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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.

Top 10 Countries with Largest Gold Reserves
July 5, 2018

Beginning in 2010, central banks around the world turned from being net sellers of gold to net buyers of gold. Last year official sector activity rose 36 percent to 366 tonnes – a substantial increase from 2016.

top 10 central banks ranked by largest gold holdings as of june 2018

The top 10 central banks with the largest gold reserves have remained mostly unchanged for the last few years. The United States holds the number one spot with over 8,000 tonnes of gold in its vaults – nearly as much as the next three countries combined. For six consecutive years the Russian Central Bank has been the largest purchaser of gold, increasing its holdings by 224 tonnes in 2017 and overtaking China to hold the fifth spot, according to the GFMS Gold Survey.

Not every central bank is a net buyer. For the second year in a row, Venezuela has been the largest seller of gold, with 25 tonnes sold last year to help pay off debt. However, gross official sector sales declined by 55 percent last year, to the lowest since 2014, indicating that central banks are happy to keep their reserves in gold, historically viewed as a safe-haven asset.

Central Banks Continue Gobbling Up Gold central bank purchases from 1997 to 2017
click to enlarge

2018 could be another strong year for central bank gold demand. According to the World Gold Council (WGC), demand in the first quarter was up 42 percent year-over-year, with purchases totaling 116.5 tonnes for the highest first quarter total since 2014. As global debt continues to skyrocket, central banks and individual investors alike might want to keep gold in their pockets, as it historically has performed well during times of economic downturn and geopolitical uncertainty.

Below are the top 10 countries with the largest gold holdings, beginning with India.

 

10. India

Tonnes: 560.3

Percent of foreign reserves: 5.5 percent

It’s no surprise that the Bank of India has one of the largest stores of gold in the world. The South Asian country, home to 1.25 billion people, is the second largest consumer of the precious metal, and is one of the most reliable drivers of global demand. India’s festival and wedding season, which runs from October to December, has historically been a huge boon to gold’s Love Trade.

Construction on the Golden Temple in Amritsar, India, concluded in 1604

9. Netherlands

Tonnes: 612.5

Percent of foreign reserves: 68.2 percent

The Dutch Central Bank announced that it will be moving its gold vaults from Amsterdam to Camp New Amsterdam, about an hour outside the city, citing burdensome security measures of its current location. As many others have pointed out, this seems odd, given that the bank fairly recently repatriated a large amount of its gold from the U.S.

The Gold Souk building in Beverwijk, The Netherlands, houses a marketplace for gold dealers and goldsmiths

8. Japan

Tonnes: 765.2

Percent of foreign reserves: 2.5 percent

Japan, the world’s third largest economy, is also the eighth largest hoarder of the yellow metal. Its central bank has been one of the most aggressive practitioners of quantitative easing—in January 2016, it lowered interest rates below zero—which has helped fuel demand for gold around the world.

The Gold Pavilion in Kyoto, japan, features beautiful gold-leaf coating

7. Switzerland

Tonnes: 1,040.0

Percent of foreign reserves: 5.3 percent

In seventh place is Switzerland, which actually has the world’s largest reserves of gold per capita. During World War II, the neutral country became the center of the gold trade in Europe, making transactions with both the Allies and Axis powers. Today, much of its gold trading is done with Hong Kong and China.

Credit Suisse gold bars and coins

6. China

Tonnes: 1,842.6

Percent of foreign reserves: 2.4 percent

In the summer of 2015, the People’s Bank of China began sharing its gold purchasing activity on a monthly basis for the first time since 2009. Although China comes in sixth for most gold held, the  yellow metal accounts for only a small percentage of its overall reserves – a mere 2.4 percent – the lowest of the top 10 central banks with the most gold. However, this figure is up slightly from 2.2 percent of holdings in 2016.

China is also the number one gold producing nation. What other countries are top gold producers? Find out here!

