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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.

Trump’s Tax Plan Could Cost You. Here’s What to Do About It
February 7, 2017

Top earners have traditionally been attracted to municipal bonds for their tax-exempt status at the federal and often state and local levels. In the wake of President Donald Trump’s stunning upset victory, however, muni investors were forced to readjust their expectations of fiscal policy going forward. Because Trump had campaigned on deep cuts to corporate and personal income taxes, equities soared while munis sold off, ending a near-record 54 weeks of net inflows.

This appears to have been premature, for a couple of reasons.

Tax Reform Unlikely to Happen Anytime Soon

House Speaker Ryan: We'll tackle Obamacare and infrastructure before tax reform As I explained to you this week, Trump and congressional Republicans are currently butting heads on how best to handle tax reform, with many lawmakers saying it’s unlikely they’ll get around to it during the new president’s first 100 days, and possibly his first 200 days.

According to House Speaker Paul Ryan, Congress will focus instead on replacing the Affordable Care Act (ACA) and funding Trump’s $1 trillion infrastructure spending package before it worries about taxes. With an estimated 30 million Americans enrolled on Obamacare exchanges, finding a suitable replacement is of high importance and might take some time. The same goes with negotiating a costly infrastructure deal, which several fiscally conservative lawmakers are hesitant to support.

Besides, we all know how fast Congress operates, even on a good day. Former President Barack Obama took office in January 2009, and even with a Democratic majority in the House and Senate, his signature health care law didn’t reach his desk until March the following year.

All of this is to say that it might be premature to start dumping your munis, or withhold an investment in munis, purely on the notion that income taxes are about to get a haircut. We’re probably looking at many more months of Obama-era tax rates, including the 3.8 percent Obamacare surcharge on investment income.

Other investors have realized this as well, which is why we’re seeing positive net inflows back into muni bond funds.

OIl Historically Rallied in the Two Years Following OPEC's Agreement to Cut Production
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Plus, You Could End Up Paying More in Taxes

If enacted as conceived, Trump’s tax reform plan would indeed be the most significant in decades, simplifying the number of tax brackets from seven to three, lowering the top rate from 39.6 percent to 33 percent and eliminating personal exemptions and filing status options.

Trump's tax proposals could end up costing some americans.

One of the unintended consequences of this is that income taxes could actually go up for certain middle-income filers. According to an analysis of Trump’s proposal by the independent Tax Policy Center, as many as 8 million American families, including a majority of single-parent households and large families, could end up paying more than they do now (emphasis mine):   

Increasing the standard deduction would significantly reduce the number of filers who itemize. We estimate that 27 million (60 percent) of the 45 million filers who would otherwise itemize in 2017 would opt for the standard deduction. Repealing personal exemptions and the head of household filing status, however, would cause many large families and single parents to face tax increases.

What this means is that tax-exempt muni bonds could still play a valuable role in your portfolio.

But What About Rising Interest Rates?

In December, the Federal Reserve lifted interest rates for only the second time in nearly a decade, and many expect to see up to three additional increases this year.

It’s important to be aware that when rates rise, bond prices fall because if newly issued bonds carry a higher yield, the value of existing bonds with lower rates declines.

This is why I believe investors should take advantage of short- and intermediate-term munis, which are less sensitive to rate increases than longer-term bonds, whose maturities are further out. 

Our Near-Term Tax Free Fund (NEARX) invests primarily in short-term municipal debt issued by quality, fiscally responsible jurisdictions. As of December 31, the fund is rated four stars overall by Morningstar among 172 funds in the Muni National Short category.

Morningstar Rating

Overall/172
3-Year/172
5-Year/147
10-Year/94

Morningstar ratings based on risk-adjusted return and number of funds
Category: Muni National Short
Through: December 31, 2016

 

To learn more, check out

 

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.

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Ratingä based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

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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Investors Shift Back into Gold as Trump’s Honeymoon Period Ends
February 6, 2017

Investors Shift Back into Gold as Trump’s Honeymoon Period Ends

That didn’t take long.

After little more than two weeks, President Donald Trump’s honeymoon with Wall Street appears to have been put on hold—for the moment, at least—with major indices making only tepid moves since his January 20 inauguration. That includes the small-cap Russell 2000 Index, which surged in the days following Election Day on hopes that Trump’s pledge to roll back regulations and lower corporate taxes would benefit domestic small businesses the most.

