Share this page with your friends:

Print

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 and Bitcoin Surge on North Korea Fears
September 11, 2017

bicion

If you’re familiar with ABC’s popular reality show Shark Tank, you should already be familiar with the concept behind the San Antonio Angel Network (SAAN). Select entrepreneurs and innovators pitch their startup ideas to accredited investors, who can choose to make early-stage investments in a potentially successful company.

I attended an SAAN meeting last week at Ferrari of San Antonio, and what struck me the most was how fluid and seamless the whole thing is. Other professionals in attendance, including lawyers and CPAs, had a similar opinion, with some of them saying it was because there wasn’t any bureaucracy or red tape to hamstring the presenters.

This is unlike the world of mutual funds, which I believe has become excessively regulated.

As I’ve said numerous times before, regulation is essential, just as referees are essential to a basketball game. No one disputes that, because otherwise there would be chaos.

Similarly, the new and very unregulated world of cryptocurrencies has grown dramatically, beyond bitcoin and ethereum. Did you know there are over 800 cryptocurrencies? These new initial coin offerings, called ICOs, are like initial public offerings (IPOs) but with little regulation or accountability. As I’ve commented before, if the refs get too powerful or too numerous, and the rules too complex, the game becomes nearly unplayable.

Cryptocurrencies Still Draw Investor Attention Following China Crackdown

Bitcoin, ethereum and other cryptocurrencies have had a meteoric year, with more than $2 billion raised in ICOs so far in 2017, according to Bloomberg. Approximately $155 billion in cryptocurrencies are in circulation around the world right now. Bitcoin by itself is at $78 billion, which is close to the $90 billion invested in all gold ETFs.

Cryptocurrencies have made red hot moves this past year
click to enlarge

Like gold, cryptos are favored by those who have a deep distrust of fiat currency, or paper money. Money, after all, is built on trust, and the blockchain technology that bitcoin is built on top of automates trust through an electronic ledger that cannot be altered. Every transaction is anonymous and peer-to-peer. The system is entirely decentralized and democratic. No monetary authority can see who owns what and where money is flowing.

This, of course, is a huge reason why some world governments want to crack down on the Wild West of virtual currencies, especially with bitcoin surging close to $5,000 this month.

China did just that last week, putting a halt to new ICOs and crypto transactions. In response, ethereum tumbled as much as 15.8 percent last Monday, or $55 a unit. Bitcoin lost $394 a unit.

China’s decision comes a little more than a month after the SEC said cryptocurrencies are securities and therefore should probably be regulated as such. At this point, though, the implications are unclear.

What’s clear to me—after seeing firsthand how easily and quickly transactions are made—is that there’s no going back. It’s possible cryptocurrencies will one day be regulated. But I’m confident bitcoin, ethereum and some other virtual currencies offer enough value to weather such a potential roadblock.

I also believe there has to be a happy medium between the excessively regulated fund industry and the potential chaos of the cryptocurrency. This is what I witnessed at the SAAN event I mentioned, which allowed the professionals in attendance to gain information, ask questions and make informed decisions.

Gold Trading Above $1,350 an Ounce

Speaking on cryptocurrencies last week, Mark Mobius, executive chairman of Templeton Emerging Markets Group, said gold could be a beneficiary of China’s decision to clamp down on ICOs. As more governments and central banks turn their attention to virtual currencies, investors could move back into the yellow metal as a store of value.

That’s a possibility, but I think gold’s price action right now is being driven by negative real Treasury yields and fears over a potential conflict with North Korea. Adjusted for inflation, the two-year and five-year Treasuries are both currently yielding negative amounts, and the 10-year continues to fall closer to 0 percent.

Real treasury yeilds fall further
click to enlarge

As I’ve explained numerous times before, gold and real interest rates share an inverse relationship. It makes little sense to invest in an asset that’s guaranteed to cost you money—which is the case with the two-year and five-year government bond right now. Investors seeking a “safe haven” might therefore add to their weighting in gold, especially with North Korea’s Kim Jong-Un raising tensions.

The yellow metal closed above $1,350 an ounce, more than a one-year high.   

