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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.

Does Coal Stand a Chance Against Renewable Energy?
June 21, 2017

world coal production fell a record amount in 2016

You might have heard the news that the first new coal mine in a decade opened this month in a small Pennsylvania town called Friedens. The Acosta Mine—the output from which will be used in the production of steel—is expected to employ between 70 and 100 people over 15 years, with salaries ranging between $50,000 and $100,000. President Donald Trump, a strong supporter of coal and fossil fuels in general, even appeared live on video during the grand opening, saying it “signals a new chapter in America’s long, proud coal mining tradition.”

Like the president, I applaud the mine’s opening. In a region that’s been hit particularly hard by the dramatic reduction in coal demand over the past five years alone, the local economy should benefit nicely from the fresh injection of high-paying jobs and tax revenue.

But does the Acosta Mine really “signal a new chapter”? Will it stanch the decades-long loss of coal mining jobs? Will it help make coal more competitive than natural gas or renewables such as wind and solar?

The simplest answer to the questions above is: Not likely. Energy markets are in full transition mode, both in the U.S. and abroad, and there really isn’t much that can be done to stop it, despite Trump’s best efforts.

An April study conducted by Columbia University’s Center on Global Energy Policy concluded that “President Trump’s efforts to roll back environmental regulations will not materially improve economic conditions in America’s coal communities.” According to the report, nearly half of coal consumption’s decline can be attributed to increased competition from natural gas. Solar and wind are responsible for about 20 percent of the decline. And as for izndustry regulations? They’re responsible for only 3.5 percent of coal’s decay, the study’s researchers say.

top contributions to coal's decline
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In light of this, I think it would be prudent for investors in natural resources and energy to adjust their holdings to reflect this transition. In the past year, we’ve overweighed renewable energy stocks in our Global Resources Fund (PSPFX), and the allocation is now a core driver of the fund’s performance.  

Coal at a Tipping Point

Let’s look at the facts. This month, just as Trump was celebrating the opening of a new coal mine, British oil and gas company BP reported in its annual review of global energy trends that coal production saw a record decline in 2016. Coal fell 6.2 percent, or 231 million tons of oil equivalent (mtoe), on a global scale. In China, the decline was even more severe.

world coal production fell by a record amount last year
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BP’s chief executive, Bob Dudley, showed little optimism that coal can be revived, even going so far as to say that 2016 marked the completion of “an entire cycle” for coal. Production and consumption were “falling back to levels last seen almost 200 years ago around the time of the Industrial Revolution,” he said, adding that the United Kingdom recorded its “first ever coal-free day in April of this year.”  

The U.S. might not have had a coal-free day, but domestic consumption is definitely in freefall. Last year, for the first time ever, natural gas represented a larger share of U.S. electricity generation than coal. Gas provided 34 percent of the nation’s power, coal 30 percent. This gap will only widen as more coal-fired plants are converted to burn natural gas, which is cheaper and cleaner. Facilities that still burn coal are rapidly aging into obscurity, with a vast majority of them (88 percent) built between 1950 and 1990.

Coal is also facing steep competition from renewables. For the first time in March, wind and solar made up 10 percent of total U.S. electricity generation, according to the U.S. Energy Information Administration (EIA). Windfarms in Texas, Oklahoma, Iowa and other states provided 8 percent, while commercial and residential solar installations represented about 2 percent.

Wind and solar made up 10% of total US electricity for first time in March
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As I shared with you last month, 2016 saw record installation of new renewable capacity across the world, with investment in wind and solar double that found in coal, gas and other fossil fuels. In the U.S., solar ranked as the number one source of new electricity generating capacity.

Renewables Cheaper than Coal

Part of the reason we’re seeing such significant growth in renewable capacity is that solar and wind make good economic sense. Bloomberg New Energy Finance (BNEF) recently reported that solar costs already rival coal in Germany and the U.S. and very soon will do so in China, the world’s largest investor in renewable energy.

Solar Will Soon Become Cheaper than Coal for China
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For years, solar has been regarded as an inefficient and costly source of energy. But its economics are now beginning to become cheap enough to potentially push coal and even some natural-gas plants out of business faster than what was once previously forecasted.

According to BNEF, costs of new energy technologies are falling so fast that it’s more a matter of when than if solar power and alternative energy sources gain a larger market share than fossil fuels.

