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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Gold 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
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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
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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.

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America’s New Emphasis on Fiscal Policy
March 20, 2017

Strong February Jobs Report Clears Path for Fed Rate HikeFor the third time in two years, the Federal Reserve lifted interest rates 0.25 percent last week following the previous week’s phenomenal jobs report. The move was seen as more dovish than many market analysts had anticipated. BCA Research went so far as to call it an “unhike,” citing a number of factors, including forecasts of only three rate hikes in 2017 instead of four.

Immediately following the announcement, the dollar lost ground, clearing the way for gold to climb more than $20 an ounce.

During her press coverage, Fed Chair Janet Yellen expressed doubt that the U.S. economy can grow much faster than 2 percent annually over the next couple of years, placing her squarely at odds with President Donald Trump, who campaigned on a pledge to boost GDP growth as much as 4 percent.

Gold Gains on a Dovish Fed
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Since Trump’s inauguration more than 55 days ago, we’ve seen a steady power shift from the monetary side to the fiscal side. I believe this will only continue to accelerate. As I said before, the eight-year stock market rally under President Barack Obama was, in many investors’ eyes, driven not by fundamentals but the Fed’s low-rate policy. Now, however, investor exuberance is being supported by proposed fiscal policy such as lower corporate taxes, deregulation and historically large budget cuts to help finance the rebuilding of the nation’s infrastructure and military.

2017 Market Outlook: The Hand Off

Not everyone is confident Trump can deliver on his infrastructure promise, however. Last week, I shared with you that the American Society of Civil Engineers (ASCE) just gave our nation’s infrastructure a dismal grade of D+, adding that we face a huge funding gap of nearly $3 trillion between now and 2025.

Last Thursday, after Trump unveiled his proposed budget for fiscal year 2018, ASCE president Norma Jean Mattei issued a discouraging note, writing that the president’s budget “would eliminate funding for many of the programs designed to improve our nation’s infrastructure.”  Although the $1 trillion could be raised at a later time, “that is not the way to effectively invest in, modernize and maintain our aging and underperforming infrastructure,” Mattei said.

Law of Unintended Consequences

Some investors see additional headwinds in White House policy. Near the end of January, the commercial airline industry was disrupted when Trump signed his initial executive travel ban from seven Muslim-majority countries. Between January 28 and February 4, bookings issued by those countries fell 80 percent compared to the same period in 2016, according to travel research firm ForwardKeys.

What might surprise some readers is that the ban’s effects went well beyond the Middle East, reaching most major world markets. Net international bookings to the U.S. cooled 6.5 percent during the period when the travel ban was in effect.

Year-over-Year Percent Change of Net International Bookings to the U.S. During Trump Travel Ban
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Among the other unintended consequences was news that customs agents were detaining a number of U.S. citizens who might not have had Western-sounding names. Sidd Bikkannavar, a U.S.-born engineer, was not only detained on his way back home to Los Angeles but also asked to turn over his work-issued phone and provide the access PIN to unlock it, potentially compromising sensitive material and contacts related to his work at the NASA Jet Propulsion Laboratory. Muhammad Ali Jr., son of the celebrated heavyweight boxer, was also stopped at least twice while flying in recent weeks.

Trump’s second travel ban, which was also struck down by a federal judge, was opposed by nearly 60 U.S. technology companies—including Airbnb, Pinterest, Lyft and Warby Parker—which filed a brief in support of Hawaii’s lawsuit to block the executive order. Tech companies “and thousands of other businesses throughout the American economy have prospered and grown through the hard work, innovation and genius of immigrants and refugees,” the brief read.  

I bring this up only to show once again that regulations, in whatever form, often emerge out of the best of intentions—in the travel ban’s case, public safety—but they sometimes carry negative consequences that act as friction in our economy. Government policy is a precursor to change, as I like to say, and it’s important for us as investors to recognize their cause, effect and possible ramifications.

Intel Enters the Self-Driving Vehicle Market

A couple of weeks ago I attended a Young Presidents’ Organization (YPO) meeting in Vancouver, where the theme was disruption. “Disrupt, or get disrupted,” John Chambers, executive chairman and CEO of tech firm Cisco, told us during his presentation.