Gold price up more than 15 percent year to date
click to enlarge

Despite Efforts to Control Spending, National Debt Expected to Continue Growing: CBO

Similarly driving the gold Fear Trade are concerns over the national debt. Last week President Donald Trump sided with Congressional Democrats in raising the federal borrowing limit to allow Hurricane Harvey recovery aid to pass. An initial package of $7.85 billion for Harvey victims was agreed upon, but with total costs expected to be as high as $190 billion—more than the combined costs of Hurricanes Katrina and Sandy—and with Hurricane Irma yet to make landfall in Florida, the federal aid amount could eventually run even higher.

Trump partially ran on reigning in government spending, which I and many others would like to see. Even so, this might not be enough to control our runaway debt. According to an August report by the Congressional Budget Office (CBO), debt will likely continue to grow as spending for large federal benefit programs—Social Security, Medicare and the like—outpaces revenue. Interest payments on the debt will only continue to accelerate as well.

Below is a chart showing national debt as a percentage of GDP going back to the founding of the U.S. Although we’ve seen periodic spikes in response to national crises, the debt could soar to unprecedented levels within the next 10 years.

Federal debt expected to continue rising
click to enlarge

Financial writer Alex Green, the Oxford Club’s chief strategist, told me during my recent interview with him that he thought out-of-control spending posed a greater threat to our country than even North Korea.

I tend to agree with him, and that’s why I believe that investors should have a 10 percent allocation in gold, with 5 percent in bullion and 5 percent in gold stocks, mutual funds and ETFs.

I urge you to watch this brief video on investing opportunities in gold miners!

 

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.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Share “Gold and Bitcoin Surge on North Korea Fears”

The (Investing) World According to Geoffrey Caveney
September 7, 2017

The best call financial writer Geoffrey Caveney ever made was in December 2015. Gold hit a multiyear low of $1,050 an ounce, and he was convinced that the metal had found a bottom. It was time to make a trade, he thought, not just in bullion but precious metal miners, specifically the juniors and some micro-cap names.

Readers who took Geoffrey’s recommendation were no doubt grateful they did. Responding to low to negative interest rates around the world, gold rose as much as 16.5 percent in the first quarter of 2016, its best three-month performance since 1986. By the end of June, it had surged 28 percent, its best first half of the year since 1974. Producers, as measured by the Philadelphia Gold and Silver Index, likewise took off.

gold price per ounce and precious metal miners, september 2015 - July 2016
click to enlarge

Geoffrey’s track record is nothing to sneeze at. In July 2016 he advised readers to take profits on Alexco Resource, which was up an amazing 430 percent for the six-month period. A trade on Fortuna Silver Mines a month earlier netted him a 445 percent profit. He has a number of similar successes under his belt.

“I’m in the habit of thinking for myself,” he told me recently during a chat over the phone.

To make such a contrarian call on gold—or any other asset—you have to think for yourself. If you remember, gold in 2015 hadn’t logged a positive year in three years, and investor sentiment toward the precious metal was down. Every gold conference I spoke at, attendance was unusually light. When an asset gets this beat up, it’s often easy just to fall in with the herd.

But as Warren Buffett himself once said, “The time to get interested is when no one else is.”

Stay in Control of the Decision-Making Process

Thinking for himself has served Geoffrey well in a number of other ways—most notably when he got laid off during the financial crisis. Instead of wasting time looking for work that wasn’t available, he decided to try his luck at freelance tutoring. Combining his interests from when he attended Yale University in the 1990s, he began to teach young people chess, English, math and SAT prep.

His best advice to those about to take the SAT? Focus on the process rather than the goal, and keep your emotions in check. Take deep breaths, in through the nose and out through the mouth.

As Geoffrey himself pointed out, this is sound investing advice as well. Greed and fear can be powerful allies, but it’s important to learn to harness them and stay in control of the decision-making process. This isn’t New Age, hippie-dippie stuff. Ray Dalio, founder of Bridgewater, the world’s largest hedge fund, has often attributed his extraordinary success to meditating, which he says keeps him calm and centered.

“If you don’t reset yourself mentally on occasion, you run the risk of making the same mistakes over and over again,” Geoffrey said.

