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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.

Are We Nearing the End of the EU Experiment?
June 13, 2016

Global slowdown worries high Indias booming economy

Right out of the gate, I want to thank everyone who took time out of their busy schedules to tune in to our gold webcast last Wednesday. I also want to thank Aram Shishmanian, CEO of the World Gold Council, for joining me as our special guest. His deep insights into gold investing were well articulated and highly appreciated. If you happened to miss it live, I urge you to catch the replay, which we’ll be posting on usfunds.com soon. Look for it!

If you’re a serious investor—and because you’re reading this, I have to assume that you are—gold is looking more and more like a crucial trade. Fewer than two weeks remain before United Kingdom voters decide on whether the country will continue to be a member of the European Union (EU) or become the first-ever to leave it. The “Brexit,” as it’s come to be known, is arguably the most consequential political event of 2016—perhaps even more so than the U.S. presidential election in November—with far-reaching implications.

Global slowdown worries high Indias booming economy

Should the U.K. leave, it will certainly underline the question many people have about the EU’s viability. And remember, this is a group of countries that collectively has the world’s second largest gross national product (GDP), followed by China.

But whatever happens, “the European Union is not going to remain the same,” as Aram put it during the webcast. “The euro is still very unstable, and I think we could easily see an environment in which trade barriers will increase and currency wars will increase. Regrettably, we could have a weaker global economy.”

With this as the threat, “gold’s role is one of wealth protection,” Aram said.

Taking Precautions Against an Unknowable Future

Even Europeans are beginning to lose confidence in the European experiment. The Pew Research Center recently polled nearly 10,500 Europeans from 10 separate EU countries on their favorability of the 28-member bloc. Nearly half of all respondents—47 percent—held an unfavorable view.

Global Manufacturing Sector Stagnates May
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Trust in the European Central Bank (ECB) continues to falter as well. In a blistering note titled “The ECB must change course,” Deutsche Bank called out the central bank for “threatening the European project as a whole for the sake of short-term financial stability.” The ECB’s actions have “allowed politicians to sit on their hands with regard to growth-enhancing reforms.” The longer the bank persists with a negative interest rate policy, the more damage it will inflict upon Europe, Deutsche added.

Meanwhile, Frankfurt-based Commerzbank is considering stashing physical cash in pricey vaults instead of keeping it with the ECB, whose policies are cutting into bank profitability.

Speaking to the World Gold Council’s Gold Investor newsletter this month, former Governor of the Bank of England Mervyn King criticized the ECB’s negative rate policy, saying: “If you repeatedly bring down interest rates to try and persuade people to spend today rather than tomorrow, it works for a while. But they become increasingly resistant to being asked to spend their resources now rather than save for the future.”

Like Aram and others, Governor King sees gold as a likely solution. “There is clearly a need to take some precautions against an unknowable future,” he said, which is the same argument for having health insurance.

Negative rate policies are having a huge effect on bond yields, as you can see below. Over $10 trillion worth of government debt across the globe carried a negative yield as of the end of April. (In a tweet last week, legendary bond guru Bill Gross called it “a supernova that will explode one day.”) In Switzerland, three quarters of all government bonds right now actually charge investors interest. Real harm is being done to retirees, who have had to pick up part-time work at Walmart or become Uber drivers to offset lost interest on their savings and pensions.

Global Manufacturing Sector Stagnates May
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This is prompting investors to look elsewhere, including the U.S. municipal bond market, which has attracted $632 billion in assets this year alone as of June 1. Of that amount, more than $22 billion has flowed into muni mutual funds, the best start to a year since 2009. Between that year and the end of 2015, the amount of U.S. municipal debt held by foreign investors climbed 44 percent, validating its appeal as an investment with a history of little to no drama, even during times of economic turmoil and periods of rising and lowering interest rates.

$1,400 Gold this Summer?

George Soros

Joining Aram in seeing the Brexit as further proof of impeding economic troubles is billionaire investor George Soros. After a hiatus of conducting any personal trading, the 85-year-old is back in the game—this time with some bearish investments. In the first quarter, he purchased a $264 million stake in Barrick Gold, the world’s largest gold producer, and a million shares in precious metals streaming company Silver Wheaton. It appears he’s added to both positions, indicating a bet against the broader equity market.

