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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.

One Weird Trick to Forecast Commodity Trends
January 19, 2016

GDP and PMI

If you want to know about the past, a good place to start is by looking at GDP. It tells you the dollar value of a country or region’s goods and services over a specific time period. But GDP’s like looking in the rearview mirror, in that it shows you where you’ve been and little more. It’s “blind” to what’s ahead of you.

For that you need another indicator, and if you’re a regular reader of the Investor Alert or Frank Talk, my CEO blog, you probably know which one I’m referring to: the purchasing managers’ index (PMI).

Unlike GDP, the PMI forecasts future manufacturing conditions and activity by assessing forward-looking factors such as production levels, new orders and supplier deliveries. PMI, then, is like the high beams that help guide you at night through the twists and turns of a mountain road.

Several times in the past, we’ve shown that there’s a high correlation between the global PMI reading and the performance of commodities and energy three months later. 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. Our research shows that between January 1998 and June 2015, copper had an 81 percent probability of rising 7 percent, while crude jumped the same amount three-quarters of the time.

Commodities and Commodity Stocks Historically Rose Three Months After PMI 'Cross-Above'
click to enlarge

But 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. And as I mentioned last week, the global PMI fell in December, from 51.2 in November to 50.9. The reading also crossed below the moving average.

Global Manufacturing Cools in December
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As you can see, the PMI has been in a relatively steady downtrend since midyear 2014, signaling the decline in commodities during the same period.

Below is our newly-released Periodic Table of Commodity Returns, which has consistently been one of our most popular research pieces year after year. Precious metals ended 2015 as the best-performing group, with palladium, gold and silver ranking among some of the more resilient commodities. A high-resolution copy of the table is available for download.

The Periodic Table of Commodity Returns
click to view interactive

Time to Cut the Red Tape

One of the main contributors to the lower global PMI reading in December was weak American manufacturing activity, according to a recent report from Cornerstone Macro. The research group had expected an improvement, but the one-month U.S. PMI reading landed “with a thud” at 48.2, its lowest point since June 2009.

U.S. Manufacturing Eases Down in December
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China also contracted in December, dropping to 48.2. The reading also crossed below the three-month average.

China Manufacturing Still in Contraction Mode
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The Asian giant is responsible for consuming massive amounts of raw materials—60 percent of the world’s concrete, 54 percent of aluminum. So when the PMI falls in both China and the U.S., the two largest economies in the world, it’s not a good sign.

 

China Consumes Mind-Boggling Amounts of Raw Materials

Cornerstone cites the strong U.S. dollar, weaker exports, rising manufacturing inventory and the plunge in oil prices as factors that led to the downturn last month.

I agree that these factors played a huge role—oil slid below $30 per barrel this week—but I would also add more burdensome regulations to the list. Such rules have gunked up the gears of industry, and it’s essential that they be cleaned out to ignite synchronized global growth.

It’s hard to overemphasize just how important the American manufacturing sector is to the national (and world) economy. According to the National Association of Manufacturers (NAM), manufacturing has the highest multiplier effect and drives more innovation than any other sector. For every $1 spent on manufacturing, $1.40 is created and pumped back into the U.S. economy. The sector employs more than 12 million Americans, or roughly 9 percent of the workforce, and supports more than 18 million additional jobs.

If it were its own country, American manufacturing would be the ninth largest in the world.

And yet the cost of federal regulations falls disproportionately on manufacturers, who pay an average $19,500 per worker in compliance costs—about $10,000 more than what other industries must pay on average.

George Mason University’s Mercatus Center, a free market think tank, studied the effects of federal regulations on the productivity of various industries between 1997 and 2010. Unsurprisingly, the group found that the most regulated industries experience the least amount of growth. Whereas output per person for lightly regulated companies grew 63 percent during the period, output grew only 33 percent for those that carry heavier regulatory burdens.

More rules means less productivity and efficiency. As an analogy, imagine if professional basketball were played with more referees than players on the court, and with more rules than anyone can remember. No one would be able to score! This would have a huge multiplier effect: Viewers would drop off, ticket sales would plummet, advertising would dry up, and much more.

