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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.

Commodities Halftime Report: Separating the Wheat from the Chaff
July 10, 2017

amber waves of grain wheat is the best performing commodity of 2017

Of the 14 commodities we track closely at U.S. Global Investors, wheat rose to take the top spot for the first half of 2017, returning more than 25 percent. The grain was followed closely by palladium—used primarily in the production of catalytic converters—which gained 24 percent.

seperating the wheat from the chaff
click to enlarge

To view our ever-popular, interactive Periodic Table of Commodity Returns, click here.

Between the start of the year and June 30, the Bloomberg Commodity Index contracted 4.03 percent, with energy weighing down on the mostly strong performances of precious and industrial metals and agriculturals.

Contributing to metals’ gains was U.S. dollar weakness. During the first six months, the greenback lost 7.54 percent, responding partially to President Donald Trump’s comment in April that the dollar was “getting too strong.”

More recently, the president tweeted his thoughts on gas prices, which he pointed out were “the lowest in the U.S. in over ten years” for the July Fourth holiday. “I would like to see them go even lower,” he added.

Trump Goes to Warsaw

Speaking of Trump, I feel as if he has represented the U.S. and its values admirably during his visit to Europe last week. His speech in Warsaw sought to strengthen ties between America and Poland, which the New York Times just named the “next economic powerhouse.”

ahead of the g20 meeting this week, Presidend Trump and First Lady Melania arrived in Poland, greeted by Polish President Adrezej Duda and wife Agata.

Trump drew attention to a danger that’s “invisible” yet every bit as dangerous as terrorism and extremism—namely, “the steady creep of government bureaucracy that drains the vitality and wealth of the people.”

The U.S. and Poland “became great not because of paperwork and regulations,” the president said, “but because people were allowed to chase their dreams and pursue their destinies.”

This is the Trump I believe voters elected last November. If he were only able to stay on message and give his Twitter account a rest, he might more easily help engender and inspire an environment that better reflects the vision he described to his Polish audience.

I’m also encouraged by his first one-on-one meeting with Russian President Vladimir Putin. From what I’ve read, it sounds as if the two leaders managed to make some progress on Syria, with both sides agreeing to cooperate in maintaining “safe zones.”

Oil Embroiled

Regarding lower gas prices, Trump just might get his wish. Having fallen 14.30 percent in the first six months, oil is currently underperforming its price action of the past four years.

2017 oil underperforming the past four years
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Much of the thanks for oil’s slump goes to U.S. shale producers, which were quick to reactivate dormant rigs following the Organization of Petroleum Exporting Countries’ (OPEC) December announcement that it would be cutting production. As a result, the market is awash in black gold. In May, the Energy Information Administration (EIA) estimated that domestic output should average 9.3 million barrels a day this year and nearly 10 million in 2018, a level unseen in the U.S. since 1970.

West Texas Intermediate (WTI) popped above $47 a barrel last week, however, on news that oil and gas inventories in the U.S. dropped sharply the previous week. What’s more, the number of active North American oil rigs fell by two in the week ended June 30, from 758 to 756 rigs, the first such contraction since January, according to the Baker Hughes Rig Count.

Although constructive, there’s still quite a bit of terrain to cover before oil reaches the low- to mid-$50s we saw at the start of the year.

Where’s the Wheat?

As I told you back in May, the U.S. reclaimed its longstanding title as the world’s number one wheat exporter this year, displacing Russia, whose weak currency gave the Eastern European country a competitive advantage.

We might soon slip to second place yet again, for two primary reasons: 1) low U.S. wheat plantings and 2) severe droughts and unexpectedly hot weather conditions in the Northern Plains.

According to a March report from the U.S. Department of Agriculture (USDA), American farmers just aren’t planting wheat like they used to. Not only are we seeing shrinkage in the acreage devoted to the amber grain—more and more farmers are switching to soybeans—but wheat seedings are down for a second straight year. The USDA, in fact, estimates them to be at their lowest level ever since records began nearly 100 years ago in 1919.

