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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.

Exclusive Interview: How Alex Green Beat the Market 16 Years Straight
August 21, 2017

Alex Green Cheif Investment Strategist of The Oxford Club and Investment U

For more than a decade and a half, my friend Alexander Green has been educating and entertaining investors as editor of numerous popular newsletters, many of which I’ve cited in my own writing.

For those of you subscribed to one or more of his services through the Oxford Club or Investment U, I’m sure you’ll agree that Alex is among the finest financial writers working today. His articles are brimming with intelligence, wisdom, humor and candor—all of which he brings to his public appearances at investment conferences.

Last week it was my pleasure to speak one-on-one with Alex, and together we touched on subjects ranging from our favorite books on investing to the secret lives of millionaires to business moats.

Below are highlights from the interview, but this is only the first of two parts. I’ll conclude it next week in a Frank Talk, which you can subscribe to here.

Enjoy!

You didn’t go into politics or medicine or law. What triggered you to go into the investment world?

At the time, I was living in Orlando. I got a copy of the Orlando Sentinel, and on the front page of the business section was a headline that read: “The average stockbroker in the U.S. makes $187,000 a year.” This was in 1985. Thirty years later, that’s still a substantial amount of money. I remember thinking: “If the average stockbroker makes $187,000, what do the good ones make?”

I crammed the article into my wallet and started telling everyone that I was going to become a stockbroker. Someone then told me that he had just sold a phone system to a broker in Winter Park, Florida, and he was looking to hire someone.

I went out and talked to him and got my first job in the money management business. At the small firm where I started, I was writing research reports and client communications. I discovered I enjoyed research and writing even more than dealing with clients, so when the opportunity arose to become a time financial writer, I took it. That was about 17 years ago.

You’ve published four books so far—The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. Tell us about the genesis of one or two of them.

I was speaking at a conference in Phoenix about 10 or 12 years ago, and when I came off stage, this older gentleman was waiting for me. He poked his finger at me and said: “Money, money, money. You’ve made a lot of money over the years, but I have to ask, do you ever think about anything else?”

At first I thought he was kidding, but come to find out, he really felt that I thought about nothing but money all day long. I realized then that I write hundreds of columns a year, and virtually every single one is about stocks or bonds, currencies or commodities, interest rates or economic growth. This guy figured I thought about nothing except money and how it’s made.

Beyond wealth

Of course, we all have our outside interests, and we hope for some kind of balance in our lives. And so when I went back home to Baltimore, I came up with the idea to write something expressing the idea that life isn’t just about making money. I wanted to talk about living a rich life, not just about getting richer.

This led to a column I initially called “Spiritual Wealth.” That name, though, became a problem since the word “spiritual” is one of the most nebulous words in the English language. It can mean  any number of different things to different people.

I eventually changed the name to “Beyond Wealth,” which is probably more accurate anyway. It turned into a series of reflections on things that I thought were important—things I’d read or done that I felt were of interest. All of it had very little to do with money. Those articles became one of the most popular things we do, and the eventual book turned out to be a bestseller. I was glad to have found a wider audience out there.

At this year’s FreedomFest conference in Las Vegas, you debated with The New York Times’ Robert Frank about meritocracy and luck. Robert argued that our success in life is mostly due to luck, and you disagreed. Could you talk about that?

A good book to read on this subject is Thomas Stanley’s The Millionaire Next Door. Dr. Stanley spent a lifetime researching the habits and characteristics of the nation’s wealthiest individuals. I might add here that the Spectrum Group revealed that, as of the end of 2016, one out of every nine households in the U.S. had a net worth of $1 million or more. What Dr. Stanley found is that these millionaires have many characteristics in common. Primarily, they do everything in their power to maximize their income and minimize their expenses. They religiously save and invest the difference, then leave the money alone to let it compound for years, if not decades.

That’s how most people become millionaires, regardless of their color, sex or orientation—not by establishing a software company in their garage or making a hit record or playing third base for the Yankees. Most people just work hard, save, invest and compound.

How does that thinking apply to the market?

A few years ago, a guy named Burton Malkiel wrote a book called A Random Walk Down Wall Street. He said that it’s very difficult to beat the market, and even those who do beat it do so because of luck, not skill. So you can see we’re coming to the same sort of argument as Robert Frank.

The independent Hulbert Financial Digest has ranked our Oxford Communiqué in the top 10 investment newsletters in the nation for 16 years now. We beat the market for one year, two years, five years, 10 years, 16 years now. People would say: “Well, you’re just lucky.” It’s a tough thing to argue against. But when enough time goes on, and you continue to beat the market, it should clue someone in that there’s more than luck at play.

Would you say that Warren Buffett is just simply lucky? No, he’s a financial genius who’s taken actions that others haven’t, and he’s reaped the rewards. When Roger Federer won his 19th singles major title recently, nobody said: “Wow, he’s really lucky.”