China and India a $4 Trillion Opportunity

BNEF now estimates that China and India, the two most populous countries, represent a $4 trillion investment opportunity in new energy capacity by 2040, with most of the investment (nearly 75 percent) in wind and solar.

Although coal will likely be needed to meet the huge population explosions in the two economic powerhouses, its role will steadily diminish, falling to a 17 percent share in India by 2040, according to BNEF estimates. Renewables, meanwhile, will represent about half of all energy capacity.

Wind and Solar: Performance Drivers

This is why we’ve given renewables an overweight position in our Global Resources Fund (PSPFX). There’s still room in the fund for coal—Australia’s Whitehaven Coal has gained more than 190 percent for the 12-month period as of June 20—but we see attractive opportunities in wind and solar.

Among our favorite energy stocks right now are SolarEdge Technologies, up 50 percent year-to-date as of June 20; Vestas Wind Systems, the largest wind farm manufacturer in the world, up 33 percent; Siemens Gamesa, up 15 percent; and Sociedad Química y Minera de Chile (SQM), one of the world’s top three lithium producers, up 16 percent. (Lithium is used to manufacture lithium-ion batteries.) 

Year-to-date, these companies are outperforming the broader S&P 500 Energy Index and are strong drivers of PSPFX’s performance.

Click here to learn more about the Global Resources Fund (PSPFX) and to see its performance and composition!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

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

The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by the Global Resources Fund 3/31/2017: BP PLC 0.13%, Whitehaven Coal Ltd. 1.47%, SolarEdge Technologies Inc. 1.25%, Vestas Wind Systems A/S 1.54%, Gamesa Corp Tecnologica SA 1.30%, Sociedad Química y Minera de Chile 1.22%.

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Trump Bids Adieu to Paris Climate Agreement. What Does this Mean for Energy Investors?
June 5, 2017

Trump Bids Adieu to Paris Climate Agreement. What Does this Mean for Energy Investors?

Surprising no one, President Donald Trump announced his decision to withdraw the U.S. from the Paris climate agreement last week, highlighting the depth of his commitment to keep “America First.” Also surprising no one, the media is making much of the fact that the U.S. now joins only Nicaragua and Syria in refusing to participate in the accord.

Trump was under intense pressure from business leaders, politicians on both sides of the aisle, environmental activists, members of his Cabinet—even his own daughter Ivanka, reportedly—to stay in the agreement, but he made his decision with the American worker in mind. The Paris accord, Trump said, “is simply the latest example of Washington entering into an agreement that disadvantages the United States,” leaving American workers and taxpayers “to absorb the cost in terms of lost jobs, lower wages, shuttered factories and vastly demised economic production.”

This is the assessment of Secretary of Commerce Wilbur Ross, who went on Fox News to defend the decision. “Any time that people are taking money out of your pocket and you make them put it back in, they’re not going to be happy,” Ross said, making a similar argument to the one that prompted the Brexit referendum last year.

Just as many Brits were tired of following rules passed down from unelected officials in Brussels, many Americans have feared the encroachment of global environmentalists’ socialist agenda, which they believe threatens to usurp their freedom.

A thought-provoking article from FiveThirtyEight outlines how climate science became a partisan issue over the last 30 years in the U.S. It was the fall of the Soviet Union in the early 1990s, the article argues, that brought on a significant partisan shift in attitude, with conservative thinkers beginning to see the regulations that went along with environmentalism as the new scourge.

No, the Sky Isn’t Falling

Despite the withdrawal, I believe that the U.S. will not stop innovating and being a world leader in renewable energy—even while oil and natural gas production continues to surge. As the president himself said, we will still “be the cleanest and most environmentally friendly country on Earth.”

Recently I shared with you that we’re seeing record renewable capacity growth here in the U.S., with solar ranking as the number one source of net new electric generating capacity in 2016. In the first quarter of 2017, wind capacity grew at an impressive 385 percent over the same period last year. The “clean electricity” sector now employs more people in the U.S. than fossil fuel electricity generation, according to the 2017 Energy and Employment Report.

This was all accomplished not because of an international agreement but because independent communities, markets and corporations demanded it. Solar and wind turbine manufacturers will likely continue to perform well in the long term as renewable energy costs decline and battery technology improves.

