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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.

It Might Be Time to Grab the Commodities Bull by the Horns
January 25, 2017

Commodity investors have had to endure a dry spell for a while now, but those days are starting to look as if they might be behind us. We see encouraging signs that a bottom has been reached and a new commodities super-cycle has begun, as global manufacturing expansion and inflation are finally gathering steam following the financial crisis more than eight years ago.

As a group, commodities had their first positive year since 2010, ending 2016 up more than 11 percent, as measured by the Bloomberg Commodity Index.

commodities end positively for the first time in six years
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A large percentage of this growth occurred in the days following the U.S. election, suggesting the reflation trade is officially in motion, which should be supported in the coming weeks and months by President Donald Trump’s pro-growth policies.

Just this week, Trump signed executive orders to proceed with the controversial Keystone XL and Dakota Access pipelines, emphasizing that the steel to be used in their construction will be American-made. Following the announcement, stock in energy infrastructure company TransCanada, which is expected to resubmit plans for the pipeline after it was rejected by the Obama administration, immediately hit a new high, while shares of several steel companies traded up.

Between Election Day and Inauguration Day, the commodities index rose 5.4 percent, with double-digit growth in crude oil (up 17.1 percent), copper (10.5 percent) and iron ore (17.7 percent).

commodities up double digits since trump's election
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Of the 14 commodities that we track in our ever-popular Periodic Table of Commodity Returns—which has been updated for 2016 and is available for download—only two ended the year down: corn and wheat. All this, following the group’s worst annual slump since the 2008 financial crisis.

The Periodic Table of Commodity Returns

Investment Banks Turn Bullish on Commodities

Back in May, Citigroup was first to say that the worst was over for commodities, and in December it made the call that most raw materials were poised to “perform strongly” in 2017 on global fiscal stimulus and economic expansion.

Now, for the first time in four years, Goldman Sachs has recommended an overweight position in commodities, following reports that revenue from commodity trading at the world’s 12 biggest investment banks jumped 20-25 percent in the fourth quarter of 2016 compared to the same period in 2015.

As reported by Bloomberg, Goldman’s head of commodities research, Jeffrey Currie, drew attention to the “cyclical uptick in global economic activity,” which is “driving demand, not only for oil but all commodities.”

“U.S. and China are focal points where we’re seeing the uptick,” Currie continued, “but even the outlook for Europe is much more positive than what people would have thought six months to a year ago.”

Indeed, manufacturing activity continues to expand at a robust pace, with January’s preliminary purchasing managers’ index (PMI) for the U.S. and the eurozone registering an impressive 55.1 and 54.3, respectively. We won’t know China’s January PMI until next week, but in December it improved at its fastest pace in nearly four years. As I shared with you earlier this month, the global manufacturing PMI expanded for the fourth straight month in December, reaching its highest reading since February 2014. I’m optimistic that it will expand again in January.

Global Manufacturing Climbs to 34-Month High in December 2016
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Again, we closely monitor the PMI, as our research has shown that it can be used to anticipate the performance of commodities and energy three and six months out. It looks as if the world’s big banks have begun to acknowledge this correlation as well. With the health of global manufacturing trending up, we see commodities demand following suit in the coming months.

Number of Auto Sales Hits an All-Time High

Case in point: auto sales. Last year marked a new record high, with 88.1 million cars and light commercial vehicles driven off of car lots. That figure was up 4.8 percent from 2015.

Global Auto Sales Reached a New Record in 2016
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China was the standout, which increased sales 13 percent and saw 3.2 million new units sold. It should be noted, however, that sales were assisted by a 50 percent tax cut on smaller vehicles, which is no longer in place.

China sold a record number of automobiles in 2016
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But consider this: Here in the U.S., the average age of cars and light trucks continues to creep up and is now 11.6 years, as of January 2016, according to IHS Markit. Improvements in quality is the main reason for the increase.