I admit, everyone has certain amounts of good and bad luck in their personal and professional lives. But to say that luck is the only determining factor is dispiriting to people who have come the furthest. It’s demeaning to say that it’s all luck, not education or hard work or persistence.

Similarly, the people who consistently beat their benchmarks are not just lucky. If you do it long enough, it’s clearly evidence of skill.

Tell us about your “Gone Fishin’” portfolio. How do you look for investment opportunities?

The gone fishin portfolio

The  Gone Fishin’ portfolio is based on the idea that, since nobody knows with any certainty what the economy or market is going to do, it’s sensible to make the foundation of your portfolio a diversified, asset-allocated basket of index funds. You want to make sure your expenses are low and that you have high tax-efficiency and your asset classes are properly represented. Simple and straightforward.

The idea is that there are 10 different asset classes in the portfolio, and you invest according to various percentages: 30 percent in U.S. stocks, 30 percent in foreign stocks, 10 percent each in high-grade bonds, high-yield bonds and Treasuries, and 5 percent each in real estate investment trusts (REITs) and gold shares.

Then, at the end of every year—or on your birthday or anniversary—rebalance the portfolio to bring all the target percentages back into alignment. That reduces your risk because you’re cutting back on what’s depreciated the most and adding to what’s depreciated the least. Over time, this adds to your return while reducing the portfolio’s volatility.

What would you say to someone right now who’s nearing retirement age or who has just retired?

I don’t think enough people think about this, to be honest, Frank. Like you, I’ve been invested in the market for over 30 years, and when I was in my 20s, 30s and 40s, we had horrific selloffs like the stock market crash of ’87, the financial bust that happened when the internet media ended, and then of course the financial crisis. When you’re younger, you realize you’ve still got decades ahead of you, and you can take actions that allow you to be comfortable with whatever your long-term scenario might be.

But as you get older, after you reach the age of 50 or so, it becomes necessary to reevaluate your goals. There’s a bus out there waiting for us as we cross the street. The thing about getting older is, you have to reduce your risk. You’re not going to be working that much longer—or maybe you’re in retirement already—and you just don’t have the time to make it back should there be a market crash. I always say to make your portfolio as conservative as you can live with once you reach this stage of your life. It might crimp your returns, but it’s also going to save your butt if we go into another financial crisis like we did in 2008.

Are there any books on investing you’d like to recommend? How did they help you?

How to make money in stocks

One book I would recommend is How to Make Money in Stocks by William O’Neil, the founder of Investor’s Business Daily. It’s probably 30 years old and has gone through some updates since then. O’Neil is looking for companies that have high sales growth, 25 percent or better compounds in earnings, higher returns on equity, great product innovation, good management and sustainable profit margins.

But to be honest, I think there’s only so much you can learn from books. I say that because you have to learn the hard way and actually feel the terror of a down draft, or fight the instinct to be greedy when you go through a long, full market as we’re in now.

So who do you look to? Where do you get your wisdom and insight?

In the mid-80s, there were three legendary investors: Warren Buffett, Peter Lynch and John Templeton. I started reading and listening to everything I could—all the Berkshire-Hathaway reports, but also tapes of Templeton and Lynch speaking at conferences.

No one knows what the economy or stock market is going to do, but Buffett, Lynch and Templeton knew to identify a business that was selling for a lot less than what it was worth and hold it until the market recognized that value. That sort of became the mantra for me from then on.

It was then that I realized I was not going to play this guessing game about what GDP growth is going to look like, what inflation’s going to be, what the Fed or stock market is going to do. That’s all a distraction. What really matters is individual businesses beating Wall Street expectations. That’s what drives stocks higher in the long term.

I often tell investors at conferences that, if you look back through history, you’d be hard-pressed to find a single example of a company that increased its earnings, quarter over quarter, year after year, and not see its stock tag along. It doesn’t matter what kind of market we’re going through or what kind of economy we’re in, those stocks tend to appreciate really strongly.

One of the publications you edit is the Momentum Alert. Can you tell us what that is?

Speaking of beating Wall Street expectations, this is exactly what we focus on in the Momentum Alert.

These companies tend to be superbly managed, but most important, they have a moat around the business. Let me give you three examples. Blockbuster, Radio Shack and Borders all went bust. There was no way for those companies to protect their margins, whether they were renting video tapes, selling electronic equipment or selling books and CDs. They had nothing to protect them from competition coming in and doing it on a bigger scale or doing it online.

Winning businesses tend to have something that protects margins. That could be a copyright or trademark or patent. Profits attract competition just as honey attracts bears. You’re not going to come across a really profitable niche and find that other people don’t want to exploit it also. You need something to keep them at arm’s length.

