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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.

Gold Looks Like a Bargain Just in Time for Christmas
December 4, 2017

Gold christmas tree decorations

One of the most compelling and engaging presenters at the Precious Metals Summit in London last month was Ronald-Peter Stöferle, a managing partner at Liechtenstein-based asset management company Incrementum. Incrementum, as you may know, is responsible for publishing the annually-updated, widely-read “In Gold We Trust” report, which I’ve cited a number of times before.

During his presentation, Stöferle shared the fact that his wife prefers to do her Christmas decoration shopping in January. When he asked her why she did this—Christmas should be the last thing on anyone’s mind in January—she explained that everything is half-off. A bargain’s a bargain, after all.

This is very smart. Here we are several days before Christmas, and demand for ornaments, lights and other decorations is red-hot, so be prepared to pay premium prices if you’re doing your shopping now. But mere hours after the Christmas presents have been unwrapped and Uncle Hank has fallen asleep on the couch with a glass of boozy eggnog, stores will begin slashing prices to get rid of inventory.

Gold bullion and mining stocks are currently in the “January” phase, so to speak, according to Stöferle. The Barron’s Gold Mining Index, which goes all the way back to 1938, recently underwent its longest bear market ever, between April 2011 and January 2016. And as I already shared with you, the World Gold Council (WGC) reported last month that gold demand fell to an eight-year low in the third quarter.

Barrons gold mining index bear markets since 1942
click to enlarge

“Most people get interested in stocks when everyone else is,” Warren Buffett famously said. “The time to get interested is when no one else is.”

The same logic applies to Christmas decorations, gold and mining stocks.

Gold on Track for Its Best Year Since 2010

As of my writing this, gold is trading around $1,280, up 11 percent in 2017. That’s off 5 percent from its 52-week high of $1,351 set in September. If it stays at its present level until the end of the year, the metal will end up logging its best year since 2010, when it returned 30 percent.

former national security advisor pleaded guilty to lying to fbi

Gold traded up on Friday as the U.S. dollar weakened following news that former National Security Advisor Mike Flynn pleaded guilty to lying to the FBI about conversations he had with Russian officials last December during the presidential transition. It’s possible that the details Flynn might provide as part of a plea bargain could help special prosecutor Robert Mueller advance his investigation into Russia’s meddling in the 2016 election.

But back to gold. Considering it’s faced a number of strong headwinds this year—a phenomenal equities bull run that’s drawn investors’ attention away from “safe haven” assets, lukewarm inflation and anticipation of additional rate hikes, among others—I would describe its performance in 2017 as highly respectable.

And yet if you listen to the mainstream financial news media, gold is “boring” and “flat.” Speaking to CNBC last week, Vertical Research partner Michael Dudas called the gold market “eerily quiet.”

10 day standard deviation

click to enlarge

Dudas was specifically describing gold’s volatility, but even here the facts tell a slightly different story. In the table to the right, you can see the 10-day standard deviation for a variety of assets, using data from the past 12 months. Gold traded with higher volatility than domestic equities, the U.S. dollar and global emerging markets. Of those measured, only oil and bitcoin showed higher volatility.

Based on volatility alone, it’s stocks that look pretty “boring” and “quiet” this year, but you’re not likely to hear a pundit or analyst describe them that way.

And with good reason. The S&P 500 hasn’t fallen more than 3 percent from a previous high for more than 388 days now, the longest stretch ever for the index. And for the first time in its 120-year history, the Dow Jones Industrial Average has reached four 1,000-point milestones in a single year—with a whole month left to go. It’s possible that excitement over the Senate’s tax bill will be enough to push the Dow above 25,000 sometime before the ball drops in Times Square. The drama involving Flynn, however, could threaten to derail those chances.

Dow jones industrial average made history again
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What this means is that, compared to domestic equities, gold is highly undervalued right now. The gold-to-S&P 500 ratio, a time-tested trading indicator, is near 50-year lows. I see this as a strong buy signal, especially now as we await the Federal Reserve’s decision to lift rates this month. If you recall, gold broke out strongly following the December rate hikes in 2015 and 2016.

Gold is a bargain right now compared to stocks
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In his December outlook on precious metals, Bloomberg Intelligence commodity strategist Mike McGlone writes that “gold is ripe to escape its cage soon,” adding that “prices just don’t get as compressed as they did for gold in November, indicating a breakout soon.”

