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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.

Rising Global Taxes and Regulations (Indirect Taxation) Are Chipping Away at the Benefits of Low Interest Money
March 21, 2016

Fracking Now Half of U.S. Crude Oil Production

During a trip to New York last week I was able to talk gold and commodities on Bloomberg TV, and also had the pleasure of hearing Canadian Prime Minister Justin Trudeau address Wall Street investors in the Bloomberg studios the same day. Trudeau discussed his plan for new infrastructure spending of C$60 billion over the next 10 years, as a means to lift the country’s highly oil-dependent economy. Trudeau answered questions on his country’s federal fiscal deficit and I was able to ask him about the amount of Ontario’s debt in particular. Ontario has twice the debt as the state of California and only half of its population.

Canada Prime Minister Justin Trudeau speaks to Bloomberg in New York this weekIn the U.S., states are held to a strict balanced budget standard when it comes to fiscal taxation and spending, while the federal government can let the budget go into deficit spending. In Canada, however, it’s the opposite, and the provinces seem to have abused their debt levels, but Trudeau is ready to help.

The former Prime Minister of Canada, Stephen Harper, never smiled like Justin Trudeau. But he was a great defensive leader, and his conservative leadership allowed the country to successfully weather the financial crash of 2008. Now the current government can leverage that strong balance sheet to stimulate economic activity.

During the Bloomberg conference, Trudeau sought to reassure his audience that he will remain cautious on spending.

Creeping Taxation and Negative Interest Rates Ignite Global Caution

Compliance and regulation measures have intensified from the financial sector to the food industry, from the U.S. all the way to Brazil. Many CEOs of banks, as well as brokers that I have spoken with recently, have lamented on the financial burden of excessive regulation and the indirect taxation that comes along with this rise in rules on steroids. Regulations are fueled with good intentions; however, the unexpected consequences like slow global growth need to be adjusted.

In Brazil, the government promotes short-term government bonds to fund its bloated government workforce. The anti-capitalist nature of Brazil’s government extends to extreme limitations on public markets, where new companies can only go public by offering shares at $1,000. And I’ve shared with you before how Colombia’s citizens are taxed at every turn.

Meanwhile, central bankers around the world captured headlines last week, and it looks as if easy money is here to stay for the time being, as well as high taxes and regulations. The prevailing message was that global economic conditions have not improved well enough to support any significant changes to monetary policy, which now has interest rates around the globe at near-zero or, in some cases, subzero levels.

Janet YellenThe week before last, the European Central Bank (ECB) came out with deeper cuts to already-negative rates and steeper purchases of bonds, from 60 billion euros to 80 billion euros. This was followed on Tuesday by the Bank of Japan’s (BoJ) decision to leave negative rates unchanged as it assesses the impact of its controversial policy, which shocked global markets when it was unveiled in January. Likewise, the Bank of England decided on Thursday to keep interest rates at the historic low of 0.5 percent.

As I (and many others) expected, the Federal Reserve also put rates on hold, even as the U.S. economy is showing signs of improvement in employment, housing and inflation. According to Fed Chair Janet Yellen, a soft global economy made a rate hike too risky.

Be that as it may, our emphasis on central bank actions is way overdone and in many ways a distraction from what’s really important: balanced fiscal policy. Today, many investors expect central banks to jumpstart the global economy, and indeed their decisions can have huge consequences. But they can’t do it alone. What we need is a commitment to streamline regulation and relax taxes, with prudent spending on economy-boosting infrastructure, manufacturing and construction. Until that happens, it doesn’t matter how low policymakers drop rates or how much debt they purchase.

Tailwinds to Global Growth

I’ve written before about how we use the purchasing managers’ index (PMI) as a forward-looking indicator. It’s like using the high beams on your car, to see where the economy is headed three or six months from now. In the latest PMI update from February, the reading trended downward to 50.

Industrial production data came out last week down 0.5 percent in February. As I’ve discussed numerous times, industrial production is a subset of GDP, both of which indicate where the markets have been.