Now, with a Federal Reserve rate hike looking more and more unlikely this month, gold is expected to resume its bull run, according to Australia and New Zealand Bank Group (ANZ) commodity strategist Daniel Hynes. This, along with a possible Brexit, could push the yellow metal to $1,400, a price we haven’t seen in three years this month.

Paradigm Capital also sees the rally picking up where it left off in May, noting that gold’s trajectory so far this year resembles the one it took in 2002, the first full year of the last bull market, which carried the metal to $1,900 in 2011. “The resemblance is rather striking,” Paradigm writes.

Global Manufacturing Sector Stagnates May
click to enlarge

The investment dealer forecasts gold to reach nearly $1,400 by year-end after a dip in October. It also maintains its position that this particular bull run will peak at $1,800 sometime during the next three to four years.

Whether or not this turns out to be the case is beside the point. Savvy investors—not to mention central banks and governments—recognize gold’s historical role in minimizing the impact of inflation, negative rates and currency depreciation. This is what I call the Fear Trade, and I always advocate up to a 10 percent weighting in gold that includes gold stocks as well as bullion, coins and jewelry.

Catching Up with Sectors and Industries

Because we’re near the halfway mark of 2016, I thought you’d be interested to see what the top performing sectors and industries were for the year so far.

As for sectors, utilities is on top, delivering more than 15 percent so far. Jittery investors, worried about slow global growth and geopolitical threats, have moved into defensive stocks such as water and electricity providers and telecommunications companies, many of which offer steady dividends in a low-yield world. Financials, as you might imagine, have been hurt by interest rate uncertainty.

Global Manufacturing Sector Stagnates May
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Below I’ve highlighted the 10 best performing industries for the year, and interestingly enough, metals and mining companies, particularly those involved in the gold space, lead all others. Spot gold is up 20 percent so far, but amazingly gold miners have doubled investors’ money. Metals and mining companies have rallied more than 53 percent.

Global Manufacturing Sector Stagnates May
click to enlarge

Many of the top-performing companies this year had some of the biggest declines last year because of impaired balance sheets. To maintain their performance long-term, they will need to show earnings.

 

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.

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.

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

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 3/31/2016: Barrick Gold Corp., Silver Wheaton Corp.

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Top 10 Countries with Largest Gold Reserves
May 25, 2016

Beginning in 2010, central banks around the world turned from being net sellers of gold to net buyers of gold. Last year they collectively added 483 tonnes—the second largest annual total since the end of the gold standard—with Russia and China accounting for most of the activity. The second half of 2015 saw the most robust purchasing on record, according to the World Gold Council (WGC).

lucara diamond at a nine-year high

click to enlarge

Not every top bank is a net buyer. The Bank of Canada has liquidated close to all of its gold, mainly in coin sales, while Venezuela is in the process of doing the same to pay off its debts.

But most of the world’s central banks right now are accumulating, holding and/or repatriating the precious metal. As of this month, they reportedly owned 32,754 tonnes, or about 17.8 percent of the total amount of gold ever mined, according to the WGC.

It’s worth noting that this global gold-buying spree coincides perfectly with the rise of unconventional monetary policies following the financial crisis—massive bond-buying programs, rapid money-printing schemes and near-zero or, in some cases, negative interest rates. The jury’s still out on whether these measures have been a success or not, but for now, it appears as if banks are hedging against their own policies.

Investors would be wise to do the same. Confidence in central banks’ ability to stem further economic deterioration continues to deflate.

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

 

10. India

Tonnes: 557.7

Percent of foreign reserves: 6.3 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 number one or number two largest consumer of the precious metal, depending on who you ask, 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: 61.2 percent

The Dutch Central Bank is currently seeking a suitable place to store its gold while it renovates its vaults. 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: 2.4 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, it lowered interest rates below zero—which has helped fuel demand in gold around the world.