Over 2,000 ancient Buddha statues have been excavated in China

5. Russia

Tonnes: 1,909.8

Percent of foreign reserves: 17.6 percent

The Russian Central Bank has been the largest buyer of gold for the past six years and earlier this year overtook China to have the fifth largest reserves. In 2017 Russia bought 224 tonnes of bullion in an effort to diversify away from the U.S. dollar, as its relationship with the West has grown chilly since the annexation of the Crimean Peninsula in mid-2014. To raise the cash for these purchases, Russia sold a huge percentage of its U.S. Treasuries.

Gilded domes of the Annunciation Cathedral in Moscow, Russia

4. France

Tonnes: 2,436.0

Percent of foreign reserves: 63.9 percent

France’s central bank has sold little of its gold over the past several years, and there are calls to halt it altogether. Marine Le Pen, president of the country’s far-right National Front party, has led the charge not only to put a freeze on selling the nation’s gold but also to repatriate the entire amount from foreign vaults.

Anne of Brittany's wedding crown

3. Italy

Tonnes: 2,451.8

Percent of foreign reserves: 67.9 percent

Italy has likewise maintained the size of its reserves over the years, and it has support from European Central Bank (ECB) President Mario Draghi. The former Bank of Italy governor, when asked by a reporter in 2013 what role gold plays in a central bank’s portfolio, answered that the metal was “a reserve of safety,” adding, “it gives you a fairly good protection against fluctuations against the dollar.”

Detail of a gold lion in St. Mark's Basilica in Venice, Italy

2. Germany

Tonnes: 3,371.0

Percent of foreign reserves: 70.6 percent

Last year Germany completed a four-year repatriation operation to move a total of 674 tonnes of gold from the Banque de France and the Federal Reserve Bank of New York back to its own vaults. First announced in 2013, the move was expected to take until 2020 to complete. Although gold demand fell last year after hitting an all-time high in 2016, this European country has seen gold investing steadily rise since the global financial crisis.

A variety of Germman coins

1. United States

Tonnes: 8,133.5

Percent of foreign reserves: 75.2 percent

With the largest official holdings in the world, the U.S. lays claim to nearly as much gold as the next three countries combined. It also has the highest gold allocation as a percentage of its foreign reserves at over 75 percent. From what we know, the majority of U.S. gold is held at Fort Knox in Kentucky, with the remainder held at the Philadelphia Mint, Denver Mint, San Francisco Assay Office and West Point Bullion Depository. Which state loves gold the most? Well, the state of Texas went so far as to create its very own Texas Bullion Depository to safeguard investors’ gold.

The US holds most of its gold at the US Bullion Reservatory at Fort Knox

Can't get enough of gold? Learn all about the yellow metal's seasonal trading patterns by downloading our free whitepaper, Gold's Love Trade, today!

gold love trade whitepaper frank holmes

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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Russia Is Defying Expectations
June 25, 2018

Russian president Vladimir Putin holding the FIFA world cup trophy at a pre tournament ceremony in Moscover in September 2017

 

Before being defeated today by Uruguay at the 2018 FIFA World Cup, Russia surprised experts and fans alike. Expectations were low at best. Because of recent setbacks, including a disastrous performance at the 2016 UEFA European Championship and injuries sustained by key players, the federation ranked a dismal 66th place among Fédération Internationale de Football Association teams—its lowest position ever. The only reason it didn’t have to qualify to compete was because Russia is the host nation. (This is the first time in its 88-year history, by the way, that the World Cup has been held in Eastern Europe.)

And yet Russia has defied predictions that the federation would be eliminated right out of the gate.

It’s managed to advance to the knockout stage, but that’s likely as far as it will get when it goes up against either Spain or Portugal on July 1. As for which team might win the Cup, sophisticated predictive models using portfolio theory and the historical performance of players are pointing to France beating Spain in the final.

