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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.

5 Reasons Why Active Management Works
September 13, 2016

As we all know, exchange-traded funds (ETFs) have increasingly become the hot menu item, attracting a lot of money away from actively-managed funds such as mutual funds. But don’t discount active management just yet! There’s still plenty of room in your portfolio for this type of investment.

Consider the following:

1. First-Mover Advantage

Active management gives us the ability to act swiftly and strategically, with the surgical skill of a highly-trained team of Special Forces. It allows us to push out of the starting blocks much faster.

As active managers, we closely monitor key indicators and macroeconomic themes such as PMI (the Purchasing Manager’s Index), which we’ve written about many times, and negative real interest rates. These indicators, among other factors, often serve as the signals we’re looking for.

2. Explicit and Tacit Knowledge

Some people have book smarts (explicit knowledge), while others have street smarts (tacit knowledge). Active management requires that you have both.

Not only are we experts in geology and mineral resources, we’re also world travelers with “boots on the ground” experience visiting mines, spending time with mining crews and meeting with management teams.

Frank Holmes Gold Mining

3. Technical Models

We are practitioners of quantitative analysis on a per-share basis. We use a matrix of top-down macro models and bottom-up micro stock selection models to determine weightings in individual securities. When looking at mining stocks, for instance, we screen for the following factors:

Our Factors For Selecting Mining Stocks

4. Hidden Gems

Using technical stock screens and tacit knowledge of management teams can help us uncover hidden gems with attractive growth prospects.

One such company is Nevada-based Klondex Mines, which reported incredible second-quarter growth of 82 percent in net income and 25 percent in the amount of gold produced compared to the same time last year. Klondex is up more than 156 percent year-to-date, as of August 30.

Granted, this type of performance is out-of-the-ordinary, and there’s no guarantee it will be repeated in the future. But when it happens, active management can help us capture the upswing.

gold mine

5. Portfolio Manager Tenure

Active management is only as good as the people running it, and at U.S. Global Investors, we’re fortunate to have one of the best in the business—Ralph Aldis.
Ralph has over 20 years’ worth of experience at USGI alone and was even named a metals and mining “TopGun” fund manager by Brendan Wood International last year. The capital markets performance measurement firm recognized a group of investors as “optimal leaders of thought in the industry” during the year. The honor was given based on a vote from 269 sell-side professionals, and this was Ralph’s second time to receive such recognition from his peers.

Ralph Aldis Portfolio Tenure

 

Explore opportunities in precious metals and mining investment!

 

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.

Cash Flow Return on Invested Capital (CFROIC) is defined as consolidated cash flow from operating activities minus capital expenditures, the difference of which is divided by the difference between total assets and non-interest bearing current liabilities. 

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2016: Klondex Mines Ltd., Silver Wheaton Corp.

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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Look to Chindia for Gold’s Love Trade
September 12, 2016

Diwali trigers gold's love trade in India. The five-day festival of lights kicks off on October 30

A few weeks ago, I shared with you what I brought home from my trip to Toronto, Vancouver and New York City, where I had met with gold fund analysts. The current gold bull run began in January, but as I told you, the general retail investors weren’t buying then. The only people buying that early were quants and huge hedge funds. The question, then, was: What factors or models were the quants using to uncover gold’s meteoric rise this year?

One of the factors they were looking at, I learned, was low SG&A-to-revenue. “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 includes everything from shipping fees to salaries to utilities. SG&A-to-revenue is an unusual factor, not typically used among analysts and fund managers, so we were curious to apply it.

Using this information, we looked just at the first quarter to find the mining companies that spent the least amount of money on these daily operations relative to revenue. Mining companies, after all, have had trouble with expense discipline.

What we discovered was nothing short of astonishing. All combined, the top 10 gold companies for the quarter—led by South Africa-based Harmony Gold—returned a spectacular 88 percent. That’s almost double what the Market Vectors Gold Miners ETF (GDX) returned over the same period (45.5 percent). 

Top 10 Gold Names Based on SG&A-to-Revenue
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As early as January, the drivers were in place to fuel gold’s best first half of the year since 1974. The yellow metal is now in position to have its best year overall since 2010, when it rose 29.5 percent.

 

DISCOVER INVESTMENT OPPORTUNITIES IN THE GOLD SPACE

 

Upcoming Festivals Could Activate Love Trade

I talk a lot about the differences between gold’s Fear Trade and Love Trade. Loyal readers know that the Fear Trade is associated with negative real interest rates and excessive money supply, which triggers an imbalance of monetary and fiscal policies and macroeconomic uncertainty. Historically, investors in the U.S., Japan, Germany and the U.K. have been the main drivers of the global Fear Trade.