Is Trump's Honeymoon with Wall Street Over Already?
click to enlarge

And therein lies part of the problem. Although the president managed to sign an executive order last week requiring the elimination of two federal regulations for every new rule that’s adopted (and ordered a review of Dodd-Frank and former President Obama’s fiduciary rule), other campaign promises that initially excited investors—tax reform and an infrastructure spending deal among them—might have already hit a roadblock.

According to Reuters, a three-day meeting in Philadelphia between President Trump and congressional Republicans ended in a stalemate, with it looking less and less likely that tax reform will happen during Trump’s first 100 days in office—perhaps even the first 200 days. As for infrastructure, several Republicans were reportedly wary of committing to such an enormous spending package before more complete details become available.

Travis Kalanick, Uber CEO, dropped out of Trump's business advisory panel

Meanwhile, Trump’s seven-nation travel ban received a lukewarm—and, in some cases, hostile—reception from many in the business world who have traditionally depended on foreign talent. That’s especially the case in Silicon Valley, where close to 40 percent of all workers are foreign-born, according to the 2016 Silicon Valley Index. (Around the same percentage of Fortune 500 companies were founded by immigrants or children of immigrants, including Steve Jobs, whose biological father was Syrian.) One of the more dramatic responses toward the travel ban was Uber CEO Travis Kalanick’s dropping out of Trump’s business advisory panel, following an outcry from users of the popular ride-sharing app who saw his participation with the president as an endorsement of his immigration policies.

Notable Silicon Valley Immigrants

I’ve shared with you before that the media often take Trump literally but not seriously, whereas his supporters take him seriously but not literally. I think it’s evident that the market is finally coming to terms with the fact that Trump, unlike every other politician before him, actually meant everything he said on the campaign trail, including his more protectionist and nationalist ideas.

Although I don’t necessarily agree with Trump’s plans to raise tariffs, withdraw from free-trade agreements and restrict international travel, it might be easy to some to see why he feels American companies need protecting from foreign competition. Last week I attended the Harvard Business School CEO Presidents’ Seminar in Boston, and among the topics we discussed was China’s ascent as an economic and corporate juggernaut. Take a look at the chart below, using data from Fortune Magazine’s annual list of the world’s 500 largest companies by revenue. Whereas the U.S. has lost ground globally over the past 20 years, China’s share of large companies has exploded, from having only three on the list in 1995 to 103 in 2015. The number of Japanese firms, meanwhile, has more than halved in that time.  

U.S. Has Lost Share of World's Largest Companies to China
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I will say, while I’m on this topic, that the uncertainty and unpredictablilty surrounding Trump has given active management a strong opportunity to demonstrate its value in the investment world. Assessing the risks and implications of his actions, policies and tweets, which change daily, really requires a human touch that fund managers and analysts can provide.

Dollar Down, Gold Up

One of those implications is the U.S. dollar’s decline. Following Trump’s comment that it was “too strong” and hurt American exporters’ competitiveness, currency traders shorted the greenback, causing it to have the worst start to a year since 1987.   

U.S. Dollar Has Rockiest Beginning of the Year Since 1987, Boosting Gold
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This, coupled with a more dovish Federal Reserve, expectations of higher inflation and growing demand for a safe haven, has helped push gold prices back above $1,200 an ounce. January, in fact, was the best month for the yellow metal since June, when Brexit anxiety and negative government bond yields sent it to as high as $1,370.

Gold Posts Its Biggest Monthly Gain Since June 2016
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Demand for gold as an investment was up a whopping 70 percent year-over-year in 2016, according to the World Gold Council. Gold ETFs had their second-best year on record. But immediately following the November election, outflows from gold ETFs and other products accelerated, eventually shedding some 193 metric tons.

But now, just two weeks into Trump’s term as president, the gold bulls are banging the drum, with several large hedge fund managers taking a contrarian bet on the precious metal.    

Inflationary pressures are indeed intensifying. U.S. consumer prices rose 2.1 percent in December year-over-year, their fastest pace since 2014, and inflation across the globe is beating market forecasts, with the Citi Global Inflation Surprise Index turning positive for the first time since 2012. Anything above zero indicates that actual inflation is stronger than expectations for the month.