Even so, these aging vehicles will need to be replaced in the next few years, meaning domestic auto sales should remain strong. This bodes well for platinum and palladium, both of which are used in the production of catalytic converters.

But what about electric cars, which have no need for catalytic converters since they’re emissions-free? As I’ve shared with you before, electric cars—the demand for which continues to climb—use three times more copper wiring than vehicles with a conventional internal combustion engine.

There’s always an opportunity if you know where to look!

 

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 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.

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 12/31/2016.

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Holiday Edition: Here Are the Top 6 Frank Talk Posts of 2016
December 27, 2016

Good Tidings we bring to you and yours

This year has been one for the history books. Donald Trump was elected as the 45th president of the United States, gold had its best quarter in a generation, Warren Buffett decided he likes airlines again and voters in the United Kingdom elected to leave the European Union. Loyal readers of the Investor Alert newsletter and my CEO blog Frank Talk know that we covered it all, too.

As we head into the New Year, I want to share with you the six most popular Frank Talk posts of 2016. Before I do that, however, I think it’s important to note one recurring theme I write about that continues to help our investment team and shareholders better understand the movement in commodities and energy: the purchasing managers’ index (PMI).

Using PMI as a Guide

As I explain in this January Frank Talk, our research has shown that PMI performance is strongly correlated with the movement in commodities and energy three and six months out. PMI forecasts future manufacturing conditions and activity by assessing forward-looking factors such as new orders and production levels.

When a PMI “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has historically signaled a possible uptrend in crude oil, copper and other commodities. The reverse is also true. When the monthly reading crosses below the three-month moving average, the same commodities and materials have in the past retreated three months later.

In the three months following a “cross-above,” oil rose about 7 percent, 75 percent of the time, based on 10 years’ worth of data. Copper, meanwhile, rose more than 9 percent most of the time.

Commodities and Commodity Stocks Historically Rose Three Months After PMI 'Cross-Above'
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In November, the JPMorgan Global Manufacturing PMI reading clocked in at 52.1, a 27-month high. This shows that sector expansion has extended for a sixth straight month, which is very encouraging news. Following OPEC's recent production cut, we believe the decision is constructive for energy in the near-term, while a rising PMI is good news for the long term.

JPMorgan Global Manufacturing PMI Continues Upward Momentum
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We are finally seeing major media outlets and other Wall Street thought leaders recognize the importance of PMI as well.

2016 In Review: The Top 6 Posts

Every year I have the opportunity to engage and educate curious investors through my Frank Talk blog, and I am grateful to all of my subscribers who continue to stay engaged with the stories I share. Below are the top six Frank Talk posts of 2016 based on what you found most fascinating. I hope you enjoy this brief recap.

1. Gold Had Its Best Quarter in a Generation. So Where Are the Investors?

In April we were pleased to report that gold was having its best quarter in 30 years—rising 16.5 percent year-to-date at the time. During the first quarter, the yellow metal had its best three-month performance since 1986, mostly on fears of negative interest rates and other global central bank policies.

What we noticed, however, was an anomaly in terms of investor interest. Retail investors were very bullish on bullion but remained bearish on gold stocks.

This was a missed opportunity. Even though gold stocks have retreated since the summer, the NYSE Arca Gold Miners Index is still up 40 percent for the 12-month period. Over the same period, the S&P 500 Index is up only 10 percent, with the Trump rally driving most of it.

As you can see in the oscillator below, gold is currently down more than two standard deviations. In the past, this was a good time to accumulate, as mean reversion soon followed.

Gold vs. 2-Year Treasury Yield Percent Change Oscillator
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The 2-year Treasury yield, meanwhile, is looking overbought and set to correct, based on our model. The math suggests a nearly 90 percent probability that mean reversion will occur over the next three months, with yields falling and the gold price rising back to its mean.