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

7. Switzerland

Tonnes: 1,040

Percent of foreign reserves: 6.7 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. Just last quarter, the Swiss National Bank posted a $5.9 billion profit, largely a result of its sizable gold holdings.

Credit Suisse gold bars and coins

6. Russia

Tonnes: 1,460.4

Percent of foreign reserves: 15 percent

Russia has steadily been rebuilding its gold reserves in the last several years. In 2015, it was the top buyer, adding a record 206 tonnes in its 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

5. China

Tonnes: 1,797.5

Percent of foreign reserves: 2.2 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. In December, the renminbi joined the dollar, euro, yen and pound as one of the International Monetary Fund’s reserve currencies, an expected move that required the Asian country to beef up its gold holdings. (The precious metal represents only 2.2 percent of its foreign reserves, so it’s probably safe to expect more heavy buying going forward.) And in April, China, the world’s largest gold producer, introduced a new renminbi-denominated gold fix in its quest for greater pricing power.

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

4. France

Tonnes: 2,435.7

Percent of foreign reserves: 62.9 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: 68 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 banks 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: 3,381

Percent of foreign reserves: 68.9 percent

Like the Netherlands, Germany is in the process of repatriating its gold from foreign storage locations, including New York and Paris. Last year, the country’s Bundesbank transferred 210 tonnes, and it plans to have the full 3,381 tonnes in-country by 2020.

A variety of Germman coins

1. United States

Tonnes: 8,133.5

Percent of foreign reserves: 74.9 percent

With the largest holding in the world, the U.S. lays claim to nearly as much gold as the next three countries combined. It also has one of the highest gold allocations as a percentage of its foreign reserves, second only to Tajikistan, where the metal accounts for more than 88 percent. Donald Trump made headlines recently, claiming “we do not have the gold,” but 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.

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

Can’t get enough gold? Register for our next webcast, “All Eyes on Gold: What’s Attracting Investors to the Yellow Metal.”

lucara diamond at a nine-year high

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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Recession on the Horizon? Look at the Big Picture
February 1, 2016

Central Banks Could be running out of tricks to stimulate their economies. U.S. Global Investors

Today the Bank of Japan (BoJ) rattled global markets on Friday by announcing its adoption of a negative interest rate policy intended to spur banks to lend and consumers to spend. The world’s third-largest economy, then, joins a handful of European countries who are experimenting with less-than-zero rates, among them Denmark, Austria, Switzerland and Sweden, which I’ve written about previously.

The BoJ’s move is just the latest to suggest that global central banks’ bag of tricks to stimulate growth is quickly running empty, and that the imbalance between monetary and fiscal policies continues to accelerate. Negative rates charge banks for parking excess cash and ultimately punish savers, yet make gold more attractive.

Already companies and individuals are more indebted than ever before.

Bloomberg reports that corporate leveraging around the world has reached an unprecedented, and arresting, $29 trillion. In 2015, debt reached three times earnings before interest, taxes, depreciation and amortization, a 12-year record. An estimated one third of these companies, meanwhile, are unable to generate enough returns on investment to cover the cost of credit.

Global Corporate Debt-to-Earnings Ratio Is at a 12-Year High
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If this is a debt bubble, it only adds to speculation that we’re headed for a global recession. As I mentioned recently, several prominent voices, including George Soros and Marc Faber, believe recessionary forces are growing stronger, precipitated by struggling commodity prices and surging global debt.

It might be hard to remember after a nearly seven-year equity bull market, but we’ve been here before.

Credit Suisse looked at 14 recessionary pullbacks between 1929 and 2008 and found that the S&P 500 Index, after lasting an average 298 trading days, declined an average 33 percent. Some of these recessions, obviously, lasted longer and were more severe than others, such as the most recent one that lasted between 2007 and 2009.

Since 1929, the S&P 500 Index Has Averaged a 33% Decline During Recessionary Pullbacks
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But each of these pullbacks, Credit Suisse notes, provided ample buying opportunities in U.S. equities. Rebounds following the recessions averaged 62 percent—80 percent following the 2007 financial crisis.

