Share this page with your friends:

Print

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.

Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe
May 22, 2017

Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe

Europe is back on the map. That was one of the main takeaways last week from the SkyBridge Alternatives (SALT) hedge fund conference in Las Vegas, where $3 trillion in assets was represented. Speaker after speaker touted European equities for their attractive valuations and as a means to diversify away from the volatile American market in light of rising U.S. geopolitical risk. France’s election of centrist Emmanuel Macron over far-right nationalist Marine Le Pen this month has especially eased investors’ fears that antiestablishment forces would challenge the integrity of the European Union (EU).

Economic growth is finally picking up in Europe—“solid and broad,” as European Central Bank (ECB) president Mario Draghi recently put it—and many countries’ purchasing managers’ indexes (PMIs) are at five- and six-year highs. Export orders and hiring have accelerated. Labor participation is improving. European commodity sectors, including energy and metals, look cheap and oversold, meaning it might be time to start accumulating.

Trading at around 17 times earnings, European companies are priced to move compared to American firms, which are trading at 22 times earnings.

European Stocks Have an Attractive Dividend Yield

Dividend yields also look attractive relative to U.S. stocks. The MSCI Emerging Europe Index, which is most heavily weighted in Russian, Polish and Turkish stocks, currently yields 3.2 percent. The S&P 500 Index, by comparison, yields 2 percent.

A recent Barron’s article, “Europe on Sale: Time to Buy Foreign Stocks,” makes the same bullish case as many of the SALT presenters. Its author, Vito J. Racanelli, suggests that the eight-year bull run in the U.S. could be coming to an end, and that the baton is being passed to Europe. Overseas markets have already attracted more fund flows so far this year than the U.S. market, with a whopping $6.1 billion being plowed into European equity funds in the week ended May 10.

“Given attractive valuations, diminished political risk, low interest rates and a pickup in global growth, international markets, and Europe in particular, could finally start to outperform,” Racanelli writes.

 

 

Talking Geopolitics

Before moving on, I want to share a few other takeaways from SALT. One of the highlights was hearing billionaire investor Dan Loeb, who manages the $16 billion hedge fund firm Third Point. Loeb said that serious investors should closely monitor geopolitics as a backdrop or overlay when making investment decisions because government policy can have the fastest and most significant impact on your portfolio.

Daniel S. Loeb

That was flattering to hear. Not only do I spend a lot of time discussing and analyzing geopolitics, both here in the weekly commentary and my CEO blog Frank Talk, but it’s baked right into U.S. Global Investors’ methodology: Our investment process clearly asserts that “government policy is a precursor to change.” Loeb’s comments, I felt, validated our emphasis on geopolitics.

Many conferences I attend can often get bogged down in partisan politics, but SALT was refreshingly balanced. Joe Biden was as welcome on-stage as Jeb Bush. No one came out entirely in favor of or against President Donald Trump or his policies. Instead, presenters discussed the inherent risks and opportunities in an intelligent, even-handed manner. I aspire to do the same.

One of the speakers was John Brennan, the former CIA director, who’s scheduled to testify before the House Intelligence Committee later this month as part of its investigation into Russia’s alleged involvement with the 2016 election. Brennan, who told lawmakers as far back ago as August that the agency had information pointing to possible collusion between Russia and the Trump campaign, shed some much-needed light on allegations that Trump shared sensitive intelligence with Russian officials this month—a “serious mistake,” he said—explaining that such leaks to the media are potentially just as damaging to national security as the president’s actions.

Also notable was former Federal Reserve Chair Ben Bernanke’s thoughts on Washington’s little-known power dynamics. He said there are really three parties jockeying for control in the capital—Republicans, Democrats… and the “beltway party.” It’s this last group, composed of deeply entrenched lobbyists and career bureaucrats, that gives Washington outsiders such as Trump the hardest time and actively tries to sabotage agendas that shake up the status quo.