Is a Recession Brewing? History Says Maybe

So what are the catalysts that could trigger a breakout? Stöferle mentions two: a possible recession and stronger inflation.

“I think the odds are pretty high that a recession might be upon us sooner or later because we’re in this rate hike cycle, and as always the central banks are way behind the curve,” he said.

What Stöferle is referring to is the strong historical correlation between new U.S. rate hike cycles and recessions. Going back more than 100 years, 15 of the last 18 recessions were directly preceded by monetary tightening.


Recessions have historically followed us rate hike cycles click to enlarge

The Federal Reserve isn’t just raising rates, remember. It’s also begun to unwind its $4.5 trillion balance sheet, which was built in the years following the financial crisis. This carries historical risk. The central bank has embarked on similar reductions six times in the past—in 1921-1922, 1928-1930, 1937, 1941, 1948-1950 and 2000—and all but one episode ended in recession.

“Quantitative tightening will fail,” Stöferle predicted.

Obviously, there’s no guarantee that this particular round will have the same outcome as past cycles, but if you agree with Stöferle, it might be prudent to have as much as 10 percent of your wealth in gold bullion and gold stocks.

 

The Risks Surrounding Tax Reform

Inflation is a trickier thing to forecast. A lot of people, myself included, had expected the cost of living to show signs of life this year in response to some of President Trump’s more protectionist and policies. But nearly 10 months into his term, no major legislation has been passed or signed.

That might be about to change with the highly anticipated tax reform bill, which the Senate passed late Friday night. If the bill reaches Trump’s desk, it will be the first time in a generation that the U.S. has amended its tax code.

But will the $1.5 trillion bill, as it’s currently written, lead to stronger economic growth and pay for itself, as its most vehement supports insist? My hope is that it will. As I’ve been saying for a while now, it’s time we begin relying more on fiscal policies to drive growth, especially now that the Fed is beginning to tighten policy.

In the spirit of staying balanced, though, there are troubling signs and forecasts that the bill could actually end up being a disappointment. After reviewing the bill, the Joint Committee on Taxation (JCT) estimates that its enactment could lead to a whopping $1.4 trillion increase in the deficit between now and 2027. Even if we factor in economic growth that might come as a result of reforms, the JCT says, we’d still be looking at a $1 trillion shortfall.

Many economists are also skeptical. A recent University of Chicago Booth School of Business survey of economists from Yale, MIT, Princeton, Harvard and other Ivy League schools found that over half did not believe the current tax bill will “substantially” grow GDP. Only 2 percent thought it would, and more than a third were uncertain. Additionally, nearly 90 percent believed that if the bill is enacted, the U.S. debt-to-GDP ratio will be “substantially” higher a decade from now.

And then there’s the Kansas experiment from five years ago. In May 2012, Governor Sam Brownback signed a sweeping state tax reform bill that in many ways resembles the Senate’s current tax bill. It slashed personal and business income taxes, consolidated the state’s three tax brackets into two and eliminated a number of credits and exemptions. Hopes were high that the reforms would kickstart economic expansion, help taxpayers and attract new business to the state.

Instead, none of that happened. Following the bill’s enactment, Kansas GDP growth remained stagnant, trailing the national growth rate as well as that of neighboring states and even its own rate from years past. This year, the nonprofit financial watchdog group Truth in Accounting gave Kansas a failing financial grade of D, citing its inability to pay its debts or balance its budget.


Kansas 2012 tax cuts failed to spur growth a lesson for the us click to enlarge

In June of this year, Kansas’ Republican-controlled state legislature voted to raise taxes for the first time since reforms were enacted and eventually had to override Governor Brownback’s veto. Many of those state legislators who initially supported the Kansas tax cuts are now warning federal lawmakers that similar outcomes could occur on a nationwide scale.

I’m not sharing this to discredit tax reform—in fact, I’m strongly in favor of it. However, I believe it’s important to highlight the fact that nothing in life is guaranteed. Hope for the best, prepare for the worst. What steps can you take now in the event the tax reform bill doesn’t accomplish what it’s designed to do—or worse? This type of uncertainly has historically made gold shine the brightest.