Think of the difference between IBM and Apple. IBM made its systems compatible, so other companies—Dell and Compac, for example—came in and made IBM-compatible machines.

No one makes an Apple-compatible machine because Apple never leased its patents to another company. All of those profits for the iMacs, iPhones, iPods and so on all go straight to Apple. That’s the kind of magic that can really help propel a stock up for longer periods of time.

My interview with Alex will conclude in this week’s Frank Talk. I don’t want you to miss it, so make sure you’re subscribed to receive the email alert!

 

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.

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. 

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: Apple Inc.

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Storm Advisory—What You Need to Know Now
August 7, 2017

Venezuela on the Brink - An Opportunity for Oil Investors?

In July, the Institute for Supply Management’s (ISM) Non-Manufacturing Index fell to an 11-month low of 53.9, 3.5 points below its June reading of 57.4. The index measures the non-manufacturing, services industries such as food services, education, real estate, health care and more.

U.S. ISM Non-Manufacturing PMI sinks to 11-month low in July
click to enlarge

Economists had expected a reading closer to 56.9, so it’s safe to call this a disappointment. Although the index is still above the key 50 threshold, where it’s held for 91 straight months now, the slowdown suggests that “the economy may have lost some momentum going into the third quarter,” as Capital Economics’ Andrew Hunter said in a note last week.

Following this report, it’s possible we’ll see the U.S. dollar rally before pulling back even further. Having hit a 15-month low last week, the dollar looks oversold and ready for a “retracement,” as CLSA’s Christopher Wood put it.

“It remains remarkable how weak the dollar has been so far this year given the Fed’s surprisingly hawkish rhetoric and given that its latest statement last week still suggests that the American central bank intends to commence balance sheet contraction next quarter,” Wood wrote in the latest “GREED and fear.”

New York Post Survivor White House

I’ll have more to add on the Fed’s balance sheet later. 

July was the dollar’s fifth consecutive month of losses, the longest such stretch since December 2010 through April 2011. As I said in a Frank Talk last week, the major contributing factor to the greenback’s slide is political uncertainty surrounding President Donald Trump and Congress. Not only did the Obamacare repeal and replace bill fail (again), but Trump’s White House continues to look like a revolving-door workplace, with the foul-mouthed Anthony Scaramucci pushed out as communications director last week after only 10 days on the job. This reportedly came at the urging of brand new chief of staff John Kelly, who recently replaced Reince Priebus.

But it’s no secret that Trump favors a weaker currency. Since he declared that the dollar was “getting too strong” back in April, it’s lost close to 8 percent of its value against a basket of several other currencies. Add to this the disappointing ISM report, weakening automobile sales and slightly lower-than-hoped-for GDP growth in the second quarter, and it seems less and less likely we’ll see more than one additional rate hike in 2017.

Economic Growth Revised Down

On Friday, the Labor Department announced the U.S. economy added a robust 209,000 jobs in July, beating the consensus, while the unemployment rate dropped even further to a 16-year low of 4.3 percent.

Wage growth, however, remained pretty flat, which is a concern. Consumption is the number one driver of economic growth in the U.S., and if American workers aren’t getting raises, they’re not spending more.

All of this is spurring some economists to rethink their U.S. growth estimates. In its World Economic Outlook for July, the International Monetary Fund (IMF) revised down its domestic economic growth forecast, from 2.3 percent to 2.1 percent in 2017, and from 2.5 percent to 2.1 percent in 2018. The Washington-based fund attributes this revision to “the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes.”

IMF economists, in other words, have doubts that tax reform, deregulation or an infrastructure package will be coming anytime soon.

We’ll see if they’re right. After the August recess, Congress plans to tackle tax reform, which the U.S. sorely needs. I hope lawmakers can come together and pass a comprehensive bill this fall that will deliver some relief to American workers, families and corporations.

Fed to Take Away the Punchbowl

Big changes could be coming on the monetary side this fall as well. In an address to the Economic Club of Las Vegas last week, President and CEO of the Federal Reserve Bank of San Francisco John Williams said the Fed will likely begin the process of monetary normalization as soon as next quarter. This includes unwinding the Fed’s $4.5 trillion balance sheet, composed of long-term Treasuries and mortgage-backed securities (MBS). The process could take up to four years to complete.

Federal reserve expected to begin unwinding its balance sheet this fall
click to enlarge

Now that “we’ve finally recovered from the recession,” Williams said, it’s time for the private and public sectors to “step up and take the lead in making the investments and enacting policies needed to improve the longer-term prospects of our economy and society.”

I agree 100 percent. For nearly 10 years now we’ve seen an imbalance in monetary and fiscal policies, with the economy and stock market being propped up by cheap credit.

There’s a historical risk in the Fed reducing its balance sheet, though. The central bank has embarked on this reduction six times in the past—in 1921-1922, 1928-1930, 1937, 1941, 1948-1950 and 2000—and all but one episode ended in recession.

