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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.

Is this the Start of a Hot New Metals Bull Market?
August 14, 2017

Aluminum metals

Major U.S. indices slid for a second straight week as President Donald Trump and North Korea both escalated their saber-rattling, with Kim Jong-un explicitly targeting Guam, home to a number of American military bases, and Trump tweeting Friday that “Military solutions are now fully in place, locked and loaded.” The S&P 500 Index fell 1.5 percent on Thursday, its largest one-day decline since May. Military stocks, however, were up, led by Raytheon, Lockheed Martin and Northrop Grumman.

As expected, the Fear Trade boosted gold on safe haven demand. The yellow metal finished the week just under $1,300, a level we haven’t seen since November 2016. Last week, Ray Dalio, founder of Bridgewater Associates, the largest hedge fund in the world, said it was time for investors to put between 5 and 10 percent of their portfolio in gold as a precaution against global and domestic geopolitical risks. The threat of nuclear war is at the top of everyone’s mind, but Dalio reminds us that our indecisive Congress could very well fail to agree on raising the debt ceiling next month, meaning a “good” government shutdown, as Trump once put it, would follow.

Dalio’s not the only one recommending gold right now. Speaking to CNBC last week, commodities expert Dennis Gartman, editor and publisher of the widely-read Gartman Letter, said that he believed “gold is about to break out on the upside strongly” in response to geopolitical risks and inflationary pressures. Gartman thinks investors should have between 10 and 15 percent of their portfolio in gold.

Government shutdowns haven’t always been harmful to the stock market—during the last one, in October 2013, stocks actually gained about 3 percent—but I agree that it might be prudent right now for investors to de-risk and ensure their portfolios include safe haven assets such as gold and municipal bonds. Dalio and Gartman’s allocation percentages mirror my own. For years, I’ve recommended a 10 percent weighting in gold, with 5 percent in bullion and 5 percent in high-quality gold stocks, mutual funds and ETFs.

 

Analysts Bullish on Metals and Commodities

Weaker US Dollar helped commodities beat the market in july

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Like stocks, the U.S. dollar continued its slide last week. This has lent support not just to gold but also commodities, specifically industrial metals. The Bloomberg Commodity Index actually beat the market in July, the first time it’s done so this year.

If we look at the index’s constituents, we find that six metals—aluminum, copper, zinc, gold, silver and nickel—have been the top drivers of performance this year, thanks to a weaker dollar, China’s commitment to rein in oversupply and heightened demand. According to Bloomberg, an index of these six raw metals has jumped to its highest in more than two years.

Some market observers believe this is only the beginning. Guy Wolf, an analyst with Marex Spectron Group, told Bloomberg that he doesn’t “see anything” to make him doubt the firm’s belief that metals “are now in a bull market.”

“As people start to realize that the reasons for prices going up are robust and sustainable, that’s going to bring more money into the market,” Wolf added.

This bullish sentiment is shared by Mike McGlone, senior commodities analyst with Bloomberg Intelligence, who writes that commodities’ strong performance in July  “could be the beginning of a trend.”

“Supported by demand exceeding supply, on the back of multiple years of declining prices, a peaking dollar should mark an inflection point for sustained commodity recovery,” McGlone says.

I can’t say whether we might eventually see the highs of the commodities supercycle in the 2000s, but this news is certainly constructive.

Aluminum Liftoff

The top performer right now is aluminum, up more than 20 percent year-to-date. Last week it breached $2,000 a tonne for the first time since December 2014 and is currently trading strongly above its 50-day and 200-day moving averages.

US ISM non-manufacturing PMI sinks to 11 month low in july
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Demand for aluminum is growing in the automotive and packaging industries, its two key markets. With consumers and governments demanding better fuel efficiency, automakers are increasingly turning to aluminum, which is around 40 percent lighter than steel. According to Ducker Worldwide, a market research firm, the amount of aluminum used to build each new vehicle will double between the early 2010s and 2025, eventually reaching 500 pounds. That’s up from only 100 pounds per vehicle, which was the case in the 1970s. Airline manufacturers such as Boeing and Airbus are also expected to increase demand for the lightweight metal.

Supply-side conditions are also improving. Prices have struggled in recent years as China—which accounts for roughly 40 percent of world output—flooded the market with cheap, and often illegal, metal. Recently, however, the Asian giant has called for dramatic capacity cuts in a number of provinces. By the end of 2017, an estimated 4 million metric tons of capacity will have closed, or one-tenth of the country’s total annual output, according to MetalMiner.