Think Gold Has Fallen Short of Expectations this Year? Don’t Blame Bitcoin

At conferences I’ve attended and spoken at recently—the Silver & Gold Summit in San Francisco and Mines and Money in London among them—the suggestion has been made by a few big-name investors and money managers that bitcoin’s meteoric rise is to blame for the market’s apparent disregard for gold and gold stocks right now. With bitcoin up more than 1,050 percent since the beginning of the year, even after a 21 percent dip last Wednesday, many market-watchers might simply be too star-struck by the newness of bitcoin to be bothered by the “barbarous relic.”

I happen to think this is a mistake. As much as I believe in the value of bitcoin, gold and gold stocks still play a crucial role in the modern portfolio.

As I told Kitco News’ Daniela Cambone at the Silver & Gold Summit, bitcoin isn’t responsible for dismantling gold. Although both assets are currencies, I don’t see them at odds because they serve very different functions. For one, gold is more than money—it’s worn as jewelry, widely used in dentistry and can be found in art and even some high-end foods. It’s been traded around the world for millennia and, unlike bitcoin, does not require electricity. Indeed, it conducts electricity, which is why you can find it in your iPhone and GoPro camera’s circuitry.

Frank Holmes on CNBC london

Bitcoin is more than money as well. It’s the most influential spokesperson, if you will, of blockchain technology, upon which the currency is built. Speaking with SmallCapPower’s Angela Harmantas at the Mines and Money conference in London, I made the comparison that bitcoin is to email as blockchain is to the internet. In the earliest days of the internet, few people truly understood what it was or could predict the implications of this new technology—but email they understood. It’s what woke people up to the idea of using the internet. Bitcoin is doing just that for blockchain.

But blockchain’s utility goes far beyond finance. As a decentralized, highly encrypted ledger, it has untold potential to change the way we run our lives, businesses and governments. Among other tasks, the technology can help manage digital rights to intellectual property, bring transparency to supply chains and reliably track the spending of public funds. It can even be used as a tamper-proof voting system, whether you’re voting for a new chairman of the board or president of the United States. One day soon, we might all be e-voting from our smartphones and tablets, reassured that our vote cannot be compromised.

For more on my outlook on bitcoin and blockchain, and to get my thoughts on why I think HIVE Blockchain Technology is well-positioned to be an industry leader, watch my full interview with Angela Harmantas.

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.

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.

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. The U.S. Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S.trade partners' currencies. The Barron’s Gold Mining Index (BGMI)  consists of publicly traded companies involved primarily in the mining for gold

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly.

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The World Is Running out of Gold Mines—Here’s How Investors Can Play It
October 30, 2017

the world is running out of gold mines, here's how investors can play it

My good friend Pierre Lassonde, cofounder and chairman of Franco-Nevada, doesn’t know how we’ll replace the massive gold deposits of the past 130 years or so. Speaking with the German financial newspaper Finanz und Wirtschaft this month, Pierre says we’re seeing a significant slowdown in the number of large deposits being discovered. Legendary goldfields such as South Africa’s Witwatersrand Basin, Nevada’s Carlin Trend and Australia’s Super Pit—all nearing the end of their lifecycles—could very well be a thing of the past.

Over the medium and long-term, this could lead to a supply-demand imbalance and ultimately put strong upward pressure on the price of gold.

According to Pierre:

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. 

So few new large mines are being discovered today, Pierre says, mostly because companies have had to slash exploration budgets in response to lower gold prices. Earlier this year, S&P Global Market Intelligence reported that total exploration budgets for companies involved in mining nonferrous metals fell for the fourth straight year in 2016. Budgets dropped to $6.9 billion, the lowest point in 11 years. Although we’ve seen an increase in spending so far this year, it still dramatically trails the 2012 heyday.

Total nonferrous exploration budgets fell to an 11 year low in 2016
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And because it takes seven years on average for a new mine to begin producing—thanks to feasibility studies, project approvals and other impediments—output could recede even more rapidly in the years to come.

“It doesn’t really matter what the gold price will do in the next few years,” Pierre says. “Production is coming off, and that means the upward pressure on the gold price could be very intense.”

Have We Reached Peak Gold?

Frank Holmes standing next to Pierre Lassonde right at Mines and Money London in December 2015

What Pierre is talking about, of course, is the idea of “peak gold.” I wrote about this last year and suggested another factor that could be curtailing new discoveries—namely, the low-hanging fruit has likely already been picked. Gold is both scarce and finite—one of the main reasons why it’s so highly valued—and explorers are now having to dig deeper and venture farther into more extreme environments to find economically viable deposits.