As to the second point, severe to extreme hot and dry weather conditions in the Northern Plains—specifically in areas of Montana and the Dakotas—are putting wheat (and corn) on the defensive. According to the U.S. Drought Monitor, parts of Montana just experienced their driest May and June in 99 years and the driest January through June since 1983. Last week alone, temperatures in the region surged into the 90s and 100s, about 15 to 20 degrees above the norm. These conditions are expected to persist for several more weeks.

drought in the northern plains has impacted spring wheat conditions
click to enlarge

Supply constraints have pushed the grain up 25 percent so far this year to a nearly two-year high. A bushel now costs a little over $5, but some analysts see it rising above $6 and $7.

Precious Metals Continue to Shine

Also benefiting from limited supply is silver, which climbed nearly 4.5 percent as of June 30. The Silver Institute reported in May that global silver mine production in 2016 declined for the first time in 14 years on lower-than-expected output from lead, zinc and gold projects. World supply decreased 0.6 percent year-over-year, or about 32.6 million ounces.

Meanwhile, silver’s use in solar photovoltaic (PV) cells hit a new record high last year, further boosting demand. As I shared with you in May, solar ranked as the number one source of new electric generating capacity in the U.S. in 2016, followed by natural gas and wind.

In the first half of 2017, palladium, the silvery-white metal used in the production of catalytic converters, has surged to a 16-year high on speculative demand.

palladium price closing in on 16 year high
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At first blush, this trade might seem counterintuitive. After all, gas-powered vehicles, which use catalytic converters to control emissions, are expected to be surpassed in sales by electric vehicles, which do not require palladium, as early as 2040. Volvo just announced that it would completely phase out gas-only vehicles by 2019. Meanwhile, Tesla’s first mass-market battery electric vehicle (BEV) finally hit production last week.

Driving palladium’s rally this year, though, are bets that European car buyers will soon be switching from diesel-burning to gas-burning cars because of emissions concerns.

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

Palladium—one of the rarest elements on earth and mined almost exclusively in Russia and South Africa—is the smallest precious metals market, making its prices particularly vulnerable to such speculative trading. It’s achieved near-price parity with its sister metal, platinum, for the first time in two decades.  

On the other end of the spectrum is gold, whose market is larger than many major global stock and bond markets. Those include U.K. gilts, German bunds, the FTSE 100 Index, the Hang Seng Index and others.

Up 7.75 percent in the first six months, gold was supported largely by strong demand in India as consumers made their purchases ahead of the government’s Goods and Services Tax (GST), in effect since July 1, which levies a 3 percent tax on gold.

The impact of the country’s demonetization in December is also still being felt, with Indians’ confidence in fiat currencies tested. I believe Prime Minister Narendra Modi’s scheme to combat black money and public corruption, while admirable, has only reinforced Indians’ faith in the yellow metal as a store of value.

With consumer prices in the U.S. possibly set to begin rising on President Trump’s more protectionist policies—once he can get them enacted—gold priced in dollars could also be headed higher.

The Road Ahead

There’s a lot we’ll be keeping our eyes on in the second half of the year. For one, look to India’s upcoming Diwali holiday and fourth-quarter wedding season, during which gold gift-giving is considered auspicious.

Earlier in the year, I was excited about Trump’s ambitious infrastructure agenda, which would have greatly boosted domestic demand for base metals and energy. But with the Senate still locked in negotiations over what to do about Obamacare, an infrastructure deal looks as if it’s months if not years away.

Finally, I think with Tesla firing up its Nevada-based Gigafactory, investors would be prudent to keep their eyes on aluminum, cobalt, nickel and especially copper, as electric vehicles use around three times as much of the red metal as conventional vehicles. Lithium, which I featured back in March, is also expected to be a beneficiary of the move to BEVs.

 

 

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 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 FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong.

The Baker Hughes North American rig count is released weekly at noon central time on the last day of the work week. 

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.

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The Top Six Things You Should Know About Royalty Companies Now
July 3, 2017

franco nevada royalty companies big truck

This past week was an exciting one for U.S. Global Investors. If you haven’t heard, my team and I had the distinct honor of ringing the closing bell at the New York Stock Exchange on Thursday to mark the launch of our latest ETF.