Also supporting prices is the Commerce Department’s decision last week to slap duties on aluminum coming into the U.S. from a number of Chinese producers that were found to be heavily subsidized by the Chinese government.

The Virginia-based Aluminum Association applauded the decision, saying that its members “are very pleased with the Commerce Department’s finding and we greatly appreciate Secretary [Wilbur] Ross’s leadership in enforcing U.S. trade laws to combat unfair practices.”

The aluminum industry, the trade group says, supports more than 20,000 American jobs, both directly and indirectly, and accounts for $6.8 billion in economic activity.

Miners Getting Back to Work

There’s perhaps no greater signal of a shift in sentiment than an increase in mining activity as producers take advantage of higher prices. Bloomberg reported last week that the number of new holes drilled around the globe has accelerated for five straight quarters as of June. What’s more, drilling activity so far this quarter, as of August 7, suggests that number could extend to six quarters.

US ISM non-manufacturing PMI sinks to 11 month low in july
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I believe activity will only continue to expand as China pursues further large infrastructure projects, which will require even more raw materials such as aluminum, copper, zinc and other base metals. And I still have confidence that Trump and Congress can deliver on a grand infrastructure deal—the president has been turning up the heat on Senate Majority Leader Mitch McConnell, writing on Twitter that the Kentucky senator needs to “get back to work” and put “a great Infrastructure Bill on my desk for signing.”

With government spending on infrastructure falling to a record low of 1.4 percent of GDP in the second quarter, such a bill would help modernize our nation’s roads, bridges, waterways and more. It would also serve as a huge bipartisan win for Trump, which he sorely needs to build up his political capital.

But beyond that, a $1 trillion infrastructure deal would greatly boost demand for metals and other raw materials, perhaps ushering in a new commodities supercycle.

 

 

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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: The Boeing Co., Airbus SE.

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Venezuela on the Brink—An Opportunity for Oil Investors?
July 31, 2017

Venezuela on the Brink - An Opportunity for Oil Investors?

Venezuela is sliding closer and closer toward the brink, and things look as if they’ll get worse, unfortunately, before they improve.

A country that boasts the largest proven oilfield in the world should not be facing such dire food and medicine shortages, not to mention rampant protests and violence in the streets. But that’s what happens when far-left, authoritarian socialist regimes threaten to dissolve economic freedom, the rule of law and democracy itself.

As you might have heard, a vote passed in Venezuela on Sunday that could permanently amend the country’s constitution for the worse. President Nicolas Maduro is now poised to become the world’s next absolute dictator.

draghi ending ecb stimulus not there yet

Last Wednesday, the U.S. Treasury Department issued economic sanctions on 13 current and former Venezuela government officials in an effort to encourage Maduro to drop the election, which—let’s be honest—was likely rigged in his favor. According to Transparency International, Venezuela is among the most corrupt countries on the planet, ranking 166 out of 176 in 2016.

“We will continue to take strong and swift actions against the architects of authoritarianism in Venezuela, including those who participate in the National Constituent Assembly as a result of today’s flawed election,” the U.S. State Department said in a statement issued Sunday.

So why am I telling you this? Again, Venezuela sits atop the world’s largest proven oil patch. Crude accounts for roughly 95 percent of its export earnings. If Maduro does not relent, the U.S. could very possibly target the country’s oil industry next.

As Evercore ISI put it last week, the Treasury Department’s decision is “the first step toward comprehensive sectoral sanctions, including crude oil imports into the U.S.”

This would be phenomenally disruptive to Venezuela’s already fragile economy. Right now, the U.S. is the country’s top cash-generating market. Unlike most other markets, the U.S. pays its oil import invoices in full and on time. Venezuela could always boost exports to other existing clients, but the cash would dry up.

To be fair, such a move wouldn’t be exactly painless for the U.S. either. Venezuela is currently its third-largest supplier of crude, following Canada and Saudi Arabia. Several large American producers, including Chevron, Halliburton and Schlumberger, have joint-venture contracts with Petroleos de Venezuela (PDVSA), the South American country’s state-run oil company. And a number of oil refineries in the U.S. are equipped specifically to handle Venezuela’s notoriously extra-heavy crude.       

top 5 crude suppliers to the U.S.
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Speaking to MarketWatch last week, Oil Price Information Service energy analyst Tom Kloza said the “possibility of chaos” in Venezuela could adequately spur an oil rally that the most recent global production cuts have failed to achieve. Despite the Organization of Petroleum Exporting Countries’ (OPEC) December agreement to trim output in an effort lift prices, crude fell more than 14 percent in the first six months of 2017 and is currently underperforming its price action of the past four years. 

