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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.

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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This Could Be a No-Brainer Gold Buying Opportunity
October 2, 2017

GoGo Gold

Last week I was pleased to be the keynote speaker at the Denver Gold Show in beautiful Colorado Springs, Colorado. Attendance was strong, sentiment was up and my presentation on quant gold investing was very well received.

Frank Holmes keynote Speaker at The Denver Gold Show

As I’ve explained before, our firm uses quantamentals in our gold investing process, combining old-fashioned, bottom-up stock picking with big data and machine learning. This allows us to screen for the best possible producers with the most attractive balance sheets. We prefer miners that have a proven track record of sustainable profitability even when precious metal prices are down.

It’s these quantamentals that went into the creation of our newest quant ETF, our first to launch in Canada.

On Friday, I was thrilled to be back in my hometown of Toronto, where Galileo team members and I had the privilege of opening the Toronto Stock Exchange. The TSX, as you may know, has a long history of being the world’s premiere marketplace for mining stocks, and in 2016, 57 percent of the world’s financing for mining companies was done on the TSX. It’s only fitting, then, that our new ETF is traded there.

I urge you to listen to the ETF Trends webcast in which Tom Lydon and I discuss the gold market today and the factors we use in picking the strongest gold stocks.

Prepare for Gold to Get Sloppy, but Backdrop Remains Strong into Year-End

Early last week, North Korea said it was interpreting some of President Donald Trump’s comments as a declaration of war, insisting it can freely shoot down American military planes even if they’re not flying in North Korean airspace. As everyone is pointing out, the country has made similar threats in the past, but with Trump as president, there could be an added level of unpredictability.

Ordinarily, we would expect geopolitical risk of this scale to boost the price of gold on increased safe haven demand. Instead, the yellow metal struggled last week to extend the gains it’s made in 2017 so far.

Markets are closed but shopping is in during Chinas Golden Week

The main contributor to the pullback is likely the fact that markets in China will be closed this week in observance of Golden Week. Think of Golden Week as China’s Fourth of July—if the Fourth of July lasted for several days. This year marks the 68th anniversary of the founding of the People’s Republic of China.

Given that the country is the world’s largest gold market, the metal has in the past depreciated leading up to the week-long celebration. If you remember from last year, gold was knocked down significantly after someone dumped as much as $2.25 billion of the metal in the futures market, and on October 2, gold suffered its biggest one-day loss in three years. Last week it fell 1.33 percent.

Gold price has traded down prior to chinas Golden Week in October
click to enlarge

As you can see above, gold immediately rallied following the correction in 2014 and 2015, but it continued to drop in 2013 and 2016.

There’s no telling what it might do this year, of course, but I believe this could be a good buying opportunity, as the fourth-quarter Indian wedding season has historically brought with it higher gold prices on stronger demand. The backdrop looks favorable for all metals, in fact, as we head into the final quarter of the year, with improving global economic and manufacturing activity suggesting demand could surge.

Granted, other factors besides Golden Week are putting pressure on gold right now. The U.S. dollar just had one of its best months of the year, and the real five-year Treasury yield turned positive. Keep your eyes on yields, though, because as soon as they turn negative again, gold could take off.

Then there’s the record-setting stock market, which might discourage some investors from seeking a safe haven. But I think it’s worth pointing out that gold has remarkably held its own during this bull run, closely keeping track with the S&P 500 Index in 2017. As of last Friday, the S&P 500 was up 11.6 percent year-to-date, gold 11.5 percent.

U.S. Ready to Reform Tax Code for First Time in More than 30 Years

Small-cap stocks, as measured by the Russell 2000 Index, were among the biggest winners immediately following the November election, the idea being that Trump’s “America first” policies would benefit smaller, domestic companies with less exposure to foreign markets the most.

This trade was put on hold somewhat as Trump’s pro-growth agenda repeatedly stalled in Congress. But renewed talks of tax reform last week excited investors, helping to push the Russell 2000 back into record-closing territory. For the 12-month period, the index of American small-cap stocks is beating the S&P 500 by nearly 3 percent.

Small cap stocks jump on tax return excitement
click to enlarge

The bottom line is that Congressional Republicans—and Trump—need this win after the multiple failed attempts to repeal and replace Obamacare. Tax reform should be much easier to achieve, as there seems to be greater consensus on what needs to be done.