While in New York last week, I had the privilege of seeing many colleagues face-to-face. It’s always a pleasure for me to be able to talk gold with industry friends and experts. One stop during my trip that I thoroughly enjoyed was to chat with Pimm Fox and Lisa Abramowicz on Bloomberg Radio. Our discussion was dynamic as always and I shared with them my outlook for gold in the second half of the year, along with the opportunities I continue to see with royalty names.

discussing gold with lisa abramowicz and pimm fox at bloomberg radio

I still find it curious that many investors don’t realize what a significant role royalty and streaming companies play in the mining business.

Last year I wrote about some of my favorite royalty names, and how I came to know about this business model in the gold mining industry early in my career. If you haven’t read that blog post, I encourage you to go back and explore the groundbreaking work done by Seymour Schulich and Pierre Lassonde, the two founders of Franco-Nevada.

I think that now is a good time to take another look at royalty companies. Here are the top six things I believe investors should know about this specialized sector.

1. What Is a Royalty Company?

Royalty companies, sometimes called streaming companies, serve a special role in the mining industry. Developing a mine property to start producing gold or other precious metal is an expensive, often time-consuming process. Infrastructure needs to be built out, permits applied for, laborers hired and more.

A royalty company serves as a specialized financier that helps fund exploration and production projects for cash-strapped mining companies. In return, it receives royalties on whatever the project produces, or rights to a “stream,” an agreed-upon amount of gold, silver or other precious metal.

bhow does the royalty and streaming financial work
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2. Many Gold Royalty Companies Have Still Been Outperforming Gold

When looking over the last 12 months, many of the royalty companies have outperformed gold. While this is indeed remarkable, it is important to remember that royalty companies do have a robust business model. Their ability to generate revenue in times when the gold (or other precious metal) price is both rising and falling is what makes them attractive.

royalty companies outperformed gold
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3. Remember Real Interest Rates

There’s no question that the gold price is volatile, and in any given 12-month rolling period, historically it’s not unusual for the price of the yellow metal to fluctuate up or down by 20 percent. It’s important for investors to remember that gold historically shares a strong inverse relationship with real interest rates. You can see in the chart that as rates rise, the price of gold falls, and vice versa.

gold historically shares an inverse relationship with real rates
click to enlarge

This is another reason why I like the royalty model. Since royalty companies set fixed, lower-than-market prices for mining output, they can better manage the volatility that is inherent in the gold market. For example, Wheaton Precious Metals’ 19 agreements in 2016 entitled the company to buy silver at an average price of $4.42 an ounce and gold at $391 an ounce.

4. Speaking of Revenue

Last time I wrote about these companies, I shared with you that the three big royalty names boast impressive sales per employee. This is still true. Take a look at the 12-month revenue per employee of Franco-Nevada, Royal Gold and Wheaton Precious Metals. Wheaton has only around 30 employees, but has one of the highest rates in the world, generating $25.8 million per employee. By comparison, Newmont, which employs around 30,000 people, generated $310,000 per employee during the same period. Barrick also falls short by comparison.

royalty companies have greater revenue per employee model than procedures
click to enlarge

5. Friendly to Shareholders

Paying dividends is important to investors, as it reflects the health of a company in terms of its cash flow and profits. Even more favorable in the eyes of investors is a company that is growing its dividends. Between 2012 and 2017, royalty companies had a combined annual dividend growth rate of 17 percent. Compare that to 11 percent growth for the S&P 500 Index, and as low as negative 23 and negative 32 percent for global and North American precious metal miners.

royalty companies dividend rates have been growing
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In fact, 2017 marks Franco-Nevada’s 10th straight year of dividend increases since the company went public in 2007.

6. Less Reliance on Debt

Royalty companies are better allocators of capital than some of the biggest gold miners. Take a look at Newmont Mining, which has a 43 percent debt-to-equity ratio, and Barrick has a massive 91 percent. By comparison, many of the royalty companies have much lower debt, and Franco-Nevada has zero debt. This history of profitability and fiscal discipline is one of the main reasons I find royalty companies so attractive.

royalty companies have less debt
click to enlarge

 

 

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. 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 03/31/2017: Barrick Gold Corp, Franco-Nevada, Newmont Mining, Osisko Gold Royalties Ltd., Royal Gold, Inc., Sandstorm Gold Ltd., Wheaton Precious Metals Corp.