Life Changes, and So Should Your Strategy

Aside from tutoring, Geoffrey grew his interest in investing, where he put his background in math and chess to good use. In his youth he took chess lessons from the distinguished Uzbek grand master Gregory Serper, and he learned to apply this highly strategic mode of thinking to his trades. As his instincts improved, he started writing about investing and finance on sites such as Seeking Alpha, focusing on gold, precious metal miners, emerging markets, tech, cryptocurrencies and other themes. He watched his readership grow.

both chess and investing require strategic thinking

“Gold always gets lots of attention as well as bitcoin or any cryptocurrency,” he said. “I see tremendous value in China, but I find that those articles get much less attention.”

As someone who also writes about gold and China, I can attest to the accuracy of his observation.

As for gold, Geoffrey believes you “don’t have to be a gold bug to invest 5 or 10 percent,” which is in alignment with what I’ve been saying for years. Gold, I believe, is for all seasons and economic climates—5 percent in bullion, 5 percent in quality gold stocks, mutual funds and ETFs. Rebalance every year.

A New Market Newsletter

Right now Geoffrey is focused on the next trade and increasing his readership. In June he launched a newsletter, the Stock & Gold Market Report, which can be found on Seeking Alpha. In it he shares his latest buy and sell recommendations, and he also offers a handy service on how to build a well-balanced portfolio from the ground up.

After reading his valuable insights and speaking one-on-one with him, I feel confident recommending a subscription to the Stock & Gold Market Report. I wish Geoffrey all the best in this new endeavor and look forward to hearing from him again!

 

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 Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

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 6/30/2017.

Share “The (Investing) World According to Geoffrey Caveney”

We Looked into the Effects of Hurricane Harvey and Here’s What We Found
September 5, 2017

Hurricane Harvey named a 1000 year flood event

Unless you’ve been away from a TV, computer or smartphone for the past week, you’ve likely seen scores of pictures and videos of the unprecedented devastation that Hurricane Harvey has brought to South Texas and Louisiana. As a Texan by way of Canada, I’d like to take a moment to reflect on the human and economic impact of this storm, one of the worst natural disasters to strike the U.S. in recorded history.

Below are some key data points and estimates that help contextualize the severity of Harvey and its aftermath.

$503 Billion

In a previous Frank Talk, “11 Reasons Why Everyone Wants to Move to Texas,” I shared with you that the Lone Star State would be the 12th-largest economy in the world if it were its own country—which it initially was before joining the Union in 1845. Following California, it’s the second-largest economy in the U.S. A huge contributor to the state economy is the Houston-Woodlands-Sugar Land area, which had a gross domestic product (GDP) of $503 billion in 2015, according to the U.S. Bureau of Economic Analysis. Not only does this make it the fourth-largest metropolitan area by GDP in the U.S., but its economy is equivalent to that of Sweden, which had a GDP of $511 billion in 2016.

Hurricane Harvey

1-in-1,000 Years

The amount of rain that was dumped on parts of Southeast Texas set a new record of 51.88 inches, breaking the former record of 48 inches set in 1978. But now we believe it exceeds that of any other flood event in the continental U.S. of the past 1,000 years. That’s according to a new analysis by the Cooperative Institute for Meteorological Satellite Studies and Dr. Shane Hubbard, a researcher with the University of Wisconsin-Madison. Hubbard’s conclusion required the use of statistical metrics since rainfall and flood data go back only 100 years or so, but the visual below might help give you a better idea of just how rare and exceptional Harvey really is.

Hurricane Harvey named a 1000 year flood event

$190 Billion

According to one estimate, Hurricane Harvey could end up being the costliest natural disaster in U.S. history. Analysts with Risk Management Solutions (RMS) believe economic losses could run between $70 billion and $90 billion, with a majority of the losses due to uninsured property. This is a conservative estimate compared to AccuWeather, which sees costs running as high as $190 billion, or the combined dollar amounts of Hurricanes Katrina and Sandy. If so, this would represent a negative 1 percent impact on the nation’s economy.

500,000 Cars and Trucks

The wind and rains damaged more than just houses, schools, refineries and factories. According to Cox Automotive, which controls Kelley Blue Book, Autotrader.com and other automotive businesses, as many as half a million cars and trucks could have been rendered inoperable because of the flooding. That figure’s double the number of vehicles that were destroyed during Hurricane Sandy in 2012. What this means, of course, is that auto dealerships are going to have their work cut out for them once the waters recede and insurers start cutting some checks. Buyers can likely expect to see a huge premium on used cars.