One of the most promising upcoming disruptive technologies is autonomous, self-driving automobiles. This tech has the potential to change every industry, including mining, as I told Mining Journal chief editor Richard Roberts last week. So ubiquitous are self-driving cars expected to become, “it seems likely that eventually many people will no longer feel the need to own a car or even know how to drive,” according to management consulting firm Bain & Company. Bain sees the global value of this market, including software, hardware and services, reaching between $22 and $26 billion a year by 2025, with annual growth between 12 percent and 14 percent.

Estimated SystemsAutonomous Market Size
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Brian Krzanich, CEO of chip-maker Intel, sees it closer to $70 billion by 2030.

As you might have heard, Intel just finalized its deal to purchase Israel-based Mobileye, maker of sensors and cameras for driverless vehicles, for $15.3 billion. It’s the second-largest acquisition Intel has ever made, following last year’s purchase of Altera for $16.7 billion.

Mobileye stock immediately jumped more than $10 a share.

Mobileye Stock Surges on Intel Acquisition News
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Although Intel’s business deals haven’t always been profitable in the past, I believe this is a smart move. With sales of desktop computers stagnating, it’s essential for the company to expand its presence and become more competitive in the burgeoning field of internet of things, which will affect as many as 500 billion devices, including vehicles, in the next 10 to 15 years, according to Chambers.

Calling All Curious Investors

If you enjoyed reading this and found value in it, I invite you to subscribe to my award-winning CEO blog, Frank Talk, where I get deeper into topics such as behavioral finance, energy and the gold market.

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2016.

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The Bull Market Just Turned Eight. What Now?
March 13, 2017

Top headlines from March 2009

Eight years ago last week, President Barack Obama gave investors a surprisingly hot trading tip. In office less than two months, he commented that we were at “the point where buying stocks is a potentially good deal if you’ve got a long-term perspective.”

Obama couldn’t have known then how accurate his call was. The market found a bottom that very week, and investors who took the president’s advice managed to get in on the absolute ground floor.

At the time, investor sentiment was at or near record lows. The number of S&P 500 Index stocks trading below $10 a share had grown tenfold since the end of 2007. The New York Stock Exchange, in fact, had to temporarily suspend its requirement that equities trade at more than $1 a share. Giant companies such as Citigroup and General Motors—a share of which cost little more than a pocketful of spare change—were at risk of being delisted.

Today, many of those bullish investors have seen some spectacular gains. Since its low of 666 in March 2009, the S&P 500 has climbed a whopping 260 percent, with not a single year of losses. The average annual return has been over 15.7 percent, based on Bloomberg data. With dividends reinvested, it’s closer to 18 percent.

Just take a look at Apple, which has surged more than 1,080 percent as it introduced or expanded its line of got-to-have, now-ubiquitous products, from the iPhone to iPad.

Obama's Long-Term Perspective
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To show you just how far we’ve come, I put together a few comparisons of several indices and economic factors between March 2009 and now.

You’ve Come a Long Way, Baby: U.S. Economy Then and Now
  March 2009 Most Recent Data, March 2017 Percent Change
S&P 500 Index 666.79 (intraday low, March 6) 2,400.98 (intraday high, March 1) 260%
Dow Jones Industrial Average 6,440.08 (intraday low, March 9) 21,169.11 (intraday high, March 1) 228%
University of Michigan Consumer Sentiment Index 69.5 96.3 38%
U.S. ISM Manufacturing Purchasing Managers’ Index (PMI) 35.8 57.7 (February) 61%
Housing Starts 505,000 1,290,000 155%
Light Vehicle Sales 9,552,000 17,465,000 83%
Unemployment 8.7% 4.7% (February) -45%
Gold $885 (intraday low, March 18) $1,248.30 (intraday high, March 1) 41%
Sources: S&P Dow Jones Indices, Bureau of Economic Analysis, University of Michigan, Bureau of Labor Statistics, Census Bureau, ISM, IBA

Of course, there have been market skeptics. As others have pointed out, this particular bull run—the second-longest in U.S. history—has arguably been the least loved, with many investors calling it artificial and arguing that it’s been driven not by fundamentals but the Federal Reserve’s policy of record-low interest rates.

Who's to Thank for the Bull Market?
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Now there are those who wonder how much longer this bull run can last. And if it ends, will it be with a bang or a whimper?