Russian Airports Could Be Biggest Beneficiaries of Hosting World Cup

This is the second time in the past five years that Russia has hosted a major international sports tournament, and questions have surfaced about what economic benefits, if any, doing so affords.

As I shared with you back in February, the Eastern European country spent as much as $50 billion, a record-breaking sum, to host the 2014 Winter Olympics in Sochi. It seems insurmountable, but Fitch Ratings concluded that the debt was “manageable,” citing the reduction of interest rates to 0.5 percent and noting that the cost is less than 2.5 percent of Russia’s gross domestic product (GDP).

There’s also evidence that the investment had been well made. Four years later, Sochi is still full of tourists, and locals even have a nickname for the old Olympic Park, now a resort town: “Sochifornia.”

Hosting the World Cup has set Russia back an estimated $14 billion—again, a record amount for the competition. And like the Olympics, the Cup could produce some modest net economic benefits—in the short-term, at least—according to experts.

Back in April, tournament organizers predicted that, as a result of increased tourism and large-scale spending on infrastructure, the competition would add nearly $31 billion to Russia’s economy in the 10 years between 2013 and 2023. (FIFA selected Russia as the host nation in 2010.)

Russian airports such as Moscow Domodedovo Airport are among the biggest long-term beneficiaries of World Cup-related capital spending.
"Moscou" by OliBac Licensed under a Creative Commons Attribution 2.0 Generic (CC-BY2.0). https://flic.kr/p/ovkQad

Analysts with Moody’s Investors Service were slightly less upbeat, writing that they see “very limited economic impact at the national level.” Among the beneficiaries are food retailers, hotels, telecommunications firms and transportation, as “better public infrastructure will likely generate additional tax revenue and reduce capital spending needs for the hosting regions in the coming years.” But the greatest long-term beneficiary, Moody’s says, are Moscow-based international airports, since “upgraded facilities will support higher passenger flow, even after the event.”

Watch this brief video on opportunities in the global airline and airport industries by clicking here!

Russia’s Recovery Gathering Pace

Besides its soccer prowess, Russia is defying expectations in other ways—and equity investors should be taking notice.

Having emerged last year from a two-year recession that was triggered by the collapse in oil prices and imposition of sanctions following its annexation of Crimea, the country is now in full-on recovery mode. In a note to investors last week, Capital Economics senior emerging markets economist William Jackson says that GDP growth in May picked up to more than 2 percent year-over-year, up from 1.3 percent in the first quarter. Most of the changes, according to Jackson, came in manufacturing, which he estimates to be growing by more than 5 percent year-over-year, compared with only 1 percent previously.

“This all supports the point we’ve been making for some time,” he writes, “that Russia’s recovery was likely to resume and gather pace this year.”

Once almost entirely reliant on oil exports, the government of the world’s leading oil producer has lowered the structure of exports from 70 percent energy in 2013 to 59 percent last year, according to the World Bank. Today, the budget is back in surplus, and government debt stands at a remarkable 33 percent of GDP, the lowest among G20 nations.

Key inflation is currently running at a record low of 2.4 percent year-over-year, well below the Central Bank of Russia’s (CBR) target of 4 percent. Food inflation, in particular, is near zero percent.

russian inflation is at a record low level below central banks target
click to enlarge

Unemployment continues to decline. In May it fell to 4.7 percent, a record low since the collapse of the Soviet Union in 1991.

unemployment in Russia fell to a record low in May
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Because of low inflation and a near-full employment jobs market, real wages are expanding healthily across all sectors. This is helping to drive stronger private consumption and investment. In May, retail sales grew 2.4 percent compared to the same month last year.

real wages in Russia are growing across all sectors
click to enlarge

Government Policy Supportive of Future Growth

The Russian government is currently enacting or considering policy that should help sustain the economy’s recovery. For one, it recently moved to raise the retirement age to reduce the cost to the state budget on an aging population, the Financial Times reports. (The median age in Russia is nearly 40, compared to around 30 for the entire world.) The pension age for men will increase from 60 years to 65 years in 2028, while for women it will increase from 55 years to 63 years in 2034.