24%

Most people know that Texas is oil country. What they might not know is that it’s also the nation’s number one gasoline-producing state, accounting for nearly a quarter of U.S. output, as of August. In addition, the Lone Star State leads the nation in wind-powered generation capacity, natural gas production and lignite coal production, according to the Energy Information Administration (EIA).

600,000 Barrels a Day

The largest oil refinery in the U.S. belongs to Motiva Enterprises, wholly controlled by Saudi Aramco, the biggest energy company in the world. Located in Port Arthur, about 110 miles east of Houston, Motiva is capable of refining up to 603,000 barrels of crude a day. As floodwaters gradually filled the facility, the decision was made last Wednesday to shut it down completely, and as of Friday morning, there was no official timetable as to when operations might begin again, according to the Houston Business Journal. The consequences will likely reverberate throughout the energy sector for some time.

5 largest oil refineries impacted by hurricane Harvey
click to enlarge

Motiva isn’t the only refinery that was affected, of course. As much as 31 percent of total U.S. refining capacity has either been taken offline or reduced dramatically because of Harvey, according to CNBC. The Houston area alone, known as the energy capital of the world, is capable of refining about 2.7 million barrels of crude a day, or 14 percent of the nation’s capacity.

$2.50 a Gallon

As of last Friday morning, gas prices in Texas had surged to $2.33 a gallon on average, more than a two-year high, according to GasBuddy.com. In the Dallas-Ft. Worth area, prices at some pumps are reportedly near $5 a gallon. By Monday, prices had spiked even more, to $2.50 a gallon.

US dollar tracks trumps favorability down
click to enlarge

With concerns that a gas shortage might hit the state, panicked Texas consumers lined up outside numerous stations, sometimes for miles, to drain them dry. By 5:00 on Thursday, the 7-Eleven next door to U.S. Global headquarters was serving diesel only.

54 Million Passengers

The Houston Airport System is one of the busiest in the world, with the total number of passengers enplaned and deplaned standing at roughly 54 million, as of April 2017. Flights at the city’s two largest airports, Bush Intercontinental and Hobby, were suspended Sunday, September 27, with more than 900 passengers stranded between the two. Commercial traffic resumed on Wednesday, though service was limited. According to Bloomberg, United Airlines, which has a major hub at Bush Intercontinental, was scheduling only three arrivals and three departures a day.

US dollar tracks trumps favorability down
click to enlarge

The International Business Times reports that several major airlines are offering frequent flyer miles in exchange for donations to Hurricane Harvey disaster relief. American Airlines, for example, will provide 10 miles for every dollar donated to the American Red Cross after a minimum $25 contribution. Other carriers have similar programs, including United, Delta Air Lines, Southwest Airlines and JetBlue Airways.

The Kindness of Strangers

For all the talk of economic impact and barrels of oil, it’s important we keep in mind that Hurricane Harvey has had real consequences on individuals, families and businesses. Many of them have lost everything.

I might not have been born in the U.S., but I’ve always been moved and inspired by how selflessly Americans rally together and rush to each other’s aid in times of dire need.

This, of course, is one of those times, and I urge everyone reading this to consider donating to a reputable charity of your choice. For our part, U.S. Global Investors will be donating money, food, clothing and other necessities to one of our favorite local charities, the San Antonio Food Bank.

Please keep the people of South Texas and Louisiana in your thoughts and prayers!

 

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. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co., JetBlue Airways Corp.

Share “We Looked into the Effects of Hurricane Harvey and Here’s What We Found”

Got a Bully Problem? Send in a Tough Guy
August 30, 2017

donald trump you're fired

Here’s a news flash for you: Donald Trump is controversial and caustic. He says exactly what’s on his mind, no matter how incendiary, and he’s not afraid to make enemies, even with members of his party. “Bully” is a phrase many people use to describe the 45th U.S. president.

The thing is, no one who voted for Trump—I think it’s safe to say—didn’t already know this about him. His being a bully is baked right into his DNA, and he expertly honed this persona during his stint as the tough-as-nails host of NBC’s The Apprentice.

Remember when Trump received flak a few weeks back for retweeting a gif of himself body-slamming “CNN”? The clip actually came from WrestleMania 23 in 2007, when the future president defeated World Wrestling Entertainment (WWE) CEO Vince McMahon—and consequently got to shave his head—in a fight billed as the “Battle of the Billionaires.” Trump’s bombastic style and rough edges were so aligned with the smack-talking world of professional wrestling that he was inducted into the WWE Hall of Fame in 2013.