“Trump Rally” Could Have Further Room to Grow

It’s important to keep in mind the old investing adage, “Bull markets don’t die of old age.” Bear markets have been incited by everything from geopolitical conflicts to stagflation to oil price shocks to financial crises. Although no one can say with all certainty that age is irrelevant in a market’s longevity, there are signs that the current eight-year-old run has further room to grow, at least in the short term.

President Donald Trump’s pro-growth policy proposals, including lower corporate taxes, deregulation and infrastructure spending, have jolted many people’s “animal spirits,” with several indices already hitting near-record highs. In January, the Index of Small Business Optimism posted a reading unseen since 2004, as I shared with you earlier. More recently, the Bloomberg Consumer Comfort Index, which measures American consumers’ views on the U.S. economy and their personal finances, climbed to 50.6, the first time it’s exceeded 50 in a decade. Note how few times it’s risen above that level in the past 17 years.

U.S. Bloomberg Consumer Comfort Index Exeeds 50 for the First Time Since 2007 in February
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And of course there’s the booming jobs market. Following the record 75 straight months of jobs creation under Obama, employers continue to ramp up their rate of hiring even more, indicating a rosy financial and economic outlook. Despite candidate Trump’s tendency to question the validity of encouraging jobs reports before the election, President Trump now has much to brag about in his first full month in office.

According to the Bureau of Labor Statistics (BLS), the U.S. added a phenomenal 235,000 jobs in February, with gains made in construction, manufacturing, mining, educational services and health care. The report indicated that mining added 8,000 positions during the month, 20,000 in total since a recent low in October, just before the election. This shows executives’ confidence in Trump, who pledged to revive the industry by eliminating job-killing regulations.

Another recent report was even more generous than the BLS. The ADP National Employment Report showed U.S. employment increasing by nearly 300,000 from January to February. Medium-size businesses—those with between 50 and 499 employees—expanded the most, adding 122,000 positions.

February's 'Blowout' Jobs Report
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Gold historically has fallen on better-than-expected jobs reports, but I was happy to see that it actually gained on Friday after eight days of losses. The yellow metal held above $1,200 an ounce, even as it becomes more and more certain that interest rates will be hiked this month.

 

Valuations High, but Good Deals Can Still Be Found

Some investors right now might be discouraged by high stock valuations. Although it’s true certain sectors are beginning to look expensive—information technology is currently trading at more than 23 times earnings, real estate at 43 times earnings and energy at a whopping 113 times earnings—there are still some attractive deals.

Airlines Look Inexpensive Relative to the Market

Among them is the airlines industry, which as of today has a very reasonable price-to-earnings ratio of 9.97. At 21.85, the S&P 500 is more than twice as expensive.

This is one of the many reasons why billionaire investor Warren Buffett is bullish on airlines, which he once called a “death trap” for investors. Not only did his holding company Berkshire Hathaway purchase shares of the four big domestic carriers—American, United, Delta and Southwest—but it dramatically expanded those holdings in the fourth quarter, according to regulatory filings. Now there’s even speculation that Buffett and Berkshire Hathaway could be planning to acquire one of these four carriers outright, with Morgan Stanley’s Rajeev Lalwani writing that Southwest’s “domestic focus, robust and sustainable free cash flow, range of growth opportunities, defensible cost structure and more tenured management team” make it a logical candidate.

 

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.

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 University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan.  The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spend money. The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states. The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The Bloomberg Consumer Comfort Index is a weekly, random-sample survey tracking Americans' views on the condition of the U.S. economy, their personal finances and the buying climate.

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 12/31/2016: American Airlines, United Continental Holdings, Delta Air Lines, Southwest Airlines.

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(VIDEO) What Drives the Price of Gold?
March 9, 2017

In my more than 35 years of investing in hard assets, precious metals and mining, I’ve learned to manage my expectations of gold’s short-term price action. Sure, there have been surprises along the way, but generally, the yellow metal has behaved relatively predictably to two macro drivers, the Fear Trade and Love Trade.

Last year, gold had its best first half of the year in decades, all in response to Fear Trade factors such as low to negative global government bonds and geopolitical risks, specifically Brexit and the upcoming U.S. election.