What’s more, ICBC Standard Bank recently highlighted the growing costs of higher yields, which are being overlooked. Net interest payments on the nearly $14 trillion of U.S. debt will amount to around $250 billion this year—or 1.4 percent of U.S. gross domestic product. “If we apply an 80 basis point increase to the net interest forecasts,” the bank writes, “then by 2026 the Treasury would be paying an additional $185 billion in interest annually, and interest will have increased to 3.3 percent of GDP.” This could strengthen the investment case of gold.

2. What Brexit Is All About: Taxation (and Regulation) Without Representation

Just three days before U.K. voters went to the polls, I shared my thoughts on why those betting on the “stay” campaign might be surprised to find Eurosceptical Brits prevailing in the Brexit referendum. British citizens voted to exit the EU on June 23, a move that many were not expecting. One of the main grievances of voters was the heavy burden of EU regulations, which are decided by unelected officials in Brussels with little to no cost-benefit analysis.

According to Open Europe, a nonpartisan European policy think tank, the top 100 most expensive EU regulations set the U.K. back an annual 33.3 billion pounds, equivalent to $49 billion.

33.3 Billion Annual Cost of teh EU's Top 100 Regulations on U.K. Businesses

3. 11 Reasons Why Everyone Wants to Move to Texas

As a “Tex-Can”—born in Canada, living in Texas for the past 26 years—I am so blessed to call Texas my home. Although we are global investors, often focusing on macro-economic issues and government policies, I enjoyed writing this piece highlighting 11 reasons why Texas is truly a remarkable place to live. Did you know if Texas were its own nation, its economy would be about the same size as Canada’s?

The Global Scale of America's Economy
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4. Did OPEC Just Cry Uncle?

Back in October, the Organization of Petroleum Exporting Countries (OPEC) tentatively agreed to a production cut at its meeting in Algiers. Officials announced a “plan” to limit daily production, but I warned investors not to get too excited over OPEC’s decision at the time, since nothing was set in stone. Some OPEC members were already wavering, with Iraq questioning output numbers and Nigeria moving to boost production.

Fast forward to December. For the first time since 2008, OPEC has agreed to a crude oil production cut, renewing hope among producers and investors that prices can begin to recover in earnest after a protracted two-year slump.

5. Use This Tax Strategy Like the Top 1 Percent

Many people might have the impression that the top 1 percent of society—those making over $521,411—deal mainly in exotic investments such as derivatives, fine art and rare French wines. The truth is actually a lot less exciting—they invest in munis. Muni bond income, after all, is entirely exempt from federal and often state and local taxes—a feature that should appeal not just to money-saving, high-net worth individuals but to all investors.

 

 

 

Wealthiest U.S. Households Own an Increasing Share of Municipal Debt
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6. Romania Did This, And Now It's Among the Fastest Growers in Europe

In July I wrote a piece highlighting a country I don’t always discuss—Romania. At the end of last year, and after years of tepid growth, Romania’s government moved to revise its tax code. The country reduced the value added tax (VAT) rate from 24 percent to 20 percent, lowered the income withholding tax rate, nixed a controversial “special construction” tax, simplified deductibles and exempted certain dividends from corporate income tax.

The changes have worked much faster than expected. In the first quarter of 2016, Romania grew 4.3 percent year-over-year, beating the 3.9 percent analysts had expected, and up 1.6 percent from the fourth quarter of 2015.

Keep Calm and Invest On

I want to end on one final point. Trump recently responded to the Berlin Christmas Market massacre—the perpetrator of which was just shot dead by police in Italy last week—saying the event validates his past support of banning Muslims from entering the country and creating a Muslim registry for those already in the U.S.

I’ve said before that people too often take President-elect Trump literally but not seriously, and I think this is one of those cases. I don’t believe he will literally ban all 1.6 billion Muslims from coming into the country, nor does he literally mean it. More likely such a ban would resemble President Jimmy Carter’s temporary cancellation of Iranian visas in response to the hostage crisis, but that’s mere speculation. The issue of Shia-Sunni relations alone is far too complex, with the schism as deep and nuanced as when Protestants broke from the Catholic Church in the 16th century.   