That’s who Trump is. He’s a tough guy. But I’m convinced that’s why he was elected—to stand up to even bigger bullies.

donald trump you're fired

Standing Up to the Beltway Party

Right now those bullies include members of the beltway party, sometimes referred to as “the deep state”—career bureaucrats, lobbyists, regulators and other officials who make it their mission to oppose any Washington outsider who threatens to shake up the status quo.

The beltway party isn’t a new phenomenon, of course. For the past 50 years, the number of government workers relative to the entire U.S. workforce has remained virtually the same. Meanwhile, the percentage of Americans employed in manufacturing has steadily plummeted.

government workers make up greater percentage of U.S. workforce than manufacturing
click to enlarge

Think about it: We have fewer people in this country who innovate and build things than people who enforce the laws that often prevent manufacturers from innovating and building at their fullest potential. What hope do they have?

When you have a bully problem, you don’t send in a Boy Scout. That’s what we learned with Jimmy Carter, whose presidency Trump’s administration so far resembles in an interesting way, according to former Federal Reserve chair Ben Bernanke. Carter and Trump, both outsiders, were sent to Washington to “drain the swamp” of the beltway party. We all know unsuccessful Carter was, but that’s likely because he was simply too nice and “decent” for the White House.

I don’t think anyone would ever accuse President Trump of being too nice and decent, but I also don’t think decency is what we need right now. Decency won’t motivate Congress to pass tax reform. Decency won’t roll back strangulating regulations.

 

Unlike Carter, Trump is a disruptor. He’s disrupting government just as Sam Walton, Jeff Bezos and Elon Musk disrupted the marketplace with Walmart, Amazon and Tesla. These entrepreneurs and businesses were initially criticized for shaking up the status quo and setting new precedents. Similarly, Trump gets harshly maligned, and for the very same reasons.

A Battle Brewing over Financial Regulations to EPA Finding Ways to Stop Infrastructure Spending

Most everyone is aware of the fight that took place this past weekend between now-retired Floyd Mayweather and UFC Lightweight Champion Conor McGregor. Although official pay-per-view data hasn’t been released yet, the number of people who paid the $100 to tune in is expected to exceed the roughly 4.6 million who bought access to watch the Mayweather-Manny Pacquiao fight in 2015. This year, Mayweather’s purse was a guaranteed $100 million but will likely be northwards of $200 million. When all is said and done, McGregor’s payday is estimated to be about half that, according to ESPN.

It wasn’t called “the Money Fight” for nothing.

But over the weekend, a “money fight” of a different kind took place, with the first volley fired in Jackson Hole, Wyoming, where the annual economic symposium of central bankers was held. In what could be her last speech as chair of the Federal Reserve, Janet Yellen defended the efficacy of financial regulations that were enacted following the subprime mortgage crisis nearly 10 years ago.

Because of the reforms, Yellen said, “credit is available on goods terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today’s strong economy.” Banks are “safer” today, she insisted.

Never mind that her conclusions here are questionable at best. Post-crisis reforms such as 2010’s Dodd-Frank Act have actually led to a large number of community banks drying up, giving borrowers, especially in rural areas, fewer options. Because of added compliance costs, many banks have done away with free checking, which disproportionately affects lower-income customers.

Leaving all that aside for now, Yellen’s intent was crystal clear. She made it known to President Trump that, should he re-nominate her to head the Fed when her term ends in February, she will do what she can to protect post-crisis regulations.

Trump, of course, has another point of view. He’s promised to do a “big number” on Dodd-Frank, which he claims has prevented “business friends” from getting loans.

So far he’s been true to his word. In April, he signed an executive order issuing a review of Dodd-Frank. Many of his top-level appointments to the Federal Deposit Insurance Corporation (FDIC), the U.S. Securities and Exchange Commission (SEC) and other such federal agencies have come from a pool of people the big banks feel comfortable with. And his Cabinet is well-stocked with former investment bankers, most notably Steven Mnuchin, who heads the Treasury Department.

In June, the Treasury Department released its recommendations for regulatory reform. Among them are a wholesale reduction in financial regulations, a decrease in their complexity and greater coordination among regulators.