But the Love Trade failed to lift gold in the fourth quarter mainly because Indian Prime Minister Narendra Modi’s demonetization efforts to combat dark money and tax evasion left many low and middle-income Indians without the cash to purchase gold jewelry for weddings and investment purposes.

Investing, like life, is all about managing expectations. But if you don’t know what to look for, this can be difficult to do. That’s why we put together this video to help educate investors like you on what we believe are the top five drivers of gold. I hope you find it helpful in informing your investment decisions. If you find any value in it, I invite you to pass it along to your friends and colleagues.

Happy investing!    

 

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

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Disrupt... Or Get Disrupted
March 6, 2017

disrupt or get disrupted

Last week I was in Vancouver attending YPO EDGE, the annual summit for business executives from more than 130 countries. YPO, which stands for Young Presidents’ Organization, has roughly 24,000 members worldwide. Together, they employ 15 million people and generate a massive $6 trillion in revenue annually.

What I appreciate about YPO is that it stresses peer-to-peer learning. Those who think it’s all about networking and cutting deals are missing the point.

The theme this year was disruption—how innovative breakthroughs in technology, medicine, transportation, machine learning and more have transformed, and will continue to transform, the world we live and work in.

Moneyball movie poster

“Disrupt, or get disrupted,” John Chambers, executive chairman and former CEO of Cisco, said during his conversation with CNBC’s Tyler Mathisen.

Chambers was speaking specifically of what he calls the “digital era,” which will soon replace the information age. The internet of things is expanding very aggressively right now, but it’s still in its infancy. In 10 to 15 years, Chambers says, more than 500 billion devices worldwide will be connected to the internet. This will irrevocably change how we live our daily lives, conduct business, deploy health care, invest and more.

So what does this mean? For one thing, Chambers estimates that as much as 40 percent of companies now in operation around the world will not exist “in a meaningful way” sometime within the next two decades. To survive, companies will need to reinvent themselves by integrating digitization into the fabric of their business strategy. In the world Chambers imagines, every company will be, at its core, a technology company, and data will become the new oil.

After his presentation, I had the pleasure to share a few words with Chambers in private. I was amazed to hear that, during his tenure as CEO in the 1990s, Cisco had an unbelievable compound annual growth rate (CAGR) of 65 percent. I was even more amazed to hear that he managed to turn 10,000 of his employees into millionaires. I don’t know if that’s a record, but it wouldn’t surprise me if it was. He told me that he wouldn’t be able to do the same today because of our current tax laws. In any case, Chambers embodies all that makes America great—curious, innovative, forward-thinking and willing to share his share his success with his employees.

How to Pick Home Run Stocks, According to Moneyball

A lot of what Chambers talked about during his presentation reminded me of one such disruptor, Billy Beane, the former general manager of the Oakland A’s and subject of Michael Lewis’ 2003 bestseller Moneyball: The Art of Winning an Unfair Game, which was later turned into a 2011 film starring Brad Pitt. Despite being about baseball, it’s one of the best books on stock-picking ever written.

Moneyball movie poster

For those unfamiliar, Moneyball tells the story of the A’s’ famous 2002 season and Beane’s efforts to build a competitive team despite a lack of revenue and the recent loss of several key players, among other disadvantages. Making matters worse, conventional factors for selecting new players—long perpetuated by the “wisdom” of industry insiders—had grown stale, antiquated… and just plain wrong. Appearance, personality and other biased perceptions were still very much part of the selection process.

With little else left to lose, Beane focused on what he felt were better indicators of offensive performance, including on-base percentage and slugging percentage. This allowed him to cut through the biases and find overlooked, undervalued, inexpensive players. “An island of misfit toys,” as Jonah Hill’s character Peter Brand puts it in the movie.

Beane, in other words, became a value investor—one who depended not on emotion or “instinct” but empiricism and quantitative analysis. All of the picks who fell into his model were mathematically justified.

The strategy worked better than anyone expected. Although the A’s had one of the lowest combined salaries in Major League Baseball, they finished the year first in the American League West. Their winning streak of 20 consecutive wins that season remains the longest in American League history.