Venezuela’s vote this past weekend, followed closely by fresh U.S. Treasury Department sanctions, could be the “only true element that would change the dynamic for crude,” Kloza says.

Crude Gains on Inventory Draw

West Texas Intermediate (WTI) crude climbed to a nearly two-month high last week—but not entirely in response to the upcoming Venezuela vote. The U.S. Energy Information Administration (EIA) reported that crude oil inventories, not including those in the Strategic Petroleum Reserve (SPR), sharply fell 7.2 million barrels in the week ended July 21. Stocks now stand at slightly more than 483 million barrels. Although still historically high, inventories have now decreased for four straight weeks.

U.S. Crude stocks see big draw, sending oil prices higher
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Last Tuesday, oil jumped 3.34 percent, its biggest one-day gain since November 2016. The commodity is on track to have its first positive month since February.

Also supporting oil right now is speculation that domestic producers could soon start slashing capital budgets after months of depressed prices. Anadarko Petroleum made headlines last week after becoming the first major U.S. producer to announce cuts. The Texas-based company plans to trim $300 million from its 2017 budget.

But don’t expect domestic output to slacken anytime soon. In its Short-Term Energy Outlook, released last week, the EIA forecasts crude production to reach a record high of 9.9 million barrels a day on average in 2018. That would push it over the previous record of 9.6 million barrels a day, set way back in 1970.

EIA forecasts record U.S. oil production in 2018
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Not everyone agrees with this assessment. In a report last week, Capital Economics writes that “after more than a year of steady gains, the number of active drilling rigs will decline in the second half of the year. Accordingly, while mining structures investment probably posted another rise in the second quarter, these gains won’t be repeated in the second half of the year.”

Active Rigs and Mining Structures Investment Set to Fall
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It’s important to remember, though, that a common theme among American frackers is that operations have become exceedingly more efficient than ever before. When oil prices collapsed more than two years ago and rigs were mothballed, output remained strong. So it’s possible that even with fewer rigs actively pumping crude, and less capital going into mining structures, we could still see domestic production reach 10 million barrels a day by next year.

OPEC Compliance at Six-Month Low

Obstructing price appreciation right now is news that a number of OPEC countries are not complying with production guidance laid out earlier in the year. The compliance rate fell from 95 percent in May to a six-month low of 78 percent in June, with monthly output from Algeria, Ecuador, Gabon, Iraq, the United Arab Emirates and Venezuela totaling more than what should be allowed.

Meanwhile, Libya and Nigeria—which are exempt from the OPEC agreement because recent political instability in those countries knocked out months’ worth of production—dramatically increased output that reportedly has Saudi Arabia worried.

Peak Oil Demand in 10 Years?

Looking ahead on the demand side, we could see global oil consumption peak as soon as the late 2020s or early 2030s.

draghi ending ecb stimulus not there yet

That’s according to Ben van Beurden, CEO of Royal Dutch Shell. Speaking to CNBC last Thursday, van Beurden cited growth in electric vehicle sales as well as countries switching from fossil fuels to renewables as major catalysts that would trigger peak demand much sooner than previous estimates. Back in November, the International Energy Agency (IEA) said it didn’t expect demand to peak before 2040.

But things are changing more rapidly every day. In June, Volkswagen—the world’s number one manufacturer by sales—announced it would cease selling fossil fuel-burning automobiles by 2020. Both France and the United Kingdom recently said gas and diesel cars would be banned by 2040. India, the fastest growing automobile market, set a similar target for 2030.

Even when oil demand peaks—whether in 2030 or 2040—it won’t “go out of fashion overnight,” van Beurden said. Planes, ships and heavy trucks will continue using fossil fuels all around the globe, and smaller emerging markets will not be able to make the transition to renewables so easily as larger economies such as Western Europe, China and India.

“Supply will shrink faster than demand can shrink,” he explained, “and therefore, working on oil and gas projects will remain relevant for many decades to come.”