Global Inflation Beats Expectations in December for the First Time Since 2012
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OPEC Making Good on Production Agreement

Among the commodities showing resilience right now is oil, especially on reports that the Organization of Petroleum Exporting Countries (OPEC) is 60 percent of the way to reaching its output target after agreeing to cutting production in early December for the first time since 2008.

Gold Posts Its Biggest Monthly Gain Since June 2016
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Of course, this news is tempered by analysts’ expectations that U.S. producers will export more crude than four OPEC members combined in 2017. According to Bloomberg, the U.S. could sell as much as 800,000 barrels a day overseas, which is more than Libya, Qatar, Ecuador and Gabon produced in December.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every invest. Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. 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, a widely recognized small-cap index.

The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

The Citi Global Inflation Surprise Index measure price surprises relative to market expectations. Readings below zero indicate that actual inflation is below market expectations, where readings above zero indicate that inflation is above expectations.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/30/2016.

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What These Four Global Leaders Have in Common with Trump
February 2, 2017

President Donald J. Trump was elected on promises to “Make America Great Again,” and since January 20 he’s already signed a number of executive orders to tighten border security and ease regulations. Whether you approve of his actions or not, no one can deny that many of Trump’s policies are a sharp departure from American politics of the last 70 years, which has emphasized globalism and interventionism.

It isn’t until we look at the bigger picture, though, that we realize Trump’s ascent is in line with a nationalistic wave that’s spreading across the globe, from Asia to Europe and beyond. As investors, it’s important that we familiarize ourselves with these global policymakers, thought leaders, mavericks and disruptors. Government policy, after all, is a precursor to change.

Below are four such leaders who have more in common with Trump than you might realize.  

1. Narendra Modi – India

Narendra Modi’s 2014 campaign slogan, “Good times ahead,” is in many ways cut from the same idealistic cloth as “Make America Great Again.” Indeed, the similarities between Modi and Trump are numerous. Both men have made it their top goals to strengthen economic growth by deregulating key industries and taking a protectionist approach to manufacturing, reflected in their respective “Make in India” and “America First” policies. A former tea merchant, Modi has often been described as a Hindu nationalist, with alleged goals to replace secularism with Hinduism as the guiding principle of Indian government and society. Like Trump, he’s interested in “draining the swamp” of public corruption. To that end, Modi took an extreme measure in November, eliminating all 500 and 1,000 rupee banknotes—90 percent of the nation’s currency—one of the effects of which was a sharp decline in December’s gold demand.   

Modi's Demonetization Scheme Impacted India's Gold Imports in December 2016
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2. Xi Jinping – China

Upon taking leadership of the People’s Republic of China in 2013, Xi Jinping made it his mission to crack down on corrupt “flies” (rank-and-file party officials) and “tigers” (senior officials) who were suspected of lining their pockets with black money. Since Xi began to “drain the swamp,” courts have prosecuted more than 200,000 officials on corruption-related charges and disciplined hundreds of thousands more. His campaign, which has been wildly popular with the masses, hit Asian gaming capital Macau particularly hard. Before the crackdown, Macau, a special administrative region of China, was adding the equivalent of a Las Vegas Strip every year in revenue, according to the Wall Street Journal. More recently, Xi instructed senior officials to lead by example, warning them there were “no forbidden areas in intra-party supervision, and no exceptions.”

Macau's Gaming Revenue Took a Hit from Chinese Anti-Corruption Measures
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3. Mauricio Macri – Argentina

It might be hard to believe now, but Argentina once ranked among the top 10 wealthiest nations in the world, following the U.K., U.S. and Australia. Following years of rule by the far-left Justicialist Party, however, the South American country languished in corruption and stagnation. In November 2015, voters said “no, gracias” to further leftist rule by electing businessman and two-term Buenos Aires mayor Mauricio Marci as president. It was an upset victory for the people of Argentina, who have seen their once-prosperous nation deteriorate under decades of Marxist policies. Since being sworn in, Macri has made business growth and the economy a number one priority, loosening regulations in the telecommunications sector, easing currency controls, cutting energy subsidies and eliminating tariffs.