The reform could help the government save an estimated $27.3 billion a year, according to a Russian think tank.

The government is also reportedly working on a plan to invest more in infrastructure and reduce “unnecessary regulation that is holding back private investment.” That’s according to Morgan Stanley’s Clemens Grafe, who adds that plans for “national projects” will be drawn up by October “that should help Russia to become one of the five largest economies in the world.”

Time to Consider Investing in Moscow?

Some might consider that fanciful thinking, but it doesn’t take away from the fact that Russia is an attractive place to invest right now, especially compared to the U.S. market.

Besides an economy in recovery, consider the following: Whereas the S&P 500 Index is up a little more than 13 percent for the 12-month period, the MOEX Russia Index has seen gains closer to 22 percent. That comes with an appealing 6.46 percent dividend yield, compared to 1.94 percent for U.S. stocks.

The price is right too. Russia trades at an inexpensive 6.39 times earnings, the U.S. at 21.08 times earnings, according to Bloomberg data.

Interested in learning more about emerging Europe? Watch this brief video featuring U.S. Global research analyst Joanna Sawicka as she describes her favorite three countries in this fast-growing region.

 

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 S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. The MOEX Russia Index  is the main ruble-denominated benchmark of the Russian stock market.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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Gold, World War II and Operation Fish
June 5, 2018

Darkest Hour I recently had the opportunity to see the excellent 2017 film Darkest Hour, about British Prime Minister Winston Churchill’s struggle to keep the United Kingdom in the fight against the Nazis, even as members of his own government pressured him to capitulate. Gary Oldman’s portrayal of the tough-as-nails leader is at turns tender and rousing—and very well deserving of the Best Actor Oscar.

I’d recommend the film to anyone, whether they’re a student of World War II or not.

It got me thinking, though, about the important role gold played in how the war was financed, as well as the U.K.’s daring efforts to prevent its gold holdings from falling into Adolf Hitler’s hands, should Nazi forces successfully invade the island and ransack its central bank. After all, Germany had done as much in a number of Central European countries before threatening the U.K.

Although not directly addressed in Darkest Hour, the U.K. ended up evacuating billions of dollars’ worth of gold bullion and other assets across the Atlantic, all to be kept safely in Canada. The mission, codenamed “Operation Fish,” is still the largest movement of physical wealth in history.

Germany’s Economic Straits

So why was Hitler so interested in acquiring gold?

To answer that, we really need to go back to the 1920s. At the time, Germany was in serious economic straits. It faced unprecedented hyperinflation, among the very worst such incidents in world history.

This was clearly a problem for Hitler, who, soon after being appointed Reich Chancellor in 1933, set in motion the remilitarization of Germany, in direct violation of the Treaty of Versailles. Because the Western European country is not particularly resource-rich—the one exception is coal—everything from aluminum to zinc would have to be imported to manufacture the guns, tanks, ships, and warplanes needed to wage an extended conflict in the age of advanced machines.

But this was the Great Depression, which had suffocated the German economy as much as it had the United States’. Unemployment climbed to as high as 30 percent. In his inaugural address via radio, Hitler vowed to “achieve the great task of reorganizing our nation’s economy” through “a concerted and all-embarking attack against unemployment.”

Much like Roosevelt’s New Deal in the U.S., Hitler’s government tackled unemployment by dipping into deficit spending. It financed great public works projects such as the autobahn, railroad, housing and more.

The plan worked. Within four years, just as promised, unemployment was virtually thwarted. It’s been said that, had Hitler stopped in 1936 or 1937, he might today be remembered as one of the 20th century’s most admired leaders.