Other factors contributing to the decline include tougher regulations and higher production costs. And unlike with the oil industry, no “fracking” method has been invented yet to extract gold from hard-to-reach areas, though Barrick—the world’s largest producer by output—has been experimenting with sensors at its Cortez project in Nevada.

Take a look at how drastically annual output has fallen in South Africa, once the world’s top gold-producing country by far. In the 1880s, it was the discovery of gold in South Africa’s prolific Witwatersrand Basin—responsible for more than 40 percent of all gold ever mined in human history, if you can believe it—that helped transform Johannesburg into one of the world’s largest and most populous cities. Today, South Africa’s economy is the most advanced and stable in Sub-Saharan Africa, all thanks to the yellow metal.

In 1970, miners dug up more than 1,000 metric tons—an unfathomably large amount. Since then, production has steadily dropped. No longer in the top spot, South Africa produced only 167.1 tons in 2016, an 83 percent plunge from the 1970 peak. Meanwhile, miners in the notorious Mponeng mine—already the world’s deepest at 2.5 miles—continue to follow veins even deeper into the earth at greater and greater expense.

South Africa's gold output has been in steady decline for more than 45 years
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Australia could soon be seeing a similar downturn over the next four decades. A first-of-its-kind study conducted by MinEx Consulting and released this month, shows that Australia’s gold production is expected to see a significant drop between now and 2057. By then, all but four of the 71 currently operating mines in the country will be exhausted. Most of these will close in the next couple of decades. Any additional production will be dependent on new exploration success, which will become increasingly difficult if companies don’t invest in exploration and if the Australian government doesn’t relax rules in the mining space.

MinEx estimates that “for the Australian gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance.”

To be fair, large discoveries haven’t disappeared entirely. Back in March it was reported that Shandong Gold Group, China’s second-largest producer, uncovered a deposit in eastern China containing between 380 and 550 metric tons of the yellow metal. If true, this would make it the country’s largest ever by amount. The mine has an estimated lifespan of 40 years once operations begin.

In addition, Kitco reports this month that Toronto-based Seabridge Gold recently stumbled upon a significant goldfield in northern British Columbia. The find appeared, coincidentally, after a glacier retreated. It’s estimated to contain a whopping 780 metric tons.

“There’s no question that as glaciers retreat, more ground will become available for exploration and more discoveries could be made in that part of the world,” Seabridge CEO Rudi Fronk told Kitco.

The company already has the permits to begin mining.

Seabridge gold is up 15 percent for the three month period
click to enlarge

Exploration Budgets Jumped

Gold represents over half of global annual commodities exploration budgets

 

As I said earlier, we just saw an encouraging spike in the amount spent on exploration. According to S&P Global Market Intelligence, exploration budgets increased in the 12-month period as of September for the first time since 2012. Budgets jumped 14 percent year-over-year to $7.95 billion, with gold explorers leading the way. During this period, gold companies spent around $4 billion on exploration, which is roughly half the value of all nonferrous metals mining budgets.

But because exploration is getting more expensive for reasons addressed earlier, senior producers might very well decide instead to acquire smaller firms with proven, profitable projects.

This could create a lot of value for investors, so I would keep my eyes on juniors that look like targets for takeover. Dealmaking in the Australian mining industry, for example, is showing some growth this year compared to last, according to a September report by accounting firm BDO. Last year, Goldcorp finalized its deal to acquire Vancouver-based junior Kaminak Gold, and in May of this year, El Dorado announced it was taking over Integra Gold for C$590 million. I expect to see even more deals in the coming months.

In the meantime, I agree with my friend Pierre’s “absolute rule” that investors should hold between 5 and 10 percent gold in your portfolio. I would also add gold stocks to the mix, especially overlooked and undervalued names, and rebalance once and twice a 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.

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 9/30/2017: Franco-Nevada Corp., Seabridge Gold Inc.

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Car Manufacturers Are Electrifying Copper, “The Metal of the Future”
October 16, 2017

Copper is being called the metal of the future

As many of you know, copper is often seen as an indicator of economic health, historically falling when overall manufacturing and construction is in contraction mode, rising in times of expansion.