How to Invest When Stocks Make You Worry

Whether or not a recession is imminent, I believe it’s a good idea for investors to be prepared by having a well-diversified portfolio, including assets such as gold and municipal bonds. Gold has tended to have a low correlation with stocks, meaning that even when stocks were tumbling, it’s managed to retain its value well. The same can be said for short-term, high-quality munis, which have been shown to offer a greater amount of stability than some other types of securities, even during market downturns.

In 2015, munis, as represented by the Barclays Municipal Bond Index, were actually the top fixed-income asset class, beating both Treasuries and corporate debt. They also outperformed S&P 500 Index stocks, returning more than double what equities delivered.

Muni Bonds Outperformed Other Major Bond Categories in 2015
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Muni fund inflows gained momentum in the second half of 2015 as global stock markets began to show signs of trouble, and so far this year, investors are piling into munis at a rate of about $1 billion per week.

The last couple of decades were among the most volatile, with the tech bubble and financial crisis challenging markets. Out of more than 31,000 equity and bond funds during this 21-year period, only 0.12 percent of the total number, made up almost completely of municipal and short-term bond funds, managed to delivered positive returns on a consistent basis. Learn more about the $3.7 trillion muni market!

Did Russia Just Blink?

Several forecasts last week suggest oil prices are unlikely to recover in 2016—and might fall even further.

Morgan Stanley says crude could reach $20 per barrel as the U.S. dollar continues to strengthen. The U.S. Energy Information Administration (EIA) predicts that we might not see supply and demand start to rebalance and prices recover until late 2017. And the World Bank lowered its 2016 forecast for crude oil prices, from $51 per barrel on average to $37 per barrel. The downward revision is based on a number of factors, including sooner-than-expected oil exports from Iran, a mild winter in the Northern Hemisphere and, most significantly, continued imbalance between global supply and demand. U.S. producers have been much more resilient than expected to lower oil prices.

But talk that meaningful production cuts are on the horizon led oil higher last week, helping it achieve its first three-day winning streak of the new year. In the global production staring contest, it appears as if Russia blinked first, as it just expressed an interest in reaching terms with the Organization of Petroleum Exporting Countries (OPEC) on output cuts.

Like Saudi Arabia, Nigeria, Iraq and Venezuela, Russia greatly depends on oil exports, the revenue from which makes up about half of its government’s total revenue. The country averaged 10.5 million barrels a day in 2014, making it the world’s third-largest oil producer after the U.S. and Saudi Arabia. Coupled with Western sanctions for its involvement in Ukraine, low prices have wreaked havoc on Russia’s economy, which contracted 3.7 percent in 2015 and is expected to fall another 1 percent this year. The ruble, which closely tracks the decline in Brent oil, has lost approximately half its value against the U.S. dollar in the last two years.

Russian Ruble Has Tracked Brent Oil's Decline
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Reaching a production cap deal with OPEC, whose members are collectively responsible for about 40 percent of the world’s output, would help rebalance supply and demand and firm up prices.

Oil has historically bottomed in the month of January, and it appears that we finally found a bottom. It remains under pressure, but we could see oil climb to between $38 and $40 per barrel over the next three months.

In the longer term, things look more constructive. Oil will continue to be the world’s most important source of energy for at least the next couple of decades, according to a new report from ExxonMobil. We should expect to see a 25 percent increase in energy demand by 2040, which is like adding another North and South America.

Looking at transportation fuels, natural gas demand is expected to grow the most—300 percent between 2014 and 2040. Jet fuel should climb 55 percent as air travel demand increases in emerging and developing markets.

Global Transportation Demand by Fuel Type on the Rise
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China Still a Long-Term Growth Story

Higher Incomes in China Spur Demand for Durable Goods

By 2040, the world population should surge to nine billion, with a greater percentage of people than ever before demanding affordable, reliable energy for their homes and businesses.

Even though its demand for materials and commodities has cooled in the last year, China should continue to see huge consumption growth in durable goods for many years to come as its GDP per capita expands.