Indeed, the tax code has not been fundamentally changed in more than 30 years. If Trump gets his way, the number of personal income tax brackets will fall from seven to three, with the top marginal rate lowered from 39.6 percent to 35 percent.

US tax code hasnt been overhauled in a generation
click to enlarge

The corporate tax rate, meanwhile, would be set at a more reasonable 20 percent, down from 35 percent—currently the highest rate in the world among developed economies. This should help U.S.-based firms become much more competitive, and ideally it would encourage multinationals to bring home the estimated $3.6 trillion in cash held overseas.

As I told Fox Business’ Liz Claman on her show recently, I’m very bullish right now, with global GDPs and the purchasing manager’s index (PMI) headed higher. U.S. tax reform should only encourage further growth, both here and abroad.

Stay Informed

Many exciting developments are coming down the pipeline! I’ll be traveling more, speaking to investors, executives and other business leaders. Make sure you’re subscribed to my award-winning CEO blog Frank Talk to stay in the loop!

 

 

 

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

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Gold and Bitcoin Surge on North Korea Fears
September 11, 2017

bicion

If you’re familiar with ABC’s popular reality show Shark Tank, you should already be familiar with the concept behind the San Antonio Angel Network (SAAN). Select entrepreneurs and innovators pitch their startup ideas to accredited investors, who can choose to make early-stage investments in a potentially successful company.

I attended an SAAN meeting last week at Ferrari of San Antonio, and what struck me the most was how fluid and seamless the whole thing is. Other professionals in attendance, including lawyers and CPAs, had a similar opinion, with some of them saying it was because there wasn’t any bureaucracy or red tape to hamstring the presenters.

This is unlike the world of mutual funds, which I believe has become excessively regulated.

As I’ve said numerous times before, regulation is essential, just as referees are essential to a basketball game. No one disputes that, because otherwise there would be chaos.

Similarly, the new and very unregulated world of cryptocurrencies has grown dramatically, beyond bitcoin and ethereum. Did you know there are over 800 cryptocurrencies? These new initial coin offerings, called ICOs, are like initial public offerings (IPOs) but with little regulation or accountability. As I’ve commented before, if the refs get too powerful or too numerous, and the rules too complex, the game becomes nearly unplayable.

Cryptocurrencies Still Draw Investor Attention Following China Crackdown

Bitcoin, ethereum and other cryptocurrencies have had a meteoric year, with more than $2 billion raised in ICOs so far in 2017, according to Bloomberg. Approximately $155 billion in cryptocurrencies are in circulation around the world right now. Bitcoin by itself is at $78 billion, which is close to the $90 billion invested in all gold ETFs.

Cryptocurrencies have made red hot moves this past year
click to enlarge

Like gold, cryptos are favored by those who have a deep distrust of fiat currency, or paper money. Money, after all, is built on trust, and the blockchain technology that bitcoin is built on top of automates trust through an electronic ledger that cannot be altered. Every transaction is anonymous and peer-to-peer. The system is entirely decentralized and democratic. No monetary authority can see who owns what and where money is flowing.

This, of course, is a huge reason why some world governments want to crack down on the Wild West of virtual currencies, especially with bitcoin surging close to $5,000 this month.

China did just that last week, putting a halt to new ICOs and crypto transactions. In response, ethereum tumbled as much as 15.8 percent last Monday, or $55 a unit. Bitcoin lost $394 a unit.

China’s decision comes a little more than a month after the SEC said cryptocurrencies are securities and therefore should probably be regulated as such. At this point, though, the implications are unclear.

What’s clear to me—after seeing firsthand how easily and quickly transactions are made—is that there’s no going back. It’s possible cryptocurrencies will one day be regulated. But I’m confident bitcoin, ethereum and some other virtual currencies offer enough value to weather such a potential roadblock.

I also believe there has to be a happy medium between the excessively regulated fund industry and the potential chaos of the cryptocurrency. This is what I witnessed at the SAAN event I mentioned, which allowed the professionals in attendance to gain information, ask questions and make informed decisions.

Gold Trading Above $1,350 an Ounce

Speaking on cryptocurrencies last week, Mark Mobius, executive chairman of Templeton Emerging Markets Group, said gold could be a beneficiary of China’s decision to clamp down on ICOs. As more governments and central banks turn their attention to virtual currencies, investors could move back into the yellow metal as a store of value.

That’s a possibility, but I think gold’s price action right now is being driven by negative real Treasury yields and fears over a potential conflict with North Korea. Adjusted for inflation, the two-year and five-year Treasuries are both currently yielding negative amounts, and the 10-year continues to fall closer to 0 percent.