Can Mauricio Macri Make
click to enlarge

4. Nigel Farage – United Kingdom

Not all disruptors need to be presidents or prime ministers. As founder and once-leader of the populist, right-wing UK Independence Party (UKIP), Nigel Farage has already made a lasting impact on the United Kingdom. The former commodities trader was instrumental in the campaign to leave the European Union (EU), and following the referendum’s passage, Farage invoked the 1996 sci-fi action film “Independence Day” by declaring June 23 “our independence day” from failed socialist rules, regulations and immigration policies. Reportedly close to Trump, Farage was the first British politician to meet with the then-president-elect after the November election and has since come out in full support of his more controversial policies, including the “extreme vetting” of refugees.   

Brexit Pounded the POund
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Honorable Mention, Looking Ahead

These five global mavericks, Trump included, are certainly not the only ones in power right now, and we can expect to see more in the months and years ahead. Emboldened by Brexit and Trump, other nationalistic candidates are rising in European polls, with several major elections coming up this year in France, Germany, Hungary, the Netherlands and elsewhere.

Among the candidates with a reasonable chance to gain control is Marine Le Pen, president of France’s Front National Party, which takes a hard Euroskeptic stance. (She is, in fact, daughter of its founder, Jean-Marie Le Pen.) If elected president of France in May, Le Pen pledges many dramatic changes, including withdrawing from  the Schengen Area, which eliminates border controls and passports among 26 European countries; giving priority to French citizens with regard to jobs and housing; reintroducing the death penalty and boosting spending on prisons; and issuing a “Frexit” referendum to quit the EU.

 

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

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It Might Be Time to Grab the Commodities Bull by the Horns
January 25, 2017

Commodity investors have had to endure a dry spell for a while now, but those days are starting to look as if they might be behind us. We see encouraging signs that a bottom has been reached and a new commodities super-cycle has begun, as global manufacturing expansion and inflation are finally gathering steam following the financial crisis more than eight years ago.

As a group, commodities had their first positive year since 2010, ending 2016 up more than 11 percent, as measured by the Bloomberg Commodity Index.

commodities end positively for the first time in six years
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A large percentage of this growth occurred in the days following the U.S. election, suggesting the reflation trade is officially in motion, which should be supported in the coming weeks and months by President Donald Trump’s pro-growth policies.

Just this week, Trump signed executive orders to proceed with the controversial Keystone XL and Dakota Access pipelines, emphasizing that the steel to be used in their construction will be American-made. Following the announcement, stock in energy infrastructure company TransCanada, which is expected to resubmit plans for the pipeline after it was rejected by the Obama administration, immediately hit a new high, while shares of several steel companies traded up.

Between Election Day and Inauguration Day, the commodities index rose 5.4 percent, with double-digit growth in crude oil (up 17.1 percent), copper (10.5 percent) and iron ore (17.7 percent).

commodities up double digits since trump's election
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Of the 14 commodities that we track in our ever-popular Periodic Table of Commodity Returns—which has been updated for 2016 and is available for download—only two ended the year down: corn and wheat. All this, following the group’s worst annual slump since the 2008 financial crisis.

The Periodic Table of Commodity Returns

Investment Banks Turn Bullish on Commodities

Back in May, Citigroup was first to say that the worst was over for commodities, and in December it made the call that most raw materials were poised to “perform strongly” in 2017 on global fiscal stimulus and economic expansion.

Now, for the first time in four years, Goldman Sachs has recommended an overweight position in commodities, following reports that revenue from commodity trading at the world’s 12 biggest investment banks jumped 20-25 percent in the fourth quarter of 2016 compared to the same period in 2015.

As reported by Bloomberg, Goldman’s head of commodities research, Jeffrey Currie, drew attention to the “cyclical uptick in global economic activity,” which is “driving demand, not only for oil but all commodities.”

“U.S. and China are focal points where we’re seeing the uptick,” Currie continued, “but even the outlook for Europe is much more positive than what people would have thought six months to a year ago.”

Indeed, manufacturing activity continues to expand at a robust pace, with January’s preliminary purchasing managers’ index (PMI) for the U.S. and the eurozone registering an impressive 55.1 and 54.3, respectively. We won’t know China’s January PMI until next week, but in December it improved at its fastest pace in nearly four years. As I shared with you earlier this month, the global manufacturing PMI expanded for the fourth straight month in December, reaching its highest reading since February 2014. I’m optimistic that it will expand again in January.