U.S. Industrial Production Heads Lower
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Regulations and high taxes are headwinds to global growth. Whether we are looking ahead or looking back, the data are showing slowdown in the global economy. We need a fiscal policy intervention to be the tailwind that pushes the economy in the right direction. We hope that the Trans-Pacific Partnership (TPP) will be signed soon, eliminating many tariffs and restrictions to trade, but it is currently held up by protests from unions. Once passed, we are optimistic the TPP will facilitate and accelerate global trade.

Gold is Smiling

The most welcome news was that the core consumer price index (CPI)—which excludes food and energy—rose 2.3 percent year-over-year in February, representing the fourth straight month of inflation and the highest rate since October 2008.

Good for Gold: Core Inflamation Heats Up
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As I’ve pointed out many times before, gold has tended to respond well when inflationary pressure pushes real interest rates below zero. To get the real rate, you subtract the headline CPI from the U.S. Treasury yield. When it’s negative, as it is now, gold becomes more attractive to investors seeking preservation of their capital. The yellow metal has risen more than 18 percent so far this year.

Other precious metals have also been strong performers in 2016, with silver up 13 percent, platinum 11 percent, and palladium 8 percent.

Good Ol’ American Ingenuity from Silicon Valley to U.S. Energy Fields

The U.S. Energy Information Administration (EIA) reported last week that hydraulic fracturing, or fracking, now accounts for a little more than half of current U.S. crude oil production. In 2000, fracking wells produced only 2 percent of the national total. Today, they make up over 50 percent of oil output—a figure that will likely continue to climb as technology improves.

Fracking Now Half of U.S. Crude Oil Production
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But since the end of 2015, overall oil production in the U.S. has begun to taper down. Last week I shared with you the fact that December’s year-over-year change in output turned negative for the first time in five years, a sign that U.S. producers are finally responding to low prices.

This decline in production is reflected in the chart below, which also shows that Iraq’s share of the global oil market has grown comparatively more than Saudi Arabia and Russia’s.

Incremental Oil Production since January 2014
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The anticipated production freeze between those two countries, therefore, probably won’t have as significant an impact on oil prices as markets are hoping for. It will only ensure that the two-million-barrels-per-day global surplus won’t get any worse.

Plus, there’s no guarantee such a freeze would stick, let alone could be agreed upon. Iran has already called the proposal “ridiculous” and plans not to reign in production until it reaches pre-sanction output levels, and Saudi Arabia is unlikely to let its chief political adversary in the region gain the upper hand.

As I’ve said before, short of geopolitics, the likeliest path to oil recovery is to coordinate a production cap on a global scale. The chances of that happening, however, are slim to none.

Tax-Free, Stress-Free Income with Calm Investing

No matter what happens with the Fed’s interest rate decisions, be sure to register for our webcast on March 30. Learn about the power of municipal bonds in uncertain rate environments.

 

 

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 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 weights of components are based on consumer spending patterns.

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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Did Oil Prices Just Find a Bottom?
March 14, 2016

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

As the Middle East’s main business hub, Dubai is the most populous city in the United Arab Emirates (UAE) and home to the world’s tallest manmade structure, the 163-story Burj Khalifa, which climbs to a neck-craning 2,717 feet. Designed by Adrian Smith, who attended Texas A&M University, the Khalifa Tower is an engineering marvel and stands as a symbol not only of the futuristic and forward-thinking look of this oil-rich country but also its emphasis on seeking intellectual capital from all over the world.

Last week I had the pleasure of attending the annual Young Presidents’ Organization (YPO) event, held this year in Dubai, where I learned best practices on leadership as well as how to strike the right balance between business and family life. The YPO has 24,000 peer-to-peer members who together employ 15 million people across 130 countries and generate $6 trillion in revenue every year.

It was an enriching experience, equaled only by my admiration for what the UAE has managed to accomplish with its oil revenues. Tall construction cranes can be seen in every corner of Dubai, signaling urban growth. There are plans to expand its efficient light rail system, which shuttled me from the airport to downtown for only $1. I was happy to see many of the train stations colored gold.