Shell reported knockout second-quarter earnings as cash generation rose sharply. The Anglo-Dutch producer’s earnings attributable to shareholders rose to $1.9 billion in the June quarter, a whopping 703 percent increase over the same period last year. Free cash flow stood at an incredible $12.1 billion, up from negative $3.1 billion during the same quarter in 2016.

With the price of oil having averaged $45 a barrel for the past two years, Shell will remain “very disciplined” going forward, van Beurden said.

 

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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: Chevron Corp., Dutch Royal Shell PLC,  

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Commodities Halftime Report: Separating the Wheat from the Chaff
July 10, 2017

amber waves of grain wheat is the best performing commodity of 2017

Of the 14 commodities we track closely at U.S. Global Investors, wheat rose to take the top spot for the first half of 2017, returning more than 25 percent. The grain was followed closely by palladium—used primarily in the production of catalytic converters—which gained 24 percent.

seperating the wheat from the chaff
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To view our ever-popular, interactive Periodic Table of Commodity Returns, click here.

Between the start of the year and June 30, the Bloomberg Commodity Index contracted 4.03 percent, with energy weighing down on the mostly strong performances of precious and industrial metals and agriculturals.

Contributing to metals’ gains was U.S. dollar weakness. During the first six months, the greenback lost 7.54 percent, responding partially to President Donald Trump’s comment in April that the dollar was “getting too strong.”

More recently, the president tweeted his thoughts on gas prices, which he pointed out were “the lowest in the U.S. in over ten years” for the July Fourth holiday. “I would like to see them go even lower,” he added.

Trump Goes to Warsaw

Speaking of Trump, I feel as if he has represented the U.S. and its values admirably during his visit to Europe last week. His speech in Warsaw sought to strengthen ties between America and Poland, which the New York Times just named the “next economic powerhouse.”

ahead of the g20 meeting this week, Presidend Trump and First Lady Melania arrived in Poland, greeted by Polish President Adrezej Duda and wife Agata.

Trump drew attention to a danger that’s “invisible” yet every bit as dangerous as terrorism and extremism—namely, “the steady creep of government bureaucracy that drains the vitality and wealth of the people.”

The U.S. and Poland “became great not because of paperwork and regulations,” the president said, “but because people were allowed to chase their dreams and pursue their destinies.”

This is the Trump I believe voters elected last November. If he were only able to stay on message and give his Twitter account a rest, he might more easily help engender and inspire an environment that better reflects the vision he described to his Polish audience.

I’m also encouraged by his first one-on-one meeting with Russian President Vladimir Putin. From what I’ve read, it sounds as if the two leaders managed to make some progress on Syria, with both sides agreeing to cooperate in maintaining “safe zones.”

Oil Embroiled

Regarding lower gas prices, Trump just might get his wish. Having fallen 14.30 percent in the first six months, oil is currently underperforming its price action of the past four years.

2017 oil underperforming the past four years
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Much of the thanks for oil’s slump goes to U.S. shale producers, which were quick to reactivate dormant rigs following the Organization of Petroleum Exporting Countries’ (OPEC) December announcement that it would be cutting production. As a result, the market is awash in black gold. In May, the Energy Information Administration (EIA) estimated that domestic output should average 9.3 million barrels a day this year and nearly 10 million in 2018, a level unseen in the U.S. since 1970.

West Texas Intermediate (WTI) popped above $47 a barrel last week, however, on news that oil and gas inventories in the U.S. dropped sharply the previous week. What’s more, the number of active North American oil rigs fell by two in the week ended June 30, from 758 to 756 rigs, the first such contraction since January, according to the Baker Hughes Rig Count.

Although constructive, there’s still quite a bit of terrain to cover before oil reaches the low- to mid-$50s we saw at the start of the year.

Where’s the Wheat?

As I told you back in May, the U.S. reclaimed its longstanding title as the world’s number one wheat exporter this year, displacing Russia, whose weak currency gave the Eastern European country a competitive advantage.

We might soon slip to second place yet again, for two primary reasons: 1) low U.S. wheat plantings and 2) severe droughts and unexpectedly hot weather conditions in the Northern Plains.

According to a March report from the U.S. Department of Agriculture (USDA), American farmers just aren’t planting wheat like they used to. Not only are we seeing shrinkage in the acreage devoted to the amber grain—more and more farmers are switching to soybeans—but wheat seedings are down for a second straight year. The USDA, in fact, estimates them to be at their lowest level ever since records began nearly 100 years ago in 1919.