Global Manufacturing Climbs to 34-Month High in December 2016
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Again, we closely monitor the PMI, as our research has shown that it can be used to anticipate the performance of commodities and energy three and six months out. It looks as if the world’s big banks have begun to acknowledge this correlation as well. With the health of global manufacturing trending up, we see commodities demand following suit in the coming months.

Number of Auto Sales Hits an All-Time High

Case in point: auto sales. Last year marked a new record high, with 88.1 million cars and light commercial vehicles driven off of car lots. That figure was up 4.8 percent from 2015.

Global Auto Sales Reached a New Record in 2016
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China was the standout, which increased sales 13 percent and saw 3.2 million new units sold. It should be noted, however, that sales were assisted by a 50 percent tax cut on smaller vehicles, which is no longer in place.

China sold a record number of automobiles in 2016
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But consider this: Here in the U.S., the average age of cars and light trucks continues to creep up and is now 11.6 years, as of January 2016, according to IHS Markit. Improvements in quality is the main reason for the increase.

Even so, these aging vehicles will need to be replaced in the next few years, meaning domestic auto sales should remain strong. This bodes well for platinum and palladium, both of which are used in the production of catalytic converters.

But what about electric cars, which have no need for catalytic converters since they’re emissions-free? As I’ve shared with you before, electric cars—the demand for which continues to climb—use three times more copper wiring than vehicles with a conventional internal combustion engine.

There’s always an opportunity if you know where to look!

 

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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2016.

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“America Works… Never Bet Against America”
January 23, 2017

America works and I think it'll work fine under donald trump... never bet against America. Warren Buffett

And like that, it happened. Despite the polls, despite what anyone believed was possible, including many of his own supporters, billionaire developer Donald J. Trump was sworn in as the 45th President of the United States.

Whether you agree with him not, he’s now leader of the world’s largest economy and commander of history’s most powerful military force.

This is something that could only happen in the U.S.

President Trump and now-former President Barack Obama couldn’t be more different in their backgrounds, visions and leadership styles—more so than any other two men whose administrations happen to adjoin the other’s.

And yet the transition went remarkably smoothly and orderly.

I don’t believe there’s ever been such a meaningful and potentially consequential transfer of power in U.S. history, with the incoming president all but promising to undo every last policy of his predecessor, line by line. That Obama peacefully and cordially handed over the executive office to a man who led the charge in questioning his legitimacy for a number of years is a testament to the strength and durability of our democratic process.

It’s a process that’s key to America’s exceptionalism.

Although I don’t always agree with Trump, it saddens me to see so much negativity about him in the media and protests in the streets. Now that he’s president, the time has come to unite behind him and root for his success. If he succeeds, America succeeds. If he fails—as many seem to hope for—America fails.

Take Warren Buffett. He backed Hillary Clinton throughout the primaries and general election. And yet on the eve of Trump’s inauguration, he said he supported the new president and his cabinet “overwhelmingly,” adding that he’s confident America “will work fine under Donald Trump.”

I think what Buffett recognizes is that the vast majority of people who voted for Trump did so for the right reasons. Throughout his campaign, Trump’s promise to bring back American jobs and secure the nation’s borders resonated with everyday folks who have begun to feel overlooked. Entrepreneurs, small business owners and those working in the financial industry found hope and encouragement in his pledge to lower corporate taxes and roll back regulations.  (Just today, Trump told a room full of CEOs that he promised to cut regulations “by 75 percent, maybe more.”) I believe most Americans, regardless of political ideology, want these things—which is why we saw such a large number of people who previously voted for Obama give Trump their vote this time.

As I often say, government policy is a precursor to change, and we’re likely about to see some sweeping changes. But as investors, it’s as important as ever that we don’t panic or get distracted by the noise. Instead, continue to focus on the fundamentals and keep your eyes on the long-term prize.

Inflation Plays Catch-Up

Inflation, as measured by the consumer price index (CPI), got a strong jolt in December, rising 2.1 percent year-over-year, its fastest pace in at least two-and-a-half years. Higher gasoline prices—which rose more than 8 percent in December—and health care costs were the main culprits, with medical bills surging the most in nine years.