We must ensure that this doesn’t happen in manufacturing.

We must ensure that we don't put more reerees than basketball players on the court.

TPP to Unleash Global Trade

To achieve synchronized global growth, policymakers from the G20 countries must commit themselves to cutting red tape.

Look at how quickly energy and shipping companies shifted into gear after Congress lifted the 40-year-old oil export ban less than a month ago. Two tankers have already departed from Corpus Christi, Texas, to deliver crude to Europe. In anticipation of the policy change, infrastructure companies have poured billions into building new pipelines and oil storage facilities and expanding loading capacity at ports.

TPP Expected to Increase Member Countries' GDPs, Exports and Imports

That’s why I’m excited for Congress to ratify the Trans-Pacific Partnership (TPP), which was finally settled upon in October by the 12 participating nations, the U.S. and Canada included. Since then, I’ve been writing and speaking extensively about the TPP, yet I can’t seem to emphasize enough how vital the passage of this landmark free-trade agreement is for global economic growth and job creation.

Once ratified, 18,000 tariffs are expected to be eliminated among the 12 TPP nations, which together account for 40 percent of global GDP and 20 percent of global trade. The World Bank estimates that individual GDPs will rise between 0.4 and 10 percent by 2030 as a direct result of the TPP.

Could 2016 Be Gold's Turnaround Year?

As the Periodic Table of Commodity Returns above indicates, gold has seen annual losses for the past three years. But there are already signs that 2016 could reverse the trend. With equities around the world weakening, more consumers have been turning to the precious metal as a safe haven.

In China, physical delivery from the Shanghai Gold Exchange reached a record 2,596 tonnes, or a whopping 80 percent of total global output for 2015.

Record Physical Delivery from the Shanghai Gold Exchange in 2015
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In addition, the People’s Bank of China reported adding 19 more tonnes in December, bringing the total amount to over 1,762 tonnes.

Meanwhile, here in the U.S., demand is just as electric. On January 1, Americans gobbled up unprecedented amounts of gold and silver coins from the U.S. Mint, purchasing in one day a sizable percentage of total sales in the entire month a year ago.

Record Silver and Gold Coin Sales?
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“Should the epic demand for precious metals from the first day of sales persist,” writes Zero Hedge, “we are confident that the Mint will run out of gold and silver within a few days.”

We will continue to monitor the global PMI, and once the global, China and U.S. readings all cross above the 50 mark, it’ll be time to lock and load.

Later this week I’ll be speaking at the Vancouver Resource Investor Conference, the world’s largest investor conference for resource exploration. I hope to see you there, but if you can’t make it, I’ll be sure to share with you my thoughts and takeaways.

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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

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

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Hope for the New Year: 3 Asset Classes for 2016
January 4, 2016

Earlier, I reflected back on 2015 by revisiting the 10 most popular posts of the year. Today I’d like to look ahead to 2016 by pinpointing three asset classes that I believe hold opportunities for investors.

Three Asset Classes and Airlines

Gold

Going forward, gold prices will largely be affected by U.S. monetary policy. The Federal Reserve began its interest rate-normalization process with a small but significant 0.25 percent increase, and unless the Fed has reason to mark time or reverse course in 2016, rates should continue to rise steadily.

This will bump up not just the U.S. dollar—which historically shares an inverse relationship with gold, since it’s priced in dollars—but also real interest rates. As I’ve discussed many times before, real rates have a huge effect on the yellow metal.

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

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

But today, the U.S. has virtually no inflation—the November reading was 0.5 percent—so real rates are running at less than 2 percent.

Across the Atlantic, many investors are now realizing that Europe’s quantitative easing (QE) programs have failed to improve market performance in any substantial way. Earnings per share growth estimates in the European stock market have not budged. The lack of real growth in this market is a compelling argument for global investors to own gold for the long term.

Low interest rates, higher taxes and tariffs and more labyrinthine global regulations since 2011 are all contributing to the global slowdown. Neither QE3 in Europe nor QE3 in the U.S. has led to a marked improvement in growth. What markets need now to ignite growth are fewer taxes, tariffs and regulations and smarter fiscal policies.