But let’s say for a moment that Trump somehow succeeds in implementing a complete ban and creating a registry. These plans would not come cheap. One team of researchers estimated a ban would cost the U.S. economy at least $71 billion a year in lost spending on tourism, education and more. As for a registry, the similar National Security Entry-Exit Registration System (NSEERS)—created in response to 9/11 and dissolved this month by President Barack Obama—cost taxpayers about $10 million a year.

New rules, laws and regulations associated with a ban and registry would also add to our already bloated list of rules, laws and regulations. Trump has said he is committed to axing regulations. I’m all for limiting the regulatory burden, but I wonder what Trump (and incoming Homeland Security secretary John Kelly) would need to cut and streamline to offset the additional rules and costs.

This is the very definition of the law of unexpected consequences, and it’s important to be cognizant of “the negatives of Trump’s anti-globalization ideas,” in the words of billionaire money manager Bill Gross. It’s for this reason that investors should remain diversified, in gold, equities and tax-free municipal bonds.

To all of our readers around the world, I wish you robust health, buckets of wealth and tons of happiness in the New Year!

 

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 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 NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.

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

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

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Here’s What Oil Did the Last Time OPEC Cut Production
December 5, 2016

Here's What Oil Did the Last Time OPEC cut Production

It finally happened. For the first time since 2008, the Organization of Petroleum Exporting Countries (OPEC) agreed to a crude oil production cut last week, renewing hope among producers and investors that prices can begin to recover in earnest after a protracted two-year slump, one of the worst in living memory.

The last three times the cartel agreed to trim output—in 2008, 2001 and 1998—oil rallied in the following weeks and months. Of course, there’s no guarantee the same will happen this time around, as other market forces are at play, but it’s helpful to look at the historical precedent.

OIl Historically Rallied in the Two Years Following OPEC's Agreement to Cut Production
click to enlarge

OPEC’s decision follows a strong endorsement from Goldman Sachs, which upgraded its rating on basic materials to overweight for the first time in four years. Analysts see commodities gaining 9 percent on average over the next three months, 11 percent over the next six months.

As reported by TheStreet’s Paul Whitfield, Goldman’s change of heart was prompted by “the recent acceleration in global PMIs (purchasing managers’ indexes),” which “suggests commodity markets are entering a cyclically stronger environment.” 

The JPMorgan Global Manufacturing PMI rose slightly in November to a 27-month high of 52.1, extending sector expansion for the sixth straight month—very encouraging news.

JPMorgan Global Manufacturing PMI continues upward momentum
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As I’ve shared with you many times before, our own research has shown a strong correlation between PMI performance and commodity prices three and six months out. I’m thrilled to see Wall Street and media outlets coming around to this realization as well.

In short, OPEC’s production cut is constructive for energy in the near term, while a rising PMI is good news for the long term.

$70 Oil Next Year?

Since oil collapsed in September 2014, as much as $4 billion have been wiped from oil workers’ wages in the U.S. alone, according to Bureau of Labor Statistics data. Countries that rely heavily on oil revenue—Venezuela, Colombia, Russia and Nigeria, notably—have had to stretch balance sheets. And for the first time in nearly 40 years, Alaska, where the oil industry accounts for half of all economic activity, is scheduled to impose an income tax by 2019.

Many analysts now find reason to be optimistic about a recovery in energy. Speaking to the Houston Chronicle, David Pursell of energy investment bank Tudor, Pickering, Holt & Co. predicts “2017 will be a better year for oil and gas activity than we anticipated.” Pursell sees crude possibly rallying above $70 a barrel sometime next year. 