A sleekly designed monorail station in Dubai

Five Guys in Dubai

As is the case in China and elsewhere, spending on infrastructure is key for long-term sustainable growth. Countries and city-states such as Singapore, Hong Kong and now Dubai have spent wisely on new airports, sea ports, subways, light rail and hospitals—all wise fiscal spending that has always given the U.S. a huge advantage. With oil revenues, UAE leadership has paid for citizens to earn degrees in America and military training in the U.S., including San Antonio, Texas. The city of Dubai has a massive U.S. naval base for regional security.

The Dubai Mall, the second-largest in the world, is a wonder to explore. It contains 1,600 stores and restaurants from the U.S. and Europe and also features the Dubai Aquarium, one of the world’s largest. You truly feel as if you are in America, with the most popular restaurants being Five Guys Burgers and Fries, the Cheesecake Factory and U.S. pizza chains. I was surprised to see Tex-Mex food being delivered on motorcycles.

The Palazzo Versace is one of Dubai's leading 5-star fashion hotels.

This is the sort of extravagance and attention to detail travelers have come to expect from the country’s most popular attractions. At the Palazzo Versace hotel in Dubai, for instance, visitors can beat the desert heat by relaxing in air-conditioned sand. In Abu Dhabi, the Shaikh Zayed Grand Mosque is believed to have the world’s largest carpet, capable of accommodating more than 44,000 worshippers. The intricate craftsmanship of the marble and gold along the walls and columns is breathtaking to behold.

The Sheikh Zayed Mosque

The Impact of Electronic Payments

I also want to point out that the digital banking system has made a huge impact on the UAE’s economy. I just read an article in the Khaleej Times newspaper, reporting that electronic payments have boosted the UAE’s GDP by $3.7 billion in five years. This increase is indicative of a trend of rising card usage across many countries, as you can see in the chart below.

In the same edition of the newspaper, I was interested to read that for the third year in a row, Singapore has been listed as the most expensive city in the world, followed by Zurich and Hong Kong.  According to the article, “Falling commodity prices have created deflationary pressures in some countries, but in others, currency weakness caused by these falls has led to spiraling inflation.”

Light at the End of the Tunnel? The IEA Calls a Bottom in Oil Prices

Despite its relatively small size in population and land mass, the UAE is the world’s sixth-largest oil producer, following the U.S., Saudi Arabia, Russia, China and Canada. Among Organization of Petroleum Exporting Countries (OPEC) members, it’s the second-largest, after Saudi Arabia.

These rankings might very well rise in the coming years, however, as the Middle Eastern country plans to expand production between 30 and 40 percent by 2020, even as Brent crude prices have struggled to crack $40 per barrel.

But on a global scale, oil production is finally dropping—and that’s constructive for prices. In a report released on Friday, the International Energy Agency (IEA) writes that “prices might have bottomed out,” citing a February decline in both OPEC and non-OPEC output and hopes of U.S. dollar weakness.

Although I’m cautious, the current recovery is in line with oil’s seasonality trends for the five- and 15-year periods, which show that prices have risen between March and the beginning of the busy summer travel season.

West Texas Crude Oil Historical Patterns
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The PHLX Oil Service Sector Index has gained 4.4 percent since the beginning of the year, while prices have rallied above their 50-day moving average, touching three-month highs.

Oil Responds to Easonality Trend
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As the IEA points out, this rally is being spurred by optimism that OPEC and Russia can agree on a production freeze—not a cut, as some people think. A meeting date has yet to be decided upon, however, presumably because Iran announced it will not agree to an output freeze until it reaches its pre-sanction market share.

Like Iran, Saudi Arabia has resisted capping production. To plug up the deficit, it’s reportedly seeking up to $8 billion from international banks, the first time it has done so in more than a decade. The kingdom is also considering issuing foreign bonds and listing a part of its state oil company, Saudi Arabian Oil, or Aramco.

With WTI up 25 percent in 2016 and 3 percent in March, investor sentiment has improved since October, when it crossed into “panic” territory for the first time since 2011.