European Earnings per Share (EPS) Growth Estimates Not Responding to ECB QE
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The chart below, courtesy of Evercore ISI, helps to illustrate some of the challenges we’ve faced in 2015 in terms of the investments we manage. Growth remains scarce globally. M2 money supply in the U.S. also looks dim.

Global Trade Volumes Are Declining
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Looking forward, we’re hopeful that these two indicators—global trade volume and money supply—will turn up. Both are necessary to improve commodity and emerging market investments.

On the upside, gold demand in China remains strong. It’s important to remember that more than 90 percent of demand comes from outside the U.S., in China and India in particular. Precious metals commentator Lawrie Williams reports that Chinese gold withdrawals from the Shanghai Gold Exchange (SGE) crossed above 51 tonnes for the week ended December 18.

Already Chinese demand is higher than the previous annual record set in 2013, and if total withdrawals for 2015 climb above 2,500 tonnes, as Lawrie expects, this will be “equivalent to around 80 percent of total global annual new mined gold production.” We expect demand to rise even more as we approach the Chinese New Year—historically a key driver for gold’s Love Trade—which falls on February 8 in 2016.

Gold: 24 Hour Composite Historical Patterns
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Oil

BCA Research believes oil markets will rebalance in 2016, not because of a price collapse but because production will continue to slide and consumption, grow. Most of these adjustments are being made in nonmembers of the Organization of Petroleum Exporting Countries (OPEC). In the U.S. alone, over 600,000 barrels per day have fallen out of the market as the rig count falls.

Oil Production Falling in Non-OPEC Nations, Helping to Rebalance Markets
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Russia, however, is unwilling to cut its production in a bid to compete with OPEC. In November, the country hit a post-Soviet record of 10.8 million barrels produced per day. And even more oil is expected to come out of Iran in 2016 once international sanctions are lifted.

For these reasons, Moody’s recently trimmed its 2016 oil forecast. West Texas Intermediate (WTI) crude will average $40 per barrel, down from $48, according to the ratings agency. The projection for Brent was slashed even more significantly, from $53 to $43.

To put this in perspective, oil averaged $55 per barrel in 2015, compared to $85 in 2014.

In all likelihood, then, oil prices probably need to remain lower for longer in order to rebalance the market.

Airlines

Last month I shared the latest report from the International Air Transport Association (IATA), which states that global airlines will post record net profits of $33 billion for 2015. Because fuel prices are expected to stay low, airlines could very well hit another record at the end of 2016—$36.3 billion, according to the IATA.

Savings from lower fuel prices are partially to thank for these profits. Goldman Sachs points out, however, that we shouldn’t expect prices to fall at the same magnitude as they did in 2014 and 2015.

Fuel Price Windfalls Tightening Up
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As a result of lower fuel prices and airlines’ improved discipline in capacity growth and capex spending, the group is poised to see increased operating margins in the coming years, according to Morgan Stanley.

U.S. Airline Industry Operating Margins Are Expected to Rise in 2016
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In short, operating margin tells you what percentage of every dollar made the company keeps as revenue before taxes. The higher the operating margin, the better off the company is.

Ancillary revenue is also contributing more to airlines’ bottom line. Such revenue comes from non-ticket fees such as baggage and handling, cancellations, seat upgrades, meals and the like. According to ancillary revenue expert IdeaWorks, the total global amount generated from these fees is estimated to rise to a whopping $59.2 billion in 2015, up from $49.9 billion in 2014. That accounts for 7.8 percent of global airline revenue, an improvement from the 6.7 percent in 2014.

Global Ancillary Revenue From $2.5 Billion in 2007 to $59 Billion Estimated in 2015

The increased revenue is helping to boost domestic airlines’ free cash flow. Bank of America Merrill Lynch has forecast that airlines will see the highest free cash flow in years, one of the best indications of a company’s ability to generate cash.

Domestic Airlines are Forecasted to See Greatest Free Cash Flow in Years
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Managing Expectations in 2016, a Presidential Election Year

As we reflect back on 2015, it’s important to remember that everything happens in cycles—from the presidential election cycle to the gold seasonality cycle and even to weather patterns. Similarly, every asset class has its own DNA of volatility.