The Love Trade, on the other hand, is all about gold’s powerful allure and its timeless role as a gift without peer. It has two significant benefits: one, as beautiful gold jewelry to be worn, and two, as financial security. Although gold jewelry is often given as a special gift in Western countries, it pales in comparison to what takes place in China and India, or “Chindia”—home to about 40 percent of the world’s population, and the two largest gold importers.

The following image, courtesy of Visual Capitalist, shows emphatically just how enormous this region’s population is. More people live inside the green circle—which covers not just India and China but also Japan and some South China Sea countries—than outside it.

More than Half of the World's Population LIves Inside This Circle

As I shared with you last month, the two Asian countries together accounted for more than half of total global gold jewelry demand in 2015. The U.S., by comparison, represented about 5 percent of demand. All of Europe, even less.

Significant to boosting the metal’s price are important cultural events, from India’s upcoming Diwali festival and fourth-quarter wedding season to the Chinese New Year in January. Going back decades, the yellow metal has tended to perform best in September, when jewelry, coin and bullion dealers restock their inventories in preparation for these celebrations.

Also known as the Festival of Lights, Diwali begins October 30 this year, followed by the wedding season. To give you a sense of scale, as many as 150 million Indian weddings will be held between 2011 and 2021, according to the Government of India. For each wedding, between 0.7 and 70 ounces of gold are typically purchased, which is equivalent to 35 percent to 40 percent of total wedding expenses.

Of course, you can’t convert cash into gold if you don’t have the cash. What’s more, gold priced in Indian rupees and Chinese renminbi has really taken off, making it more expensive to Indian and Chinese consumers than America buyers.

Gold Priced in U.S. Dollars, Indian Rupees and Chinese Renminbi
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Gold consumption, then, really depends on household income. Fortunately, income growth in Chindia is booming with the rise of the middle class.

Rising Incomes = Golden Opportunity

And just how much income growth are we talking about? According to Boston Consulting Group (BCG) data, consumer spending in both China and India will soon overtake spending in Germany and France, and is on a trajectory to match Japan’s level of consumption.

India and China's affluent class will consume as much as some major countries by 2020
click to enlarge

By 2020, the number of “affluent” households in China—those with annual incomes of at least $20,000—will grow to 280 million, equal to 30 percent of the country’s urban population. That’s quite a leap up from today’s 120 million households labeled as “affluent.” It’s also good news for the Love Trade.

As for India, the number of middle class consumers is expected to triple between now and 2025, eventually reaching 89 million people, according to McKinsey & Company.

What I find even more incredible is that by 2030, the economic output of India’s top five cities is expected to reach the size of five middle-income countries today, according to McKinsey. Mumbai’s massive $245 billion economy, for example, could soon exceed the entire country of Malaysia. Likewise, India’s capital city of New Delhi could one day be bigger than the Philippines.

This presents a huge opportunity for the Love Trade to expand even more, as rising incomes and economic momentum have been a tailwind for gold demand.

I’ve pointed out before the relationship between M2 money supply growth in China and the price of gold. Money supply isn’t the same as income growth, of course. But it serves as further evidence that the more money that’s available—and the more people who have access to that money—the more it can be converted into gold.

Gold Price Has Largely Followed Chinese Money Supply
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Negative real interest rates play an important role as well, as I’ve discussed many times before. The yellow metal shares an inverse relationship with real rates, which is what you get when you subtract inflation from nominal interest rates.

silver is the best performing commodity of the year having returned more than 38 percent as of September 9

Speaking of which, many investors are wondering if rates will rise this year or not. December is still on the table, but the likelihood of a hike this month seems to have been doused by the August jobs report, which came in below expectations. CNBC reports that Goldman Sachs economists walked back their call for a September rate hike when it was revealed the U.S. economy added only 151,000 jobs, 32 percent fewer than the same month a year ago and a whopping 69 percent decrease from July’s payroll additions.

Be that as it may, markets seem to be betting the end of easy money could arrive sooner rather than later. Stocks sold off today in their worst session since June 24, the day after Brexit.

The Friday before last, both gold and silver jumped on the underwhelming jobs numbers. As I told Daniela Cambone during last week’s Gold Game Film, which you can watch here, silver is an important metal to follow because as people develop more confidence in the precious metal area, silver could begin to take center stage.

