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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.

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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Will Gold Finish 2015 with a Gain?
October 19, 2015

Gold-Ready-For-His-Closeup

After its stellar performance last week, gold might do something it hasn’t done since 2012—that is, end the year in positive territory. You can see past returns for yourself in our perennially popular Periodic Table of Commodities Return.

Responding to a weaker U.S. dollar, continued contraction in global growth and wide speculation that interest rates will stay near-zero for the remainder of the year, the yellow metal broke above its 200-day moving average and is close to erasing its 2015 losses.

gold-breaks-above-its-200-day-moving-average
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This could be the price reversal many gold bulls have been expecting.

Back in August I shared with you that legendary hedge fund manager Stanley Druckenmiller, who’s made some mythic calls over his long career, invested $323 million of his own money in gold, now the largest position in his family funds. Although such a large weighting isn’t appropriate for all investors—I’ve always recommended 10 percent in gold: 5 percent in gold stocks, 5 percent in bullion—it looks as if Druckenmiller made another good call.

The big news last week was that Walmart took a massive hit after the retail giant said it expected a profit slump in 2016. Walmart investors lost a whopping $24 billion—$21 billion on Wednesday alone. While this news dominated the headlines, it’s important to recognize that the total amount of net assets in the SPDR Gold Trust, the world’s largest gold-backed ETF, is just slightly more than Walmart’s one-week loss.

in-one-week-walmart-shares-lose-nearly-as-much-as-GLD-total-net-assets

“Death” of the Dollar?

It’s no mere coincidence that gold’s breakout coincides with the weakening of the U.S. dollar last week. The greenback signaled what’s known as a “death cross,” just in time for Halloween. Widely recognized as the start of a bearish trend, a death cross occurs when the 50-day moving average crosses below the 200-day.

This hasn’t happened since September 2013.

US-dollar-experiences-a-death-cross
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As ominous as this sounds, it’s good news for gold and other metals and commodities, not to mention emerging markets and American exports. For the past year, the strong dollar has crushed these assets, something I write and speak about frequently. If the death cross does indeed indicate the start of a downward trend, gold might have the breathing room it needs to reach the important $1,200 resistance level.

Our China Region Fund (USCOX) and Emerging Europe Fund (EUROX) have responded well to the dollar’s drop, both of them crossing above their 50-day moving averages.

China-Region-Fund-USCOX-Crossed-above-50-Day-Moving-Average
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Emerging-Europe-Fund-EUROX-Crossed-above-50-Day-Moving-Average
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When we factor in the Love Trade, gold has even further upside potential. In India, the world’s largest consumer of the precious metal, the annual wedding and fall festival season has officially begun, which has historically triggered a spike in demand. This period is followed by Christmas and the Chinese New Year in February, when gold prices have surged, based on the shorter-term, five-year pattern.

Gold-seasonality
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Russian Air Strikes Ignite the Fear Trade

Gold has also likely benefited in the short term by the Fear Trade, specifically global geopolitical events such as Russia’s involvement in Syria. We should never welcome war, but the truth is that political turmoil very often has had a positive effect on commodity prices and currencies. Both the Russian ruble and Brent oil are currently above their 50-day moving averages.

the-russian-ruble-and-brent-oil-are-above-their-50-day-moving-averages
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In a recent piece titled “The New Cold War Battlefield… and How It Will Affect Oil Prices,” Dr. Kent Moors, global energy strategist for “Oil & Energy Investor,” writes that what happens in the Middle East has “always had a rather direct impact on energy prices and the prospects for investing in the sector.”

Syrian-president-Basher-al-Assad-shaking-hands-with-Russian-president-Vladimir-Putin

The difference today, Moors says, is that Syria “is a rising power vacuum right smack in the middle of the largest concentration of global crude production.”

This is a theme that’s explored in even further detail in my friend Marin Katusa’s bestselling book, “The Colder War: How the Global Energy Trade Slipped from America’s Gasp.”