The OPEC deal, announced last Wednesday, aims to reduce production by 1.2 million barrels a day, or about 1 percent of global output. For comparison’s sake, the cartel, which controls a third of all oil production, agreed to a reduction of 2.2 million barrels a day in 2008. Although not an OPEC member, Russia has also agreed to trim production—by about 300,000 barrels a day—the first time it’s cooperated with OPEC since 2001.

Following the announcement, West Texas Intermediate (WTI) crude surged above $50 a barrel.

Crude oil surges above $50 a barrel on OPEC production cut announcement
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Meanwhile, investors piled into oil ETFs, with inflows into one surpassing $1 billion on Thursday alone. Shares of Halliburton, Continental Resources and California Resources all saw dramatic spikes.

Oil explorers & producers jump on production cut news
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The Challenges Ahead

Some investors are understandably cautious. OPEC doesn’t have the authority to enforce compliance from its 14 member-nations, and output has typically exceeded quotas.

What’s more, it’s likely U.S. shale producers, which today operate at lower costs compared to other players, will be first to take advantage of a bump in prices. Drilling activity is already accelerating. Since May, the number of active oil rigs in North America has climbed 50 percent to 474, as of November 23.

Most low-cost oil is in U.S. Shale Reserves
click to enlarge

“U.S. oil production growth is all but guaranteed to return in 2017,” according to Joseph Triepke, founder of oil research firm Infill Thinking. Triepke adds that as many as 150 rigs could be reactivated next year in Texas’ Permian Basin alone.

It’s there, in the Wolfcamp formation of the Permian, that the United States Geological Survey (USGS) recently discovered 20 billion barrels of “technically recoverable” oil, the largest deposit ever to be found in the U.S. Bloomberg reports that the deposit is worth an estimated $900 billion at today’s prices.  

On the demand side, higher prices could spell trouble in emerging countries whose currencies have weakened against the U.S. dollar in recent months, especially since Donald Trump won the presidential election. Because oil is priced in dollars, it’s become more expensive in China and India, the second and third largest oil consumers following the U.S.

Gold Looks Technically Oversold, Ready for a Price Reversal

As I often say, every asset class has its own DNA of volatility, which is measured by standard deviation. Specifically, standard deviation gauges the typical fluctuation of a security or asset class around its mean return over a period of time ranging from one day to 12 months or more.

This brings us to mean reversion, which is the theory that, although prices might trend up for some time (as in a bull market), or fall (as in a bear market), they tend to move back toward their historic averages eventually. Such elasticity is the basis for knowing when an asset is overbought or oversold—and when to sell or buy.

As you can see in the oscillator below, gold looks oversold right now and is nearing a “buy” signal, after which we can statistically expect it to return to its mean.

Gold 60-Day Percent Change Oscillator
click to enlarge

Gold’s current standard deviation for the 60-day period is about 7 percent—you can reasonably expect it to move this much over a two-month period, therefore, 68 percent of the time.

For more on standard deviation and mean reversion, I invite you to download my whitepaper, “Managing Expectations: Anticipate Before You Participate in the Market.”

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.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.

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Forget Everything You Know About Presidential Elections
October 31, 2016

2016 Elections

So here we are, eight days before America picks its poison, with most national polls showing a win for Hillary Clinton. If she pulls it off, she’ll become not only the first woman and first first lady to rise to the country’s highest office but also the first Democrat to succeed another two-term Democrat since Martin Van Buren succeeded Andrew Jackson in 1837.

She’ll also become the first to be under FBI investigation. On Friday we learned that the bureau is reopening her email case, mere days after WikiLeaks released even more damning files on the nominee. I find it interesting that back in July, eccentric internet entrepreneur Kim Dotcom predicted that WikiLeaks founder Julian Assange would turn out to be Hillary’s “worst nightmare”—a prediction that has largely come true.

Meanwhile, if Donald Trump manages an upset, he will become the oldest person ever to take the oath of office and the first to transition directly from the business world to the presidency without any past experience as a high-ranking government official (like William Howard Taft and Herbert Hoover) or military officer (like Zachary Taylor, Ulysses S. Grant and Dwight D. Eisenhower).