By recognizing these cycles and patterns, it becomes easier to manage your expectations and become more proactive than reactive. With that in mind, I’d like to focus specifically on opportunities and threats for the coming year. 

1. 2016 is the fourth year of the presidential election cycle. According to research by market historian Yale Hirsh—and later his son Jeffrey—markets have tended to perform well in presidential election years. Between 1833 and 2012, the Dow Jones Industrial Average rose on average 5.8 percent during election years.

2. After a flat year, 2015 being one of them, the market has historically been up, as you can see in the table below:

The S&P 500 Has Rallied in Years after a Flat Year
  Following Year
Flat Year S&P Earnings
1970 +11% +25%
1978 +12% +6%
1984 +26% +5%
1987 +12% +16%
1994 +34% +11%
2005 +14% +9%
2011 +13% +9%
Average +17% +12%
Source: Evercore ISI, U.S. Global Investors

3. The Trans-Pacific Partnership (TPP) should help spark a light under global trade by eliminating thousands of tariffs and other barriers that currently stand in the way of foreign investment.

4. China, an essential market for commodities demand growth, continues to stimulate its economy with low interest rates and financial stimulus.

5. As for potential threats, the biggest one in the new year continues to be global terrorism. Aside from the fact that it has increasingly made society feel less safe, terrorism reportedly cost the world $53 billion in 2014 alone, according to the latest data from the Institute for Economics and Peace. That’s the highest amount since 9/11.

I want to wish all of our readers and shareholders the very best in 2016! I would also like to invite each of you to subscribe to our free, award-winning Investor Alert newsletter and share it with family and friends.

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.

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 Dow Jones STOXX 600 Index is an index of 600 stocks representing large-, mid- and small-capitalization companies in the developed countries of Europe. 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.

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This Industry Is Set to Post Record Profits on Lower Fuel Costs
December 14, 2015

Global Airlines are Expected to Post a Collective $33 Billion in Net Profits This Year

Everyone knows there are winners and losers in any bear market, including the recent commodity rout. Low crude oil prices have definitely hurt explorers and producers. Airlines, on the other hand, appear to be thriving.

According to the International Air Transport Association (IATA), a global airlines trade group, the industry is set to post a collective $33 billion in net profits this year—a record—on fuel cost savings and stronger passenger flight demand.

Want to know how significant a record this is? In 2014, profits came in at $17.4 billion—about half of what they are today.

What’s more, profits are expected to be even larger next year.

World demand grew 6.7 percent from a year ago, the IATA says, and is estimated to rise a further 6.9 percent in 2016. And with oil likely to stay relatively low, the group forecasts that airlines will spend $135 billion on fuel in 2016, down nearly a quarter from $180 billion in 2015.

This, coupled with improved fuel efficiency, is expected to contribute toward the group ending next year with estimated total net profits of $36.3 billion.

You can see below that global airline stocks have soared in recent years, especially in response to flagging oil, airlines’ largest expense.

Low Oil Prices Have Been a Huge Windfall for Airlines
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In the past, airlines were notorious for their inefficiency and tendency to destroy capital. These claims were probably exaggerated, especially by Warren Buffett, who has repeatedly decried the industry as a money-loser. What a lot of people don’t realize is that Buffett didn’t do as bad as he claimed.

Former US Airways CEO Ed Colodny explained in 2013 that after Buffett’s shares didn’t appreciate, he wrote down his investment and got out when he could.

“I think at the end of the day, he got all his dividends paid and his principal back,” Colodny said.  

In any case, airlines are now going into their third year of the present secular bull market. These often last much longer. We believe this cycle is different, in that the U.S. airline industry could easily create $20 billion of free cash flow this year and next. Low fuel costs have been the cherry on top.

Where Does Oil Go from Here?

Bloomberg Businessweek

Indeed, 2015 was not kind to oil and other commodities, with many of them slumping to multiyear and, in some cases, multi-decade lows.

Back in August, the cover of Bloomberg Businessweek featured a whole gaggle of bears, which delighted bulls. (There’s an old belief that the market will soon do the exact opposite of what the press predicts.) Yet here we are four months out, and the commodities rout has only extended itself further.