India Now the Fastest Growing Large Economy

In June, I asked if India is the new China. I think the jury’s still out on that question, but what we do know is that India has pulled ahead of China to become the world’s fastest growing large economy. In its June update to its world economic outlook, the International Monetary Fund (IMF) sees India advancing 7.4 percent this year, compared to China’s 6.6 percent. On a relative basis, these are much stronger growth rates than what we find in advanced economies such as the U.S., European Union and Japan.  

Real GDP Growth Around the World
click to enlarge

India’s manufacturing sector appears to be growing at a faster clip than China’s, when we compare the two Asian giants’ purchasing manager’s indices (PMI). For the month of August, the India PMI rose to 52.6 from 51.8 in July, indicating healthy sector expansion.

China and India Manufacturing Headed in Right Direction
click to enlarge

Meanwhile, China logged a neutral 50, indicating neither expansion nor contraction. But as you can see above, the trend is headed in the right direction and making steady improvements from its recent low of 47.2 in September 2015.

For the one-year period, the First Trust ISE Chindia Index Fund (FNI) is up more than 23 percent, as of September 4, suggesting the bad news we’ve been seeing in the media might be over, and the markets in China and India may have reached a bottom. This is good for global growth and the Love Trade. 

Book Your Flights!

At the end of this month, I will be a speaker and panelist at Mines and Money in Toronto. The conference, one of the biggest and most attended in the world, brings together leading institutional investors, mining developers and sought-after industry experts. It will take place September 26 through 28, so don’t hesitate to book your flights. I hope to see you there!  

 

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 Caixin China Manufacturing PMI, released by Markit Economics, is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.

The Nikkei India Manufacturing Purchasing Managers’ Index, reported by Markit Economics, measures the performance of the manufacturing sector and is derived from a survey of 500 manufacturing companies.

M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2016: Sibanye Gold Ltd., Northern Star Resources Ltd., Regis Resources Ltd.

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11 Reasons Why Everyone Wants to Move to Texas
August 30, 2016

Texas Wind Power

As many of you know, I was born in Canada but moved to the great State of Texas 26 years ago when I bought a controlling stake in U.S. Global Investors. As a “Tex-Can,” I’m so proud of my adoptive state and grateful for all that it’s done to help our company flourish.

But you don’t have to be a business owner to love and appreciate Texas. As you’ll see, many people are moving to the Lone Star State to take advantage of its many employment opportunities, tax advantages and all-around greatness. Below are just 11 reasons why more and more people want to move to Texas!  

1. Check out Our Mettle

The 2016 Olympic Games in Rio de Janeiro now belongs to history, and by a very wide margin, American competitors walked away with the most medals: 121 altogether. Looking at gold medals, the U.S. still ranked first, with 46 won. But if we took away what Texas collected, the Land of the Free would have fallen to third place, behind the U.K. and China.

Texas would rank third in Olympic gold medals if it were its own country
click to enlarge

Houston was the winningest Texas city. Home to Olympic medalists Simone Biles, Simone Manuel, Kerron Clement and more, H-Town is now 10 gold medals richer.

2. Moneybags

Texas is competitive in more than just Olympic events, of course. The state has the second-largest gross domestic product (GDP) in the Union, following California. If it were its own country, Texas would clock in at number 12 in the world, snuggled in between Canada and Australia.

Texas would rank twelth in GDP if it were its own country
click to enlarge

3. Tex-Can

If Texas were its own nation, in fact, its economy would be about the same size as Canada’s.

The Global Scale of America's Economy
click to enlarge

4. This Is Oil Country

Another thing Texas has in common with Canada? Black gold. Barrelsful of it.

Last month, Oslo-based Rystad Energy shared a report that shows the U.S. as now having the world’s largest reserve of recoverable oil, with 264 billion barrels in existing fields, unconventional shale and as-yet undiscovered areas. This is the first time such a report has moved the country ahead of both Saudi Arabia and Russia.

Were it not for the contributions of oil-rich Texas, however, this might not be the case. Thanks in large part to fracking in prolific fields such as the Eagle Ford Formation and Sprayberry Trend, the state leads all others in crude production, annually gushing out more than a third of total U.S. output.

You can see how the fracking boom helped propel the state into the same league as major OPEC nations Iraq, Iran, United Arab Emirates and Kuwait.

Texas Oil Production Raced Up to OPEC Gulf States
click to enlarge

5. A Mighty Wind

Texas is more than oil, of course. The natural-resource-rich state is also known for its natural gas production (it leads the nation), coal, electricity (again, number one in the States) and renewable energy—specifically, wind energy.