But there’s only so much the executive branch can do alone. A bill designed to repeal key provisions in Dodd-Frank easily passed the House in June and is now in the Senate’s hands. Because it will need to clear a 60-vote threshold, a clean repeal bill looks unlikely, but relief of any kind is better than none.

Abrasive as his style may be, Trump is our greatest hope right now in bringing sensible reform to our complex tax code and regulatory infrastructure.

Looking Ahead to 2020

The Democrats might very well take a page out of the Republicans’ handbook and put up a similarly confrontational, in-your-face candidate in 2020. Right now I can think of no one more fitting of that description than Massachusetts senator Elizabeth Warren. A Democratic Socialist cut from the same cloth as Bernie Sanders, Sen. Warren can be every bit as much a bully as Trump. If you’ve seen her grill someone during a Congressional hearing, you’ll know what I’m talking about.

But whereas Trump supports free markets and business-friendly policies, I believe a President Warren would usher in a new age of punitive taxes and regulations on steroids. Instead, businesses need blue dog Democrats, those with a more conservative voting record, who better understand the need for free markets and a healthy economy.  

As I’ve often said, it not the politics that matter so much as the policies. I support the candidate who makes it easier for Americans to conduct business and create capital. Sen. Warren has many admirable qualities, I’m sure, but her socialist, far-left ideology would be devastating to businesses and investors alike.  

Worried about geopolitical uncertainty? Now might be a good time to consider an allocation into gold stocks!

 

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 6/30/2017.

Share “Got a Bully Problem? Send in a Tough Guy”

Are You Prepared for These Potentially Disruptive Economic Storms?
August 28, 2017

Hurricane Harvey

Here in San Antonio, grocery stores were packed with families stocking up on water and canned food in preparation for Hurricane Harvey, which has devastated Houston and coastal Texas towns. I hope everyone who lives in its path took the necessary precautions to stay safe and dry—this storm was definitely one to tell your grandkids about one day.

Similarly, I hope investors took steps to prepare for some potentially disruptive economic storms, including this past weekend’s central bank symposium in Jackson Hole, Wyoming, and the possibility of a contentious battle in Congress next month over the budget and debt ceiling.

As you’re probably aware, central bankers from all over the globe visited Jackson Hole this past weekend to discuss monetary policy, specifically the Federal Reserve’s unwinding of its $4.5 trillion balance sheet and the European Central Bank’s (ECB) ongoing quantitative easing (QE) program. Janet Yellen gave what might be her last speech as head of the Federal Reserve.

As I told Daniela Cambone on last week’s Gold Game Film, there are some gold conspiracy theorists out there who believe the yellow metal gets knocked down every year before the annual summit so the government can look good. I wouldn’t exactly put money on that trade, but you can see there’s some evidence to support the claim. In most years going back to 2010, the metal did fall in the days leading up to the summit. Gold prices fell most sharply around this time in 2011 before rocketing back up to its all-time high of more than $1,900 an ounce.

Gold prices generally fell days before the annual economic symposium
click to enlarge

Many of the economic and political conditions that helped gold reach that level in 2011 are in effect today. That year, a similar Congressional skirmish over the debt ceiling led to Standard & Poor’s decision to lower the U.S. credit rating, from AAA to AA+, which in turn battered the dollar. The dollar’s recent weakness is similarly supporting gold prices.

In August 2011, the real, inflation-adjusted 10-year Treasury was yielding negative 0.59 percent on average, pushing investors out of government bonds and into gold. Because of low inflation, we might not be seeing negative 10-year yields right now, but the five-year is borderline while the two-year is definitely underwater. Bank of America Merrill Lynch sees gold surging to $1,400 an ounce by early next year on lower long-term U.S. interest rates. 

Are Government Inflation Numbers More “Fake News”?

If we use another inflation measure, though, yields of all durations look very negative. For years, ShadowStats has published alternate consumer price index (CPI) figures using the methodology that was used in 1980. According to economist John Williams, an expert in government economic reporting, “methodological shifts in government reporting have depressed reported inflation” over the years. The implication is that inflation might actually be running much higher than we realize, as you can see in the chart below.

Official US consumer inflation vs shadowstats alternate
click to enlarge

If you believe the alternate CPI numbers, it makes good sense to have exposure to gold.