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 S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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.  The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.

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Small-Cap Mining Stocks, Big-Time Opportunity
June 19, 2017

wesdome eagle river complex

Last month I told you about the upcoming rebalance of the hugely popular VanEck Vectors Junior Gold Miners ETF (GDXJ), and how it would distress shares of junior, small-cap mining stocks. I said then that the rebalance could create some excellent opportunities for astute investors to accumulate high-quality, well-managed producers at discount prices.

That day has finally arrived, bringing with it a tsunami in the junior resource space, as I told Collin Kettell on Palisade Radio the week before. It’s a buyer’s market—if you know what you’re looking for. The last time the GDXJ underwent a rebalance of this magnitude was in December 2014, so I see this as a rare event savvy investors shouldn’t miss out on.

But first a reminder of what’s been happening with the GDXJ. Basically, it had become too massive for its underlying index—composed mostly of Canadian junior gold producers—with assets rising close to $5.5 billion earlier this year, up from $1 billion only last year.

Mo Money Mo Problems

Normally this wouldn’t be such a concern. But the GDXJ was getting precariously close to owning a 20 percent share of several names in its index, which would have triggered all sorts of regulatory and tax conundrums in Canada and the U.S.

So the fund made several adjustments to its methodology, including raising the market cap threshold of allowable companies to $2.9 billion, up sharply from $1.6 billion. This means it can now hold large producers that don’t appear in its index, the MVIS Global Junior Gold Miners Index. It also means that a number of smaller constituents were down-weighted or divested altogether, giving investors less exposure to junior miners than what the fund’s name implies.

Before any of this took effect, though, many investors, hedge funds and other market participants acted on the rebalance news by indiscriminately selling down their junior mining assets. This introduced fresh volatility to underlying stocks and depreciated prices.

The selloff, I might add, was done mostly without regard for the phenomenal fundamentals and growth profiles some of these companies reported.

These Miners Get High Grades

Take one of our favorite names, Wesdome Gold Mines. The Toronto-based producer has been operating in Canada for 30 straight years as of 2017 and currently carries no debt. Two of its mines, Eagle River and Mishi, are among Canada’s highest-grade gold mines. Last summer, the company made headlines when it discovered gold at its Kiena property in Quebec, sending its stock up an amazing 49 percent to $2.24 on August 25.

wesdome eagle river complex

When Wesdome was added to the GDXJ in March, it cast newfound attention on the $417 million company. Only a month later, the rebalance was announced, and since then, its stock has eased about 19 percent.

GDXJ rebalance has created a buying opportunity for distressed smallcap mining stocks
click to enlarge

I see this as a can’t-miss opportunity for retail and institutional investors to start nibbling on Wesdome and other junior miners that have been similarly knocked down only because of fund flows.

That includes Gran Colombia Gold, the largest gold and silver producer in Colombia, and Klondex Mines, whose Fire Creek Mine in Nevada was estimated to be the highest-grade underground gold mine in the world. (According to IntelligenceMine, Fire Creek averaged 44.1 grams per metric ton (g/t) in 2015, double the ore grade of the world’s number two project, Kirkland Lake Gold’s Macassa Mine, at 22.2 g/t.)

Gran Colombia announced last week that it produced 15,444 ounces of gold in May, representing a new monthly record for the company. This brings the total amount for the first five months of the year to 68,783 ounces, an impressive 21 percent increase over the same period last year. The Canadian-based producer has a very attractive convertible bond that pays monthly.

I’ve frequently praised Klondex for its frugality, strong revenue growth and exceptional management team. The last time I visited Vancouver, I had the opportunity to chat one-on-one with its president and CEO, Paul Andre Hurt, who has 30 years of experience in high-grade mining. Not only is Paul a highly-respected chief executive in the mining space, he’s also a devoted father of five.