That’s according to research firm MKM Partners, whose chief economist, Mike Darda, urged attendees of a Fidelity event in May to hope for the best but prepare for the worst.

New York Post Survivor White House

“My opinion is that business cycles don’t just end accidentally,” Darda said. “They are killed by the Fed. If the Fed tightens enough to induce a recession, that’s the end of the business cycle.”

So how can investors prepare?

“Obviously, diversification is important,” Darda said, highlighting municipal bonds and emerging markets. “But my focus there would be on the commodity-importing emerging markets.”

Fidelity’s Julian Potenza seconded Darda’s emphasis of muni bonds, saying “investors should consider keeping the portion of their fixed-income portfolio that is currently earmarked for liquidity relatively short, in terms of duration.”

Indeed, shorter-duration, tax-free munis have a history of delivering positive returns even during economic downturns and in environments of rising and lowering interest rates.

 

As for emerging markets, CLSA reported last week that international ETF inflows so far this year are outpacing domestic U.S. ETF inflows, $103 billion to $86 billion. The brokerage and investment firm recommended an overweight position in emerging markets, specifically Europe ex-U.K.

Tech Stocks a Third of Market Gains in 2017

For the second quarter, close to a record 75 percent of S&P 500 Index companies are beating not just sales estimates but also earnings per share (EPS) estimates, according to FactSet data. What’s more, they’re beating these estimates by wider margins than historical second-quarter averages.

Record 73% of s&p 500 companies have beaten sales estimates in second quarter
click to enlarge

Granted, only around 60 percent of companies have reported as of this writing, but the news is impressive nonetheless.

How much of this is due to euphoria over Trump’s pro-growth fiscal agenda, and how much to a weakening U.S. dollar? That’s difficult to say, but no one can argue the fact that American multinationals are benefiting from a weaker dollar, which makes their exports more competitive globally. Apple, which generated 61 percent of its revenue from foreign markets in the second quarter, just reported an all-time quarterly services revenue record. “Services,” which includes Apple Music, iTunes, iCloud and Apple Pay, brought in an astounding $7.3 billion, up from $6 billion during the same quarter last year.

Speaking of Apple, it’s one of only five U.S. stocks that, together, are responsible for a third of the market’s gains in 2017, the other four being Amazon, Facebook, Microsoft and Alphabet (Google). As you can see below, information technology is up close to 22 percent year-to-date, followed by health care at 15.5 percent.

tech stocks disproportionately driving market gains
click to enlarge

The reason I share this with you is because, while the market appears to be seeing solid growth right now, it’s being propelled disproportionately by only a handful of tech stocks. The S&P 500 is up 10.6 percent, but if we remove information technology, it’s up only around 7.5 percent. This makes the market vulnerable, should those stocks see a correction.

And that’s why I believe it’s particularly important to stay diversified, as Mike Darda said—diversified in emerging markets, which offer attractive valuations; muni bonds; and, as always, gold and 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.

The ISM Nonmanufacturing index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys that monitors economic conditions of the nation.

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

Earnings per share (EPS) is a figure describing a public company's profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company's quarterly or annual net income and dividing by the number of its shares of stock outstanding.

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. 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: Apple Inc.

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Surprise! Gold Prices Have Beaten the Market So Far this Century
August 3, 2017

Spot gold finished July up more than 2 percent, its best month since February, when it returned 3.7 percent. The yellow metal responded to a struggling U.S. dollar, which has lost more than 10 percent so far this year relative to other currencies and is currently at a 15-month low. The dollar could very well continue to slide on additional political uncertainty surrounding President Donald Trump and his administration. This would mean further upside for gold and gold stocks.

Trade weighted u.s. dollar index continues to plummet
click to enlarge

Also contributing to gold’s price appreciation was lackluster economic data that, I believe, lowers the likelihood of another interest rate hike in 2017.

The yellow metal is now trading above its 50-day and 200-day moving averages, ordinarily seen as a bullish sign.

gold price is trading above its 50-day and 200-day moving averages
click to enlarge

More impressively, the price of gold has outperformed the S&P 500 Index so far this century, returning 86 percent more than the market if we index both asset classes at 100 on December 31, 1999. Over the past 17 years, the S&P 500 has undergone two major contractions, both of them resulting in a loss of around 40 percent. Gold, meanwhile, has held its value well, boosting its appeal as a portfolio diversifier.

gold price has beaten the market so far this century
click to enlarge

Our two gold funds have similarly outperformed the market so far this century, as you can see above. The Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX) are co-managed by myself and precious metals expert Ralph Aldis. Not only do Ralph and I rely on fundamentals to make stock selection and weighting decisions, but we also maintain close, productive relationships with mining company management teams across the globe.