To Trump’s supporters and many others, of course, this is one of his main assets.

But back to the polls. In the end, they can often be misleading. I can point to several previous polls that said one thing but in the end turned out to be inaccurate, starting with those that suggested Brexit wouldn’t happen. As you know, they were way off.

In a now-classic example, California polls gave L.A. mayor Tom Bradley a wide lead in the days leading up to the 1982 gubernatorial election, and yet he was roundly defeated. Known today as the “Bradley effect,” the accepted theory is that voters told pollsters they supported Bradley, an African-American, so as not to appear racist. But in the privacy of the voting booth, those same voters pulled the lever for his opponent.

Many now wonder if a reverse Bradley effect could be taking shape in the current presidential election, with voters not wanting to admit their support for Trump—the least-liked person ever to run in U.S. history, followed closely by Hillary—but casting their ballot for him anyway.

Will this Election Buck the Trend?

I’ve written before about the presidential election cycle theory, developed several decades ago by Yale Hirsch, whose son Jeffrey serves as editor of the indispensable Stock Trader’s Almanac, now in its 50th edition. But because this year’s election breaks the mold in a number of important ways, it raises the question of how closely it will hew to past elections, at least where market reaction is concerned. 

One of the most significant factors to keep in mind this year is that no incumbent’s name appears on the ballot. This is rarer than you might initially think. Since 1947, when the number of terms was limited to two, only five people have been elected twice and completed two full terms.

This two-term presidential cycle can often have a measurable effect on markets, as I wrote about in-depth in “Managing Expectations.” A president who’s up for reelection has a huge incentive to enact policies that support the economy and labor market, which investors like.

Stocks Have Stumbled in Second-Term Election Years

By the end of his second term, however, markets are faced with the reality that someone new will be occupying the Oval Office soon, complete with a new cabinet, new agenda, new governing style and new policies. This uncertainty has historically given investors the jitters—even when they’re in favor of the incoming president. (Even the most ardent Trump supporter must admit he’s more volatile and higher-risk than Hillary, who would likely maintain the status quo. But like a high-risk stock, Trump could also potentially deliver much higher returns.)

In second-term election years, then, equities dipped an average 4 percent, compared to an average increase of 7 percent during all election years.

Will we see a repeat of this in 2016? There’s no way to say for sure. But as of October 27, stocks are up more than 6 percent year-to-date. Although slightly below the average, this is much higher than returns in the last two election cycles when a new president had to be selected: In 2008, the market plunged nearly 40 percent; in 2000, it ended down 9 percent.

 

Looking Past November 8

would a democratic president and republican congress be best for capital markets?

Again, it’s the policies that matter, not necessarily the party. However, there is evidence that stocks have performed slightly better when a Democrat is president, especially when Congress is split, as it was during most of Barack Obama’s administration.

Members of both parties might not like hearing this, but it’s what data mining has uncovered.

By-and-large, though, markets seem to be agnostic as to which party is in control of the White House. So many other factors exert just as much, if not more, influence over market performance, including monetary policy, inflation/deflation and whether the country is at war or peace.

Average Market Returns Democratic and Republican Presidents
click to enlarge

Whichever way you swing, it’s becoming more compelling to have some of your portfolio in tax-free municipal bonds, which in the past have provided a certain level of stability in times of uncertainty.

Could Venezuela Become the Next Syria?

Speaking of poor policymaking, hyperinflation and violence—Venezuela is sliding closer and closer to the brink of collapse, with some sobering consequences.

This was among the topics of conversation last week at the Mining & Investment Latin America Summit in Lima, Peru. While there, I had dinner with a couple of Canadian lawyers who represent a few Latin American oil producers, some of them based in Venezuela.