Back in October, Credit Suisse reported that the size of China’s middle class had, for the first time, overtaken the size of the American middle class, 109 million adults compared to 92 million. As this group increases in number, so too rises the demand for durable goods, vehicles, energy and other things we expect to find in a middle class lifestyle.

109 Million for the first time, the size of China's middle class has overtake the U.S., 109 million compared to 92 million.

In a report last week, McKinsey & Company’s Gordon Orr urges readers to focus on the absolute scale of China’s economy, not just slowing growth.

“No matter what rate the country grows at in 2016,” Orr writes, “its share of the global economy and of many specific sectors will be larger than ever.”

For forward-looking global investors, that’s optimistic news indeed. 

 

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

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.

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Sweden Declares War on Cash, Punishes Savers with Negative Interest Rates
December 7, 2015

Among the endangered species in Sweden are the gray wolf, European otter—and cash. Back in June, I shared with you the story of how, in 1661, the Scandinavian monarchy became the first country in the world to issue paper money. (It was an unmitigated disaster, by the way.) Now it might be the first to ban it altogether.

All across Sweden, cash—the physical kind, not cash in the bank—is disappearing. Many if not most businesses have stopped accepting it. ATMs are now as uncommon as pay phones. Churchgoers tithe using mobile apps. Fewer and fewer banks even accept or dole out cash.

Here’s the chart showing the decline in the average yearly value of Swedish banknotes in circulation:

Average Value of Swedish Banknotes in Circulation is Rapidly Declining
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So what’s going on?

For one, the Swedish people have enthusiastically embraced mobile payment systems. Even homeless newspaper vendors now carry card scanners.

But that’s not the concerning part.

Cash’s demise appears to be orchestrated by Sweden’s central bank, which of course stands to benefit from the switch. In a purely electronic system, every financial transaction is not only charged a fee but can also be tracked and monitored. Plus, taxes can’t be levied on cash that’s squirreled away in Johan’s sock drawer.

Since July, interest rates in Sweden have lingered in negative territory, at -0.35 percent, forcing accountholders to spend their money or else see their balances slowly melt away. Negative rates can also be found in Denmark and Switzerland, where they’re as low as -1.25 percent. The Swiss 10-year bond yield plummeted to -0.40 percent on Tuesday, which means people are paying the government to hold their “investment.”

Nick Giambruno, senior editor of Casey Research’s International Man, calls negative interest rates in a cashless society a “scam.”  His perspective is worth considering:

If you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates... or you can spend your money. Ultimately, that’s what our Keynesian central planners want. They are using negative interest rates and the “War on Cash” to force you to spend and “stimulate” the economy.

The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

Sovereign Man goes even further, writing:

Financial privacy has been destroyed. Banks are now merely unpaid spies of bankrupt governments, and they will freeze you out of your life’s savings in a heartbeat if some faceless bureaucrat orders them to do so.

Never-ending Regulations Suffocate Small Businesses and Investors

Over the years, we’ve seen corrupt, unbalanced fiscal and monetary policies wreak havoc in socialist countries all around the globe where governments often feel entitled to restrict and even confiscate their citizens’ assets. In 2008, Argentina nationalized approximately $30 billion in private pension funds. A little over two years ago, the Cyprus government ransacked citizens’ bank accounts to “fix” its own mistakes and mismanagement. Last year Venezuela put $700 credit card spending limits on vacationers visiting Florida. Limitations on how much someone can spend and save can be found in many countries, from Italy to Russia to Uruguay.

In example after example, people’s rights to save and freely hold cash have been disrupted, with tragic results—and today we’re seeing these disruptions in first-world countries such as Sweden, Switzerland and Denmark.

I have faith that the dynamic American political system will not allow these things to happen, but we need to be aware of events in other countries and be vigilant in protecting our assets.

At the same time, many poor policies here at home have disrupted how we save and spend. For example, it’s easier to open a credit card account than a savings or investment account—which obviously doesn’t encourage either of those things.

And a recent flood of new regulations passed down from the federal government continues to suffocate small businesses. Since 1960, the Code of Federal Regulations has grown from 22,877 pages to a bloated 175,268 pages in 2014.