A Golden Opportunity

The GDXJ rebalance represents a rare opportunity to accumulate high-quality junior producers at discount prices. I always recommend a 10 percent weighting in gold—5 percent in gold stocks or mutual funds, 5 percent in bars, coins and jewelry.

Commodity prices have lately underperformed equities mostly on subdued oil demand growth, with the S&P GSCI commodity index falling about 4 percent over the last month. If we separate the index components, however, we see that precious metals have posted positive gains year-to-date along with industrial metals.  

Precious metals have outperformed so far this year
click to enlarge

As I mentioned recently, gold imports in China and India, the world’s top two consumers of the yellow metal, have advanced strongly this year on safe haven demand. China boosted its gold purchases from Hong Kong as much as 50 percent this year to 1,000 metric tons, the most since 2013. India’s imports rose fourfold in May compared to the same month last year as traders fear a higher tax rate on jewelry.

With the GDXJ down-weighting junior producers, investors might wonder how they can get broad exposure to small-cap mining stocks.

 

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 GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.

The MVIS Global Junior Gold Miners Index tracks the performance of the most liquid junior companies in the global gold and silver mining industry.

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: VanEck Vectors Junior Gold Miners ETF, Wesdome Gold Mines Ltd., Gran Colombia Gold Corp., Kirkland Lake Gold Ltd., Klondex Mines Ltd.

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Hope for the Best but Prepare for the Worst (with Gold and Munis)
June 12, 2017

Hope for the best expect the worst

Last week investors shrugged off even more drama coming out of Washington. Stocks continued to rally and hit record highs, even as former FBI director James Comey testified that, in his opinion, President Donald Trump fired him in an attempt to lift the “cloud” of the Russia investigation.

If true, this suggests obstruction of justice, an impeachable offense. And if impeached, or in the event of a resignation, Trump’s political agenda would likely be derailed. The last (and only) time a U.S. president resigned, the Dow Jones Industrial Average lost up to 40 percent, as a recent article in TheStreet reminds us.

But markets paid no mind to Comey’s insinuations, underscoring investors’ confidence that tax reform and deregulation will proceed as planned. And sure enough, just hours after Comey testified, the House of Representatives voted to repeal key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has contributed to an alarming number of small bank closures since its passage in 2010.

So once again, the wisdom of crowds prevails. If you remember, markets were forecasting as far back ago as last summer that Trump would win the November election.

This doesn’t mean, however, that Trump’s problems are behind him.

Last week I was speaking with Mike Ward, a top publisher with Agora Financial, who compared Presidents Trump and Ronald Reagan. It was suggested that, despite Trump’s apparent affection for the 40th president, he has so far failed to live up to the Great Communicator’s memory of optimism and deep respect for the office.

Whereas Reagan wanted to “tear down this wall,” Trump wants to “put up that wall.” Whereas Reagan insisted it was “morning in America,” Trump insists it’s “American carnage.” Reagan succeeded in building coalitions and unifying our allies against the Soviet Union. Trump has already managed to destabilize many of those alliances.

During the 1988 vice-presidential debate, Texas Senator Lloyd Bentsen famously ribbed then-Senator of Indiana Dan Quale for comparing himself favorably to John F. Kennedy. “I served with Jack Kennedy. I knew Jack Kennedy,” Bentsen said. “Senator, you’re no Jack Kennedy.”

Similarly, many observers are of the opinion that Trump is no Reagan.

Don’t get me wrong. I remain hopeful. President Trump wants to make America great again, and it’s still well within his power to do so—if he can practice some self-restraint and not get caught up in petty feuds. Voters support his vision. They gave him not only the Executive Branch but also Congress and most states’ governorships and legislatures.

You could say I’m hoping for the best but preparing for the worst. I advise investors to do the same. No one can say what the future holds, and it’s prudent to have a portion of your portfolio in gold, gold stocks and short-term, tax-free municipal bonds, all of which have a history of performing well in volatile times.

Gold Poised for a Breakout

Following bitcoin’s breathtaking ascent to fresh highs, gold rose to a seven-month high last week on safe-haven demand, stopping just short of the psychologically important $1,300 level. Supported by Fear Trade factors such as geopolitical turmoil—both in the U.S. and abroad—and low to negative government bond yields, gold’s move here can be seen as a bullish sign.