Trump's young presidency closely resembles Jimmy Carter's

In this regard, Bernanke said, the presidency Trump’s tenure so far resembles the most is not Richard Nixon’s, as some have suggested. It’s not even Andrew Jackson’s, which Trump himself expressly would like to emulate. Instead, it’s Jimmy Carter’s.

This might seem counterintuitive, but think about it: Both men were Washington outsiders. Both men arrived in the beltway with aspirations to transform the capital’s insular culture and “drain the swamp.” Both men had the great fortune of working with a party majority in both chambers of Congress. But because they exuded an “I alone” attitude and often picked fights with members of their own party, both men faced unusual difficulties in getting key components of their agendas passed. And just as Carter had little success in his first 100 days—in his entire four-year term, in fact—Trump’s young presidency has similarly been unable to make significant strides so far in getting much accomplished.

A White House in Crisis?

This is precisely what markets were reacting to last Wednesday, the worst week for major U.S. indices in months. Investors, fearing Trump’s pro-growth agenda could be threatened by troubling news and allegations coming out of the White House, punished small-cap stocks in particular, sending the Russell 2000 Index down 2.62 percent, its sharpest one-day loss since March. Recall that it was small caps that saw the strongest surge following the election, as investors bet on domestic growth stemming from the then-president-elect’s “American first” proposals.

the importance of diversification
click to enlarge

Now, however, some are wondering if Trump, embroiled in numerous scandals, will finish out his term. A few SALT presenters even uttered the “i” word. Jim Chanos, founder and investment manager of Kynikos Associates in New York, told the packed auditorium that he believes the market hopes Vice President Mike Pence will become president. Investors are seeking deregulation and tax cuts, plain and simple, Chanos said, and the “more stable” Pence is seen as having a better shot at delivering. This squares with reports from British gambling and betting company Ladbrokes, which announced last week that Trump is now odds-on, or highly likely, to face impeachment by the end of his first term, with bookies having to cut the price from 11/10 to 4/5.   

Banks, which stand to benefit from Trump’s plan to loosen financial regulations, were Wednesday’s biggest losers. JPMorgan was down 3.81 percent, or $3.34 a share. Goldman Sachs fell 5.27 percent, or $11.88 a share.

Apple finished the day down 3.36 percent, wiping away some $20 billion in market value. The smartphone giant, which recently became the first company ever to be worth more than $800 billion, could also benefit from Treasury Secretary Steven Mnuchin’s efforts to make it easier for multinationals to repatriate cash that’s held overseas. And if that describes any company today, it would be Apple: The iPhone-maker holds nearly $250 billion in cash and securities in offshore accounts.  

 

Dollar Weakness Gives a Boost to Gold

More so than equities, the U.S. dollar is highly sensitive to geopolitical drama. Last week, the greenback tumbled to its lowest level since the November election compared to other major currencies.

U.S. Dollar Gives up its post-election gains
click to enlarge

This helped gold, miners and commodities end the week in positive territory. Gold gained 2 percent, gold miners 0.57 percent and commodities 1.36 percent. The S&P 500, meanwhile, finished the week down 0.8 percent.

For diversification benefits, I always recommend around a 10 percent weighting in gold and gold stocks, and last week proved yet again that this strategy could help mitigate the losses in risk assets.

Unsure what else drives the price of gold? Find out!

 

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Holdings may change daily.

The MSCI Emerging Markets Europe Index captures large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. With 83 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000, a widely recognized small-cap index. 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 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.

Dividend yield is a financial ratio that indicates how much a company pays out in dividends each year relative to its share price. There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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

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

Share “Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe”

An Unexpected Change in Gold’s Seasonal Trading Pattern
May 15, 2017

an unexpected change in gold's seasonal trade pattern

Here at the outset, I want to share with you an interesting observation we made last week of gold’s seasonal trading pattern. As you can see in the chart below, based on data provided by Moore Research Center, the five-year pattern, represented by the orange line, is diverging from the longer-term trends. Note that the index on the left measures the greatest tendency for the asset to make a seasonal high (100) or low (0) at a given time.