Total Number of Pages in Code of Federal REgulations Has Expanded Dramatically
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A 2014 study conducted by the National Association of Manufacturers found that these regulations came with a hefty price tag of $2 trillion in 2012 alone, an amount equal to 12 percent of GDP. The negative effects of these laws trickle down for years through various businesses and industries, costing jobs and opportunities at wealth creation—and ultimately creating a downward multiplier effect on the country’s economy. 

In December 2013, USGI made the decision to exit the expensive money market fund business because of the increasing regulatory cost of anti-money laundering laws and FATCA. It had become too costly to bear the expense of subsidizing yields so they didn’t fall below zero. With zero interest rates and increasing regulatory costs, protecting the integrity of the $1 net asset value (NAV) had cost the money market fund industry nearly $24 billion in waived expenses between 2009 and 2013, according to the Investment Company Institute (ICI).

So what can we do to protect our wealth? One option is to store a portion of it in gold, which, compared to a basket of 24 commodities, has held on to its reputation as a long-term store of value.

Gold Has Remained Relatively Resilient in Commodities Rout
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American consumers recognize gold’s resilience and took advantage of lower prices in November. The U.S. mint sold 97,000 ounces of gold coins, up 185 percent from October, after selling out. Meanwhile, American Eagle silver coins hit an all-time annual sales record of 44.67 million ounces.

I always recommend having 10 percent of your portfolio in the yellow metal—5 percent in gold stocks, the other 5 percent in coins and bullion.

Gold has two pillars of demand: the Love Trade and the Fear Trade.

the two main drivers of gold demand
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The Love Trade is associated with traditional gift-giving during the Indian festival and wedding seasons, Christmas and the Chinese New Year. The Fear Trade, on the other hand, has to do with what we’re seeing in Sweden and elsewhere. Negative interest rates and poor government policies wipe out citizens’ ability to save. In such scenarios, investors have historically found shelter in gold.

 

The Chinese Renminbi Just Went Mainstream

international monetary fund IMF welcomes chinese Renminbi world currencies

Speaking of currencies, the International Monetary Fund (IMF), as expected, moved to include the Chinese renminbi in its Special Drawing Rights (SDR) currency basket last week, a decision that solidifies the Asian giant’s prominence in the global financial system.

This is indeed an historic milestone, not just for China but also emerging markets in general. The renminbi, also known as the yuan, is the first currency from such a country to join the elite ranks of the U.S. dollar, British pound, euro and Japanese yen. Global intelligence company Stratfor calls this “the start of a new era in the global economic structure” and an acknowledgment of “economic power in new parts of the world.”

It’s worth pointing out that the inclusion is largely symbolic. Many analysts are pointing out that it will have little near-term benefit to China, especially since the change will not go into effect until October 2016.

But according to BCA, among the long-term implications of IMF inclusion is that the “renminbi should eventually claim over 5 percent of global official reserves, or $400 billion, up from about 1 percent.” Currently, the renminbi ranks seventh worldwide as a percentage of global reserves, behind the Australian dollar and Canadian dollar.

Chinese Renminbi Poised to Grow as a Foreign Currency Asset
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To have the renminbi recognized as a reserve currency has been an important fiscal priority for Chinese leadership in recent years. This summer, the country’s central bank announced it had added to its gold reserves substantially, and later it devalued the renminbi 2 percent. That it’s finally been added to the SDR is a huge PR win.

It also means, though, that further economic reforms will need to be made. Country leaders are now charged with ensuring that the renminbi lives up to its status as a high-quality international reserve currency by maintaining its stability and ease of use.  

Global Manufacturing Poised for a Strong 2016

Just as we head into the new year, global growth bounced back a bit, alleviating investors’ fears that we were sliding into a recession. Although the global manufacturing purchasing manager’s index (PMI) cooled somewhat in November, it stayed above the three-month moving average for the second month in a row—something it hasn’t done in a year and a half.