Gold Could Be the Solution for a Vulnerable Stock Market

In a telephone interview with Reuters this week, DoubleLine Capital CEO Jeffrey Gundlach, known on Wall Street as the “bond king,” said that he still has exposure to gold, which he predicts will see continued upward price momentum in the short term.

“Gold looks cheap compared to markets that have rallied a lot, including bitcoin and including Amazon,” said Gundlach, whose firm oversees $110 billion in assets.

Indeed, information technology stocks such as Amazon, Facebook, Apple, Microsoft, Google (Alphabet) and others—the imprecisely named FANG or FAAMG stocks—have been on a tear so far this year, propelling the market higher. This has been a detractor for gold, as many investors have moved out of “safe haven” assets and into risk assets.

I should point out, though, that the stocks I just mentioned disproportionately account for up to a third of the market’s gains in 2017, according to CNBC. As of August 1, the S&P 500 is up around 10.5 percent. But if we remove tech stocks, it’s up only 7.5 percent. The market is moving higher nearly every day, but on the backs of only five or so tech stocks. This makes the market particularly vulnerable, should those stocks see a correction, and adds to gold’s investment case as a potential store of value.

What’s more, we’re only weeks away from India’s two most prolific gold-buying sprees, Diwali in October and the wedding season late in the year. Historically, now has been a good time for investors to enter the gold and precious metals market to capture the potential price appreciation that has often occurred during these important festivals.

Explore investment opportunities in gold and precious metals!

 

 

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.

Past performance does not guarantee future results.

Total Annualized Returns as of 6/30/2017
Fund One-Year Five-Year Ten-Year Gross Expense Ratio
Gold and Precious Metals Fund -20.33% -7.46% -2.30% 1.86%
World Precious Minerals Fund -19.09% -8.55% -5.98% 2.10%
S&P 500 Index 17.90% 14.63% 7.18% n/a

Expense ratios as stated in the most recent prospectus. The Adviser of the World Precious Minerals Fund has voluntarily limited total fund operating expenses (exclusive of acquired fund fees and expenses of 0.11%, extraordinary expenses, taxes, brokerage commissions and interest, and advisory fee performance adjustments) to not exceed 1.90%. With the voluntary expense waiver amount of 0.04%, total annual expenses after reimbursement were 1.95%. U.S. Global Investors, Inc. can modify or terminate the voluntary limit at any time, which may lower a fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

You cannot invest directly in an index.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 6/30/2017: Amazon.com Inc. 0.00%, Facebook Inc. 0.00%, Apple Inc. 0.00%, Microsoft Corp. 0.00%, Alphabet Inc. 0.00%.

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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“Mother of All Bubbles” Keeps Gold in Focus
July 24, 2017

global debt bubble

Today I want to discuss reports that global debt levels are at all-time highs, and what this means for your investment decisions going forward.

But first, a few comments about last week. I recently returned from the Oxford Club’s Private Wealth Seminar, held at the historic Grand Hotel on Michigan’s Mackinac Island. The hotel, which some of you might remember as the setting for the 1980 film “Somewhere in Time,” starring Christopher Reeve and Jane Seymour, took a mere 93 days to build in the 1880s—impossible by today’s standards, especially when you consider that it boasts the world’s largest front porch at 660 feet.

While there, I had the privilege of catching up with some old friends and contacts, including Alex Green, the Oxford Club’s chief investment strategist. You might have read some of his wonderful work for Investment U, the group’s educational arm.

Alex reminded me over lunch that the difference between Democrats and Republicans, in his view, is that Democrats are for personal freedom and some economic restrictions, while Republicans are for economic freedom and some personal restrictions.

I prefer to focus on policies instead of partisan politics, but Alex has a point. I’m convinced that Donald Trump, a Republican, won the presidential election because his pledge to reform the tax code and deregulate resonated with both white-collar and blue-collar Americans who felt as if the U.S. economy was no longer working for them. U.S. corporate taxes are among the highest in the Organization for Economic Cooperation and Development (OECD), spurring large multinationals to move operations overseas, and out-of-control regulations threaten to strangle business growth.

But just as Green insinuated, the Trump administration has enacted, or has hinted at enacting, policies that rankle Americans of all political stripes, precisely because they could be used to encroach upon personal liberties.

Take Attorney General Jeff Sessions’ recent decision to strengthen the government’s ability to seize private property from suspected criminals. (The operative word here is “suspected.”) Many now are arguing this directive could be abused by police and other officials. It could, in fact, violate the Fourth Amendment, which of course protects Americans against “unreasonable searches and seizures.”

This is just one among numerous policy-making decisions that have members of both political parties, as well as independents, scratching their heads. Trump was elected to reform taxes, slash regulations and generally make business and capital formation run more smoothly. It’s unclear how private-asset seizures fit into that picture.