Gold Historical Patterns
click to enlarge

The data show that lows are now reached late in the year, not in January (according to the 15-year period, represented by the dark blue line) or August (according to the 30-year pattern, represented by the light blue line). Historically, September has seen the highest returns on gold as Indians make huge purchases in preparation for Diwali and the fourth-quarter wedding season, but lately we’ve seen changes. When we calculate the average monthly returns of the past five years, from January 2012 to December 2016, we find that January is the strongest month, returning 5.3 percent, followed by August with 2.3 percent. September actually returns negative 1.3 percent.

There could be a number of reasons why this is, but it’s important to recognize that the five-year period captures the bear market that dragged gold from its high of $1,900 an ounce in August 2011 to a recent low of $1,050 in December 2015. The years 2013, 2014 and 2015 all saw negative returns, so it’s little wonder why the orange line trends down from February-March to December. 

Inflation Props Up Gold

Consumer and producer prices rose in April compared to the same time last year, favoring gold prices going forward. Consumer goods climbed 2.2 percent, down slightly from March’s 2.4 percent. Wholesale goods, meanwhile, flew up 5.3 percent, higher than economists’ expectations and the strongest year-over-year increase in nearly six years. 

U.S. Inflation's Gonna Get You
click to enlarge

On numerous occasions I’ve shown that higher inflation supports demand for gold, which has often been seen as a safe haven investment. The money you have sitting in the bank right now is guaranteed to lose value over time. The five-year Treasury bond is currently yielding a negative return. Diversiying a part of your portfolio into gold and gold stocks could help mitigate the effects of inflation on your household wealth. I’ve always recommended a 10 percent weighting with annual rebalances.   

Chindia Demand Was Strong in the First Quarter

Chindia Demand was strong in the first quarter

In India, no one questions this. Aside from property, gold is seen as the most reliable store of value, which is why it’s routinely given as a gift during weddings, graduations, births and other important life events.

Indians’ demand for gold jewelry jumped 16 percent year-over-year in the first quarter, according to the World Gold Council (WGC), as the country slowly recovers from the economic shock of Prime Minister Narendra Modi’s demonetization scheme in November.

Demand in China for gold bars and coins had an unusually strong start to the year, fueled by concerns over a weakening renminbi and uncertainty over the country’s real estate market. The first quarter has historically been a good time for Chinese demand, as that’s when the Lunar New Year falls. This year, though, demand was up an amazing 30 percent, with 105.9 metric tons (tonnes) purchased during the three-month period. According to the WGC, this was the fourth-strongest quarter on record.

Looking ahead, gold prices could be supported by steadily declining mine production. Over the next five to 10 years, output from currently-operational mines is expected to drop off steeply as a consequence of deep spending cuts for project development as well as a lack of significant new deposit discoveries.

Mine Production Likely to drop beyond 2018 as the project pipeline is squeezed
click to enlarge

Between 2012 and 2016, capital expenditure for companies in the NYSE Arca Gold BUGS Index contracted 65 percent, the WGC reports. This will inevitably squeeze the supply chain and help prices firm up.

Stock Investors Have No Fear

In the near term, gold faces a number of headwinds, including a strong U.S. dollar, rising nominal interest rates and a still-robust stock market. Despite recent geopolitical shockwaves such as President Donald Trump’s surprise firing of FBI director James Comey, investors still see stocks as a good place to be, with the CBOE Volatility Index, or VIX, trading at lows last seen in 1993.

investor fear at near-record lows: headwind for gold?
click to enlarge

Popularly known as the “fear gauge,” the VIX measures expected volatility in the S&P 500 Index over the next month. That it’s trading so low suggests that geopolitical uncertainty doesn’t always translate into investor uncertainty. Evidently Wall Street doesn’t share the same sense of impending doom as some voters and media figures appear to have right now concerning Comey’s termination and the ongoing investigation into possible collusion between the Trump campaign and the Russian government.

This matters because gold has historically benefited in times of crisis and uncertainty, whether real or perceived. But with the VIX signaling near-record-low fear in the marketplace, some investors might see this as weakening the case for gold.