As to the second point, severe to extreme hot and dry weather conditions in the Northern Plains—specifically in areas of Montana and the Dakotas—are putting wheat (and corn) on the defensive. According to the U.S. Drought Monitor, parts of Montana just experienced their driest May and June in 99 years and the driest January through June since 1983. Last week alone, temperatures in the region surged into the 90s and 100s, about 15 to 20 degrees above the norm. These conditions are expected to persist for several more weeks.

drought in the northern plains has impacted spring wheat conditions
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Supply constraints have pushed the grain up 25 percent so far this year to a nearly two-year high. A bushel now costs a little over $5, but some analysts see it rising above $6 and $7.

Precious Metals Continue to Shine

Also benefiting from limited supply is silver, which climbed nearly 4.5 percent as of June 30. The Silver Institute reported in May that global silver mine production in 2016 declined for the first time in 14 years on lower-than-expected output from lead, zinc and gold projects. World supply decreased 0.6 percent year-over-year, or about 32.6 million ounces.

Meanwhile, silver’s use in solar photovoltaic (PV) cells hit a new record high last year, further boosting demand. As I shared with you in May, solar ranked as the number one source of new electric generating capacity in the U.S. in 2016, followed by natural gas and wind.

In the first half of 2017, palladium, the silvery-white metal used in the production of catalytic converters, has surged to a 16-year high on speculative demand.

palladium price closing in on 16 year high
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At first blush, this trade might seem counterintuitive. After all, gas-powered vehicles, which use catalytic converters to control emissions, are expected to be surpassed in sales by electric vehicles, which do not require palladium, as early as 2040. Volvo just announced that it would completely phase out gas-only vehicles by 2019. Meanwhile, Tesla’s first mass-market battery electric vehicle (BEV) finally hit production last week.

Driving palladium’s rally this year, though, are bets that European car buyers will soon be switching from diesel-burning to gas-burning cars because of emissions concerns.

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

Palladium—one of the rarest elements on earth and mined almost exclusively in Russia and South Africa—is the smallest precious metals market, making its prices particularly vulnerable to such speculative trading. It’s achieved near-price parity with its sister metal, platinum, for the first time in two decades.  

On the other end of the spectrum is gold, whose market is larger than many major global stock and bond markets. Those include U.K. gilts, German bunds, the FTSE 100 Index, the Hang Seng Index and others.

Up 7.75 percent in the first six months, gold was supported largely by strong demand in India as consumers made their purchases ahead of the government’s Goods and Services Tax (GST), in effect since July 1, which levies a 3 percent tax on gold.

The impact of the country’s demonetization in December is also still being felt, with Indians’ confidence in fiat currencies tested. I believe Prime Minister Narendra Modi’s scheme to combat black money and public corruption, while admirable, has only reinforced Indians’ faith in the yellow metal as a store of value.

With consumer prices in the U.S. possibly set to begin rising on President Trump’s more protectionist policies—once he can get them enacted—gold priced in dollars could also be headed higher.

The Road Ahead

There’s a lot we’ll be keeping our eyes on in the second half of the year. For one, look to India’s upcoming Diwali holiday and fourth-quarter wedding season, during which gold gift-giving is considered auspicious.

Earlier in the year, I was excited about Trump’s ambitious infrastructure agenda, which would have greatly boosted domestic demand for base metals and energy. But with the Senate still locked in negotiations over what to do about Obamacare, an infrastructure deal looks as if it’s months if not years away.

Finally, I think with Tesla firing up its Nevada-based Gigafactory, investors would be prudent to keep their eyes on aluminum, cobalt, nickel and especially copper, as electric vehicles use around three times as much of the red metal as conventional vehicles. Lithium, which I featured back in March, is also expected to be a beneficiary of the move to BEVs.

 

 

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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
The FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong.

The Baker Hughes North American rig count is released weekly at noon central time on the last day of the work week. 

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2017.

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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
click to enlarge

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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Net Asset Value
as of 08/18/2017

Global Resources Fund PSPFX $5.45 0.01 Gold and Precious Metals Fund USERX $7.39 0.03 World Precious Minerals Fund UNWPX $6.49 0.08 China Region Fund USCOX $10.12 0.05 Emerging Europe Fund EUROX $6.76 0.03 All American Equity Fund GBTFX $23.63 -0.22 Holmes Macro Trends Fund MEGAX $19.35 0.02 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change