Texas Wind Power

Thanks to Competitive Renewable Energy Zones (CREZ) and $33 billion in invested capital, Texas ranks first in the nation for installed wind capacity and the number of megawatts generated by wind. In 2015, close to 10 percent of the state’s electricity production came from wind, according to the American Wind Energy Association.

With an estimated 17,000 Texans already employed in the state’s wind energy industry, Texas is in the process of installing an additional 5,200 megawatts.

6. Men at Work

Speaking of employment, that’s something else you can find a lot of in the Lone Star State. The oil industry might have taken a hit from falling crude prices, but the Texas economy has proven resilient. As you can see, the 2007-2008 global financial crisis had much less of an impact on state unemployment rates compared to other major countries and regions such as Canada, Australia, the European Union and United States.  

Texas Currently Has Lowest Unemployment Rate Among Selected Countries and Regions
click to enlarge

7. All Roads Lead to Texas

Welcome to Texas, drive friendly The Texas Way

Important to keeping business and commerce flowing, as well as helping commuters travel to and from their work, are roads. Texas has them in spades. According to the U.S. Department of Transportation, the state is connected by 313,596 miles of public road, the most of any state. With 18 numbered interstate highways, it also has more interstate miles than any other does.

If it were its own country, Texas would rank 13th by road network size, somewhere between Germany and Sweden.

At only $0.20 per gallon, the Texas gas tax is among the most reasonable in the nation. And because almost that entire amount goes to public transportation—$0.05 is devoted to public education—Texas has some of the best roads in the U.S.

While we’re on the topic of transportation, Texas also boasts the most airports of any state—1,415, according to StateMaster. Two of the four major U.S. carriers, American Airlines and Southwest Airlines, are headquartered in the Lone Star State.    

8. No Income Tax

There are only seven states without an income tax, Texas among them. (Alaska, Florida, Nevada, South Dakota, Washington and Wyoming round out the list.) 

Average Income Tax by State
click to enlarge

Neither does the state impose a corporate income tax, and last summer, Governor Gregg Abbott approved $4 billion in tax cuts for businesses and homeowners.

9. Gold Star State

The Texas bullion depository will be first in the nation

Governor Abbott is also responsible for what will be a first in the United States. More than a year after he signed a law to repatriate $1 billion in Texas gold bullion from a private HSBC vault in New York, construction will soon begin on the Texas Bullion Depository. Such a state-run gold depository doesn’t currently exist anywhere else in the U.S. It’s hoped that it will help turn Texas into a “financial Mecca,” in the words of one state senator.

10. Population Destination

Low taxes are one of the main appeals driving Texas’ rapid population growth. According to the Census Bureau, five of the 11 fastest-growing U.S. cities by population can be found in Texas. Ranking number two in the nation is New Braunfels, a lovely town originally settled by Germans that lies midway between San Antonio and Austin.

Between July 2014 and July 2015, the Lone Star State added 490,036 new residents, the most of any state by a wide margin.

Texas Added More REsidents than any other STate
click to enlarge

To put this in perspective, the number of new Texas arrivals alone between 2014 and 2015 exceeds the total populations of several countries, including Malta (population: 429,366, as of December 2014), Brunei (411,900, as of July 2014) and Iceland (336,060, as of June 2016). 

11. Bet on Tech

Texas Leads the Nation in Technology Exports

It’s not just people moving to Texas, though. Companies are as well—specifically tech companies, and, to get even more granular, Silicon Valley tech companies. The San Francisco Chronicle reports that, in recent years, more than $1 billion in taxable income has flowed from the Bay Area to Texas, as tech firms have sought not just lower taxes but also simpler regulation.

Indeed, the Lone Star State has emerged as a formidable tech hub to rival Silicon Valley. Employing more than 270,000 people, the state’s tech industry supports firms ranging in size from hip Austin startups to massive Fortune 500 companies such as Dell, Texas Instruments and Rackspace Hosting (which just agreed to a $4.3 billion acquisition deal by private equity firm Apollo Global Management).

For the last three years, Texas has led the nation in high-tech exports—everything from semiconductors to communications equipment. Last year, in fact, the state’s total sales amount exceeded California’s by a whopping $6.3 billion.

No wonder so many people are choosing Texas as the place to hang their hat!

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2016: American Airlines Inc., Southwest Airlines Co.