Real treasury yeilds fall further
click to enlarge

As I’ve explained numerous times before, gold and real interest rates share an inverse relationship. It makes little sense to invest in an asset that’s guaranteed to cost you money—which is the case with the two-year and five-year government bond right now. Investors seeking a “safe haven” might therefore add to their weighting in gold, especially with North Korea’s Kim Jong-Un raising tensions.

The yellow metal closed above $1,350 an ounce, more than a one-year high.   

Gold price up more than 15 percent year to date
click to enlarge

Despite Efforts to Control Spending, National Debt Expected to Continue Growing: CBO

Similarly driving the gold Fear Trade are concerns over the national debt. Last week President Donald Trump sided with Congressional Democrats in raising the federal borrowing limit to allow Hurricane Harvey recovery aid to pass. An initial package of $7.85 billion for Harvey victims was agreed upon, but with total costs expected to be as high as $190 billion—more than the combined costs of Hurricanes Katrina and Sandy—and with Hurricane Irma yet to make landfall in Florida, the federal aid amount could eventually run even higher.

Trump partially ran on reigning in government spending, which I and many others would like to see. Even so, this might not be enough to control our runaway debt. According to an August report by the Congressional Budget Office (CBO), debt will likely continue to grow as spending for large federal benefit programs—Social Security, Medicare and the like—outpaces revenue. Interest payments on the debt will only continue to accelerate as well.

Below is a chart showing national debt as a percentage of GDP going back to the founding of the U.S. Although we’ve seen periodic spikes in response to national crises, the debt could soar to unprecedented levels within the next 10 years.

Federal debt expected to continue rising
click to enlarge

Financial writer Alex Green, the Oxford Club’s chief strategist, told me during my recent interview with him that he thought out-of-control spending posed a greater threat to our country than even North Korea.

I tend to agree with him, and that’s why I believe that investors should have a 10 percent allocation in gold, with 5 percent in bullion and 5 percent in gold stocks, mutual funds and ETFs.

I urge you to watch this brief video on investing opportunities in gold miners!

 

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.

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.

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The (Investing) World According to Geoffrey Caveney
September 7, 2017

The best call financial writer Geoffrey Caveney ever made was in December 2015. Gold hit a multiyear low of $1,050 an ounce, and he was convinced that the metal had found a bottom. It was time to make a trade, he thought, not just in bullion but precious metal miners, specifically the juniors and some micro-cap names.

Readers who took Geoffrey’s recommendation were no doubt grateful they did. Responding to low to negative interest rates around the world, gold rose as much as 16.5 percent in the first quarter of 2016, its best three-month performance since 1986. By the end of June, it had surged 28 percent, its best first half of the year since 1974. Producers, as measured by the Philadelphia Gold and Silver Index, likewise took off.

gold price per ounce and precious metal miners, september 2015 - July 2016
click to enlarge

Geoffrey’s track record is nothing to sneeze at. In July 2016 he advised readers to take profits on Alexco Resource, which was up an amazing 430 percent for the six-month period. A trade on Fortuna Silver Mines a month earlier netted him a 445 percent profit. He has a number of similar successes under his belt.

“I’m in the habit of thinking for myself,” he told me recently during a chat over the phone.

To make such a contrarian call on gold—or any other asset—you have to think for yourself. If you remember, gold in 2015 hadn’t logged a positive year in three years, and investor sentiment toward the precious metal was down. Every gold conference I spoke at, attendance was unusually light. When an asset gets this beat up, it’s often easy just to fall in with the herd.

But as Warren Buffett himself once said, “The time to get interested is when no one else is.”

Stay in Control of the Decision-Making Process

Thinking for himself has served Geoffrey well in a number of other ways—most notably when he got laid off during the financial crisis. Instead of wasting time looking for work that wasn’t available, he decided to try his luck at freelance tutoring. Combining his interests from when he attended Yale University in the 1990s, he began to teach young people chess, English, math and SAT prep.

His best advice to those about to take the SAT? Focus on the process rather than the goal, and keep your emotions in check. Take deep breaths, in through the nose and out through the mouth.

As Geoffrey himself pointed out, this is sound investing advice as well. Greed and fear can be powerful allies, but it’s important to learn to harness them and stay in control of the decision-making process. This isn’t New Age, hippie-dippie stuff. Ray Dalio, founder of Bridgewater, the world’s largest hedge fund, has often attributed his extraordinary success to meditating, which he says keeps him calm and centered.