Investor Sentiment Improving after October Dip
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U.S. Companies Looking for $50 Per Barrel

To remain profitable, most U.S. producers need oil prices to be above $50 per barrel—a level we haven’t seen in eight months. In such an environment, U.S. oil companies are finally beginning to make meaningful production cuts, with the IEA expecting producers to remove more than half a million barrels per day from the market this year. In December, the monthly year-over-year change in production turned negative for the first time since September 2011.

U.S. Oil Production Dropping Off
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The number of North American rigs in operation fell below 400 for the first time since December 2009, according to Baker Hughes, helping to support prices.

Oil Prices Jump on Further Rig Count Declines
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Until now, per-well productivity has been slow to budge. Years of $100-per-barrel oil incentivized companies to develop new ways to extract crude, including fracking, and these technological advancements have greatly increased efficiency. Today, not only can a new well be drilled in record time, it can also produce four to five times what it could have only five years ago.

What Oil Companies Can Learn from Airlines

Highly-leveraged companies across the globe have had little choice but to trim their workforces, curb expenditures and let go of undeveloped projects. According to consulting firm AlixPartners, overall capital spending fell 20 percent in 2015, with a further decline of at least 30 percent expected this year.

Global Oil Companies Slash Exploration and Production Spending
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These adjustments, the most severe since the oil rout in the 1980s, have saved or raised global exploration and production (E&P) companies $130 billion, says Deloitte Consulting. But this won’t be enough for many companies: Nearly a third of all pure-play E&P companies worldwide are at high-risk of bankruptcy this year.

That’s not necessarily a bad thing. A little over a decade ago, the airline industry also found itself in extreme duress. A large percentage of carriers landed in bankruptcy court, and a wave of consolidation swept through the industry. Today, airlines are positing record quarterly profits.

In the past year, we’ve already seen some huge mergers and acquisitions in the oil industry—think Dutch Royal Shell and BP, as well as the proposed Halliburton and Baker Hughes deal. It’s likely we’ll see many more in the coming months. In the meantime, short of geopolitical turmoil, a coordinated production cap agreement among OPEC and non-OPEC countries might be the only option to firm up prices.

 

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 investor.

The PHLX Oil Service Sector Index (OSX) is a price weighted index composed of companies involved in the oil services sector.

The Credit Suisse Risk Appetite Index is a sentiment indicator designed by Credit Suisse comparing risk-adjusted returns across a wide spectrum of global assets.

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 12/31/2015: Baker Hughes Inc.

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Monopoly Is Going Cashless. Could We Be Next?
February 22, 2016

Monopoly is going cashless could we be next

Nearly everyone can recall playing Monopoly as a child, and for many, the game served as their first exposure to handling different denominations of cash. It was exhilarating to have someone land on your Park Place property, complete with hotel, and in turn receive a fistful of $50s and $100s.

A new generation of players might never get the chance to experience this, however, as Hasbro Gaming just released an “Ultimate Banking” version of the popular board game that nixes the funny money in favor of play credit cards and an electronic scanner.

You could argue it’s just a game, but Monopoly has always had a reputation for being a reflection of capitalism as it operates in the “real” world (which is why it was banned in communist states such as the Soviet Union). The cashless version of the game is no exception, as it comes at a time when calls to limit—or in some cases eliminate—the use of cash are intensifying. And to be clear, “cash” here means cash in your pocket, not cash in the bank.

Just last week, former treasury secretary Larry Summers published an op-end in the Washington Post arguing it’s time to “kill the $100 bill,” the reason being that it’s preferred by those involved in money-laundering, corruption and other illegal activity. (One million dollars denominated in $100 bills weighs 2.2 pounds, he points out, whereas the same amount in $20 bills weighs a much more cumbersome 50 pounds.) The European Union, he argues, should also consider getting rid of the 500-euro note, a position that’s echoed by European anti-fraud officials.

Bye-Bye Benjamin?