Crude oil is presently testing financial crisis support levels, making many investors wonder whether the bottom for black gold has been reached—or if more pain is to be expected.

There’s no shortage of analysts and experts right now sharing their (wildly divergent) predictions of where oil might be headed from here. Some are calling for $20 per barrel; others, such as legendary hedge fund manager T. Boone Pickens, $70 or more in the next six months.

We can’t say whether Pickens is right or wrong. It’s worth pointing out, though, that crude has pretty closely followed its five-year trading pattern, with 52-week lows reached in late November, early December. The short-term trend shows oil rallying sharply starting in January, according to Moore Research analysis.

West Texas Crude: Historical Patterns
click to enlarge

Here’s another way of looking at it. The following heat map shows that, in the last five years, the oil price historically popped in February after months of losses. What this means is that January might be a good time to buy.

Average Crude Oil Price Change by Month
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The oscillator below confirms that. Right now crude is down 1.2 standard deviations—already signaling a buy, but it might have further to fall, based on past incidences.

Average Crude Oil Price Change by Month
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One of the more balanced perspectives comes from energy strategist Dr. Kent Moors, who tempers his optimism with a dose of reality:

The Five Most Searched-For Trends by Visitors to ETFdb.com Right Now
We are not racing back to $100 a barrel oil. Absent the outlier of a geopolitical event that impacts supply, more subdued rises are in order. But we certainly do not need triple-digit oil to make some nice investment returns, especially in a sector that has been so oversold.

I agree. I’m not interested in adding my own forecast to the ever-lengthening list so much as I am in finding ways to make money at current prices.

As are other investors. Based on the most searched-for trends on ETFdb.com right now, you can clearly see what’s on their minds.

OPEC Members Revolt against Saudis as Oil Slips

One of the main reasons why prices are so depressed, of course, is that the world is awash in the stuff. The Organization of Petroleum Exporting Countries (OPEC), responsible for about 40 percent of global supply, just had its most productive month since 2012, pumping 31.7 million barrels in November. That’s 1.7 million barrels over its “official” production ceiling.

Crude slipped below $37 per barrel on the news, a seven-year low, which is about as low as prices can go for most American companies to stay profitable. (As of this writing, WTI crude sits at $35.20, Brent at $36.83.)

Brent Crude Oil Hasn't Hit 2008 Lows
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As expected, OPEC announced after its last meeting that it would keep oil production levels the same in its bid to force higher-cost producers (re: American frackers) to trim their own operations. Solidarity among its members has weakened further, however, as it becomes clearer and clearer to them that they underestimated the resilience of American oil producers.

Five OPEC members—Venezuela, Nigeria, Libya, Iran and Ecuador—are now in open opposition to the Saudi policy of unchanged production. That the cartel as a whole exceeded its production ceiling last month suggests that each member-nation is making its own rules up anyway, regardless of what was decided.

It’s estimated that OPEC is already pumping about 900,000 barrels a day more than is needed next year. And with international sanctions against Iran about to be lifted—in exchange for an agreement to halt its nuclear program—the country has promised to increase its own production from 3.3 million barrels a day to as many as 4 million barrels a day by the end of 2016.

OPEC is pumping 900,000 barrels of oil a day more than the world needs.

Venezuela in particular is in deep turmoil. Low oil prices have battered its currency and left its economy in tatters, with food shortages worsening every day. The International Monetary Fund (IMF) expects the South American country—which has the largest proven oil reserves in the world—to contract 10 percent this year and has declared it the worst-performing economy in the world right now.

In the recent parliamentary elections, rightfully fed-up Venezuelans responded by ousting members of Hugo Chavez’s United Socialist Party of Venezuela (PSUV), giving the opposition party, the more-centrist Democratic Unity Roundtable (MUD), a supermajority that could challenge President Nicolás Maduro.

This countrywide rejection of failed, far-left leadership is an encouraging sign that Latin America’s political ideology is finally shifting away from European-style socialist economic models of no growth. We’ve seen South American countries tax away growth and impose envy policies on the financial sector. Mining and oil executives have seen their cash flow confiscated by value-added taxes, leading to drops in capex and job creation.