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These Olympian Gold Royalty Companies Are Insanely Attractive
August 22, 2016

Why You Should LIke These Gold Medal Royalty Companies

In a note last week, UBS echoed its earlier assessment that gold has indeed “entered a new bull run,” as I shared with you last month. The precious metal had a spectacular first half of the year, with total global demand reaching 2,335 tonnes, the second-highest on record, according to the World Gold Council (WGC).

Despite this, gold is still under-owned, accounting for only 3 percent of total ETF assets under management, UBS writes. The group adds there is room for new or returning market participants who might have cleared out their gold positions during the recent bear market.

Driving the bull run, according to the group, are “a prolonged period of depressed real yields” and “elevated macro uncertainty.” These are themes I’ve returned to many times in the past six months, with global government bond yields continuing to drop below zero and economic and geopolitical unrest advancing following the Brexit referendum and ahead of the U.S. presidential election this November.

Confidence in monetary policy and appetite for government debt continues to erode. According to Zero Hedge, foreign central banks dumped a record $335 billion in U.S. Treasuries during the last year. The top seller in June was China, which cleared $28 billion in Treasuries off its balance sheet. Over the same period, the world’s second-largest economy added to its official gold reserves—500,000 ounces in June alone—in an effort to diversify its holdings.

China Winding Down U.S. Treasuries, Loading Up on Gold
click to enlarge

Investors should take heed of the fact that even central banks have become net buyers of gold. It’s always been my recommendation to maintain a 10 percent weighting in your portfolio—5 percent in gold bullion, another 5 percent in gold stocks.

A Superior Way to Gain Exposure to Gold

One of the best ways to play gold, I believe, is royalty and streaming companies. As a reminder, these companies serve as specialized financiers to explorers and producers. In return for upfront financing, they can receive one of two different types of payments. In one way, they can receive a royalty, or percentage, on whatever future sales the debtor company makes during the life of the mine.

In another way, they can buy a stream of precious metals at a low, fixed price. Discounts on gold, for instance, could be as much as 75 percent. This has typically been the preferred method for paying back the royalty company.

Some of our favorite names in this space include Franco-Nevada Mining, Silver Wheaton, Royal Gold and Sandstorm Gold, all of which have outperformed underlying gold for the 12-month period. Click the hyperlinks to read my special reports on Franco-Nevada and Silver Wheaton.

Royalty Companies Outshining Gold
click to enlarge

Better Allocators of Capital

Royalty and streaming companies show great opportunity on the upside but avoid many of the risks and operating expenses that explorers and producers must deal with.

Interestingly, they all employ a small group of technically skilled mining geologists, engineers, metallurgists and financial mining executives to analyze and monitor their investments.

Because they’re not responsible for buying mining machinery and building, operating and maintaining mines, they have a much lower total cash cost per ounce of gold than miners do. (In this context, cash cost refers to operational expenses that are paid using cash, rather than credit.) Their overhead is kept at a minimum, and they have some of the highest sales per employee in the world. As you can see below, their debt per share is much lower than senior miners Newmont Mining and Barrick Gold—the Army to royalty companies’ more agile and tactical Navy SEALs. Last year, Barrick cut $3.1 billion in debt last year and is on track to pay down an additional $2 billion this year.

We Believe Royalty Companies Have a Superior Business Model
click to enlarge

Their margins have typically been much larger than traditional explorers and producers, allowing them to remain profitable even during gold bear markets.

Take Sandstorm, one of the younger royalty companies. Its second-quarter cash cost per ounce of gold was a mere $261, giving it operating margins of $994 per ounce.

Compare this to Barrick, the world’s largest gold producer. Barrick reported cash costs of $578 per ounce, nearly double that of Sandstorm—and Barrick has some of the lowest costs compared to other miners, according to Motley Fool.

Royalty Companies: Capturing the Upside, Avoiding the Downside
  Mining Companies Royalty Companies
Precious metals price upside X X
Exploration upside X X
Production rate upside X X
No sustaining costs   X
No exploration costs   X
No capital expense overruns   X
Fixed cash costs   X

Investors like royalty companies because they’re a skilled team of former miners and mining executives who generate substantially greater gross margins and have materially fewer employees, with less general and administrative expense.

Further, they offer spectacular optionality. They often buy an asset with a payload over 10 years. However, these deposits often extend for 30 years, so they have potential for a much bigger payback. If the mining company expands production, it’s free additional cash flow, and if they make a large discovery near the producing mine, the royalties have free upside growth.

For further reading, one of the strongest overviews of royalty companies is Streetwise Reports’ “Precious Metal Royalties: The New Landscape.”