Global Manufacturing PMI Slows in November
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China’s manufacturing stabilized in November after six straight months of declines. The Asian giant posted a 48.6 for the month, up slightly from 48.3 in October. It’s still below the key 50.0 mark but headed in the right direction.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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 J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The S&P GSCI Enhanced Total Return Index reflects the total return available through an unleveraged investment in specific commodity components of the S&P GSCI.

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What We’re Paying Attention to Following the Paris Attacks
November 23, 2015

Ten days ago, 129 lives were brutally cut short when assailants affiliated with the terrorist group ISIS, also known as the Islamic State, stormed Paris in a series of coordinated attacks. Along with the rest of the world, we were shocked and saddened as the tragic news unfolded, worsening as the night progressed. Our thoughts are with the victims’ families and friends.

For us, the atrocity struck especially close to home, as one of our portfolio managers, Xian Liang, was in the city at the time of the attacks. We’re extremely grateful he and his wife returned home safe and sound. I wish the same could be said for the victims in Paris that day, the 224 on the Russian jet brought down by an ISIS-built bomb, the hostages in Mali Friday, and many others whose lives have been affected by the global scourge of terrorism.

We Take Our Role as Fiduciaries Seriously

As money managers, it’s our duty and responsibility to be cognizant of such geopolitical events—large and small, good and bad—and to consider all of the possible ramifications. The consequences often reach far and wide, and can be felt in the short-term (changes in investor confidence) as well as the long-term (changes in government policy).

Early last year, for instance, we were quick to adjust asset allocations when Russia invaded and annexed Crimea. We anticipated that sanctions would be imposed on the country, and indeed they were, by the U.S., European Union, Australia and other international organizations. These sanctions, coupled with falling oil prices, contributed to the Russian ruble’s dramatic breakdown.

Diesel, the seven-year-old belgian shepherd who was killed recently during a French SWAT raid

Against these challenges, I’m impressed by how strongly Russian stocks have performed lately. Last Tuesday, the Micex Index jumped to an eight-month high in ruble terms. This is especially interesting since both Brent oil and the ruble are way down. It suggests that investors are showing approval of President Vladimir Putin’s involvement in Syria.

Putin is also benefiting from a strong public relations push. The Daily Mail writes: “Russia has shown its solidarity with the people of France in an unusual way—by donating a new puppy to carry on the memory of Diesel, the police dog killed by a suicide bomber.”

It should come as a surprise to no one that, following the tragedy in Paris, defense spending will likely increase. French President François Hollande has already told Parliament that France is at war and will “be merciless” in its pursuit of justice. The country wasted no time in striking back against ISIS and has begun bombing raids in Syria.

As early as last Monday, stocks of companies that manufacture weapons and fighter jets traded up.

War Stocks Rally Following Attacks in Paris
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We own Lockheed Martin, manufacturer of the F-35, F-22 and F-16 fighters; Boeing, manufacturer of the Tomahawk cruise missile, F-18 fighter and more; and Northrop Grumman, which was recently awarded the contract to build America’s next generation of long-range strike bombers. Raytheon develops and manufactures guided missiles.

The U.S. Navy plans to buy more Boeing F/A-18E/F Super Hornets in the coming years.

International Travel to Be Hit

Understandably so, the terrorist attacks will have an impact on international travel, immigration and border security. France immediately tightened its borders, and other European countries quickly followed suit. Meanwhile, Poland’s newly-elected government rejected the European Union’s quotas for accepting refugees from Syria, an attitude that’s echoed by more than 30 U.S. states. The House of Representatives just passed legislation to suspend the admittance of 10,000 Syrian refugees, though it’s likely to be vetoed.

This is the climate we find ourselves in right now. It has a huge effect, at least in the near-term, on perceptions of international travel.

“Most people are risk-averse,” Xian says. “When my wife and I left for the airport by taxi the morning after the Paris attacks, we agreed not to travel to Europe again any time soon.”

Others share Xian’s attitude. Paris has for years been the world’s top tourist destination, but the City of Lights has already seen a huge drop-off in tourists as people have delayed or cancelled travel plans. Hotel stocks were up 10 percent in October but will likely face headwinds as a result of Paris and Mali.