Renewables Have Beaten Broader Energy Stocks
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Clearly people’s attitudes toward climate change—and its impact on business operations—are changing. This week, Exxon Mobil shareholders voted to require the company to disclose more information about how climate change and environmental regulations might affect its global oil operations. The energy giant—along with its former CEO, Secretary of State Rex Tillerson—favored staying in the climate deal.

At the same time, markets reacted positively to the exit, with the S&P 500 Index, Dow Jones Industrial Average and NASDAQ Composite Index all closing at record highs on Thursday following Trump’s announcement.

Major Indices Hit Record Highs Following US Withdrawl From Paris Agreement
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So What Does This Mean?

The question now is what investment implications, if any, the withdrawal might trigger.

The short answer is no one knows exactly what happens now. There’s already speculation that some countries might act to raise “carbon tariffs” on U.S. exports, increasing the cost of American-made goods “to offset the fact that U.S. manufacturers could make products more cheaply because they would not have to abide by Paris climate goals,” according to Politico. German chancellor candidate Martin Schulz has said that, should he be elected in September, he would refuse to “engage with the U.S. in transatlantic trade talks.” Schulz’s comments are not that far removed from those of his political rival, incumbent Angela Merkel, who called Trump’s decision “extremely regrettable.”

This has the potential to widen the rift that’s been forming between the U.S. and Germany since Trump took office. Recall that Trump refused to shake Merkel’s hand during her Washington visit in March. More recently, the president reportedly called the Germans “bad, very bad,” adding that he would stop them from selling millions of cars in the U.S.

One of the biggest winners of the withdrawal could be China. Just as the Asian giant is poised to benefit from the U.S. distancing itself from multilateral free-trade agreements such as NAFTA and the Trans-Pacific Partnership (TPP), it’s also in a position to brand itself as the world’s leader in renewable energy. Last week, Chinese Premiere Li Keqiang met with European Union (EU) officials in Brussels to discuss trade between the two world superpowers, but they also took the time to condemn the U.S. president’s actions, with European Council president Donald Tusk saying that the Paris agreement’s mission would continue, “with or without the U.S.”

Chinese Premiere Li Keqiang in Brussels in 2012

China might be the largest carbon emitter right now—it overtook the U.S. a decade ago—but it’s also the biggest investor in renewable energy generation, with $361 billion being spent between now and 2020. The country just fired up the world’s largest floating solar power plant in what used to be a coal mine, now flooded. The plant will provide as much as 40 megawatts (MW) of power to Huainan, China, home to more than 2.3 million people.    

European Manufacturers Have Strongest Jobs Growth in 20 Years

On the same day President Trump shared his decision, new purchasing manager’s index (PMI) data was released, and just like last month, European manufacturers were the big surprise. The EU manufacturing sector strengthened its expansion for the ninth straight month in May, reaching a 73-month high of 57, right in line with expectations. Jobs growth grew to an incredible 20-year high.

European Manufacturing Expands at Fastest Rate in 73 Months
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Germany led the group with a PMI of 59.5. Of the eight EU countries that are monitored, only Greece fell short of expansion.

 

The U.S., meanwhile, slipped from 52.8 in April to 52.7 in May, posting the weakest improvement in business conditions in eight months, before the election. China fared even worse, falling from 50.3 to 49.6, signaling a slight deterioration in its manufacturing sector for the first time in almost a year.

 

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

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 03/31/2017: Exxon Mobil Corp., SolarEdge Technologies Inc., Vestas Wind Systems A/S, Gamesa Corp. Tecnologica SA, Sociedad Quimica y Minera de Chile.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

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

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Here’s Why I Think Renewable Energy Is Finally Living up to Hype
May 26, 2017

Renewables Energy

Global markets have steadily been adding renewables such as wind and solar to their energy mix for several years now, but according to a handful of new reports, 2016 might have been the tipping point. Not only did the world add a record level of renewable energy capacity last year, but it did so at a significantly lower cost compared to 2015. In the U.S., wind and solar both had a knockout year, the latter of which ranked number one in terms of new capacity growth, ahead of fossil fuels. 

Investors who might have overlooked this growing industry probably can’t afford to do so any longer. After several years of hype and false starts, renewable energy is finally starting to hit its stride.