However, Hitler assumed a much more aggressive stance toward national rearmament in an effort to reclaim lost dignity—the Treaty of Versailles be damned. What stood in his way was not only his country’s lack of natural resources but also the fact that many supplier nations would not accept Germany’s worthless currency. They insisted instead to be paid in their own currency; some other international, convertible currency such as Swiss francs or U.S. dollars; or hard currency.    

How then would Germany pay for Sweden’s iron ore? Romania’s oil? Turkey’s chromium? Portugal’s tungsten and Spain’s manganese?

Enter gold.

In Gold We Trust

Before we continue, I want to make it clear that Hitler had no respect for the yellow metal, any more than he had for human life. Gold as a currency is built on trust, of which Hitler had none. He hated the metal and all it stands for—but he needed it to push forward his rearmament strategy.

during world war II, Germany's suppliers preferred gold to the reichsmark

Walther Funk, the Reich’s minister of economics and president of the country’s central Reichsbank, echoed this resentfulness at having to rely on gold:

“As far as currency is concerned, gold is unimportant to us,” Funk said in 1940. “We don’t need it as backing for a currency—which is being managed by price, volume, and wage control—but only to pay clearing balances.” 

In other words: We have absolutely no need for gold—until we need it.

But here another problem emerged: Just as it had few natural resources of its own, Germany laid claim to a relatively small gold reserve. In 1933, the Reich’s official holdings stood at only $109 million—not nearly enough to finance the kind of force Hitler envisioned.

The Greatest Gold Heist in History

So began the Reich’s looting of Europe’s gold reserves, beginning with Austria’s in 1938. At the time, Germany’s coffers were nearly empty. The infusion of Austria’s 90 to 100 metric tons of hard currency gave Hitler the boost he needed to continue his plundering.

Today we remember the Nazi’s gold heist as “one of the greatest thefts by a government in history,” in the words of Ambassador and Undersecretary of Commerce Stuart E. Eizenstat, spoken during his 1997 hearing on the status of Holocaust assets. Although estimates vary, and although the gold price fluctuates over time, it’s believed that as much as $600 million—now valued in the billions—were seized from the central banks and vaults of neighboring, occupied countries, including Austria, Poland, Belgium, Holland and the Netherlands. Millions more in silver, platinum, diamonds, artwork and other assets were stolen as well.

Operation Fish

Not every country’s hoard was pilfered, however. Once it was clear what the Nazis were up to, many outlying European countries had the prudence and foresight to secure their own reserves and keep them falling into Hitler’s hands.

And this is where we catch up with the timeline in Darkest Hour. In July 1940, as fears of a Nazi invasion intensified by the day, the U.K. shipped as much as 1,500 metric tons in gold—worth a mind-boggling $160 billion in 2017 dollars—across the Atlantic to be stored in Canada’s central bank in Ottawa.

one of the gold-bearing ships, the HMS enterprise

Codenamed “Operation Fish,” the evacuation was one of the greatest gambles ever. Writes Ottawa-based historian James Powell:

The only way to transport the tons of gold and securities was by ship across the U-boat infested North Atlantic, where 100 Allied and neutral merchant ships had been sunk in May 1940 alone. History was also not reassuring. During World War I, the SS Laurentic, carrying 43 tons of gold from Liverpool to Halifax, had been sunk in 1917 by a German U-boat off of Ireland. The loss of even one treasure ship would have major negative consequences. To buy weapons and other war materiel that it sorely needed from neutral United States, Britain had to pay in gold or U.S. dollars; no credit was permitted under the strict Neutrality Act in effect in the United States at that time.

Britain’s gamble paid off. Every last ingot made it safely across the Atlantic and was prevented from being used by the Nazis to extend their reign of terror a single day longer.

Germany Today a Gold Powerhouse

Although Hitler’s goals were despicable, his absolute need for gold reflects the precious metal’s centuries-long role as a widely accepted and trusted currency.

It’s a lesson Germany hasn’t forgotten, even today.

