX 8 and 9 within the next 10 days—much sooner than initially expected.

Analysts at Raymond James point out that the “737 MAX 8/9 aircraft are still a small part of overall fleet for most U.S. airlines, which in off-peak travel season can likely be covered by higher utilization of existing fleet or delays in certain aircraft retirements.”

Vertical Research’s Darryl Genovesi, an expert in airline revenue, says that he believes the 737 MAX grounding will have an “immaterial” effect on U.S. airlines’ first-quarter earnings per share (EPS). And if the grounding is extended into the second quarter, or into the second half of the year, we may even see higher EPS due to a supply demand imbalance.

Genovesi writes that Vertical’s models indicate that, in the event of an extended grounding, “system RASM [revenue per available seat mile] would increase by ~200 bps… This would be ~3 percent accretive to second-quarter EPS, on average, across the group including a ~9 percent EPS boost for Alaska Airlines, JetBlue and Spirit Airlines and low-single-digit boost for American Airlines, Delta Air Lines, United Continental and Allegiant Air, partially offset by a low-single-digit EPS reduction for Southwest Airlines.”

Southwest has the largest number of 737 MAX 8s in the world, with a reported 34 planes in its fleet.

Air Canada the Leading Carrier in the Country
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Finally, looking at the Canadian market, the National Bank of Canada says that both Air Canada and WestJet Airlines “remain constructive despite the recent turbulence.”

“The negative news has not changed the overall positive trend in [Air Canada’s] stock,” analyst Dennis Mark writes.

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The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index measures the stock of debt with yields below zero issued by governments, companies and mortgage providers around the world which are members of the Bloomberg Barclays Global Aggregate Bond Index.

Earnings per share (EPS) is the portion of a company's profit allocated to each share of common stock. Earnings per share serve as an indicator of a company's profitability.

A basis point one hundredth of one percent, used chiefly in expressing differences of interest rates.

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 (12/31/2018): The Boeing Co., Alaska Air Group Inc., American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co., Spirit Airlines Inc., Allegiant Travel Co., JetBlue Airways Corp., Air Canada.

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