Among our favorite energy stocks right now are SolarEdge Technologies, up more than 50 percent year-to-date as of May 24; Vestas Wind Systems, the largest wind farm manufacturer in the world, up 33 percent; Siemens Gamesa, up 27 percent; and Sociedad Química y Minera de Chile (SQM), one of the world’s top three lithium producers, up 26 percent. (Lithium is used to manufacture lithium-ion batteries.) We own these names, among other renewables, in our Global Resources Fund (PSPFX), which is currently overweight renewables. Note they are all outperforming the broader S&P 500 Energy Index, down 11 percent.

Renewables Have beaten broader energy stocks
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We find these companies attractive because their revenue is dependent not necessarily on new orders but on existing service agreements. It’s much like a car dealership. It may sell you a car at cost, but you must commit to allowing the dealer to service said car. This, of course, helps generate long-term revenue.

In the days following the November election, SolarEdge, Vestas and other “green” stocks contracted on fears that the incoming Donald Trump administration would heavily curtail the incentives for renewable capacity additions in the U.S. Ben Kallo, an analyst at Robert W. Baird, warned investors on November 9 that he expected “a significant overhang on solar stocks due to negative sentiment trades and oversupply in the industry.”

We saw the pullback as a prime buying opportunity, and we continued to accumulate renewables knowing that the underlying service portion of revenue is solid and stable. The bet was well-made. Our renewables allocation is now a core driver of PSPFX’s performance this year, as you can see here.

Renewables Grew at Record Pace in 2016

It’s no secret that President Trump prefers policies that favor coal and other fossil fuels—which we also invest in—but markets are demanding diversification into renewables as costs decline and battery technology improves. According to a new report commissioned by UN Environment’s Economy Division, 2016 saw record installation of new renewable capacity, totaling 138.5 gigawatts (GW), up 9 percent from the previous year. This was achieved despite total investments falling 23 percent to $241.6 billion on lower costs.

Even more notable is that investment in new renewable energy capacity was double that in coal, gas and other fossil fuels during the year.

Demand is being driven not just by government-subsidized clean energy initiatives. Corporations are finding that renewables can, in many cases, be cheaper than nonrenewables. Bloomberg reported last month that 190 Fortune 500 companies collectively managed to save as much as $3.7 trillion in 2016 through emission-reducing projects.

This has led to record capacity growth in solar and wind here in the U.S. In its 2016 review, the Solar Energy Industries Association (SEIA) reports that the country nearly doubled its capacity during the year after installing 14.8 GW of solar photovoltaic (PV) cells. A record 22 states each added more than 100 megawatts (MW), and for the first time ever, solar ranked as the number one source of new electric generating capacity at 39 percent, followed by natural gas (29 percent) and wind (26 percent).

in 2016, solar ranked as the #1 source of new electric generating capacity in the U.S
click to enlarge

As for wind, the U.S. added 2,000 MW in the first quarter of 2017, an incredible 385 percent increase from the same time last year, according to the American Wind Energy Association (AWEA). As many as 41 states, not including Puerto Rico and Guam, now have utility-scale wind projects, with U.S. Global Investors’ home state of Texas the leader by far. The Lone Star State currently has over 21,000 MW of installed capacity—more than Canada and Australia combined—followed at a distant second by Iowa, with nearly 7,000 MW.

U.S. Installed wind power capacity, by state
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If you recall, I highlighted wind energy capacity as one of the “11 Reasons Why Everyone Wants to Move to Texas.”

Home to parts of the Permian Basin, Eagle Ford Group and other high-density oilfields, Texas has the most proven reserves, with more than a third of all U.S. crude oil reserves. Nevertheless, the state’s wind electric generation industry employs nearly three times as many people as oil, coal and natural gas generation combined, according to data provided by the U.S. Department of Energy. 

China and India—40 Percent of World’s Population—Leading Growth

According to the Financial Times, it’s normally taken between 50 and 60 years for the world to transition from one dominant fuel source to another—think the shift from wood to coal in the 1800s. The transition we’re seeing now is different in that it’s happening at a much more accelerated rate than in the past. Many experts speculate whether the 21st century will be the last one to see widespread use of coal, gas and other nonrenewables.

It’s important to recognize where sentiment is headed. As costs fall and battery technology improves, more and more governments and corporations will demand that renewables make up a larger share of their energy mix.