But just last month we saw Argentina elect its first business-friendly president, Mauricio Macri, in decades. And now Venezuela is demanding change, so there’s hope.

As head of the cartel, Saudi Arabia hasn’t gone unscathed in the oil rout either. For the first time, the kingdom will tap international bond markets to make up for lost oil revenues.

Also in the hard-to-believe category is Alaska’s plan to institute an income tax for the first time in 35 years to “close a $3.5 billion dollar deficit the state is carrying,” according to Zero Hedge. The Last Frontier is known, of course, for giving all Alaskan residents an annual dividend based on oil revenue. In 2015, that amount was $2,072.

But since oil revenue has been cut in half, hard measures must be taken to keep the dividend running, Alaska Governor Bill Walker argues.

“This plan keeps the permanent fund permanent,” Walker tweeted last Wednesday.

And Yet Oil Demand Is Still Outpacing Supply

Crude oil reserves here in the U.S. are currently at levels not seen since 1972. That’s with a 65 percent decline in rigs in operation from a year ago, a clear indicator of how efficient American producers have become.

U.S. Crude Oil Stocks Still at High Capacity
click to enlarge

But some analysts have suggested the oversupply isn’t as bad as we might think. Tom Kloza, head of energy analysis at the Oil Price Information Service (OPIS) told CNBC this week that it’s important to think of oil supply in the context of population growth:

This is a glut in terms of the most crude oil we’ve ever had in North America. But if you measure it versus the population, it’s not altogether that much. We’ve had much more crude-per-population back in previous decades.

Kloza has a fair point. In 1970, at the height of U.S. oil production, the country’s population was just over 205 million and the total number of registered vehicles—passenger cars, motorcycles, trucks and buses—was 111 million, according to the Department of Transportation. Today the population hovers just north of 319 million and, as of 2013, the number of registered vehicles has more than doubled to 255 million.

World Crude Oil Demand Not Slowing Down
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It’s worth reminding ourselves that the U.S. isn’t the only growing country. Population is booming all over the globe. People continue to have babies—Chinese couples even more so now that the one-child policy has been lifted—and the global middle class is swelling rapidly. This helps oil demand continue to rise, as well as air travel demand.

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 NYSE Arca Airline Index (XAL) is an equal dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines.

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.

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What We’re Paying Attention to Following the Paris Attacks
November 23, 2015

Ten days ago, 129 lives were brutally cut short when assailants affiliated with the terrorist group ISIS, also known as the Islamic State, stormed Paris in a series of coordinated attacks. Along with the rest of the world, we were shocked and saddened as the tragic news unfolded, worsening as the night progressed. Our thoughts are with the victims’ families and friends.

For us, the atrocity struck especially close to home, as one of our portfolio managers, Xian Liang, was in the city at the time of the attacks. We’re extremely grateful he and his wife returned home safe and sound. I wish the same could be said for the victims in Paris that day, the 224 on the Russian jet brought down by an ISIS-built bomb, the hostages in Mali Friday, and many others whose lives have been affected by the global scourge of terrorism.

We Take Our Role as Fiduciaries Seriously

As money managers, it’s our duty and responsibility to be cognizant of such geopolitical events—large and small, good and bad—and to consider all of the possible ramifications. The consequences often reach far and wide, and can be felt in the short-term (changes in investor confidence) as well as the long-term (changes in government policy).

Early last year, for instance, we were quick to adjust asset allocations when Russia invaded and annexed Crimea. We anticipated that sanctions would be imposed on the country, and indeed they were, by the U.S., European Union, Australia and other international organizations. These sanctions, coupled with falling oil prices, contributed to the Russian ruble’s dramatic breakdown.

Diesel, the seven-year-old belgian shepherd who was killed recently during a French SWAT raid

Against these challenges, I’m impressed by how strongly Russian stocks have performed lately. Last Tuesday, the Micex Index jumped to an eight-month high in ruble terms. This is especially interesting since both Brent oil and the ruble are way down. It suggests that investors are showing approval of President Vladimir Putin’s involvement in Syria.