“If you don’t reset yourself mentally on occasion, you run the risk of making the same mistakes over and over again,” Geoffrey said.

Life Changes, and So Should Your Strategy

Aside from tutoring, Geoffrey grew his interest in investing, where he put his background in math and chess to good use. In his youth he took chess lessons from the distinguished Uzbek grand master Gregory Serper, and he learned to apply this highly strategic mode of thinking to his trades. As his instincts improved, he started writing about investing and finance on sites such as Seeking Alpha, focusing on gold, precious metal miners, emerging markets, tech, cryptocurrencies and other themes. He watched his readership grow.

both chess and investing require strategic thinking

“Gold always gets lots of attention as well as bitcoin or any cryptocurrency,” he said. “I see tremendous value in China, but I find that those articles get much less attention.”

As someone who also writes about gold and China, I can attest to the accuracy of his observation.

As for gold, Geoffrey believes you “don’t have to be a gold bug to invest 5 or 10 percent,” which is in alignment with what I’ve been saying for years. Gold, I believe, is for all seasons and economic climates—5 percent in bullion, 5 percent in quality gold stocks, mutual funds and ETFs. Rebalance every year.

A New Market Newsletter

Right now Geoffrey is focused on the next trade and increasing his readership. In June he launched a newsletter, the Stock & Gold Market Report, which can be found on Seeking Alpha. In it he shares his latest buy and sell recommendations, and he also offers a handy service on how to build a well-balanced portfolio from the ground up.

After reading his valuable insights and speaking one-on-one with him, I feel confident recommending a subscription to the Stock & Gold Market Report. I wish Geoffrey all the best in this new endeavor and look forward to hearing from him again!

 

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 Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.

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.

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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Are You Prepared for These Potentially Disruptive Economic Storms?
August 28, 2017

Hurricane Harvey

Here in San Antonio, grocery stores were packed with families stocking up on water and canned food in preparation for Hurricane Harvey, which has devastated Houston and coastal Texas towns. I hope everyone who lives in its path took the necessary precautions to stay safe and dry—this storm was definitely one to tell your grandkids about one day.

Similarly, I hope investors took steps to prepare for some potentially disruptive economic storms, including this past weekend’s central bank symposium in Jackson Hole, Wyoming, and the possibility of a contentious battle in Congress next month over the budget and debt ceiling.

As you’re probably aware, central bankers from all over the globe visited Jackson Hole this past weekend to discuss monetary policy, specifically the Federal Reserve’s unwinding of its $4.5 trillion balance sheet and the European Central Bank’s (ECB) ongoing quantitative easing (QE) program. Janet Yellen gave what might be her last speech as head of the Federal Reserve.

As I told Daniela Cambone on last week’s Gold Game Film, there are some gold conspiracy theorists out there who believe the yellow metal gets knocked down every year before the annual summit so the government can look good. I wouldn’t exactly put money on that trade, but you can see there’s some evidence to support the claim. In most years going back to 2010, the metal did fall in the days leading up to the summit. Gold prices fell most sharply around this time in 2011 before rocketing back up to its all-time high of more than $1,900 an ounce.

Gold prices generally fell days before the annual economic symposium
click to enlarge

Many of the economic and political conditions that helped gold reach that level in 2011 are in effect today. That year, a similar Congressional skirmish over the debt ceiling led to Standard & Poor’s decision to lower the U.S. credit rating, from AAA to AA+, which in turn battered the dollar. The dollar’s recent weakness is similarly supporting gold prices.

In August 2011, the real, inflation-adjusted 10-year Treasury was yielding negative 0.59 percent on average, pushing investors out of government bonds and into gold. Because of low inflation, we might not be seeing negative 10-year yields right now, but the five-year is borderline while the two-year is definitely underwater. Bank of America Merrill Lynch sees gold surging to $1,400 an ounce by early next year on lower long-term U.S. interest rates. 

Are Government Inflation Numbers More “Fake News”?

If we use another inflation measure, though, yields of all durations look very negative. For years, ShadowStats has published alternate consumer price index (CPI) figures using the methodology that was used in 1980. According to economist John Williams, an expert in government economic reporting, “methodological shifts in government reporting have depressed reported inflation” over the years. The implication is that inflation might actually be running much higher than we realize, as you can see in the chart below.