Consider China. The Asian giant is done messing around with smog and pollution, so its capacity additions going forward look very positive. India, meanwhile, is at the start of “the largest energy transformation project in the world,” as organizers of the recent Vienna Energy Forum put it. Now mostly powered by coal, India will soon be installing 50 percent more solar and wind capacity than the U.S. currently has.

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

 

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

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 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by the Global Resources Fund 3/31/2017: SolarEdge Technologies Inc. (1.25%), Vestas Wind Systems A/S (1.54%), Gamesa Corp Tecnologica SA (1.30%), Sociedad Química y Minera de Chile (1.22%).

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3 Factors that Are Changing the Oil Trade
May 16, 2017

Oil Rigs

For the last five years, crude oil has been behaving a little differently than it has in the past. At least that’s the takeaway from the chart below, based on the Moore Research Center’s analysis of oil’s seasonal trading patterns. Note that the index on the left measures the greatest historical tendency for the asset to make a seasonal high (100) or low (0) at a given time.

Crude Oil Historical Patterns
click to enlarge

First, take a look at the dark and light blue lines, which represent the average price action for the 15-year period and 30-year period. In either case, oil looks remarkably the same—lows were most likely to have occurred in mid- to late winter, followed by a rally leading into the busy summer travel season. March historically yielded the highest monthly returns, October and November the lowest.

But then something changed. The five-year period, represented by the orange line, shows oil hitting lows not in the winter but in late fall. Highs were more likely in May, not September.

So why’s this happening?

Behold exhibit A, U.S. crude oil production since 1983:

U.S. crude oil production in thousands of barrels per day
click to enlarge

American Fracking Responsible for Record Output

Frankly, a lot has changed in the five-year period compared to the longer-term periods. We can put hydraulic fracturing, or fracking, at the top of the list, as it’s responsible for the huge ramp-up in production you see in the chart above.

Fracking has been among the most disruptive technological applications in the history of U.S. energy production. In 2009, oil producers were averaging a little over 5,300 barrels a day. Just six years later, they were well on their way to 10 million barrels a day before an oversupplied market kneecapped prices, prompting producers to shut down operations and abandon oilfields.

U.S. crude oil production in thousands of barrels per dayNow, with the number of active rigs in North America on the rise—for the week ended May 5, the number crossed above 700 for the first time in two years—production is beginning to mount once again. According to the Energy Information Administration (EIA), domestic output should average 9.3 million barrels a day this year and nearly 10 million in 2018, a level we haven’t seen in this country since 1970.

Obviously this has a huge effect on the price of oil, which is reflected in the five-year trading pattern. Look again at the orange line. The dramatic plunge you see in October and November coincides with the same period in 2014 when the oil price fell by half.

As influential as fracking is, though, there are a couple other shifting factors at play, including the weather and OPEC policy.

A Growing Number of Weather Events Costing $1 Billion

Weather undeniably affects production, from droughts to floods to hurricanes. The Canadian wildfires in the summer of 2016, for example, cost oil sands producers an estimated $1.4 billion and knocked out as much as 800,000 barrels of oil a day.

Such extreme weather events are on the rise, according to most experts. The National Centers for Environmental Information (NOAA) reports that in the first quarter of 2017, there were five unusual weather incidents in the U.S. with losses exceeding $1 billion each. That might not sound like a lot—until you learn that between 1980 and 2016, the annual average for similarly large events was 5.5. (In 2016, the total was 15.) We appear to be running ahead of schedule, then, which could have the effect of disrupting some projects.

OPEC Strategy Is Less Effective

There was a time when the Organization of Petroleum Exporting Countries (OPEC) commanded great influence over global oil prices. Responsible for about 40 percent of the world’s production, OPEC can modulate the flow of the black stuff like a spigot with the intent to raise or lower prices. 

It’s a strategy that’s reliably worked in the past. In December I showed what happened in the weeks and months following its agreement to cut production in 1998, 2001 and 2008. The data show that prices rallied in the two years after such a pact.

But with American frackers increasingly dominating the global market, OPEC’s decision to trim output is becoming less and less effective.

Take a look:

Does OPEC Policy Influence Oil Prices Anymore?
click to enlarge

Since the cartel announced on November 30 that it would reduce production by 1.2 million barrels a day, or about 1 percent of global output, prices climbed to as high as $54 a barrel. Now, however, they  look ready to return where they started.