Putin is also benefiting from a strong public relations push. The Daily Mail writes: “Russia has shown its solidarity with the people of France in an unusual way—by donating a new puppy to carry on the memory of Diesel, the police dog killed by a suicide bomber.”

It should come as a surprise to no one that, following the tragedy in Paris, defense spending will likely increase. French President François Hollande has already told Parliament that France is at war and will “be merciless” in its pursuit of justice. The country wasted no time in striking back against ISIS and has begun bombing raids in Syria.

As early as last Monday, stocks of companies that manufacture weapons and fighter jets traded up.

War Stocks Rally Following Attacks in Paris
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We own Lockheed Martin, manufacturer of the F-35, F-22 and F-16 fighters; Boeing, manufacturer of the Tomahawk cruise missile, F-18 fighter and more; and Northrop Grumman, which was recently awarded the contract to build America’s next generation of long-range strike bombers. Raytheon develops and manufactures guided missiles.

The U.S. Navy plans to buy more Boeing F/A-18E/F Super Hornets in the coming years.

International Travel to Be Hit

Understandably so, the terrorist attacks will have an impact on international travel, immigration and border security. France immediately tightened its borders, and other European countries quickly followed suit. Meanwhile, Poland’s newly-elected government rejected the European Union’s quotas for accepting refugees from Syria, an attitude that’s echoed by more than 30 U.S. states. The House of Representatives just passed legislation to suspend the admittance of 10,000 Syrian refugees, though it’s likely to be vetoed.

This is the climate we find ourselves in right now. It has a huge effect, at least in the near-term, on perceptions of international travel.

“Most people are risk-averse,” Xian says. “When my wife and I left for the airport by taxi the morning after the Paris attacks, we agreed not to travel to Europe again any time soon.”

Others share Xian’s attitude. Paris has for years been the world’s top tourist destination, but the City of Lights has already seen a huge drop-off in tourists as people have delayed or cancelled travel plans. Hotel stocks were up 10 percent in October but will likely face headwinds as a result of Paris and Mali.

Gold, Diamond and Oil Declines Good for Manufacturers

Xian stresses the importance of having gold exposure as diversification. A good diversifier is any investment that’s expected to have a low correlation with the rest of your portfolio, and gold historically has little to no correlation with equities.

The yellow metal has traditionally been seen as a safe haven in times of war, but so far we’ve seen little movement. Year-to-date, gold is down nearly 9 percent, and it could possibly end 2015 in negative territory for the third straight year.

Even so, the yellow metal has performed better than other select world currencies for the year, including the Russian ruble (-10 percent), Australian dollar (-11 percent), euro (-12 percent) and Canadian dollar (-13 percent).

Gold and Diamonds Follow the Same Downtrend
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Diamonds have likewise struggled over the past four years, but with the recent news that Canadian miner Lucara discovered the largest diamond in 100 years, investors might show renewed interest. The massive 1,111-carat diamond was unearthed in Lucara’s Botswana project. Although the stone has yet to be assessed, it’s worth noting for comparison that a 100-carat diamond sold at Sotheby’s in April for $22 million.   

Gold and Diamonds Follow the Same Downward Trend
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These declines over the past three and four years have been good for jewelry companies such as Tiffany, which I wrote about last December. Gold and diamond supply is now less expensive, so the company has margin expansion.

The same can be said of oil. Low prices have hurt South Texas, the Middle East, Russia and Colombia, not to mention drillers and explorers, but they’ve been a windfall for the end consumer, including manufacturers and airlines. Falling energy prices are finding their way into the global engine of growth.

$500 Billion Peace Dividend for Global Consumers and Businesses
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Many analysts expect to see crude oil prices tick up on mounting tension in the Middle East. During past military engagements, oil has typically performed well since a lot is required to fight a war. We haven’t seen prices move just yet—oil still sits at $40 per barrel—but it’s something we’ll monitor closely. As I said earlier this month, the global purchasing managers’ index (PMI) turned up in October after bottoming in September, and in the past this has been followed by a jump in oil prices.