If this administration resolved to stay on message and on course, and worked to bring fiscal relief to everyday Americans, it might receive greater support from those who voted for Trump—and perhaps even from those who didn’t.

U.S. Dollar in Bear Market, a Boon for Gold

Since the start of the year, the five-year Treasury yield, adjusted for inflation, has risen about 150 percent. Normally this would put remarkable pressure on the price of gold—higher yields raise the opportunity cost of buying gold—but over the same period, the U.S. dollar has steadily weakened and is now officially in a bear market. Because gold is priced in dollars, this has been supportive for prices. Year-to-date, the yellow metal is up more than 8 percent.

crosscurents impacting gold treasury yeild up dollar down
click to enlarge

As I said, the greenback’s been on the decline for most of the year so far, but it slumped to a 13-month low against the euro last week following European Central Bank (ECB) president Mario Draghi’s remark that “monetary accommodation” would continue in the European Union (EU) until at least the end of the year.

draghi ending ecb stimulus not there yet

“We need to be persistent and patient and prudent, because we’re not there yet,” Draghi said, referring to the fact that EU inflation and wage growth have been disappointingly slow, despite the bloc’s economic recovery since the financial crisis. (Indeed, the June purchasing manager’s indexes for emerging European markets were all above the key 50 mark for the first time in recent memory.)

UBS: We’re Still Constructive on Gold

That gold is still holding at its current level—despite rising rates, despite a stock market that continues to rally—is “encouraging.”

That’s one of the key takeaways from a UBS note last week, in which the Swiss financial services firm maintains its constructive view of the yellow metal. Investor demand this year has been slower than expected, but UBS analyst Joni Teves makes the case that expectations of a good monsoon season in India this summer could help push consumption in the world’s second-largest importer of gold to a new record high by the end of the year. With India having imported a phenomenal 525 metric tons in the first half of 2017 alone, Teves writes that “we expect gold demand in India this year to be around historic averages,” which would be very supportive for prices.

ETPs Attracted a Record $245 Billion in the First Half of 2017

Like gold in India, exchange-traded products (ETPs) also had a knockout first half. As Deutsche Bank reports, ETPs attracted a record $245 billion in the first six months of 2017, in what has historically been the weaker half of the year. To put into perspective just how impressive this figure is, $245 billion would be the second-largest full-year record amount following 2016’s $283 billion. We could see ETP inflows climb as high as $500 billion by the end of this year, Deutsche estimates.

exchange traded porducts etps see record 245 billion in inflows in first half of year
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Of course, runaway demand for ETPs and other risk assets has contributed to muted interest in gold.

Having said that, though, BullionVault—the world’s number one online precious metals market—reported recently that private gold holdings among its users leaped to a record 38 metric tons, as of the beginning of July. That’s enough gold to make more than 10 million 18-carat wedding rings, BullionVault says, or to supply the microchips for 1.5 billion iPhones. The site points out that investor demand has lately been driven by lower prices, following three months of “light liquidation.”

Global Debt on Alert

All of what I’ve said so far pertains to the near-term. Gold’s medium- to long-term investment case, I believe, looks even brighter. Many unsettling risks loom on the horizon—not least of which is a record amount of global debt—that could potentially spell trouble for the investor who hasn’t adequately prepared with some allocation in a “safe haven.”

According to the highly-respected Institute of International Finance (IIF), global debt levels reached an astronomical $217 trillion in the first quarter of 2017—that’s 327 percent of world gross domestic product (GDP). Notice that before the financial crisis, global debt was “only” around $150 trillion, meaning we’ve added close to $120 trillion in as little as a decade. Much of the leveraging occurred in emerging markets, specifically China, which is spending big on international infrastructure projects.

total global debt stands at all time high
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It goes without saying that this is a huge risk. Some are calling this mountain of debt “the mother of all bubbles,” and we all remember how the last two bubbles ended, in 2000 (the tech or dotcom bubble) and 2007 (the housing bubble).

Paying down this debt will not be easy. As Scotiabank mentioned in a note last week: “Higher interest rates are going to make the burden of refinancing the debt considerably heavier, and as more money goes into servicing the debt, it means less money is available to spend on other things, which could lead to less infrastructure spending and increased austerity.”

Add to this the fact that global pension levels are also sharply on the rise, with people living longer and population growth—and therefore workforce growth—slowing in many advanced economies. In May, the World Economic Forum (WEF) estimated that by 2050, the size of the retirement savings gap—unfunded pensions, in other words—could be as much as $400 trillion, an unimaginably large number.

The U.S. alone adds about $3 trillion every year to the pension deficit. I shared with you earlier in the month that the State of Illinois’s unfunded pensions could be as high as $250 billion, putting each Illinoisan on the hook for $56,000.

Central banks’ efforts to promote economic growth through monetary easing haven’t exactly been a raging success, nor can they continue forever. Plus, near-zero interest rates are precisely what encouraged such inflated levels of borrowing in the first place.