The country’s official gold holdings stand at 3,372 metric tons, more than any other except the U.S. Gold represents a whopping 70 percent of its foreign reserves—again, second only to the U.S. This has helped Germany become one of the most powerful and stable economies in the world.

More recently, Germany has emerged as the world’s largest gold investor. Although China and India still outpace the European country in total amount of gold consumed, Germans are ploughing more money into gold coins, bars and exchange-traded commodities (ETCs).

Interested in reading more about the history of gold? Check out some of my other posts below!

 

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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Spinning Italy's Distressed Debt into Gold
May 30, 2018

Spinning Italy’s Distressed Debt into Gold

Serious gold investors know that May has historically been a weak month for the price of the yellow metal. For the 10-year and 30-year periods, the month delivered negative returns. The general decline in enthusiasm comes before the late summer rally in anticipation of Diwali and the Indian wedding season, when gifts of gold are considered auspicious. In the past, the fifth month has provided an attractive buying opportunity.

This particular May, the price of gold also had to contend with a stronger U.S. dollar, which appreciated against the euro as political strife in Italy spread throughout the entire continent. Priced in euros, then, gold is performing well, having closed at a nearly one-year high of 1,125 euros on May 29.

gold priced in euros at one-year high on political uncertainty in Italy
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Italian government bond yields surged dramatically following President Sergio Mattarella’s decision to block the opposition parties’ pick for economic minister, a euroskeptic who supports Italy’s exit from the eurozone. The two-year bond in particular plunged the most since the creation of the bloc’s common currency in 1999.

italian government borrowing costs surge
click to enlarge

With no working government at the moment, it appears likely that Italy will hold another election soon, raising the odds that either the Five-Star Movement or the League—both populist, anti-establishment parties—could take control. Although at opposite ends of the political spectrum, the two parties have expressed interest in at least opening an earnest discussion on the idea of ditching the euro.

Déjà Vu All Over Again

Italy’s appetite for change fits into what I see as a global trend right now. Based on what I’ve heard during my travels, middle class taxpayers, in the U.S. and elsewhere, are increasingly fed up with special interests and entrenched bureaucrats. As a result, the U.K. elected to end its complicity with failed socialist rules and regulations from Brussels. Donald Trump, an outsider and disruptor, was recognized by American voters as the right candidate to take on the beltway party.

Similarly, it’s possible that Italy could end up being next to say addio to further European Union (EU) control and take back its own economic and political destiny.

That said, the fear of another government debt crisis, similar to Greece’s, has naturally rattled markets. Because Italy, the eurozone’s third-largest economy, already has the highest debt-to-GDP in the bloc after Greece, and because Five-Star and the League both support ending austerity and challenging Brussels’ limits on government borrowing and spending, financials were the worst performing sector in the U.S. market, falling close to 4.5 percent for the week ended May 29. The Euro Stoxx Banks Index was down 5 percent for the same period. Italian banks fared even worse, collapsing nearly 25 percent since their high in late April.

italian banks get crushed
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Gold Seeing a Boost on Safe Haven Demand

Gold is trading above $1,300 an ounce again, but there could be bigger upside the more investors realize the full and global implications of Italy’s political turmoil.

The country’s public debt currently stands at 132 percent of GDP, and ratings agencies are reviewing a possible downgrade of its credit rating. Should it default on its billions of dollars in loans, a chain reaction could quickly spread to financial markets all over the world.

This is a worst-case scenario, but it’s for these reasons I think it’s prudent to have a 10 percent weighting in gold, with 5 percent in physical gold and the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

Curious to see how some are gaining exposure to gold and precious metals? Click here!

 

The EURO STOXX Banks Index is a free float market capitalization index which covers 30 stocks of banks market sector leaders mainly from 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The FTSE Italia All-Share Banks Index is a free float market capitalization index of Italian banks.