Things have gone from bad to worse, they informed me. Since 2013, when Nicolás Maduro took power after the death of Hugo Chávez, the socialist country has struggled with skyrocketing inflation, food and medicine shortages, a shrinking economy and rising violence and corruption. (Its capital city of Caracas recently overtook San Pedro Sula, Honduras, for having the world’s highest homicide rate.)

These have only intensified since oil prices fell by half more than two years ago, as oil accounts for 95 percent of Venezuela’s export earnings.

Venezuela's shrinking economy
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Now, President Maduro has effectively suspended a scheduled recall referendum, backed by the opposition-controlled National Assembly, despite as many as 80 percent of Venezuelans in favor of his removal from office. The suspension has led to widespread protests in the streets, with accusations of a coup being tossed around on both sides.

Venezuelan Presiden Nicolas Maduro has effetively suspended democratic elections, spurring mass protests.

The fear, the lawyers said, is that if Caracas falls, the vacuum it leaves behind would serve as a prime terrorist base of operations—a Latin American Syria, as it were, complete with the world’s largest proven oil reserves to finance it.

We’ve already seen the country cozy up to fellow OPEC member Iran, recognized by the State Department as the world’s leading state sponsor of global terrorism. According to the Gatestone Institute, a New York-based international policy think-tank, Iran is “partnering with Venezuela’s drug traders and creating a foothold” in the Latin American country.

It’s such a travesty that a nation as resource-rich as Venezuela could allow itself to rot from within. Its descent into chaos should serve as just the latest cautionary tale to other countries that are willing to risk stability and prosperity for even more socialism.

Join Me in San Francisco

In mid-November, I will be in beautiful San Francisco, presenting at the Silver & Gold Summit, hosted by Cambridge House. I’ll be joined by many other prestigious figures in the metals and mining industry, from top analysts to mining executives to respected newsletter writers. The conference, will be held November 14 and 15. I hope to see you there!

Join Frank Holmes at The Silver & Gold Summit

 

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.

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Did OPEC Just Cry Uncle?
October 3, 2016

Toronto

Last week I was in beautiful Toronto, where I presented the keynote address and participated in a panel discussion at the annual Mines and Money conference.  It was the first time the highly respected gathering of precious metals analysts and investors came to the Americas, and they couldn’t have chosen  a better city than my hometown. Toronto has long served as a major hub for mining finance and is home to some of the world’s largest gold producers.

Toronto is also one of the most multicultural municipalities on earth. According to its website, over 140 languages and dialects can be heard in the city, with a third of its population speaking a language other than English or French at home. This makes it an extremely attractive destination for professional millennials from all over the globe.

I had the pleasure of attending a Young Presidents’ Organization (YPO) event in Toronto as well. The YPO is the world’s preeminent group for global business leaders and executives, providing peer-to-peer learning and networking opportunities among its 24,000 members. The companies they lead generate an impressive $6 trillion in global annual revenue. The daylong event, titled “Culture Shock,” focused on the societal effects of disruptive technology, including advanced robotics, 3D printing, the internet of things and more.

Frank Holmes accepting the award for Best Americas Based Fund Manager, presented by the Mining Journal

While at the Mines and Money conference, the Mining Journal presented its Outstanding Achievement Awards. I’m humbled to share with you that Ralph Aldis and I were co-recipients of the Best Americas Based Fund Manager award. It’s a great honor to have been selected from among such an esteemed group of portfolio managers.

The award symbolizes U.S. Global Investors’ strong commitment to its investors and shareholders. It’s my firm belief that we’ve consistently been a leader in the metals and mining space. I’m deeply proud of what we’ve managed to accomplish over the years, starting almost 30 years ago when I bought a controlling interest in the company. Since then, our funds have been recognized numerous times by Lipper and Morningstar, two trusted independent financial authorities.