Having had the opportunity to hear Secretary Summers speak when I visited Harvard recently, I respect his opinion and believe his intentions are good. But ultimately the argument to eliminate the $100 bill is based on the presupposition that anyone using such a note is a drug trafficker or money launderer. This seems to go against one of the main tents of common law, namely, that we’re innocent until proven guilty.  

The risks far outweigh the benefits when you consider where this anti-cash sentiment is leading us—a cashless society. As I discussed back in December regarding Sweden’s own trend toward a cashless economy, every transaction could be monitored, not to mention taxed and charged a fee. Accounts could be frozen, which, in a cashless world, would leave you with nothing.

I’ve experienced the inconvenience that sometimes comes with electronic transactions, as I’m sure many of you have. Occasionally my credit card couldn’t be read for one reason or another, and if you’re not carrying cash, what do you do? When I’m traveling, domestically or abroad, I always carry cash with me, and $100 bills are much more convenient than a pound of $20s.

Capital controls are nothing new, but they would be much easier to impose. In Colombia, a tax is levied on every transaction, whether it is a direct deposit from your employer, transfer of funds between accounts or a purchase. Since 2003, Venezuela’s government has significantly regulated the amount of money citizens can take with them on trips abroad, in effect blocking access to foreign travel. Currently the limit is $2,000, but for travelers headed to the U.S., it drops to $700. This, along with a labyrinthine exchange rate (there are three), has only created a black market currency exchange. And since credit cards in Venezuela are issued by state-run banks, there’s no stopping the government from restricting payment on any goods or services, or from any vendor, it wishes.

Colombia and Venezuela are extreme cases, and there’s no reason to expect the same would ever happen in the U.S. At the same time, scrapping the $100 bill would further debase Americans’ economic liberty.

Gold Shines on Stellar Consumer Price Index (CPI) Reading

These concerns might be part of the reason why gold and silver coin sales are doing so well right now. The U.S. Mint began selling out of its popular American Eagle coins late last year, and demand is exceeding the mint’s weekly allocation of 1 million ounces. In Australia—where four out of five respondents to a recent poll said the country would be cash-free by 2022—gold coin sales surged 106 percent in January 2016 from a year earlier; silver coin sales, 151 percent.

Australians Load Up on Gold and Silver Coins
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Buying gold in times of uncertainty and instability is not just tradition—it’s rational behavior. The yellow metal has a long history of acting as an effective store of value.

This is especially the case with nominal interest rates turning negative around the globe. More than a fifth of the world’s GDP is now produced in countries with subzero rates, and Federal Reserve Chair Janet Yellen recently stated that the Fed will not take such rates off the table for consideration.

Key Negative Interest Rates
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Negative rates are essentially a tax on your bank deposits, intended to discourage saving. And if hard cash were no longer available to squirrel away in your mattress, gold might be the only other option.

But nominal rates aren’t the only driver. Numerous times I’ve written and spoken about gold’s relationship with real interest rates, which is what you get when you subtract headline inflation from the government bond yield. When inflation rises, real rates are pushed lower, and when they turn negative, gold becomes more attractive. Last week the Labor Department reported that core inflation in January increased 0.3 percent, its largest monthly gain since August 2011, when gold reached its all-time high of $1,900 per ounce. For the 12-month period, the consumer price index (CPI) hit an impressive 2.2 percent, its strongest showing since June 2012. Both of these readings beat analysts’ estimates and should be constructive for gold.

Prime Minister David Cameron

Also helping the metal’s appeal last week was the uncertainty surrounding whether the United Kingdom would exit the European Union. Momentum had been growing behind the “Brexit” campaign to end economic control from Brussels, with a majority of respondents to a British poll saying they were in favor of leaving the 28-member bloc. On Friday, however, Prime Minister David Cameron managed to secure a deal giving the UK “vital protections” to its economy, including never having to bail out any other EU member if it chooses not to. Gold ended the trading day up 2.3 percent to settle at $1,228.60 per ounce.