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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Which Has the Bigger Economy: Texas or Russia?
April 16, 2018

Everything is bigger in Texas

You’ve no doubt heard that everything’s bigger in Texas. That’s more than just a trite expression, and I’m not just saying that because Texas is home to U.S. Global Investors.

Want to know how big Texas really is? Let’s compare its economy with that of Russia, the world’s largest country by area. As you probably know, Russia’s been in the news a lot lately, so the timing of this comparison makes sense. The U.S. just levied fresh sanctions against the Eastern European country for its alleged meddling in the 2016 presidential election, and early last week President Donald Trump warned Russia that the U.S. military could soon strike its ally Syria in response to its use of chemical weapons—a promise he kept Friday evening.

The Russian ruble traded sharply down following the news, decoupling from Brent crude oil, the country’s number one export.

Russian ruble decoupled from Brent crude following US snactions
click to enlarge

But back to the comparison. Even though Russia has nearly five times as many residents as Texas, the Lone Star State's economy is more than $400 billion larger. Texans, therefore, enjoy a gross domestic product (GDP) per capita of around $58,000, whereas Russians have one closer to $8,700.

Texas Is So Much More than Oil Country

The Russian Federation is the largest single producer of crude in the world, pumping out 10.95 million barrels per day (bpd) in January, according to the country’s energy minister. Texas is no slouch, though, as its output came close to 4 million bpd in January. That’s the most ever for a January since at least 1981. And from December 2017 to February 2018, its oil and gas industry accounted for nearly 30 percent of the state’s employment growth, according to the Federal Reserve Bank of Dallas.

But whereas Russia’s economy is highly dependent on exports of oil and petroleum products, the Texas economy is broadly diversified. The state ranks first in the U.S. for not only oil production but also wind energy. It has a robust agricultural sector, and it’s a leading hub for advanced technology and manufacturing, aeronautics, biotechnology and life sciences. Austin, the state capital, is steadily emerging as the most dynamic U.S. filmmaking city outside of Hollywood.

Texas exports

All of this has helped contribute to Texas being among the fastest growing states in the U.S. In 2017, it grew by more than 1,000 new residents per day.

Meanwhile, Russia’s population is slowly shrinking because of low birth rates and low immigration. Its population peaked at 148 million in the early 1990s—right around when the Soviet Union fell—and by 2050, it’s estimated to sink to 111 million. 

Can Russia Root Out Its Corruption?

One area where Russia trumps Texas is in corruption. If you think Texas—or any other state—has a corruption problem, Russia takes it to a whole new level.

But Russia takes it to a whole new level. Last year, it ranked 135 out of 180 countries on Transparency International’s Corruption Perceptions Index (CPI), released in February. Among Eastern European countries, only Uzbekistan, Tajikistan and Turkmenistan ranked lower. Watchdog group Freedom House was similarly critical in its most recent analysis, giving the country an overall democracy score of 6.61 out of 7, with 7 being “least democratic.”

So notorious and widespread is Russia’s mafia that a number of movies have been made about it. One of the best among them is David Cronenberg’s excellent Eastern Promises (2007).

Having said all that, I believe it’s prudent for investors to underweight Russian stocks for the time being and overweight Western Europe. Because of U.S. sanctions, Americans have until May 7 to divest completely from a number of Russian names, including Rusal, En+ Group and GAZ (Gorkovsky Avtomobilny Zavod), all of which saw serious outflows last past week. The MSCI Russia Index, which covers about 85 percent of Russian equities’ total market cap, plunged below its 200-day moving average, but last Thursday it jumped more than 4 percent, its best one-day move in two years.

Click here to learn more about underweighting Russian stocks.

Weaker Greenback and $1 Trillion Deficit Helps Gold Glitter

Gold is rallying right now, but as I told Daniela Cambone in last week’s “Gold Game Film,” it has little to do with Russian geopolitics, or even trade war fears, which have subsided somewhat in the past couple of weeks. Instead, the price of gold is responding primarily to a weaker U.S. dollar. For the 30-day period, the greenback has dipped close to 20 basis points—for the year, more than 11 percent.