Where We See the Gold Opportunities

In this environment, we seek high-quality producers that are profitable and show improvements in revenue and cash flow. This yields junior companies such as Klondex and Wesdome, both of which have demonstrated strong fundamentals, low SG&A (selling, general and administrative expenses),  cost-conscientious management and higher-grade ore.

The recent bubble in gold stocks unwound, which was harmful to some quality gold names that were affected by the issues involving the VanEck Vectors Junior Gold Miners ETF (GDXJ), which I wrote about last week. Since the GDXJ methodology update was announced, the ETF has recorded large redemptions, with assets plunging as much as 25 percent.

The GDXJ doesn’t have any smart beta attributes—instead, it relies on market cap. As portfolio manager Ralph Aldis put it, this means “we find a lot of high-quality companies being indiscriminately sold down.” We see this as an opportunity to nibble at some attractive small-cap growth names.

 

 

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

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. The Producer Price Index (PPI) measures prices received by producers at the first commercial sale.  The index measures goods at three stages of production:  finished, intermediate and crude.

The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.

Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.

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

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

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 3/31/2017: Klondex Mines Ltd., Wesdome Gold Mines Ltd., VanEck Vectors Junior Gold Miners ETF.

Share “An Unexpected Change in Gold’s Seasonal Trading Pattern”

Can Too Much Money Go Into One ETF?
May 5, 2017

When billions of dollars flow into an ETF, it’s safe to assume this is because of its popularity among investors. The VanEck Vectors Junior Gold Miners ETF (GDXJ), which invests heavily in junior gold miners around the world, can attest to this kind of popularity, with some $1.5 billion flowing into it this year alone. Total assets jumped 60 percent in 2017 to over $5 billion.

lumber logs a 12 year high

At some point, however, as is the case with the GDXJ, asset growth can outpace an ETF’s underlying index. As BMO Capital Markets reported in mid-April, there will be a massive rebalance trade around the GDXJ on June 17, with changes already taking place. The index methodology is now permitting larger companies to be added, with significant demand for around 18 potential new additions, in conjunction with down-weighting of existing names.

The new index methodology allows the ETF’s largest company by market cap to be $2.9 billion, versus $1.8 billion under the current method, reports Investor's Business Daily. This puts it over the traditional $2.5 billion limit for small caps.

Impacts of the “Pre-Balance”

So what will the “pre-balance” and official rebalance in June mean for investors? For starters, it may mean less exposure to small-cap names. As I told Kitco News, this is a disruptor for small-cap gold stocks, which are getting knocked down for no reason when they have great fundamentals.

In addition, the ETF will need to sell $3 billion worth of its existing holdings to buy the new large-cap additions, which will create a massive funding trade significantly impacting existing names, BMO continues.

The number of companies the GDXJ can invest in starting in June will go from 48 to 69.

Sifting and Sorting For Opportunity

Since the GDXJ methodology update was announced, Macquarie Research reported last week that both the GDXJ and the VanEck Vectors Gold Miners ETF (GDX) have recorded large redemptions. Since April 13, the GDXJ has gone from $5.5 billion to $4.1 billion, losing approximately 25 percent of its assets. Similarly, the GDX went from $12.4 billion to $10.1 billion since the news – a drop of 19 percent.

lumber logs a 12 year high
click to enlarge

“Indiscriminate selling pressure has been placed on the sector due to redefining the index methodology not based on the fundamentals of companies,” explains portfolio manager Ralph Aldis. The investment universes of both the GDX and the GDXJ are defined by market cap and liquidity and designed like many ETFs are, to deliver beta but not alpha.

“There are no smart beta attributes to these ETFs, meaning we find a lot of high quality names are being indiscriminately sold down,” Aldis continues. “This may provide an excellent entry point for astute investors to pick up small-cap, high-quality growth names.”

 

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 above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the interview were held by one or more accounts managed by U.S. Global Investors as of 03/31/2017: VanEck Market Vectors Junior Gold Miners ETF (GDXJ), VanEck Vectors Gold Miners ETF (GDX).