Oil Prices Aligned with Seasonality Trade

Oil was up last week with prices rising above their 50-day moving average, mostly on a production cap agreement between the world’s two largest producers, Russia and Saudi Arabia. Historically, oil bottoms every February, and today it’s right on cue. We are now due for a rally until Easter at least, possibly until the beginning of summer.

West Texas Crude Oil Historical Patterns
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Another factor to consider is money supply. Based on our own regression analysis, there’s a high correlation between money supply growth in the seven most populous countries and commodity prices. If you look back to 2011, when oil averaged $100 per barrel and gold peaked at $1,900, money supply was strong. Since then it’s been falling, particularly in China, as you can see below. But with money supply on the upswing, we might have a good chance for a rally here.

Will Commodity Prices Continue to Track China's Money Supply Growth?
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Besides continued oversupply, oil’s most significant headwind remains the U.S. dollar. As it has gained in strength, emerging market currencies have declined.

U.S. Dollar's Uptrend Still Intact, Emerging Markets Weaken
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As always, it’s important to follow the smart money. Just as influential “Shark Tank” investor Mark Cuban went long on gold recently, we’ve seen big-name investors place their bets that oil prices will climb. It was widely-reported last week that billionaires Warren Buffett, George Soros and hedge fund manager David Tepper all disclosed buying shares of Kinder Morgan, the Houston-based oil and gas pipeline company. Buffett’s stake alone amounts to 26.5 million shares, currently valued at around $450 million.

In the meantime, low oil prices continue to give a lift to transportation stocks such as airlines, many of which reported record net profits for the fourth quarter.  Be sure to subscribe to my blog, Frank Talk, to learn more about oil and other commodities.

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 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 weights of components are based on consumer spending patterns. M2 money supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

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 J.P. Morgan EM Currencies Index is a tradable benchmark for emerging markets currencies vs. the U.S. dollar.

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 12/31/2015: Hasbro Inc.

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Comparisons to 2008 Spark Gold’s Fear Trade
January 25, 2016

Are we headed for another 2008? George Soros thinks so.Plunging oil prices, rising market volatility, surging global debt—it’s all beginning to remind some investors of 2008. Earlier this month, billionaire former hedge fund manager George Soros warned of an impending financial crisis similar to the last major one, which sent shockwaves throughout global markets.     

The comparisons to 2008 have triggered gold’s Fear Trade, with many investors scrambling into safe haven assets. Jeffrey Gundlach, the legendary “bond king,” recently made a call that amid further market turmoil, the metal could spike as much as 30 percent, to $1,400 an ounce.

Making such predictions is often a fool’s game, but there’s no denying that gold demand is on the rise, both in the U.S. and abroad. For the one-month period ended January 20, gold (and silver) outperformed, comfortably beating domestic equities as well as a basket of other commodities.

Precious Metals on Top in 2016
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I’ve already shared with you the fact that gold has historically had a low correlation with equities. This point is worth reiterating: When equities have zigged, gold has zagged. And with volatility high in global markets right now, many investors are choosing to rotate a portion of their portfolios into the precious metal.

Marc Faber suggests that it might be a good time to get back into gold.

This was the advice of my friend Marc Faber, who recently warned investors in his influential “Gloom, Boom & Doom Report” newsletter that global stocks could fall an additional 40 percent on mounting liquidity and debt problems. In the event such a crisis occurs, Marc says, investing in gold—which, again, has been shown to be inversely correlated with stocks—might be one way to protect one’s wealth.

I’ve always recommended a 10 percent weighting in gold: 5 percent in physical bullion, the other 5 percent in gold stocks or mutual funds. This applies in all market conditions, good or bad.

Something else I want to draw attention to in the chart above is the extreme divergence in performance between gold and oil, which is trading at levels we haven’t seen in a long while. Declines in oil have traditionally invited enormous selloffs in other commodities, making gold’s resilience at this time all the more impressive.

China Consumed Nearly All of Global Gold Output in 2015

Investors in China appear to recognize the importance of gold in times of market uncertainty. Since June 2015, the Shanghai Composite Index has dropped close to 45 percent, prompting scores of retail investors to pivot into safe haven assets such as gold. As you can see below, 2015 was a blowout year for the Shanghai Gold Exchange (SGE), which in the past has served as a good measure of wholesale demand in China.

