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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.

Minute with the Analyst: Meet Joanna Sawicka
October 3, 2018

Meet Joanna Sawicka – an emerging Europe research analyst at U.S. Global Investors. Prior to joining our team in 2007, Joanna was part of Soros Fund Management in New York and JP Morgan in San Antonio. Since 2015, she has worked on the Investment team and currently is primarily responsible for analyzing companies in emerging European countries.

In this brief Q&A, I invite you to learn more about Joanna’s path to becoming an emerging Europe analyst and read what she sees on the horizon for this region as we head into year end.

What made you want to become an investment analyst?

I always knew that I wanted to pursue a career in finance. However, I didn’t know which section of the industry would suit me best until I visited the New York Stock Exchange (NYSE) for one of my classes at Baruch College. During this visit, we went to the floor of the exchange and toured a huge vault full of gold. Watching the trading and experiencing the atmosphere firsthand left a huge impression on me. It was after this trip that I moved steadily over to investments.

While working on my investment specialization in school, I especially enjoyed my simulation class. In it, we were given half a million dollars to grow. If I remember correctly, I invested in oil futures and bought Disney stock. I actually made a lot of money!

What was the most memorable trip you’ve taken for your job?

While I have traveled to many fascinating places, like the Warsaw Stock Exchange, to me, the most interesting trip was to the Wood & Company CEE Investor Days Conference in New York earlier this year. I was very surprised by how many people at the conference wanted to learn more about eastern Europe. The number of attendees speaking Polish also caught me off guard, though it makes sense since Wood & Company has a big presence in Poland.

You took a trip to Poland this summer. Did you notice any changes in the country since your last time there?

For the past three years, I have made an annual trip to Poland. Being there so frequently makes it a bit harder to see changes. Having said that, I did notice quite a bit of construction, in particular highway construction. Two years ago, when my flight landed in Warsaw, it took three or four hours to drive to my hometown, Bialystock, because the highway was not complete. This year, the drive only took two hours. There is still a lot of construction, especially on the east side, but the improvements are very apparent.

Many new businesses, small and large, began to appear starting 10 years ago, resulting in new construction projects like shopping centers. People are actually spending a lot of money. That is the most notable change to me in the last decade or so.  

Poland was recently upgraded to a developed market by FTSE Russell. What is on the horizon for Poland? Do you believe its growth is sustainable?

The upgrade to a developed market is very positive for Poland. The next step would be updating the country on the MSCI Emerging Markets Index. It’s my understanding that Poland is only missing one factor – gross domestic product (GDP) per capita. That isn’t quite strong enough yet. Once that happens, there will be more inflows into Polish equities.

Joanna Sawicka emerging europe research analyst U.S. Global Investors

It is important to mention that Poland is very strong in central emerging Europe and has the largest stock markets. There are more than 350 stocks trading on the Warsaw Stock Exchange, compared to only a handful in other central emerging European markets. Most of the stocks in other geographically similar markets, like Hungary and the Czech Republic, are not very liquid. The large equity market in Poland makes it much more accessible for larger investors.

Additionally, Poland is growing at around 5 percent, has stable inflation, low unemployment and solid consumer spending. Given these facts, I believe Poland’s growth is sustainable.

Do you see growing nationalism as a risk?

In central emerging Europe, nationalism has always had a presence, such as the Law and Justice in Poland (PiS) and Fidesz in Hungary. However, this trend is not specific to the region. In fact, it has spread into Western Europe. A far right government came into power in Austria last year. The elections in Italy, Germany and Sweden saw similar movements. I do not currently believe this is a threat, but we will have to see how it develops.

The recent emerging market sell-off has captured a lot of headlines. What is your outlook on emerging markets for the rest of 2018?

Emerging markets peaked around mid-January this year and, since then, stocks are down about 20 percent. Emerging markets were suppressed by dramatic currency depreciation in Turkey and Argentina.  At one point, we saw the lira drop about 25 percent in a couple days. Argentina experienced a huge drop as well, though the central bank of Argentina was a little more supportive with its rate hikes.

I think we are at a turning point now and emerging Europe will rebound. The Turkish bank just recently hiked rates by 625 basis points, which is very supportive of the lira. Additionally, when the price crosses above the 50-day moving average, we expect inflows. I noticed a cross in emerging markets and emerging Europe, so I think this uptrend will continue towards the end of the year.

With oil on the rise, Turkey looks even more vulnerable. Should investors be concerned?

Brent moving higher is certainly negative for Turkey, since it’s a major importer of crude oil, but a bigger concern is the weakening lira. Year-to-date, the lira has depreciated around 40 percent. So there is more to it than just higher oil prices, especially considering Turkey’s geopolitical situation.

U.S. sanctions are weighing heavily on Russia’s economy. What is Russia doing to counteract the slowdown?

U.S. sanctions have a significant impact, not only on Russia’s economy, but all of Europe’s growth, as these countries’ economies are interrelated. The latest set of sanctions was the most severe, disallowing American investors to own certain Russian equities which resulted in a sharp sell-off. There may be additional sanctions on the horizon, though no one is sure yet.

In the interim, Russia is taking measures to protect its economy. For example, the government is essentially supporting the ruble by hiking rates and discontinuing weekly forex buying. In March, Vladimir Putin won another presidential term and announced infrastructure reform, which may be supportive for the economy.