Don’t get me wrong—OPEC still exerts vast control. Oil’s poised to have its best week since late March on news that the cartel and Russia are both planning to extend production cuts into next year, with Saudi Arabia saying it’s prepared to do “whatever it takes” to draw down inventories.

But it’s important to recognize that, in a world where fracking now accounts for more than half of American output, such a strategy is less effective. It will be interesting to see what OPEC decides at its meeting later this month.

Americans Ready to Hit the Road

In its short-term energy outlook, the EIA expects record U.S. highway travel and fuel consumption this summer, which is constructive for energy stocks. Americans are projected to travel 1.4 percent more than last summer and consume 9.5 million barrels of gas per day, 20,000 more than the same period last year.

This bodes well for the types of companies held in our Global Resources Fund (PSPFX), which invests in firms involved not only in the exploration, production and processing of petroleum, natural gas, coal and other, but also basic materials such as chemicals and paper and forest products.

 

 

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

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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Amid Global Uncertainty, Pay Attention to this Manufacturing Index
April 10, 2017

There a lot construction Zurich now

Last week I returned from Zurich, where I spoke at the European Gold Forum. Investor sentiment for the yellow metal was particularly strong on negative real interest rates and heightened geopolitical uncertainty in the U.S., Europe, Middle East and South Africa. A poll taken during the conference showed that 85 percent of attendees were bullish on gold, with a forecast of $1,495 an ounce by the end of the year.

The upcoming presidential election in France is certainly raising concerns among many international investors. On one end of the political spectrum is Marine Le Pen, the far-right National Front candidate who, if elected, might very well pursue a “Frexit.” On the other end is Jean-Luc Mélenchon, a socialist of such extreme views that he makes Bernie Sanders look like Ronald Reagan. I was shocked to read that Mélenchon has pledged to implement a top tax rate of 100 percent—and even more shocked to learn that he’s moving up in the polls. An insane 100 percent tax rate would surely return the country to medieval-era feudalism, which is just another name for slavery. All the wealth naturally goes to the very top, and corruption thrives.

South African President Jacob Zuma

It’s important to recognize that in civil law countries such as France, hard line socialism is much more likely to take hold. Just look at South Africa. While in Zurich, I had the pleasure to speak with Tim Wood, executive director of the Denver Gold Group and former associate of South Africa’s Chamber of Mines.  According to Tim, the poor government policies of South Africa’s socialist president, Jacob Zuma, is driving business out of the country and has led to the resignations of several members of parliament. Tens of thousands of protestors have taken to the streets of Johannesburg demanding Zuma to step down, especially following his firing of Finance Minister Pravin Gordhan. The rand, meanwhile, has plummeted and the country was recently downgraded to “junk” status

One of the consequences of a weaker rand has been stronger gold priced in the local currency and higher South African gold mining stocks, as measured by the FTSE/JSE Africa Gold Mining Index. Among the gold companies that have seen some huge daily moves in recent days are Sibanye Gold and Harmony Gold. 

South African Gold Stocks Rand Weakness
click to enlarge

South African gold stocks look very attractive in the short term. Over the long term, however, producers might find it increasingly difficult to operate efficiently and profitably in such a mismanaged jurisdiction.

 

PMIs Show Impressive Manufacturing Growth

It was an eventful week, to say the least. The U.S., for the first time, became directly involved militarily in Syria’s years-long civil war. Senate Republicans invoked the “nuclear option” to prevent a Democratic filibuster, allowing federal judge Neil Gorsuch to obtain Supreme Court confirmation. President Donald Trump met with Chinese leader Xi Jinping at Mar-a-Lago, the so-called “Winter White House,” to discuss trade and North Korea, among other issues.

And on Friday we learned the U.S. added only 98,000 jobs in March, down spectacularly from the 235,000 that came online in February. In response to this and the Syrian air strike, gold jumped more than 1 percent, touching $1,272 in intraday trading, its highest level in five months.

Fresh purchasing manager’s index (PMI) readings for the month of March were also released, showing continued manufacturing sector expansion in the world’s largest economies, including the U.S., China and the eurozone. All of Zurich was under construction, it seemed, with cranes filling the skyline in every direction. And when I flew back into San Antonio, sections of the international airport were also under heavy construction. This all reflects strong local and national economic growth in Switzerland and the U.S.