You can probably tell where I’m headed with all of this. Another crisis could be in the works. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction.

Gold is one such asset that’s been a good store of value in such times, and gold stocks have tended to outperform the yellow metal as production costs have fallen, according to Seabridge Gold. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in gold stocks, mutual funds or ETFs.

 

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

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the commentary were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: Seabridge Gold.

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Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?
July 17, 2017

Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?

Gold got a boost Friday on weaker-than-expected inflation and retail sales figures, casting doubt on the Federal Reserve’s ability to continue normalizing interest rates this year.

Consumer prices rose slightly in June, at their slowest pace so far this year. The consumer price index (CPI), released on Friday, showed the cost of living in America rising only 1.6 percent compared to the same month last year, significantly down from the most recent high of 2.8 percent in February and below the Fed’s target of 2 percent. Much of the decline was due to energy prices, which fell 1.6 percent from May.

consumer prices continued to expand in june yet at a slower pace
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As I’ve explained elsewhere, CPI is an important economic indicator for gold investors to track. The yellow metal has historically responded positively when inflation rises—and especially when it pushes the yield on a government bond into negative territory. Why lock your money up in a 2-year or 5-year Treasury that’s guaranteed to give you a negative yield?

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

But right now the gold Fear Trade is being supported by what some are calling turmoil in the Trump administration. Last week the Russia collusion story took a new twist, with emails surfacing showing that Donald Trump Jr.; Jared Kushner, the president’s son-in-law and now-senior advisor; and former Trump campaign manager Paul Manafort all agreed to meet with a Russian lawyer last summer under the pretext that she had dirt on Hillary Clinton.

Whether or not this meeting is “collusion” is not for me to say, but the optics of it certainly look bad, and it threatens to undermine the president’s agenda even more. For the first time last week, an article of impeachment was formally introduced on the House floor that accuses Trump of obstructing justice. The article is unlikely to go very far in the Republican-controlled House, but it adds further uncertainty to Trump’s ability to achieve some of his goals, including tax reform and infrastructure spending. I’ll have more to say on this later

A Contrarian View of China

A new report from CLSA shows that Asian markets and Europe were the top performers during the first six months of the year. Korea took the top spot, surging more than 25 percent, followed closely by China.

asia and europe are the top market drivers so far this year
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Despite persistent negative “news” about China in the mainstream media, conditions in the world’s second-largest economy are improving. Consumption is up and household income remains strong. The number of high net worth individuals (HNWIs) in China—those with at least 10 million renminbi ($1.5 million) in investable income—rose to 1.6 million last year, about nine times the number only 10 years ago. It’s estimated we could see as many as 1.87 million Chinese HNWIs by the end of 2017.

According to CLSA, global trade is robust, with emerging markets, and particularly China, driving most of the acceleration this year. In the first three months of 2017, global trade grew 4 percent compared to the same period last year, its fastest pace since 2011.

“Indeed the early months of 2017 have seen China become easily the biggest single country driver of Asian trade growth,” writes Eric Fishwick, head of economic research at CLSA.

A lot of this growth can be attributed to Beijing’s monumental One Belt, One Road infrastructure project, which I’ve highlighted many times before. But according to Alexious Lee, CLSA’s head of China industrial research, a “more nationalist America” in the first six months of the year has likely given China more leverage to assume “a larger global, and especially regional, leadership role.”

This comports with what I said back in January, in a Frank Talk titled “China Sets the Stage to Replace the U.S. as Global Trade Leader.” With President Donald Trump having already withdrawn the U.S. from the Trans-Pacific Partnership (TPP) and promising to renegotiate or tear up other trade agreements—he recently tweeted that the U.S. has “made some of the worst Trade Deals in world history”—China has emerged, amazingly, as a champion of free trade, a position of power it will likely continue to capitalize on.

The country’s overseas construction orders have continued to expand, with agreements signed since 2013 valued at more than $600 billion.

business is booming for china
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Emerging Europe Expected to Remain Strong

Another recent report, this one from Capital Economics, shows that the investment case for emerging Europe remains strong in 2017. Russia is expected to strengthen over the next 12 months, while Poland, Hungary, the Czech Republic and Slovakia are likely to remain attractive.

“Russia’s economy has pulled out of recession and growth in the coming quarters will be stronger than most anticipate,” the research firm writes, adding that its central bank’s loosening of monetary policy should support the recovery even further.

To be sure, the region faces strong headwinds, including a rapidly aging population and the loss of an estimated 20 million skilled workers to foreign markets over the past 25 years, according to a July 11 presentation from the International Monetary Fund (IMF).