Gold, Diamond and Oil Declines Good for Manufacturers

Xian stresses the importance of having gold exposure as diversification. A good diversifier is any investment that’s expected to have a low correlation with the rest of your portfolio, and gold historically has little to no correlation with equities.

The yellow metal has traditionally been seen as a safe haven in times of war, but so far we’ve seen little movement. Year-to-date, gold is down nearly 9 percent, and it could possibly end 2015 in negative territory for the third straight year.

Even so, the yellow metal has performed better than other select world currencies for the year, including the Russian ruble (-10 percent), Australian dollar (-11 percent), euro (-12 percent) and Canadian dollar (-13 percent).

Gold and Diamonds Follow the Same Downtrend
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Diamonds have likewise struggled over the past four years, but with the recent news that Canadian miner Lucara discovered the largest diamond in 100 years, investors might show renewed interest. The massive 1,111-carat diamond was unearthed in Lucara’s Botswana project. Although the stone has yet to be assessed, it’s worth noting for comparison that a 100-carat diamond sold at Sotheby’s in April for $22 million.   

Gold and Diamonds Follow the Same Downward Trend
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These declines over the past three and four years have been good for jewelry companies such as Tiffany, which I wrote about last December. Gold and diamond supply is now less expensive, so the company has margin expansion.

The same can be said of oil. Low prices have hurt South Texas, the Middle East, Russia and Colombia, not to mention drillers and explorers, but they’ve been a windfall for the end consumer, including manufacturers and airlines. Falling energy prices are finding their way into the global engine of growth.

$500 Billion Peace Dividend for Global Consumers and Businesses
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Many analysts expect to see crude oil prices tick up on mounting tension in the Middle East. During past military engagements, oil has typically performed well since a lot is required to fight a war. We haven’t seen prices move just yet—oil still sits at $40 per barrel—but it’s something we’ll monitor closely. As I said earlier this month, the global purchasing managers’ index (PMI) turned up in October after bottoming in September, and in the past this has been followed by a jump in oil prices.

Oil Trends Typically Drive by Global Economic Activity
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Inflation Rousing from Sleep

We learned this week that the consumer price index (CPI) rose 0.2 percent in October, suggesting that inflation is finally picking up steam in the U.S. and giving the Federal Reserve further excuses to raise rates next month.

Based on the 2-year Treasury yield (0.89 percent) and the headline CPI (0.20 percent), real rates now stand at 0.69 percent. (Real interest rates are what you get when you subtract the CPI from the Federal funds rate.) I’ve often explained that gold responds positively when real rates turn negative, as you can clearly see in the chart below, so we’re eagerly awaiting stronger inflation.

Real Interest Rates and Gold Share an Inverse Relationship
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In a note this week, Drew Matus, an economist at UBS, wrote that inflation in the U.S. is poised to jump in the next couple of months. The CPI measures the price of a basket of goods to the price of the same goods a year ago, so inflation fell dramatically between November 2014 and January 2015 as energy prices plunged.

But “absent a similar move this year, those sharp price declines will drop out of the year-over-year data, resulting in a rapid, technical acceleration in overall inflation measure,” Matus says.

If such inflation occurs—possibly as soon as January or February, Matus points out—real rates could have a better chance of dipping into negative territory, which would be constructive for gold prices.

Thanksgiving is this week, and in light of recent events, I think we all have ample reason to express gratitude to friends and loved ones. Everyone have a blessed week!  

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.

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 9/30/2015: Lockheed Martin Corp., The Boeing Co., Northrop Grumman Corp., Lucara Diamond Corp.

The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

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

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Net Asset Value
as of 09/25/2017

Global Resources Fund PSPFX $5.78 -0.04 Gold and Precious Metals Fund USERX $8.02 0.06 World Precious Minerals Fund UNWPX $6.69 0.06 China Region Fund USCOX $10.96 -0.46 Emerging Europe Fund EUROX $6.94 -0.06 All American Equity Fund GBTFX $24.34 0.10 Holmes Macro Trends Fund MEGAX $19.99 0.03 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change