Russia is also trying to develop a better relationship with Asia. There is discussion about potentially building a pipeline through North Korea since the situation there has improved somewhat. Acquiring new “friends” could be positive for the Russian economy. 

Want to learn more about emerging Europe? Subscribe to the award-winning Investor Alert newsletter for a weekly recap of the biggest market-moving events.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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).

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

None of the U.S. Global Investors funds held any of the securities mentioned in this article as of 6/30/18.

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Two Big Reasons Why I Believe China Looks Attractive Right Now
September 25, 2018

emerging markets look like a buy after decoupling from the U.S. market

Emerging markets continue to decouple from the U.S. market, making them look attractive as a value play—particularly distressed Chinese equities. Below I’ll share with you two big reasons why I think China is well-positioned to outperform over the long term.

So far this year, the MSCI Emerging Markets Index has given up about 10 percent, mostly on currency weakness and global trade fears. The S&P 500 Index, meanwhile, has advanced roughly 9 percent as a flood of passive index buying pushes valuations up and companies buy back their own stock at a record pace.

emerging markets look like a buy after decoupling from the U.S. market
click to enlarge

S&P Dow Jones Indices reported this week that buybacks in the second quarter increased almost 60 percent from the same three months a year ago to a record $190.6 billion. For the 12 months ended June 30, S&P 500 companies, flush with cash thanks to corporate tax reform, spent an unprecedented $645.8 billion shrinking their float. In the first half of 2018, in fact, companies spent more on buybacks than they did on capital expenditures.

As I told CNBC recently, this, combined with fewer stocks available for fundamental investing, could contribute toward a massive selloff when it comes time for multibillion-dollar index funds to rebalance at year’s end.

But let’s get back to emerging markets.

The Selloff Is Overdone, According to Experts

Again, China in particular looks like a buying opportunity with stocks down near a four-year low. Speaking with CNBC last week, chief executive of J.P. Morgan Chase’s China business, Mark Leung, said that the emerging market selloff is largely overdone. “If you look at the positioning and also the fundamentals side, we think there are reasons to start going into emerging markets for the medium and long term,” Leung said, adding, “China is a big piece.”

This view was echoed by Catherine Cai, chairman of UBS’s Greater China investment banking arm, who told CNBC that she believes “among all the emerging markets, China’s still representing the most attractive market.”

The U.S. just imposed tariffs on as much as $200 billion worth of Chinese imports, which will have the effect of raising consumer prices. Among the retailers and brands that have already announced they will be passing costs on to consumers are Walmart, General Motors, Toyota, Coca-Cola and MillerCoors. China plans to retaliate with tariffs of its own on $60 billion in U.S. exports. 

Despite this, the tariffs’ impact on the Chinese economy will be “very small,” Cai said, as the country’s government is now “prepared” to handle the additional pressure.

The Power of 600 Million Millennials

The two reasons I find China so compelling right now are 1) promising demographics, and 2) financial reform.

As for the first reason, there’s really no arguing against the sheer math of Asia’s exploding population. You’ve heard the expression “There is strength in numbers,” and nowhere is that more apparent than in China and India, affectionately known as “Chindia,” where 40 percent of all humans live.

But there’s more. According to a recent report from CLSA, the entire continent of Asia is now home to nearly one billion millennials, or people aged 20 to 34. China and India alone contribute more than 600 million millennials, the youngest of whom will “start to hit their ‘peak’ earning capacity” over the next 10 years, says CLSA.

Asian millennials are changing global consumption
click to enlarge

“Millennials are more affluent, better educated with difference perspectives and priorities than their parents’ generation, which tends to sacrifice present consumption for the future,” CLSA writes. “Millennials care less about saving.”

This translates into not only the largest consumer class the world has ever seen, but also the most eager to spend their money on goods and services their parents and grandparents could never have imagined.

Consumption, in fact, now accounts for nearly 80 percent of China’s gross domestic product (GDP) growth, helping the country become less dependent on capital input and foreign trade.

China’s Capital Markets Continue to Mature

chinese premiere li keqiang: the pool is full of water and the challenge is to unblock the channels. As for my second reason, financial reform, Premier Li Keqiang recently pledged to give equal treatment to foreign investors in capital markets, all in the name of bolstering confidence among investors who may have been rattled lately by the U.S.-China trade dispute.

“The pool is full of water,” Li said, “and the challenge is to unblock the channels.”

China A-shares, those traded in the Shanghai and Shenzhen stock exchanges, were once available only to Chinese citizens living on the mainland. But as a sign of the financial market’s maturation, last week marked the first time that foreign investors living in mainland China, as well as employees of listed Chinese firms living overseas, could freely trade A-shares.

Many A-shares have already been added to indexes provided by MSCI, and FTSE Russell said it will decide soon whether to do the same.

As we’ve seen in the U.S. market and elsewhere, a stock’s inclusion in a major index has meant, for better or worse, that it automatically gets an infusion of investors’ money, regardless of fundamentals.

That Premier Li plans to open China’s market up even further is exciting, and makes its investment case even stronger.

To learn more about investment opportunities in China and the surrounding region, watch our short video by clicking here.

 

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

The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. 

Gross domestic product (GDP) is the total value of goods produced and services provided in a country during one year.

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 6/30/2018: Coca-Cola Bottling Co. Consolidated.

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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!

 

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.”

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
click to enlarge

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!

 

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