Physical Gold Delivered from Shanghai Gold Exchange (SGE) vs. World Mining Output
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Not only did gold deliveries climb to a record number of tonnes in 2015, they also represented more than 90 percent of the total global output of the yellow metal for the year.

The SGE has made it incredibly easy for Chinese citizens to participate in gold investing. Recently it rolled out a smartphone app, making it more convenient than ever before to open an account and begin trading.

Gold Miners Are Winners of the Currency Wars

Gold priced in the strong U.S. dollar might have netted a loss in 2015, but in many other parts of the world, prices were either stable or even made gains. For buyers of gold in non-dollar economies, it’s the local price that matters most, not the dollar. In Russia, the third-largest producer, the metal rose 12 percent—and came close to an all-time high. In South Africa, the sixth-largest, it was well above the all-time high. Investors there saw returns of greater than 20 percent in 2015.

Gold Was Positive in Non-Dollar Currencies
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This has been beneficial to many mining companies based outside the U.S. Operations are paid for in local currencies—most of which have weakened in the last year—but companies sell their production in U.S. dollars. This has helped offset the decline in gold prices since they peaked in 2011.

Canadian-based companies such as Claude Resources, Richmont and Agnico Eagle Mines are performing well, even in the gold bear market and amid high volatility.

Canadian Gold Stock Performance
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For the last three years, gold miners all over the globe have been thoroughly beaten up. Today, they’re heavily discounted, and there are signs that conditions are stabilizing.

Managing Expectations

With the Fear Trade heating up, it’s important that we manage our expectations. The length and extent of the current bear market, which began in September 2011, might seem unprecedented to many investors. In actuality, it doesn’t veer very far from what we’ve seen in the past, according to data presented by the World Gold Council (WGC).

Current Gold Bear Market Not Far off the Mean
January 1970 – January 2016
Current Gold Bear Market Not Far off the Mean BULL MARKET Current Gold Bear Market Not Far off the Mean BEAR MARKET
Dates Length (months) Cumulative Return Dates Length (months) Cumulative Return
Jan 1970 -
Jan 1975 
61 451.4% Jan 1975 -
Sep 1976
20  -46.4%
Oct 1976 -
Feb 1980
41 721.3% Feb 1980 -
Mar 1985
61 -55.9%
Mar 1985 -
Dec 1987
33 75.8% Dec 1987 -
Mar 1993
63 -34.7%
Apr 1993 -
Feb 1996
35 27.2% Feb 1996 -
Sep 1999
43 -39.1%
Oct 1999 -
Sep 2011
144 649.6% Sep 2011 -
Present
52 -44.1%
Average 63 385.1% Average 47 -44.0%
Median 41 451.4% Median 52 -42.7%
Source: World Gold Council, U.S. Global Investors

Reaching back to 1970, the WGC identified five bull and bear markets, with bull markets defined as periods when gold prices rose for longer than two consecutive years, bear markets as the subsequent periods when they fell for a sustained length of time. Although these lengths vary, the cumulative loss in each bear market is relatively uniform, with median returns at negative 42.7 percent.

The present bear market, at negative 44.1 percent, falls easily within the realm of normalcy.

Further, the table suggests that a turnaround in gold prices is overdue.

This past Sunday I spoke at the Vancouver Resource Investor Conference. In the coming days, I’ll share with you what I saw and heard from fellow investors in the resources and commodities space. Stay tuned!

 

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 Thomson Reuters Core Commodity CRB Index, created in 1957, is an equal-weighted index of 19 commodities. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

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 12/31/2015: Claude Resources Inc., Richmont Mines Inc., Agnico Eagle Mines Ltd.

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How Airlines Are Spending Their Record Profits
January 21, 2016

Airplane fueling - lower fuel prices represented a huge windfall for the airline industry

How did you spend your $700?