I think what’s also driving the yellow metal right now are concerns over the U.S. budget deficit and ballooning government debt. This week the Congressional Budget Office (CBO) said it estimated the deficit to surge over $1 trillion this year and average $1.2 trillion each subsequent year between 2019 and 2028, for a total of $12.4 trillion. By the end of the next decade, then, debt held by the public is expected to approach 100 percent of U.S. GDP.   

US deficits projected to be larger than previously estimated
click to enlarge

According to the U.S. National Debt Clock, government debt now stands at over $21 trillion—or, put another way, $174,000 per taxpayer. Imagine what the interest payments on that must be.

The CBO, in fact, commented on this. Believe it or not, the government’s annual payments on interest alone, made even more burdensome by rising rates, are expected to exceed what it spends on the military by 2023. And remember, defense is one of the country’s top expenditures, alongside Medicare, Medicaid and other entitlement programs.

US government is expected to start spending more on interest than defense in 2023
click to enlarge

There was even more news last week on debt and the deficit, as Congress tried, and failed, once again to amend the Constitution by requiring a balanced budget. The amendment could not get the two-thirds support it needed.

You can probably tell where I’m headed with all of this. 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. As I’ve shown before, gold has tracked U.S. government debt up since 1971, when President Richard Nixon ended the gold standard. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in high-quality gold stocks, mutual funds or ETFs.

Asset Allocation Works

On a final note, I think it’s important that investors remember to stay diversified, especially now with volatility hitting stocks and geopolitical uncertainty on the rise. I’ve discussed Roger Gibson’s thoughts on asset allocation with you before, and I believe his strategy still holds up well today to capture favorable risk-adjusted returns.

Asset allocation works
click to enlarge

In the chart above, based on Gibson’s research, you can see that a portfolio composed of U.S. stocks, international stocks, real estate securities and commodity securities gave investors an attractive risk-reward profile between 1972 and 2015. This diversified portfolio, represented above by the orange circle, delivered good returns with a digestible amount of volatility, compared to portfolios that contained only one, two or three asset classes. Concentrating in only one or two asset classes could possibly give you higher returns, but you’d also likely see much greater risk, which many investors aren’t willing to accept.

I believe adding fixed-income—specifically short-term, tax-free municipal bonds—could improve these results. Munis with a shorter duration, as I’ve explained in the past, have a history of being steady growers not just in times of rising rates but also during market downturns. In the past 20 years, the stock market has undergone two massive declines, and in both cases, short-term, investment-grade munis—those carrying an A rating or higher—helped investors stanch the losses.

Learn more about the $3.8 trillion municipal bond market by clicking here!

 

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The Corruption Perceptions Index (CPI) scores countries on how corrupt their governments are believed to be. A country's score can range from zero to 100, with zero indicating high levels of corruption and 100 indicating low levels.

The MSCI Russia Index is designed to measure the performance of the large and mid-cap segments of the Russian market. With 22 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Russia.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the US and Canada. With 927 constituents, the index covers approximately 85% of the free float-adjusted market.

The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

The Bloomberg Commodity Index, formerly the DJ-UBS Commodity Index, is a broadly diversified index that tracks the commodities markets through commodity futures contracts. Since its launch in 1998, it has emerged as a leading benchmark of commodity markets.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2018.

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Net Asset Value
as of 07/17/2018

Global Resources Fund PSPFX $5.67 -0.01 Gold and Precious Metals Fund USERX $7.56 -0.08 World Precious Minerals Fund UNWPX $3.84 -0.03 China Region Fund USCOX $10.47 -0.11 Emerging Europe Fund EUROX $6.82 0.01 All American Equity Fund GBTFX $25.57 0.08 Holmes Macro Trends Fund MEGAX $19.71 0.09 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change