Speaking of Marin, his Katusa Research and Cambridge House International will be co-producing the Silver Summit and Resource Expo in San Francisco November 23 and 24. I’ll be giving the opening keynote address. If you’d like to attend the conference as my guest, send me an email for a complimentary registration.

Real Interest Rates, Real Impact on Gold

The Fear Trade also includes monetary and fiscal policies such as money supply and real interest rates. As opposed to geopolitical events, which might have an immediate effect on gold, these drivers can have a long-term influence.

As a reminder, real interest rates are what you get when you deduct the rate of inflation from the 10-year Treasury yield. For example, if Treasury yields were at 2 percent and inflation was also at 2 percent, you wouldn’t really be earning anything. But if inflation was at 3 percent, you’d be experiencing a negative real rate.

When gold hit its all-time high of $1,900 per ounce in August 2011, real interest rates were sitting at -3 percent. In other words, if you bought the 10-year, you essentially lost 3 percent a year on your “safe” Treasury investment. Since gold doesn’t cost anything to hold, it became more attractive and the metal’s price soared.

Today, the U.S. has virtually no inflation, so real interest rates are at 2 percent, a swing of 500 basis points since August 2011. This has lately had a negative effect on gold, which means it’s even more remarkable that the precious metal has broken above its 200-day moving average.

Our office was visited last week by Barry Bannister, CFA, the chief equity strategist for investment firm Stifel, who gave us buckets of useful macroeconomic research, much of which validated what we’ve been saying for a long time regarding the relationship between the price of gold and real interest rates.

Barry made the case that real interest rates are even higher than we realize. He argued that the reason the Federal Reserve hasn’t allowed rates to lift off yet is because—you might want to sit down for this—it already has, in an “invisible” interest rate hike of 4 percent. Quantitative easing (QE), Barry said, was “negative” interest rates, and that “economic recovery and time ‘raised’ rates to 0 percent, a de facto rate hike.”

Gold’s rally last week occurred in spite of this “invisible” rate hike.

Active Management on Top

Even with gold prices off around 38 percent since the August 2011 high, our Gold and Precious Metals Fund (USERX) has done well, outperforming the Market Vectors Gold Miners ETF (GDX) and PowerShares Global Gold & Precious Metals ETF (PSAU).

active-management-on-top-USERX-vs-gold-ETF-peers
click to enlarge

Speaking to Investor’s Business Daily, portfolio manager Ralph Aldis pointed out that one of the reasons why our fund has outperformed is because we’re able to apply our tacit knowledge of company executives and management teams, as well as anticipate and act on political risks in countries we invest in. This is a skill (and benefit) that only active management can provide.

Both the GDX and the PSAU are strictly market capitalization-weighted, so they might miss out on unexpected “success stories.”

“They end up owning the biggest companies, which because of their size have difficulty growing,” Ralph told IBD.

Klondex Mines is one such success story. It’s the fund’s top weighting, at 17 percent—and yet because of its market-cap, it isn’t included at all in the two ETFs.

As Ralph told The Gold Report last week, “I want to own companies where management can increase the value proposition,” regardless of gold prices.

To end, I’d like to congratulate the U.S. Global communications team for receiving five STAR awards from the Mutual Fund Education Alliance Thursday night for excellence in investor education. Please help me applaud the team’s efforts and your commitment to being a curious and informed investor by sharing our award-winning communications with your friends, family and colleagues.

Thanks you for being a subscriber to our award-winning communications!

P.S. It’s with sadness to inform you of the passing of Raymond Edward “Ed” Flood. Ed spent his whole life and career in the mining industry, serving most recently as the CEO of Concordia Resource Corp. Back in the mid-1990s, he was the founding president of Ivanhoe Mines, today a massive producer of copper, gold and other metals that operates mostly in southern Africa.  We were early investors in Ivanhoe.