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Share “Can Too Much Money Go Into One ETF?”

Get Ready for Inflation! Lumber Logs a 12-Year High
April 17, 2017

There a lot construction Zurich now

As if you need more proof that inflation is finally starting to pick up, lumber prices rose to a 12-year high last week, supported mainly by expectations that steep duties will soon be levied on cheap softwood imports from Canada. Lumber futures rose to nearly $415 per thousand board feet last Monday, a level unseen since March 2005, soon after homeownership peaked here in the U.S.

lumber logs a 12 year high
click to enlarge

At issue is a mini-trade war between U.S. and Canadian loggers. For some time now, the American lumber industry has blamed its Canadian counterpart of unfairly dumping lumber in the U.S. that’s far below market value. Now, several factors are pushing timber prices higher. Chief among them are the likelihood of duties being raised at the Canadian border, possibly as early as next month; President Donald Trump’s calls to renegotiate NAFTA; and growing demand for new homes following the housing crisis as consumer optimism improves and millennial buyers finally seem eager to enter the market.

Shares of Canfor Corporation and Western Forest Products, Canada’s number two and number five lumber producers by annual output, have had a good three months, advancing 25.5 percent and 16.8 percent respectively as of April 12. Timberland-owner Weyerhaeuser has also impressed lately.

canadian loggers surge on higher lumber prices
click to enlarge

Gold Glimmers Brightly

As I told Daniela Cambone during last week’s edition of Gold Game Film, this is all very constructive for the price of gold, which has historically been used as a hedge during periods of rising inflation. The yellow metal closed above $1,270 an ounce last week for the first time since soon after the November presidential election. A “golden cross” has not yet occurred, with the 50-day moving average still below the 200-day, but such a move appears likely in the next few trading sessions if upward momentum can be sustained.

gold surges to a five month high on inflation and geopolitical risk
click to enlarge

Fueled also by geopolitical tensions associated with Syria, Russia and North Korea, gold demand is on the rise, with last Tuesday’s trading volumes on gold calls surging 10 times Monday’s amount on the New York Mercantile Exchange. As I already shared with you, investor sentiment of gold during the recent European Gold Forum was particularly strong. A poll taken during the conference showed that 85 percent of attendees were bullish on the metal, with a forecast of $1,495 by year’s end.

With the U.S. ramping up military action overseas, including its dropping of a devastating bomb in Afghanistan on Thursday, many investors are lightening their risk assets in favor of “safe haven” instruments such as gold and Treasuries. The S&P 500 Index dropped below its 50-day moving average last week, signaling a slowdown in blue chip stocks.

Stock Market Tumbles 50 Day Moving Average
click to enlarge

Financials were among the biggest laggards as investors have begun to question President Trump’s ability to deregulate the banking sector. After several disappointments and setbacks, including a failure to repeal and replace Obamacare, renewed military involvement in Syria and Afghanistan might provide a welcome boost to Trump’s sluggish job approval rating.

Gold also responded positively to recent comments by Trump on U.S. dollar strength and monetary policy. Specifically, he said the dollar is “getting too strong” and later supported a low interest rate policy, suggesting he might keep Janet Yellen as the Federal Reserve chair.

 

Millennial Homebuyers Finally Entering the Housing Market

April is New Homes Month, and to celebrate, the National Association of Home Builders (NAHB) shared some of the significant contributions housing provides to the U.S. economy. According to the Washington, D.C.-based group, “building 100 single-family homes in a typical metro area creates 297 full-time jobs and generates $28 million in wage and business income and $11.1 million in federal, state and local tax revenue.” The sector currently accounts for 15.6 percent of U.S. gross national product (GNP).

Indeed, housing has a phenomenal multiplier effect on the economy, as I’ve pointed out before, and I’m pleased to see its recovery after nearly a decade.

Not only is consumer confidence up, but homebuilder confidence, as measured by the NAHB, hit a 12-year high in March, supported by an improving economy and President Trump’s pledge to roll back strict regulations. In February, new housing starts hit 1.29 million units, beating market expectations of 1.26 million units.