I especially like the Zurich Airport. I travel a lot, and it’s the only airport I know of where you can sit out on an open deck and watch and listen to the jets take off and land.

Panoramic Zurich Airport

The official China PMI rose to 51.8, the fastest pace in nearly five years. Because the PMI is a forward-looking tool, this bodes well for industrial metals, as measured by the London Metal Exchange Index (LMEX). The Asian giant, as I’ve pointed out before, consistently ranks among the top importers of copper, aluminum, steel and more.

Industrial Metals Tracked China Manufacturing PMI
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The U.S. Manufacturing ISM cooled slightly to 57.2, down from 57.7 in February. This still remains high on a historical basis. Because the U.S. is the number three producer of crude, following Russia and Saudi Arabia, oil prices have tended to track the country’s manufacturing index.

Crude Oil Has Mostly Tracked US Manufacturing ISM
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Trump Tackles U.S. Trade with China

Again, Trump met with China’s Xi, a man who can be considered the U.S. president’s counterpart in many more ways than one. In February, I included Xi in a list of four global leaders who have more in common with Trump than some people might realize. Last week the Brookings Institute compiled a list of the many “striking similarities” between the two men. Among other commonalities, they’re both nationalists; they’re both populists and have expressed a desire to fight corruption; they both have a rocky relationship with the press and intellectual community; and they both prioritize domestic affairs over foreign affairs.

None of this stopped Trump from being very critical of China on the campaign trail. He threatened to name the country as a currency manipulator and raise tariffs as much as 35 percent. It will be interesting to see what agreements, if any, can come out of this meeting between the two leaders.

Trump is not wrong to raise the alarm over U.S.-China trade. In 2016, the U.S. trade deficit with China stood at a whopping $347 billion. This is down slightly from $367 billion in 2015, but still a huge number. If you look at the total U.S. balance of payments since 1960, you get an even greater sense of the imbalance.

Can Trump Balance US Trade
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At the same time, world trade volume growth has improved in recent months, especially in emerging markets and Asia.

World Trade Volume Growth Headed Right Direction
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It’s important that Trump put ample thought into improvements on international trade. I’m not convinced tariffs and border adjustment taxes (BATs) are the solution. Look at what happened in the 1930s with the Smoot-Hawley Tariff Act. In an effort to “protect American jobs,” the U.S. raised tariffs on more than 20,000 goods coming into the country, many of them as high as 59 percent. Once the act went into effect in June 1930, a trade war promptly ensued and global trade all but dried up. Today, historians almost unanimously agree that the policy, which President Franklin Roosevelt later overturned, only exacerbated the effects of the Great Depression.

One of the biggest reasons why the U.S. has such a trade deficit is due to its abnormally high corporate tax rate. The country’s largest export is intellectual and human capital. Think Apple and Google, which are designs and ideas. The problem is that the dollars received in exchange for these goods and services are sitting in Ireland, or elsewhere, and are thus not counted in the official trade balance. Should the corporate tax rate decline to an average of around 18 to 20 percent, which is consistent with other developed countries, U.S. multinational companies would likely be more inclined to repatriate those profits and tilt the balance back in America’s favor.

Tax reform, therefore, is key in making sure the U.S. remains competitive on the world stage.

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/16: Sibanye Gold Ltd., Harmony Gold Mining Co. Ltd.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.  The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

The London Metals Exchange Index (LMEX) is an index on the six designated LME primary metals contracts denominated in US dollars. Weightings of the six metals are derived from global production volume and trade liquidity averaged over the preceding five-year period. The index value is calculated as the sum of the prices for the three qualifying months multiplies by the corresponding weights, multiplied by a constant. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.

The FTSE/JSE African Gold Mining Index is a market capitalization weighted index.

Share “Amid Global Uncertainty, Pay Attention to this Manufacturing Index”

Net Asset Value
as of 06/28/2017

Global Resources Fund PSPFX $5.39 0.06 Gold and Precious Metals Fund USERX $7.37 0.06 World Precious Minerals Fund UNWPX $6.29 0.01 China Region Fund USCOX $9.45 -0.04 Emerging Europe Fund EUROX $6.32 0.05 All American Equity Fund GBTFX $24.45 0.18 Holmes Macro Trends Fund MEGAX $19.91 0.26 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change