My path crossed with Ed’s many times over the years, and I came to know him as not only a talented money manager but also an exceptional human being. I join everyone else who knew him, both personally and professionally, when I say that he’ll be sorely missed.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

 

 

Past performance does not guarantee future results.

 

 

Total Annualized Returns as of 9/30/2015:
Fund Year to Date One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Emerging Europe Fund (EUROX) 17.84% -26.10% -10.43% -4.65% 2.29% N/A
China Region Fund (USCOX) -11.46% -6.68% -4.78% 2.53% 2.97% 2.55%
Gold and Precious Metals Fund (USERX) -6.98% -21.82% -20.11% -1.79% 1.97% 1.90%
Market Vectors Gold Miners ETF (GDX) -25.39% -35.31% -23.97% N/A 0.53% N/A
SPDR Gold Shares ETF (GLD) -7.39% -8.79% -3.53% N/A 0.40% N/A
PowerShares Global Gold & Precious Metals Portfolio ETF (PSAU) -26.26% -34.84% -22.62% N/A 0.75% N/A

Expense ratios as stated in the most recent prospectus. The expense cap is a voluntary limit on total fund operating expenses (exclusive of any acquired fund fees and expenses, performance fees, extraordinary expenses, taxes, brokerage commissions and interest) that U.S. Global Investors, Inc. can modify or terminate at any time, which may lower a fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

For information regarding the investment objectives, strategies, liquidity, risks, expenses and fees of the Market Vectors Gold Miners ETF, SPDR Gold Shares ETF, or the Powershares Global Gold & Precious Metals Portfolio please refer to those funds’ prospectuses.

Investment Objective: The Gold and Precious Metals Fund is an actively managed mutual fund that focuses on gold and precious metals producing companies. The Market Vectors Gold Miners ETF is a passively managed fund that seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index. The investment objective of the SPDR Gold Trust is for the shares to reflect the performance of the price of gold bullion, less the expenses of the Trust’s operations. The PowerShares Global Gold & Precious Metals ETF is a passively managed fund that seeks to replicate as closely as possible, before fees and expense, the price and yield performance of the NASDAQ OMX Global Gold and Precious Metals Index.

Liquidity: The Gold and Precious Metals Fund can be purchased or sold at a net asset value (NAV) determined at the end of each trading day. The Market Vectors Gold Miners ETF, SPDR Gold Shares ETF and Powershares Global Gold & Precious Metals Portfolio can be purchased or sold intraday. These purchases and redemptions may generate brokerage commissions and other charges not reflected in the ETF’s published expense ratio.

Safety/Fluctuations of principal/return: Loss of money is a risk of investing in the Gold and Precious Metals Fund, the Market Vectors Gold Miners ETF, the SPDR Gold Shares ETF and the Powershares Global Gold & Precious Metals Portfolio. Shares of all of these securities are subject to sudden fluctuations in value.

Tax features: The Gold and Precious Metals Fund may make distributions that may be taxed as ordinary income or capital gains. Mutual funds are pass-through entities, so the shareholder is responsible for taxes due on distributions.

The Market Vectors Gold Miners ETF and the Powershares Global Gold & Precious Metals Portfolio may make distributions that are expected to be taxed as ordinary income or capital gains. However, ETFs are designed to minimize taxable distributions to shareholders. Shareholders of the SPDR Gold Trust will generally be treated as if they directly owned a pro rata share of the underlying assets held in the Trust. Shareholders also will be treated as if they directly received their respective pro rata shares of the Trust’s income and proceeds, and directly incurred their pro rata share of the Trust’s expenses.

The sale of shares of both mutual funds and ETFs may be subject to capital gains taxes by the shareholder.