As others have pointed out, the yellow metal breached the downward trend of the past six years, possibly pointing to further gains.

gold just breached key resistence
click to enlarge

Under pressure from a beleaguered White House and stalled policy reform, the U.S. dollar continued to sink last week, with gold outperforming the greenback for the first time since the November election. Because gold is priced in dollars, its value increases when the dollar contracts.

Gold outperforms the US dollar for the first time since election
click to enlarge

It’s also important for investors to remember that gold has often rallied when Treasuries yielded little or nothing. Why would investors knowingly lock in guaranteed losses for the next two or five years, or near-zero returns for the next 10 years? That’s precisely what Treasuries are offering, as you can see below:

Low to negative real treasury yeilds support gold
click to enlarge

Minus inflation, the two-year Treasury yielded negative 0.96 percent in April; the five-year, negative 0.38 percent; and the 10-year, a paltry 0.10 percent. (I’m using April data since May inflation data won’t be available until this Wednesday, but I expect results to look the same.)  

When this happens, investors tend to shift into other safe-haven assets, including municipal bonds and gold.

Year-to-date, the yellow metal is up more than 9.7 percent, even as the stock market extends its rally. This runs counter to what we’ve seen in the past. As I’ve explained before, gold usually has a low correlation to other assets, including stocks and bonds, which is why investors all around the globe favor it as a diversifier.

So what gives?

Top Money Managers Sound the Warning Bell

One of the most compelling answers to this question, I believe, is that stocks appear to be overvalued right now, in turn boosting gold’s safe-haven investment case. This is the assessment of Bill Gross, the legendary bond guru who currently manages $2 billion with Janus Henderson.

Speaking at the Bloomberg Invest New York summit last week, the 73-year-old Gross said markets are now at their highest risk levels since before the 2008 financial crisis. Loose monetary policy has artificially inflated stock prices despite weak economic growth, he said, adding: “Instead of buying low and selling high, you’re buying high and crossing your fingers.”

Doomsdayers bill gross paul singer marc faber trouble brewing capital markets

Marc Faber, the Swiss investor often referred to as Dr. Doom, echoed Gross’ thoughts, telling CNBC last week that “everything” is in a bubble right now, similar to the days of the dotcom bust of the late 1990s. And when this bubble bursts, Marc said, investors could lose as much as half of their assets.

That stocks appear overvalued could be a driver of gold’s performance right now, with savvy investors, anticipating a possible market correction, loading up on assets that have historically held their value in times of economic crisis.

A cadre of other top money managers and analysts share Bill Gross and Marc’s less-than-rosy market view.

At the same Bloomberg event, billionaire hedge fund manager Paul Singer—whose firm, Elliott Management, recently raised $5 billion in as little as 24 hours—warned attendees that the U.S. was at risk of another debt shock.

“What we have today is a global financial system that’s just about as leveraged—and in many cases more leveraged—than before 2008, and I don’t think the financial system is more sound,” Singer said.

Indeed, U.S. debt levels are higher now than they’ve ever been, according to the Federal Reserve Bank of New York. In the first quarter of 2017, total U.S. household indebtedness reached a mind-boggling $12.73 trillion. That’s $150 billion more than the end of 2016 and $50 billion above the previous peak set in 2008.

Low to negative real treasury yeilds support gold
click to enlarge

Even more concerning is the fact that the number of delinquencies grew for the second straight quarter as more income-strapped Americans binged on credit. We could be headed for a massive hangover.

Cumulatively, these warnings stress the importance of hoping for the best while planning for the worst. In the past, there have been few ways as effective at preserving wealth as gold, gold stocks and tax-free, short-term munis.  

Gold Vaults a Sign of Increased Demand

Demand for safety deposit boxes is surging as more savers and investors convert cash into gold

The world’s two largest consumers of gold by far, China and India, are currently importing enormous amounts of the yellow metal on safe-haven demand. Bloomberg reports that China could boost its gold purchases from Hong Kong as much as 50 percent this year over concerns of currency devaluation, a slowing real estate market and shaky stocks. Imports could advance to 1,000 metric tons, which would be the most since 2013.