That appears to be the case today. Currently trading above $3 a pound, “Doctor Copper” is up close to 28 percent year-to-date and far outperforming its five-year average from 2012 to 2016.

 

Copper is far outperforming the five year average
click to enlarge

Several factors are driving the price of the red metal right now. Manufacturing activity, as measured by the purchasing manager’s index (PMI), is expanding at a pace we haven’t seen in years in the U.S., eurozone and China. The U.S. expanded for the 100th straight month in September, climbing to a 13-year high of 60.8.

Speculators are also buying in response to word of copper shortages in China, despite September imports of the metal rising to its highest level since March. The world’s second-largest economy took in 1.47 million metric tons of copper ore and concentrates last month, an amount that’s 6 percent higher than the same month in 2016.

Why Copper Is the “Metal of the Future”

Why are we seeing so much copper entering China? One reason could be battery electric vehicles (BEVs), which require three to four times as much copper as traditional fossil fuel-powered vehicles.

China is already the world’s largest and most profitable market for BEVs, and Beijing is now reportedly working on plans to curb and eventually ban the sale of fossil fuel-powered vehicles, according to the Financial Times. This would place the Asian giant in league with a number of other powerful countries similarly crafting bans on internal combustion engines within the next 25 years, including Germany, France, Norway, the United Kingdom and India.

Because of the sheer size of the Chinese market, this move is sure to delight copper bulls and investors in any metal that’s set to benefit from higher BEV production. That includes cobalt, lithium and nickel.

According to Bloomberg New Energy Finance, BEVs will account for 54 percent of all new car sales by 2040. That year, China, Europe and the U.S. are expected to make up 60 percent of the global BEV fleet.

This could have a huge effect on copper prices over the next 10 years and more. With fewer and fewer large deposits being discovered, demand should accelerate from 185,000 metric tons today to an estimated 1.74 million tonnes in 2027, according to the International Copper Association.

Electric vehicles expected to drive copper demand
click to enlarge

These are among the reasons why Arnoud Balhuizen, chief commercial officer of Australian mining giant BHP Billiton, called copper “the metal of the future” in an interview with Reuters last month.

“2017 is the revolution year [for electric vehicles], and copper is the metal of the future,” Balhuizen said, adding that the market is grossly underestimating the red metal’s potential as BEV adoption surges around the world.

Cobalt Gets Its Day in the Sun

And let’s not forget cobalt. The brittle, silver-gray metal, used to extend the life expectancy of rechargeable batteries, is up more than 81 percent so far in 2017 and 109 percent for the 12-month period. Performance is being driven not only by growing BEV demand but also supply disruptions in the Republic of the Congo, where more than 60 percent of the world’s cobalt is mined.

“It’s a really bright future for cobalt,” Vivienne Lloyd, analyst at Macquarie Research, told the Financial Times. “There doesn’t seem to be enough of it.”

Before now, there was very little mainstream interest in cobalt as an investment, but that’s changing as rapidly as world governments are joining the chorus to move away from fossil fuels. One sign of that change is the London Metal Exchange’s (LME) upcoming cobalt contracts, one for the physical metal and another for the chemical compound cobalt sulphate. This will allow investors to trade the underlying metal and participate in the electric vehicle “revolution,” as Balhuizen calls it.

In the meantime, investors can participate by investing in a producer with exposure to cobalt—among our favorites are Glencore, Freeport-McMoRan and Norilsk Nickel—or a natural resources fund.

 

Gold Closes Above $1,300 an Ounce

Gold also looks constructive as we head into the fourth quarter and beyond, according to a number of new reports and analysis last week.

UBS strategist Joni Teves finds it “encouraging” that gold has managed to recover this year off its 2016 lows. Although a likely December rate hike could be a headwind, Teves points out that the metal performed well in the months that followed the previous three rate hikes. What’s more, gold has rallied in each January since 2014. We could see a similar bump in price this coming January.

Not only is gold trading above its 50-day moving average again, but for all of 2017, it’s been following a nice upward trend as the U.S. dollar dips further.

Gold following a nice upward trend as US dollar weakens further
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A weaker greenback, of course, is bullish for all commodities, including copper. According to Bloomberg strategist Mike McGlone, unless the dollar unexpectedly recovers in the near term, commodities, as measured by the Bloomberg Commodities Index, could gain as much as 20 percent between now and year’s end.