Rising mortgage rates and home prices are also likely encouraging buyers to enter the market. With the 30-year rate having recently fallen to a fresh 2017 low, we might see an even stronger surge in mortgage applications.

us home prices and mortgages headed higher
click to enlarge

Declines in homeownership among lower-income, nonwhite and young adults were especially dramatic following the housing crisis, as subprime lending, which many homeowners had previously relied on, all but dried up. Homeownership rates in the U.S. steadily fell to a 50-year low, which only lengthened the recovery time of the Great Recession. According to Rosen Consulting, a real estate consulting group, the U.S. economy would have been $300 billion larger in 2016 had the housing market fully returned to its long-term level of construction and homebuying.

did us homeownership just bottom
click to enlarge

Millennials, or those generally born between 1981 and 1998, have been the biggest holdouts, but we’re finally starting to see that change. The cohort—the largest group of homebuyers in the U.S. right now—represented around 45 percent of all new home loans in January of this year. It’s likely we’ll see this figure rise as more millennials become better established in their careers and tire of renting.

 

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every invest.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 3/31/17: Canfor Corp., Western Forest Products.

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

The S&P/Case–Shiller U.S. National Home Price Index is a composite of single-family home price indices for the nine U.S. Census divisions. It is calculated monthly, using a three-month moving average.

Share “Get Ready for Inflation! Lumber Logs a 12-Year High”

Gold Finds Strong Support from Negative Real Rates
April 5, 2017

7 Reasons to Be Bullish on Emerging Europe

In case you haven’t already noticed, inflation has been steadily creeping up since July. In February, the most recent month of available data, consumer prices advanced at their fastest pace in five years, hitting 2.7 percent year-over-year. March data won’t be released until next week, but I expect prices to proceed on this upward trend, buttressed by rising mortgages and costs associated with health care and energy.

One of the consequences of strong inflation is that real rates—what you get when you subtract the current consumer price index (CPI) from the nominal rate—have turned negative. And when this happens, gold has typically been a beneficiary. This is the Fear Trade in action.

Take a look below. Gold shares an inverse relationship with the real 10-year Treasury yield, which is influenced by consumer prices. When inflation is soft and the yield goes up, gold contracts. But when inflation is strong, as it is now, it can push the Treasury yield into subzero territory, prompting many investors to move into other so-called safe haven assets, including gold.

Gold Expected to Continue Benefiting from Low to Negative REal Rates
click to enlarge

Again, I expect consumer prices to continue rising, especially if President Donald Trump gets his way regarding immigration and trade. Slowing the stream of cheap labor from Mexico and other Latin American countries, coupled with raising new tariffs at the border, should have the effect of making consumer goods and services more expensive. Although it might sting your pocketbook, faster inflation could be constructive for gold investors.

$1,475 an Ounce Gold this Year?

In its weekly precious metals report, London-based consultancy firm Metals Focus emphasized the importance of negative real rates on the price of gold, writing that “real and even nominal rates across several other key currencies, including the euro, should also remain negative for some time.” The European Central Bank’s deposit rate currently stands at negative 0.4 percent, not including inflation, and Sweden’s Riksbank, the world’s oldest central bank, will continue its negative interest rate policy as it awaits stronger economic growth. Meanwhile, the Bank of Japan left its short-term interest rate unchanged at negative 0.1 percent at its meeting last month.

This is all beneficial for gold. Discouraged by the idea of negative rates eating into their wealth, many savers might be compelled to invest in gold, which enjoys a reputation as an excellent store of capital.

Based on the near-term outlook for real rates, as well as uncertainty over Brexit, rising populism in Europe and Trump’s trade and foreign policies, Metals Focus analysts see gold testing $1,475 an ounce this year. If so, that would put the yellow metal at a four-year high.

Central Banks Still Have an Appetite for Gold

Since 2010, global central banks have been net buyers of gold as they move to diversify their reserves away from the U.S. dollar. Although 2016 purchases fell about 35 percent compared to 2015, they still remained high on a historical basis, thanks mostly to China and Russia.