Good for Gold: U.S. inflation climbs above 2% in December
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Although they might hurt your pocketbook, pricier goods and services have historically been constructive for gold, as I’ve explained many times before. In August 2011, when gold hit its all-time high of $1,900 an ounce, inflation was running at 3.8 percent and the government was paying you an average 0.23 percent on the 2-year T-Note. That means investors were earning a negative 3.5 percent return, which helped boost gold’s “safe haven” status.

I expect CPI to continue to climb throughout this year and next, supported by additional interest rate hikes—two or three in 2017 alone—and President Trump’s protectionist policies.

The metal’s investment case could be strengthened even more now that Trump has officially been sworn in. His personal shortcomings and public office inexperience might raise more than a few “unknown unknowns” for some investors, prompting them to seek an alternative to stocks and bonds. Scotiabank hinted at this in a recent note, saying it expects gold holdings “to increase as investors look to diversify their portfolios in what seems likely to be a challenging year for investors.”

On Inauguration Day, gold rose a little under 1 percent to close at $1,210.

Whether you support the new president’s policies or not, it’s still prudent to maintain a 10 percent weighting in gold, with 5 percent in gold stocks, the other 5 percent in coins and bullion.

Another Gold Rally in the Works?

Look at the chart below. It’s indexed at 100 on the day the Federal Reserve raised rates in 2015 and 2016 (December 16 and 14, respectively). Although past performance doesn’t guarantee future results, gold prices so far this year appear to be tracking last year’s performance pretty closely, suggesting further upside potential. 

gold prices are tracking last year's performance since rate hike
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In the first half of 2016, gold rallied more than 31 percent, from a low of $1,046 in December 2015 to a high of $1,375 in July. With mid-December 2016 as our starting point, a similar 31 percent move this year would add close to $360 to the price of gold, taking it to above $1,520 an ounce.

Gold Has a 100-Year History of Outperforming All Major Currencies

In its 2017 outlook, the influential World Gold Council (WGC) listed six major trends that will likely support gold demand throughout the year, including heightened geopolitical risks (Brexit, Trump, the global rise of populism), a potential stock market correction, rising inflation expectations and long-term Asian growth.

The group also calls out currency depreciation. Over the past 100 years, gold has strongly outperformed all major currencies. Whereas global gold supply grows at an annual average of only 2 percent, there’s no limit to how much fiat money can be printed.   

all major currencies have depreciated over the past century relative to gold
click to enlarge

Inflation and currency depreciation are among the Fear Trade’s triggers that I often write and speak about.

Spending Watchdog: U.S. Is on an “Unsustainable Fiscal Path”

This point about currency depreciation is especially relevant in light of an alarming new report from the U.S. Government Accountability Office (GAO), the nation’s watchdog. According to the report, the federal government’s spending is “unsustainable,” and if no action is taken to rectify the problem, the debt-to-GDP ratio will soon exceed its historical high of 106 percent, set in 1946.

To be clear, that means our nation’s debt will be larger than its economy.

an unsustainable fiscal path debt-to-gdp ratio expected to surpass its historical high
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The federal deficit increased to $587 billion in 2016, after six years of declining deficits. Spending increases were driven by entitlement programs such as Medicare and Medicaid, which surged 4.9 percent and 5.3 percent, respectively, during the year.

Whether Trump can change any of this, we’ll just have to wait and see. He seems interested in lowering costs and bringing some fiscal sanity to the government, as demonstrated by his criticism of Boeing over the perceived cost of Air Force One. At the same time, massive tax cuts, coupled with a $1 trillion infrastructure package, will likely drive up deficit spending even more.

All the more reason to have a portion of your portfolio invested in gold and gold stocks.

In the meantime, I wish President Trump all the best!

 

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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: The Boeing Co.

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Net Asset Value
as of 02/22/2018

Global Resources Fund PSPFX $6.17 0.01 Gold and Precious Metals Fund USERX $6.94 -0.01 World Precious Minerals Fund UNWPX $4.18 -0.04 China Region Fund USCOX $11.80 -0.07 Emerging Europe Fund EUROX $7.84 0.06 All American Equity Fund GBTFX $25.22 No Change Holmes Macro Trends Fund MEGAX $19.33 -0.19 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change