Meanwhile, India—whose affection for gold goes back millennia—saw its imports of the yellow metal rise fourfold in May compared to the same month last year as traders fear a higher tax rate on jewelry. Imports climbed to 126 tons, versus 31.5 tons last May.

As impressive as this news is, there’s no sign more compelling that investors have an insatiable appetite for gold right now than the growing demand for safety-deposit boxes. According to Bloomberg, companies in Europe are scrambling to meet customers’ needs for a safe, inexpensive place to store their bullion in the face of negative interest rates and rising inflation. Two firms in particular have plans to build additional facilities capable of holding 100 million euros ($112 million) each in bars and coins.

Daniel Marburger, CEO of European coin dealer CoinInvest, told Bloomberg that he had just finished working with a German customer whose bank account was charged negative interest rates. To prevent this from happening again, the customer converted his cash into gold and silver, which he sees as a more reliable store of value.

Negative rates are “definitely a driving factor and will lead to more sales and also more storage clients,” Marburger said.

 

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

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In Gold We Trust
June 6, 2017

With the U.S. dollar taking another hit last Friday on a weaker-than-expected jobs report, gold closed up 1.12 percent for the day. A Bloomberg gauge of 72 junior miners, however, has lost 15 percent since the end of January, and the rebalance of the VanEck Vectors Junior Gold Miner ETF (GDXJ), which I previously wrote about, is also having a depressing effect on many gold names.

This was a major concern among investors at the International Metal Writers Conference in Vancouver, which I presented at last week. Despite gold gaining 9 percent so far this year, junior gold miners have not followed through with those gains as the GDXJ is set to cut in half its exposure to the junior mining space on June 16.

We’ve Only Just Begun

Other investors aren’t so pessimistic. Every year for the past 11 years, Liechtenstein-based investment firm Incrementum has issued its closely-read “In Gold We Trust” report. The 2017 edition, released last Thursday, raises a number of interesting observations that add some shine to gold’s investment case.

 

For one, its analysts firmly believe that gold’s price turnaround last year “marked the end of the cyclical bear market,” adding that “the rally in the precious metals sector has probably only just begun.” To illustrate this, the group tracked the performance of every gold stock bull market going back to 1942, using the Barrons Gold Mining Index. The bull market that began last year, highlighted in red below, does indeed look as if it has much more room to run.

Will Todays Gold Stocks Track Previous Markets
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Among the reasons why “prudent investors” should consider accumulating gold and gold stocks now, according to Incrementum, are excessive global debt, the “gradual reduction of the U.S. dollar’s importance as a global reserve currency” and what the group sees as a high probability that the U.S. is close to entering a recession.
Interestingly, the investment firm shows that nearly every U.S. recession, going back 100 years, was preceded by an increase in interest rates.

“The historical evidence is overwhelming,” Incrementum writes. “In the past 100 years, 16 out of 19 rate hike cycles were followed by recessions. Only three cases turned out to be exceptions to the rule”—one in the 1960s, one in the early 80s, the last in the mid-90s.

The U.S., of course, is currently at the start of a new cycle, though the ho-hum jobs report for May—138,000 jobs added, versus expectations for 185,000—casts doubt on a rate hike this month. Nevertheless, Incrementum’s research makes a compelling case that a recession could be imminent, making gold even more attractive as a store of value.

As for gold stocks, Incrementum favors “conservatively managed companies which are not merely pursuing an agenda of growth at any price, but are instead prioritizing shareholder interest.”

This is an apt description of the kinds of gold companies we prefer—frugal, small- to mid-cap names such as Klondex, Wesdome Gold Mines, Kirkland Lake and many others.

 

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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 03/31/2017: Klondex Mines Ltd., Kirkland Lake Gold Ltd., Wesdome Gold Mines Ltd., VanEck Vectors Junior Gold Miners ETF (GDXJ).

The Barrons Gold Mining Index is the longest-running gold index, going back seven decades.

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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