Oil Trends Typically Drive by Global Economic Activity
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Inflation Rousing from Sleep

We learned this week that the consumer price index (CPI) rose 0.2 percent in October, suggesting that inflation is finally picking up steam in the U.S. and giving the Federal Reserve further excuses to raise rates next month.

Based on the 2-year Treasury yield (0.89 percent) and the headline CPI (0.20 percent), real rates now stand at 0.69 percent. (Real interest rates are what you get when you subtract the CPI from the Federal funds rate.) I’ve often explained that gold responds positively when real rates turn negative, as you can clearly see in the chart below, so we’re eagerly awaiting stronger inflation.

Real Interest Rates and Gold Share an Inverse Relationship
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In a note this week, Drew Matus, an economist at UBS, wrote that inflation in the U.S. is poised to jump in the next couple of months. The CPI measures the price of a basket of goods to the price of the same goods a year ago, so inflation fell dramatically between November 2014 and January 2015 as energy prices plunged.

But “absent a similar move this year, those sharp price declines will drop out of the year-over-year data, resulting in a rapid, technical acceleration in overall inflation measure,” Matus says.

If such inflation occurs—possibly as soon as January or February, Matus points out—real rates could have a better chance of dipping into negative territory, which would be constructive for gold prices.

Thanksgiving is this week, and in light of recent events, I think we all have ample reason to express gratitude to friends and loved ones. Everyone have a blessed week!  

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 9/30/2015: Lockheed Martin Corp., The Boeing Co., Northrop Grumman Corp., Lucara Diamond Corp.

The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

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

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5 World Currencies That Are Closely Tied to Commodities
November 18, 2015

5 World Currencies That Are Closely Tied to Commodities

For more than a year now, commodity prices have been under pressure from the strong U.S. dollar and slowing global demand. This has made a huge dent in the balance sheet of many net exporters of resources, in turn weakening their currencies.

This should come as a shock to no one, but what most people don’t realize is just how closely some currencies track certain commodities. When I presented at the International Mining and Resources Conference in Melbourne, Australia, earlier this month, I shared several charts that show this correlation. Many attendees were astounded—and we’re talking professional economists, money managers and CEOs here.

With that said, I think it’s important that you see this correlation as well. Below are five world currencies that have been impacted by lower commodity prices.

1. Australian Dollar

Australia now accounts for around a third of global iron ore production, according to the country’s budgetary office. This means that its income is very sensitive to price changes. As demand from China, the world’s largest consumer of iron ore, has softened, so too has the Australian dollar.

Australian Dollar Tracks Iron Ore Prices
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2. Canadian Dollar

The sixth-largest oil producer in the world is Canada, about a quarter of whose exports is oil. The Conference Board of Canada, a not-for-profit economic research group, estimates that sales for the country’s energy sector will recede a sizable 22 percent this year. In Alberta, where revenue from oil sand exports had until recently helped the province become the fastest-growing in Canada, GDP is expected to contract 1 percent. And in September, the country’s economy shrank for the second straight quarter. As for the Canadian dollar, it’s fallen around 15 percent against the dollar for the one-year period.

Canadian Dollar Tracks Oil Prices
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3. Russian Ruble

Compared to Canada and Australia, Russia’s export mix isn’t nearly as diversified: About half of its exports in terms of value are a combination of oil and natural gas. (Russia sits atop the third-largest oil reserves in the world, the number one natural gas reserves.) It should come as no surprise, then, that its currency is highly influenced by Brent oil. Where oil went starting in July 2014, so went the ruble.

Russian Ruble Tracks Oil Prices
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4. Colombian Peso

The same story can be found in Colombia, where oil exports are responsible for about 20 percent of government revenue. Officials estimate, however, that oil sales will total $1.1 billion in 2016, compared to $6.7 billion in 2014. With prices lingering just above $41 per barrel, the Colombian peso has retreated 30 percent against the U.S. dollar for the one-year period.

Colombian Peso tracks Oil Prices
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5. Peruvian Sol

Besides gold, copper is Peru’s most important mineral export by value. With around 13 percent of the world’s copper reserves, it’s the third-largest producer after Chile and China. As such, the Peruvian sol has declined in tandem with the red metal.

The Peruvian Sol Tracks Copper Prices
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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