Meanwhile, BCA writes that major risks in 2018—inflationary expectations stemming from President Donald Trump’s protectionism, tensions between the U.S. and China, and continued strife in the Middle East among them—could keep the shine on gold.

The research firm reminds investors that gold has historically done well in times of economic and geopolitical crisis, outperforming the S&P 500 Index, U.S. dollar and 10-year Treasury by wide margins. Because the metal is negatively correlated to other assets, it could potentially serve as a good store of value if equities entered a bear market.

Such a bear market, triggered by tighter U.S. monetary policy, could take place as early as 2019, BCA analysts estimate. Gold would then stand out as a favorable asset to hold, especially if inflationary pressures pushed real Treasury yields into negative territory.

A Fear Trade Lesson from Germany

This is the lesson Germany has learned over the past 10 years, as I shared with you last week. Before 2008, Germans’ investment in physical gold barely registered on anyone’s radar, with average annual demand at 17 metrics tons. The country’s first gold-backed exchange-trade commodities (ETCs) didn’t even appear on the market until 2007.

But then the financial crisis struck, followed by monetary easing and low to negative interest rates. These events ultimately pushed many Germans into seeking a more reliable store of value.

Now, a new report from the World Gold Council (WGC) shows that German investors became the world’s top gold buyers in 2016, ploughing as much as $8 billion into gold coins, bars and ETCs. Amazingly, they outspent Indian, Chinese and U.S. investors.

Gold investment in Germany hit a new high in 2016
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Analysts with the WGC believe there is room for further growth, citing a recent survey that shows latent demand in Germany holding strong. Impressively, 59 percent of German investors agreed that “gold will never lose its value in the long-term.” That’s a huge number, suggesting the investment case for gold remains attractive.

Learn more about investing in gold mining by watching my interview on the floor of the New York Stock Exchange!

 

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

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

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

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

The U.S. Dollar Index measures the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: BHP Billiton Ltd., Glencore PLC, Freeport McMoRan Inc., MMC Norilsk Nickel PJSC.

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Germans Have Quietly Become the World’s Biggest Buyers of Gold
October 11, 2017

Germans Have Quietly Become the World’s Biggest Buyers of Gold

When I talk about Indians’ well-known affinity for gold, I tend to focus on Diwali and the wedding season late in the year. Giving gifts of beautiful gold jewelry during these festivals is considered auspicious in India, and historically we’ve been able to count on prices being supported by increased demand.

Another holiday that triggers gold’s Love Trade is Dussehra, which fell on September 30 this year. Thanks to Dussehra, India’s gold imports rose an incredible 31 percent in September compared to the same month last year, according to GFMS data. The country brought in 48 metric tons, equivalent to $2 billion at today’s prices.

As I’ve shared with you many times before, Indians have long valued gold not only for its beauty and durability but also as financial security. Indian households have the largest private gold holdings in the world, standing at an estimated 24,000 metric tons. That figure surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

 

A New Global Leader in Gold Investing?

But as attracted to gold as Indians are, they weren’t the world’s biggest investors in the yellow metal last year, and neither were the Chinese. According to a new report from the World Gold Council (WGC), that title shifted hands to Germany in 2016, with investors there ploughing as much as $8 billion into gold coins, bars and exchange-traded commodities (ETCs). This set a new annual record for the European country.

Gold investment demand in Germany Hit a New High in 2016
click to enlarge

Germany’s rise to become the world leader in gold investing is a compelling story that’s quietly been developing for the past 10 years. Before 2008, Germans’ investment in physical gold barely registered on anyone’s radar, with average annual demand at 17 metrics tons. The country’s first gold-backed ETC didn’t even appear on the market until 2007.

But then the financial crisis struck, setting off a series of events that ultimately pushed many Germans into seeking a more reliable store of value.

“While the world fretted about Lehman Brothers, German investors worried about the state of their own banking system,” the WGC writes. “Landesbanks, the previously stable banking partners of corporate Germany, looked wobbly. People feared for their savings.”

To stanch the bleeding, the European Central Bank (ECB) slashed interest rates. Banks began charging customers to hold their cash, and yields on German bunds dropped into negative territory.