Recently I shared with you that Ray Dalio—manager of Bridgewater, the world’s largest hedge fund with $150 billion in assets—was one among several big-name investors who have added to their gold weighting in recent days on heightened political risk. That includes Congress’ possible failure to raise the debt ceiling and, consequently, a government shutdown. Dalio recommends as much as a 10 percent weighting in the yellow metal, which is in line with my own recommendation of 10 percent, with 5 percent in physical gold and 5 percent in gold stocks, mutual funds and ETFs.

I urge you to watch this animated video about opportunities in quality gold mining stocks!

Falling Dollar Good for U.S. Trade

Returning to the dollar for a moment, respected CLSA equity strategist Christopher Wood writes in this week’s edition of GREED & fear that it’s “hard to believe that the political news flow in Washington has not been a factor in U.S. dollar weakness this year.”

The U.S. media certainly wants you to believe that Trump is bad for the dollar. Take a look at this chart, showing the dollar’s steady decline alongside President Donald Trump’s deteriorating favorability rating, according to a RealClearPolitics poll.

US dollar tracks trumps favorability down
click to enlarge

However, a weak dollar is good for America’s economy. I’ve commented before that Trump likes a falling dollar, because it is good for the country’s export trade of quality industrial products. It’s also good for commodities, which we see in a rising gold price and usually energy prices.

Ready for a Big Fight?

You might have watched the Mayweather vs. McGregor fight, but have you been watching the fight between Trump and the Fed?

At the symposium in Jackson Hole, Fed Chair Janet Yellen squared up directly against Trump when she defended the strict regulations that were put in place after the financial crisis. Echoing these comments was Dallas Fed chief Robert Kaplan. This is the opposite of what Trump has been calling for, which is the streamlining of regulations that threaten to strangle the formation of capital.

Hurricane Harvey

It’s important to recognize that the market is all about supply and demand. The number of public companies in the U.S. has been shrinking, with about half of the number of listed companies from 1996 to 2016. Readers have seen me comment on this previously, and I believe that the key reason for this shrinkage is the surge in federal regulations. The increasingly curious thing is that we are seeing the evolution of more indices than stocks, as the formation of capital must morph.

As I told CNBC Asia’s Martin Soong this week, there is a huge amount of money supply out there, and investors are looking for somewhere to invest. The smaller pool of stocks combined with the greater supply of money means that the market has seen all-time highs. In addition, major averages were regularly hitting all-time highs not necessarily on hopes that tax reform would get passed, but on strong corporate earnings, promising global economic growth and the weaker U.S. dollar.

Meanwhile, small-cap stocks are effectively flat for 2017 and heading for their worst year since 1998 relative to the market, according to Bloomberg. Hedge funds’ net short positions on the Russell 2000 Index have reached levels unseen since 2009. Remember, these are the firms that were expected to be among the biggest beneficiaries of Trump’s “America first” policies.

However, the weakness in U.S. manufacturing has a great impact on the growth of these stocks, as indicated by the falling purchasing managers’ index (PMI). The slowdown in manufacturing is offset by strength in services, shown by the Flash composite PMI score of 56.0 which came out this week. Though there is a spread between large-cap and small-cap stocks, historically this strong score is an indicator of growth to come.

Spread between large cap and small cap stocks continues to widen
click to enlarge

Some big-name investors and hedge fund managers are turning cautious on domestic equities in general. On Monday, Ray Dalio announced on LinkedIn that he was reducing his risk in U.S. markets because he’s “concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies).” Pershing Square’s Bill Ackman and Pimco’s Dan Ivascyn have also recently bought protection against market unrest, according to the Financial Times. Chris Wood is overweight Asia and emerging markets.

Stay Hopeful

It’s important to keep in mind that there will always be disruptions in the market, and adjustments to your portfolio will sometimes need to be made. For those of you who read my interview with the Oxford Club’s Alex Green, you might recall his “Gone Fishin’” portfolio, which I think is an excellent model to use—and it’s beaten the market for 16 years straight. Green’s portfolio calls for not just domestic equities, Treasuries and bonds but also 30 percent in foreign stocks and as much as 10 percent in real estate and gold.

Stay safe out there! In the meantime, explore investment opportunities in emerging markets!

 

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 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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 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.

The U.S. Dollar Index is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.

Share “Are You Prepared for These Potentially Disruptive Economic Storms?”

Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change