These purchases are likely to continue this year, according to Metals Focus, though at a slower rate as many banks get closer to meeting their target reserves amount.

Central Banks Have Been Net Buyers of Gold Since 2010
click to enlarge

Because gold accounts for only 2.3 percent of China’s reserves, as of March, the Asian country might very well keep up with its monthly purchases for some time. (The U.S., by comparison, has nearly 75 percent of its reserves in gold.)  

I’ve pointed out before that it’s reasonable for investors to pay attention to what central banks are doing. They’re diversifying their assets and, in a way, hedging against their very own policies. It would be prudent for every household to do the same. As such, I recommend a 10 percent weighting in gold, with 5 percent in bullion (coins and jewelry), the other 5 percent in quality gold stocks.

Lipper Recognizes Our Gold Fund

I believe an exceptional way to get exposure to high-quality gold stocks is through our Gold and Precious Metals Fund (USERX), which invests in precious metals mining “seniors,” or those that generally have the largest market cap in the mining sector. The first no-load gold fund in the U.S., USERX seeks not just capital appreciation but also protection against monetary instability and the very inflation I discussed earlier.

I’m very pleased to tell you that the fund was recently recognized by Thomson Reuters Lipper. In a New York City ceremony in March, the mutual fund data provider awarded USERX with two Fund Awards for 2017 in the Precious Metals Equity Funds category for the three- and five-year periods.

In January, the Gold and Precious Metals Fund was also awarded a 5-Star Overall Rating by respected investment ranking and analysis firm Morningstar, as of December 31, 2016. The fund was rated among 71 Equity Precious Metals funds, based on risk adjusted returns.

USERX is co-managed by myself and precious metals expert Ralph Aldis. The two of us were honored with the Mining Journal’s Best Americas Based Fund Manager award for 2016.

I invite you to visit the fund page for the Gold and Precious Metals Fund (USERX) to explore its holdings and performance! 

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Past performance does not guarantee future results. A high ranking does not necessarily mean that a fund had a positive return over the ranking period. See current performance for the Gold and Precious Metals Fund here.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Morningstar ratings for the Gold and Precious Metals Fund (USERX), in the Equity Precious Metals fund category: USERX was rated 5 Stars Overall out of 71 funds, 5 Stars out of 71 funds for the three-year period, 5 Stars out of 64 funds for the five-year period, and 4 Stars out of 46 funds for the 10-year period, as of December 31, 2016.

The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Lipper named the Gold and Precious Metals Fund the Best Precious Metals Equity Fund, out of 62 funds, for the three-year period ending 11/30/2016. The fund was also recognized as Best Precious Metals Equity Fund, out of 58 funds, for the five-year period ending 11/30/2016.   The award was earned for the fund’s consistent performance over the three-year and five-year periods ending 11/30/16.The award selection process began with Lipper calculating a Consistent Return score for each fund for the three-year and five-year time periods as of 11/30/16. Consistent Return is a quantitative metric that incorporates two characteristics: risk-adjusted return, and the strength of the fund's performance trend. The top-scoring Consistent Return fund within each classification received the awards. 

Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user's own risk. This is not an offer to buy or sell securities.

The Mining Journal’s Best Americas Based Fund Manager award is among the publication’s annual Outstanding Achievement Awards and was decided based on metrics provided by Morningstar. The Mining Journal, based in London, is a leading publication for the global mining industry.

The consumer price index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

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

Share “Gold Finds Strong Support from Negative Real Rates”

Net Asset Value
as of 05/22/2017

Global Resources Fund PSPFX $5.40 0.02 Gold and Precious Metals Fund USERX $7.15 0.05 World Precious Minerals Fund UNWPX $6.29 0.02 China Region Fund USCOX $8.85 0.10 Emerging Europe Fund EUROX $6.41 0.03 All American Equity Fund GBTFX $24.19 0.17 Holmes Macro Trends Fund MEGAX $19.12 0.05 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change