All of this had the effect of rekindling German investors’ interest in gold. As I’ve explained before, gold prices have historically surged in that country’s currency when real government bond yields turned subzero. What we saw in Germany was no exception.

gold price jumped when German government bond yield turned negative
click to enlarge

Weakening Faith in Paper

As the WGC points out, Germans are acutely aware that fiat currencies can become unstable and lose massive amounts of value. In the 1920s, the German mark dipped so low, a wheelbarrow overflowing with marks wasn’t enough to buy a single loaf of bread. In the past 100 years, the country has gone through eight separate currencies.

It’s little wonder, then, that a 2016 survey found that 42 percent of Germans trust gold more than they do traditional money.

This is where Germans and Indians agree. The latter group’s faith in the banking system has similarly been eroded over the years by regime changes and corruption, and gold has been seen as real money.

It’s not just individual German investors who harbor a strong faith in gold. The Deutsche Bundesbank, Germany’s central bank, spent the past four years repatriating 674 metric tons of Cold War-era gold from New York and Paris. The operation, one of the largest and most expensive of its kind, concluded in August. Today the central bank has the second largest gold reserves in the world, following the Federal Reserve.

Room for Further Growth

With Germans’ demand for gold investment products having already reached epic proportions, what can we expect next? Will interest continue to grow, or will it recede?

Analysts with the WGC believe there is room for further growth, citing a survey that shows latent demand in Germany holding strong. Impressively, 59 percent agreed that “gold will never lose its value in the long-term.” That’s a huge number.

Regardless of whether or not investment expands in Germany, this episode shows that gold is still seen as an exceptional store of value, and trusted even more so than traditional fiat money. For gold investors, that’s good news going forward.

 

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

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Here’s Why Bitcoin Won’t Replace Gold So Easily
October 9, 2017

GoGo Gold

What a week it was.

First and foremost, I’d like to acknowledge the horrific mass shooting that occurred in Las Vegas, the deadliest in modern American history. On behalf of everyone at U.S. Global Investors, I extend my sincerest and most heartfelt condolences to the victims and their families.

The memory of the shooting was still fresh in people’s minds during last Tuesday’s Hollywood premiere of Blade Runner 2049, which nixed the usual red carpet and other glitz in light of the tragedy. Before the film, producers shared poignant words, saying that in times such as these, the arts are crucial now more than ever.

I had the distinct privilege to attend the premiere. My good friend Frank Giustra, whose production company Thunderbird Entertainment owns a stake in the Blade Runner franchise, was kind enough to invite me along. Despite the somber mood—a pivotal scene in the film even takes place in an irradiated Las Vegas—I thought Blade Runner 2049 was spectacular. Even if you’re not a fan of the original 1982 film, it’s still worth experiencing in theaters. Hans Zimmer and Benjamin Wallfisch’s synth-heavy score is especially haunting.

CNET recently published an interesting piece examining the accuracy of future tech as depicted in the original Blade Runner, from androids to flying cars to off-world travel read the article here.

Still in the Early Innings of Cryptocurrencies

Speaking of the future, I spoke on the topic of the blockchain last week at the Subscriber Investment Summit in Vancouver. My presentation focused on the future of mining—not just of gold and precious metals but also cryptocurrencies.

Believe it or not, there are upwards of 2,100 digital currencies being traded in the world right now, with a combined market cap of nearly $150 billion, according to Coinranking.com.

Obviously not all of these cryptos will survive. We’re still in the early innings. Last month I compared this exciting new digital world to the earliest days of the dotcom era, and just as there were winners and losers then, so too will there be winners and losers today. Although bitcoin and Ethereum appear to be the frontrunners right now, recall that only 20 years ago AOL and Yahoo! were poised to dominate the internet. How times have changed!

It will be interesting to see which coins emerge as the “Amazon” and “Google” of cryptocurrencies.

For now, Ethereum has some huge backers. The Enterprise Ethereum Alliance (EEA), according to its website, seeks to “learn from and build upon the only smart contract supporting blockchain currently running in real-world production—Ethereum.” The EEA includes several big-name financial and tech firms such as Credit Suisse, Intel, Microsoft and JPMorgan Chase, whose own CEO, Jamie Dimon, knocked cryptos a couple of weeks ago.

To learn more about the blockchain and cryptocurrencies, watch this engaging two-minute video.