OPEC Decision Helps Oil Post Its Second Straight Month of Gains

You’ve probably heard by now that, in an effort to lift oil prices, the Organization of Petroleum Exporting Countries (OPEC) tentatively agreed to a production cut at its meeting in Algiers last week. The cartel, which controls more than a third of world output, plans to limit daily production to between 32.5 million barrels and 33 million barrels, down from 33.2 million barrels.

Saudi Oil Minister Khalid al-Falih pushed for product cuts

This comes more than two years since oil prices were kneecapped, wreaking havoc on several OPEC member nations’ economies. Saudi Arabia currently faces a steep budget deficit, as oil revenues make up close to 90 percent of the country’s budget. Meanwhile, Venezuela’s currency, the bolivar, has become so worthless that it’s now cheaper to use it as a napkin than to buy actual napkins. Airlines flying to the U.S. won’t even accept bolivars. (Of course, this has more to do with the government’s woeful mismanagement of the country than oil prices.)

It’s important for investors not to get too excited over OPEC’s decision. At the moment, none of this is set in stone. Some OPEC members are already wavering, with Iraq questioning output numbers and Nigeria moving to boost production.

Plus, American producers are likely to step into the void OPEC would create. Compared to last year, production is down only 535,000 barrels a day—and that’s with far fewer operating rigs. But it appears companies are eager to get back to work. In 12 of the last 13 weeks, North American drillers reactivated mothballed rigs. I expect to see the pace rise as it becomes clearer OPEC will make good on its resolution.

American Oil Producers Are REactivating Rigs
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Consolidation Could Ease the Pain

For the past two years, OPEC’s pump-at-will policies have flooded the market with cheap supply, causing economic pain for producers with higher cash costs, including those involved in fracking, the Canadian oil sands and deepwater drilling.

Since January 2015, more than 100 U.S. and Canadian producers have declared bankruptcy, representing a combined $67 billion in debt, according to Dallas law firm Haynes and Boone.

Number of North American Oil and Gas Bankruptcy Filings Exceeds 100
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To weather the low-price environment, global exploration spending has been slashed for two consecutive years. As Bloomberg reports, total investment in world oilfields stands at $450 billion, a significant 24 percent decline from last year. The International Energy Agency (IEA) expects the cost-cutting to extend into next year.

This has driven new oil discoveries to their lowest point since 1947.

It also underscores the need for industry consolidation. With exploration budgets down, major oil companies will rely on acquisitions to replace up to half of their reserves, according to energy consultancy firm Wood Mackenzie. When the airline industry was mired in bankruptcies a decade ago, we saw a huge wave of mergers and acquisitions, and we should expect to see the same in the oil patch.

A few big oil and gas deals have come out of the price rout—Royal Dutch Shell’s acquisition of BG, worth $70 billion, is the largest by far—but more will likely take place in the near term. Antitrust officials prevented energy giants Halliburton and Baker Hughes from realizing their $35 billion deal, announced back in November 2014.

America’s Gas Binge Hits a New Record

Oil inventories might be brimming all over the globe, but demand remains strong and expected to swell alongside the global middle class. As I told you in June, India is expected to have the fastest growing demand for crude between now and 2040, replacing China. 

But don’t count the U.S. out. Even with fuel efficiency improving in automobiles, Americans burned through a massive 406 million gallons a day in June, the most recent month of data from the U.S. Energy Information Administration. This sets a new record, beating the previous one set in July 2007, soon before the recession. The record might be short-lived, however, once the July and August data are released.

Americans Drove to REcord Gasoline Consumption in June
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Low prices have emboldened many Americans to purchase vehicles with lower fuel efficiency such as trucks, vans and SUVs, which has been great for auto companies and lenders.

People are also taking longer road trips. According to the Transportation Department, motorists logged 287.5 billion miles in July, the most ever for the busy summer travel month. That’s the equivalent of taking 3,000 round trips to the sun, which is what it feels like after all the flights I’ve taken recently.

 

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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 6/30/2016.

Share “Did OPEC Just Cry Uncle?”

Net Asset Value
as of 09/25/2017

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