Information provided here is neither tax nor legal advice and is general in nature. Federal and state laws and regulations are subject to change.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund, Emerging Europe Fund and Gold and Precious Metals Fund as a percentage of net assets as of 9/30/2015: Wal-Mart Stores Inc. 0.00%, SPDR Gold Shares ETF 0.00%, Market Vectors Gold Miners ETF 0.00%, PowerShares Global Gold & Precious Metals Portfolio ETF 0.00%, Klondex Mines Ltd. in Gold and Precious Metals Fund 16.91%, Concordia Resource Corp. 0.00%, Ivanhoe Mines Ltd. 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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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Emerging Europe Analyst: “Poland Today Reminds Me of America”
July 22, 2015

Joanna Sawicka, research analyst for USGI's Emerging Euroope Fund (EUROX), in her hometown of Bialystok, PolandJoanna Sawicka still remembers having to wait in line for hours to buy food and school supplies. In communist-controlled Poland, such basic goods were rationed. Families received special government-issued cards that permitted them to buy only the minimal amount of meat per month. This experience made a lasting impression on Joanna as a child and inspired her to work toward a life in which she would not want for anything.

Now the research analyst for our Emerging Europe Fund (EUROX), Joanna recently visited her native Poland and found it to be a drastically different country from the one she grew up in. I sat down with her to chat about her travels and where she thought the Eastern European country might be headed from here.

So tell me about your trip.
Basically it was a family trip. I got to spend time with my parents and some old friends, not to mention check out how Poland looks now and see the changes that have happened since I last visited nine years ago.

I combined the trip with a short two-day visit to Warsaw, where I attended the Capital Markets Summit at the Warsaw Stock Exchange. The main topics of discussion during the conference included real estate and the growing role of debt capital markets. We also discussed the continued effort to privatize Polish businesses, a process that began in 1991 after the fall of communism.  

What’s changed since your last visit?
I saw big changes. There’s now a small business on every street corner. A lot of my old friends own businesses now. Poland is the largest beneficiary of European Union funds, and people are clearly taking advantage of having more money and better opportunities.

Another change I saw were the highways and roads being developed. They’re so much bigger and better from when I was a child. The highway from Warsaw to Bialystok, where I was born, used to be one lane each way. Now it’s being developed into two lanes each way, so it will be faster, better-looking and more convenient. The cars are also better now than what I remember. The Fiats and Polonezes have been replaced with Mercedes and BMWs.

On the other hand, electronics and clothing have become very expensive. While I was over there, I priced the iPad for my daughter and was surprised to find that it was quite a bit more expensive than here in the U.S. I was also able to visit CCC, one of the holdings in the Emerging Europe Fund. It’s a retail shoe and handbag store that looks a little like Payless ShoeSource, but it’s bigger and nicer. It’s being managed very cost-efficiently because they have few people working there.

CCC, Polish shoe and handbag retailer

What advice do you have for someone who’s interested in investing in Poland?
As always, if you’re investing in another country, you need to be careful with currencies. As for Poland in particular, be selective. There are many good opportunities, but it’s important to be familiar with the company’s story as well as the people managing it. Right now, political risk is a concern, and the financial sector is under some pressure. The populist Law and Justice Party seeks to increase taxes on banks and opposes the domestic ownership of lenders.

What do you see in store for Poland?
I see Poland moving forward quickly and with confidence. When I was little, the neighborhood grocery store carried next to nothing other than milk and bread. For meat, you had to wait in a line for a couple of hours. Today, I can go to the same store and easily find anything that’s available here in the U.S. In fact, Polish stores carry an even wider selection of produce and other goods than what Americans might be used to.

In that respect, the Poland of today reminds me of America. It has so many new opportunities, and people’s lives have vastly improved since the end of communism. Investment dollars are coming in from abroad, and many people have taken the opportunity to open up their own businesses. It’s still more challenging to open a business in Poland than in the U.S., though. There’s so much bureaucracy, and the paperwork takes a lot of time to complete. You have to know the right people. Although there is room for further improvement, I’m very proud of Poland and its people.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 6/30/2015: CCC SA 0.80%, Fiat Chrysler Automobiles N.V. 0.00%, Bayerische Motoren Werke AG 1.03%.

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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Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change