That’s how much the average American driver saved at the pump in 2015, according to a report from J.P. Morgan Chase. The bank also found that the savings fueled consumer spending on non-gas related purchases, which, based on credit and debit card transactions, were higher than previously thought. For every dollar saved, Americans spent roughly $0.80 on other things—restaurant visits, appliances, new gadgets and more.

But everyday consumers weren’t the only ones who saved big in 2015. Lower fuel prices represented a huge windfall for the airline industry. Delta Air Lines alone netted $5.1 billion in savings. As a whole, U.S. carriers retained between 50 and 75 percent of fuel cost savings, says Credit Suisse, and with crude oil at 13-year lows, they can expect to hang on to a similar percentage this year.

Lower Oil Prices a Huge Windfall for Airlines in 2015
click to enlarge

As I mentioned in a previous Frank Talk, cheaper fuel helped the domestic airline industry soar to record profits in 2015. According to the International Air Transport Association (IATA), airlines are collectively set to post an annual $33 billion in net profits, up from $17.4 billion in 2014, an increase of almost 90 percent.

Profits could touch $36 billion this year, the IATA says, resulting in record amounts of free cash flow.

Domestic Airlines are Forecasted to SEe Greatest Free Cash Flow in years
click to enlarge

So the question is: What are airlines doing with it all?

Generous Rewards, Attractive Valuations

Besides upgrading their fleets to include more fuel-efficient aircraft, airlines are putting the cash to work by improving balance sheets and rewarding shareholders.

In 2015, more than $10 billion—about 7 percent of U.S. airlines’ market cap—was returned to shareholders in the form of stock buybacks and dividends. That’s double the amount from 2014. Among the carriers expected to raise their dividends this year are Delta, American Airlines, Alaska Air Group and Southwest Airlines, according to a Barron’s article this week. Credit Suisse calls American’s $1.5 billion stock buyback program, more than 12 percent of its market cap in 2015, “a sign of management confidence of what’s to come in 2016.”

Investors are taking notice. Within the industrials sector, airlines are the least expensive, with network carriers (American, Delta, United Airlines, etc.) at 7.1 times earnings and low-cost carriers (Spirit Airlines, JetBlue, Allegiant Air, etc.) at 10.5 times earnings.

Airlines Remain the Least Expensive in Industrials Sector
click to enlarge

A concern some investors might have is rising labor costs, which have overtaken fuel as airlines’ top expense. (In its World Airline Profit Outlook 2016, the CAPA Centre for Aviation calculates that the industry’s fuel expenses came down from 30 percent of revenue in 2014 to 25 percent in 2015. This year, they could fall to as low as 19 percent.) There have been reports that pilots, flight attendants, ground crew and other personnel are seeking higher wages and salaries as company profits climb.

These additional costs, if approved, could be offset by not only lower-for-longer fuel prices but also growing ancillary revenue—non-ticket fees for checked-in baggage, priority seating, in-flight meals and the like—and more disciplined capex spending.

Don’t expect airfares to drop dramatically, however. As far as anyone can tell, they’re likely to stay where they currently are. In the second quarter, the average price for a seat fell a slight 2.8 percent year-over-year, from $396 to $385.

That’s a little less than the $700 you saved at the pump.

 

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

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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 12/31/2015: JPMorgan Chase & Co., American Airlines Group Inc., Delta Air Lines Inc., Allegiant Travel Co., JetBlue Airways Corp., Virgin America Inc., Alaska Air Group Inc., United Continental Holdings Inc., Southwest Airlines Co., Spirit Airlines Inc.

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Net Asset Value
as of 02/22/2018

Global Resources Fund PSPFX $6.17 0.01 Gold and Precious Metals Fund USERX $6.94 -0.01 World Precious Minerals Fund UNWPX $4.18 -0.04 China Region Fund USCOX $11.80 -0.07 Emerging Europe Fund EUROX $7.84 0.06 All American Equity Fund GBTFX $25.22 No Change Holmes Macro Trends Fund MEGAX $19.33 -0.19 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change