Longest Winning Streaks in American League Baseball History
Team Number of Wins Season
A’s 20 2002
White Sox (tie) 19 1906
Yankees (tie) 19 1947
Royals 16 1977
Mariners (tie) 15 2001
Red Sox (tie) 15 1946
Twins (tie) 15 1991
Source: MLB, U.S. Global Investors

Beane changed the game—literally. Today, nearly every club in the MLB relies on “sabermetrics,” or baseball statistics, to select players. This helps them develop a “portfolio” of constituents whose overlooked potential gives the club the greatest odds possible of outperforming the “market.”

Finding Frugal Miners

As active managers, we try to do the same. Like Beane, we use a host of quantitative, top-down and bottom-up factors to help us find the most undervalued precious metals and resource stocks.

One such factor, low SG&A-to-revenue, I shared with you back in September. “SG&A” stands for “selling, general and administrative expenses” and refers to the daily operational costs of running a company that are not related to making a product. It stands to reason that a company with lower-than-average expenses relative to its revenue might have wider margins than a company with oversized expenses, but few investors look at this metric outside of quants.

Using this factor, we found 10 names whose average returns in the first quarter of 2016 amounted to a phenomenal 88 percent—nearly double what the Market Vectors Gold Miners ETF (GDX) returned over the same three-month period.

Top 10 Gold Names Based on SG&A-to-Revenue
click to enlarge

Of course, a company must meet several other factors before it qualifies for our models, but this is just one example of the type of rigorous quantitative analysis we conduct.

Probability Is in the Pudding

In Moneyball, Lewis quotes Dick Cramer, cofounder of STATS, a sports statistics company: “Baseball is a soap opera that lends itself to probabilistic thinking.”

The world of investing is the same, and lately there’s been no better soap opera than watching the major indices hit near-daily all-time highs on hopes that President Donald Trump and the Republican-controlled Congress can lower taxes, slash regulations and find the money to invest in the military and infrastructure. On Monday last week, the Dow Jones Industrial Average posted its 12th straight day of gains, a winning streak we haven’t seen in 30 years. And on Wednesday, it tied a previous record, set in 1987, for the fastest 1,000-point move. It took only 24 trading days for the Dow to surge from 20,000 to 21,000. (Since then it’s fallen below that mark.)

Dow Jones Industrial Average Ties Record for Fastest 1,000-Point MOve
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But like baseball, investing lends itself to probability thinking, and here we have experience as well.

As I’ve said a number of times before, we closely monitor the monthly Global Manufacturing Purchasing Managers’ Index (PMI) because it’s forward-looking rather than backward-looking, like gross domestic product (GDP). As such, we’ve found a high correlation between the PMI reading and the performance of commodities and energy one, three and six months out. When a “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has historically signaled a possible uptrend in crude oil, copper and other commodities. Our research shows that between February 2007 and February 2017, the S&P 500 Energy Index rose 10.2 percent, 79 percent of the time after a “cross-above,” while the S&P 500 Materials Index rose 7.2 percent, 86 percent of the time. Knowing this helps us anticipate the opportunities ahead.

Commodities and Commodity Stocks Historically Rose Three Months After PMI Cross-Above
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In February, the global PMI rose to 52.9, a 69-month high. It was also the sixth straight month of manufacturing expansion, which bodes well for commodities, materials, miners and other key assets we invest in.

Individual PMI readings for the U.S., eurozone and China—which together make up about 60 percent of global GDP—all advanced in February. 

Manufacturing Activity Accelerates in U.S., Eurozone and China
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The eurozone’s reading of 55.4 was its highest since April 2011, with expansion being led by the Netherlands, Austria and Germany. The region is more optimistic about the future than at any time since the debt crisis, and the weakened euro has provided a welcome tailwind to help boost sales and exports.

China’s PMI held above 50.0, indicating industry expansion, for the seventh straight month in February on improved new order inflows, higher demand and greater optimism.

The U.S., meanwhile, ended the month with an impressive 57.7, its highest reading since August 2014. Of the 18 manufacturing industries that are tracked, 17 reported growth, including machinery, computer and electronic products, metals, chemical products and others. New orders rose significantly, from 60.4 in January to 65.1 in February, as did backlog of orders, which advanced a whopping 7.5 percent.

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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 12/31/2016: Harmony Gold Mining, Northern Star Resources, Regis Resources, Sibanye Gold.

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

The 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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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