But I believe that as conditions in central emerging Europe countries continue to improve, many of those workers will be returning home. Life in the region is not the same as it was 10 or 20 years ago, when good jobs might have been scarce. Firms are now growing at a healthy rate and hiring more workers. As you can see below, unemployment rates in Poland, Hungary and the Czech Republic have been falling steadily since at least 2012 and are now lower than the broader European Union.    

emerging europe countries hard at work
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This strength is reflected in emerging Europe’s capital markets. For the 12-month period as of July 12, Hungary’s Budapest Stock Exchange is up 38 percent. Poland’s WIG20 is up more than 43 percent. Meanwhile, the STOXX Europe 600 Index—which includes some of the largest Western European companies—has made gains of only 17 percent over the same period.

 

Markets Still Believe in Trump

As we all know, the mainstream media’s criticism and ire aren’t reserved for China alone. Ninety-nine percent of the media right now is against President Trump, for a number of reasons—some of them deserved, some of them not.

Markets, however, seem not to care what the media or polls have to say. The Dow Jones Industrial Average continues to hit new all-time highs. Even though it’s stalled a few times, the “Trump rally” appears to be in full-speed-ahead mode, more than eight months after the election.

Back in November, I wrote about one of my favorite books, James Surowiecki’s The Wisdom of Crowds, which argues that large groups of people will nearly always be smarter and better at making predictions than an “elite” few. Surowiecki’s ideas were vindicated last year when investors accurately predicted Trump’s election, with markets turning negative between July 31 and October 31.

For the same reason, I think it’s important we pay close attention to what markets are forecasting today.

The White House is under siege on multiple fronts, which, as I said, has been positive for gold’s Fear Trade. But equity investors also seem to like the direction Trump is taking, whether it’s pushing for tax reform and deregulation or shaking up the “beltway party,” composed of deeply entrenched D.C. lobbyists and career bureaucrats. Just last week, the president made waves for firing a number of bureaucrats at the Department of Veteran Affairs (VA), long plagued by scandal and controversy. Since he took office in January, Trump has told more than 500 VA workers “You’re fired!”   

The Fundamentals of “Quantamental”

Of course, we look at so much more than government policy when making investment decisions. We take a blended approach of not only assessing fundamentals such as market share and returns on capital but also conducting quantitative analysis.

It’s this combination that some in the industry are calling “quantamental” investing. At first glance, “quantamental” might sound like nothing more than cute wordplay—not unlike “labsky,” “bullmation” and other clever names we give mixed-breed dogs—but it’s rapidly replacing traditional investment strategies at the institutional level.

Business Insider puts it in simple terms: “Quantamental managers combine the bottom-up stock-picking skills of fundamental investors with the use of computing power and big-data sets to test their hypotheses.”

See my Vancouver Investment Conference presentation, “What’s Driving Gold: The Invasion of the Quants,” to learn more about how we use quantitative analysis, machine learning and data mining.

Wall Street: The Birthplace of American Capitalism and Government

moments after closing bell june 29

The concept of quantamentals helps explain our entry into smart-factor ETFs. As most of you already know, members of my team and I visited the New York Stock Exchange (NYSE) three weeks ago to mark the launch of our latest ETF.

While there, Doug Yones, head of exchange-traded products at the NYSE, gave us a short history lesson about the exchange and surrounding area.

Most investors are aware that the NYSE, which is celebrating its 225th anniversary this year, is the epicenter of capitalism—not just in the U.S. but also globally.

moments after closing bell june 29

What many people might not realize is that on the site where the exchange now stands, Alexander Hamilton, the first U.S. treasury secretary, floated bonds to replace the debt the nascent country had incurred during the Revolutionary War.

Right next door to the NYSE is Federal Hall, where George Washington took his first oath of office in April 1789. The building today serves as a museum and memorial to the first U.S. president, whose statue now looks out over Wall Street and its passersby.

In this one single block of Wall Street, therefore, American capitalism and government were born. Here you can find the essential DNA of the American experiment, which, over the many years, has fostered our entrepreneurial spirit to form capital and to create new businesses and jobs. Growth, innovation and competition run through our veins, and that’s largely because of the events that unfolded centuries ago at the NYSE and Federal Hall.

For more insight and commentary like this, subscribe to my award-winning CEO blog, Frank Talk.

 

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 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 Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price-only performance of large, actively traded shares on the Budapest Stock Exchange. The WIG20 Index is a modified capitalization-weighted index of 20 Polish stocks which are listed on the main market. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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Net Asset Value
as of 02/23/2018

Global Resources Fund PSPFX $6.24 0.07 Gold and Precious Metals Fund USERX $7.03 0.09 World Precious Minerals Fund UNWPX $4.25 0.07 China Region Fund USCOX $12.01 0.21 Emerging Europe Fund EUROX $7.83 -0.01 All American Equity Fund GBTFX $25.53 0.31 Holmes Macro Trends Fund MEGAX $19.61 0.28 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 0.01