Understanding blockchain in two minutes

 

Will Bitcoin Replace Gold?

Lately I’ve been seeing more and more headlines asking whether cryptos are “killing” gold. Would the gold price be higher today if massive amounts of money weren’t flowing into bitcoin? Both assets, after all, are sometimes favored as safe havens. They’re decentralized and accepted all over the world, 24 hours a day. Transactions are anonymous. Supply is limited.

Have gold and bitcoin peaked for 2017
click to enlarge

But I don’t think for a second that cryptocurrencies will ever replace gold, for a number of reasons. For one, cryptos are strictly forms of currency, whereas gold has many other time-tested applications, from jewelry to dentistry to electronics.

Unlike cryptos, gold doesn’t require electricity to trade. This makes it especially useful in situations such as hurricane-ravished Puerto Rico, where 95 percent of people are reportedly still without power. Right now the island’s economy is cash-only. If you have gold jewelry or coins, they can be converted into cash—all without electricity or WiFi.

Finally, gold remains one of the most liquid assets, traded daily in well-established exchanges all around the globe. Every day, some £13.8 billion, or $18 billion, worth of physical gold are traded in London alone, according to the London Bullion Market Association (LBMA). The cryptocurrency market, although expanding rapidly, is not quite there yet.

I will admit, though, that bitcoin is energizing some investors, especially millennials, in ways that gold might have a hard time doing. The proof is all over the internet. You can find a number of TED Talks on bitcoin, cryptocurrencies and the blockchain, but to my knowledge, none is available on gold investing. YouTube is likewise bursting at the seams with videos on cryptos.

Bitcoin is up 350 percent for the year, Ethereum an unbelievable 3,600 percent. Gold, meanwhile, is up around 10 percent. Producers, as measured by the NYSE Arca Gold Miners Index, have gained 11.5 percent in 2017, 23 percent since its 52-week low in December 2016.

 

 

Look Past the Negativity to Find the Good News

The news is filled with negative headlines, and sometimes it’s challenging to stay positive. Take Friday’s jobs report. It showed that the U.S. lost 33,000 jobs in September, the first month in seven years that this happened. A weak report was expected because of Hurricane Irma, but no one could have guessed the losses would be this deep.

The jobs report wasn’t all bad news, however. For one, the decline is very likely temporary. Beyond that, a record 4.88 million Americans who were previously sitting out of the labor force found work last month. This helped the unemployment rate fall to 4.2 percent, a 16-year low.

Have gold and bitcoin peaked for 2017
click to enlarge

There’s more that supports a stronger U.S. economy. As I shared with you last week, the Manufacturing ISM Purchasing Managers’ Index (PMI) rose to a 13-year high in September, indicating rapid expansion in the manufacturing industry. Factory orders were up during the month. Auto sales were up. Oil has stayed in the relatively low $50-a-barrel range, which is good for transportation and industrials, especially airlines. Small-cap stocks, as measured by the Russell 2000 Index, continue to climb above their 50-day and 200-day moving averages as excitement over tax reform intensifies.

These are among the reasons why I remain bullish.

One final note: Speaking on tax reform, Warren Buffett told CNBC last week that he’s waiting to sell assets until he knows the plan will go through. “I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” he said.

It’s a fair comment, and I imagine other like-minded, forward-thinking investors, buyers and sellers will also wait to make huge transactions if they can help it. Tax reform isn’t a done deal, but I think it has a much better chance of being signed into law than a health care overhaul.

Upcoming Event

Later this month I’ll be in Barcelona attending and speaking at the 18th annual LBMA/LPPM Precious Metals Conference, where I’ll be speaking on quant investing. If you’re in the area between October 15 and 17, I’d be thrilled to see you! You can register here.

 

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

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. 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 index benchmark value was 500.0 at the close of trading on December 20, 2002.

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.

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 6/30/2017.

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Net Asset Value
as of 12/15/2017

Global Resources Fund PSPFX $5.91 -0.03 Gold and Precious Metals Fund USERX $7.27 -0.06 World Precious Minerals Fund UNWPX $5.67 -0.05 China Region Fund USCOX $11.08 -0.09 Emerging Europe Fund EUROX $7.06 -0.01 All American Equity Fund GBTFX $24.78 0.24 Holmes Macro Trends Fund MEGAX $22.12 0.24 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change