Official US consumer inflation vs shadowstats alternate
click to enlarge

If you believe the alternate CPI numbers, it makes good sense to have exposure to gold.

Recently I shared with you that Ray Dalio—manager of Bridgewater, the world’s largest hedge fund with $150 billion in assets—was one among several big-name investors who have added to their gold weighting in recent days on heightened political risk. That includes Congress’ possible failure to raise the debt ceiling and, consequently, a government shutdown. Dalio recommends as much as a 10 percent weighting in the yellow metal, which is in line with my own recommendation of 10 percent, with 5 percent in physical gold and 5 percent in gold stocks, mutual funds and ETFs.

I urge you to watch this animated video about opportunities in quality gold mining stocks!

Falling Dollar Good for U.S. Trade

Returning to the dollar for a moment, respected CLSA equity strategist Christopher Wood writes in this week’s edition of GREED & fear that it’s “hard to believe that the political news flow in Washington has not been a factor in U.S. dollar weakness this year.”

The U.S. media certainly wants you to believe that Trump is bad for the dollar. Take a look at this chart, showing the dollar’s steady decline alongside President Donald Trump’s deteriorating favorability rating, according to a RealClearPolitics poll.

US dollar tracks trumps favorability down
click to enlarge

However, a weak dollar is good for America’s economy. I’ve commented before that Trump likes a falling dollar, because it is good for the country’s export trade of quality industrial products. It’s also good for commodities, which we see in a rising gold price and usually energy prices.

Ready for a Big Fight?

You might have watched the Mayweather vs. McGregor fight, but have you been watching the fight between Trump and the Fed?

At the symposium in Jackson Hole, Fed Chair Janet Yellen squared up directly against Trump when she defended the strict regulations that were put in place after the financial crisis. Echoing these comments was Dallas Fed chief Robert Kaplan. This is the opposite of what Trump has been calling for, which is the streamlining of regulations that threaten to strangle the formation of capital.

Hurricane Harvey

It’s important to recognize that the market is all about supply and demand. The number of public companies in the U.S. has been shrinking, with about half of the number of listed companies from 1996 to 2016. Readers have seen me comment on this previously, and I believe that the key reason for this shrinkage is the surge in federal regulations. The increasingly curious thing is that we are seeing the evolution of more indices than stocks, as the formation of capital must morph.

As I told CNBC Asia’s Martin Soong this week, there is a huge amount of money supply out there, and investors are looking for somewhere to invest. The smaller pool of stocks combined with the greater supply of money means that the market has seen all-time highs. In addition, major averages were regularly hitting all-time highs not necessarily on hopes that tax reform would get passed, but on strong corporate earnings, promising global economic growth and the weaker U.S. dollar.

Meanwhile, small-cap stocks are effectively flat for 2017 and heading for their worst year since 1998 relative to the market, according to Bloomberg. Hedge funds’ net short positions on the Russell 2000 Index have reached levels unseen since 2009. Remember, these are the firms that were expected to be among the biggest beneficiaries of Trump’s “America first” policies.

However, the weakness in U.S. manufacturing has a great impact on the growth of these stocks, as indicated by the falling purchasing managers’ index (PMI). The slowdown in manufacturing is offset by strength in services, shown by the Flash composite PMI score of 56.0 which came out this week. Though there is a spread between large-cap and small-cap stocks, historically this strong score is an indicator of growth to come.

Spread between large cap and small cap stocks continues to widen
click to enlarge

Some big-name investors and hedge fund managers are turning cautious on domestic equities in general. On Monday, Ray Dalio announced on LinkedIn that he was reducing his risk in U.S. markets because he’s “concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies).” Pershing Square’s Bill Ackman and Pimco’s Dan Ivascyn have also recently bought protection against market unrest, according to the Financial Times. Chris Wood is overweight Asia and emerging markets.

Stay Hopeful

It’s important to keep in mind that there will always be disruptions in the market, and adjustments to your portfolio will sometimes need to be made. For those of you who read my interview with the Oxford Club’s Alex Green, you might recall his “Gone Fishin’” portfolio, which I think is an excellent model to use—and it’s beaten the market for 16 years straight. Green’s portfolio calls for not just domestic equities, Treasuries and bonds but also 30 percent in foreign stocks and as much as 10 percent in real estate and gold.

Stay safe out there! In the meantime, explore investment opportunities in emerging markets!

 

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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 Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their 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.

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 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.

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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