A New Entrant

Just as there still might be ample scope for gold investors to participate in the market, one CEO is betting there’s still room for another entrant into the precious metals royalty company space. Long-time precious metals commentator David Morgan recently helped found Lemuria Royalties, which reported in June that it had acquired its first silver royalty from a Peruvian mine operated by a subsidiary of Fortuna Silver Mines.

In January of this year, Morgan summed up his reasoning for establishing a new royalty company: “We favor the streaming and royalty companies a great deal because the risk is very low relative to, let’s say, an exploration company or even a producing company.”

This is precisely why we continue to find the royalty business model very attractive.

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 06/30/2016: Barrick Gold Corp, Fortuna Silver Mines, Franco-Nevada Corp, Newmont Mining Corp, Royal Gold Inc., Sandstorm Gold Ltd., Silver Wheaton Corp.

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Gold Spending in India Is Set to Get a Boost from a Strong Monsoon Season
August 18, 2016

Since before recorded human history, the people of India have had an insatiable appetite for gold, treasuring it not only for its flawless natural beauty and religious significance but also as a superb store of value. This tradition carries on today, with India’s demand for gold jewelry in 2015 reaching more than 668 tonnes, nearly a third of total global demand and second in size only to China.

India and China Dominate Global Gold Jewelry Market
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I’ve pointed out many times before that the price of gold is largely driven by the Love Trade in India. Demand fluctuates year-to-year depending on several factors, the two most significant being the number of Indian weddings held in the fourth quarter and the amount of crop revenue that’s generated as a result of the summer monsoon season.

The wedding season is still three months away, but the June to September monsoon season is currently in full swing. It’s impossible to overstate just how crucial this period is to India’s important agriculture sector. During an average monsoon season, the Indian subcontinent can receive close to 80 percent of its total annual precipitation.

Most reports so far this year indicate surplus rainfall, with 12 inches being dumped nationwide last month alone, the fifth best month since the 1990s. This should come as welcome relief to Indian farmers, whose incomes have been squeezed by two long years of drought.

It’s also good news for gold consumption.

Converting Crops into Gold

Because of the above-average monsoon, gold spending in India is expected to increase 11 percent in 2016/2017 over the previous September to August crop season, according to Thomson Reuters. This would help reverse weak second-quarter jewelry demand in India due to a gold jewelers’ strike that closed the market for six weeks early in the quarter, a new 1 percent excise duty on jewelry and rising prices.

Gold has Rallied 26% Year-to-Date
click to enlarge

About a third of Indian gold demand comes from rural farmers, who have traditionally converted a percentage of all crop revenue into the precious metal to be held as insurance and sold in times of dire need. A GFMS/Thomson Reuters study conducted last year found that, between 1985 and 2014, there was a strong positive correlation between Indian crop revenue and spending on gold.

Following the crop season, we have Diwali and the Indian wedding season to look forward to.

Diwali, also known as the Festival of Lights, is arguably the most sacred holiday in Hinduism, celebrated by millions of people all over the globe. Much like Christmas, it serves as a major shopping season. Families splurge on expensive items such as cars, appliances, clothes—and gold jewelry. You can see how, in past years, the price of gold has ramped up in August and September as Indian merchants and jewelers restock inventories in preparation for the fall festival.  

Gold has Rallied 26% Year-to-Date
click to enlarge

150 Million Indian Weddings Between Now and 2021?

The largest owners of gold in Indian are women, as it is auspicious to give them gifts of gold jewelry before their weddings. Because India lacks a formal social security system, it’s vital for women in particular to have some form of wealth preservation in the event of divorce or widowhood. This is what’s known as stridhan—a portion of a married couple’s wealth that is controlled exclusively by the wife and to which she is entitled, even after separation from her husband.

As World Gold Council CEO Aram Shishmanian put it during our joint webcast in June: “In India, a marriage is not a marriage without gold.”  

Indian Weddings and Gold Infographic

So how many weddings are we talking about, and how much gold? Let’s look at the numbers. According to the Indian government, there are 300 million Indians between the ages of 25 and 29 from now until 2021. During this period, a projected 150 million weddings will take place. And for each wedding, roughly 35 percent to 40 percent of total expenses will be devoted to gold in the form of bullion, coins and jewelry.     

Put another way, it’s estimated that the amount of gold purchased for a typical Indian wedding ranges between 20 and 2,000 grams—equivalent to a little over 70.5 ounces, or $95,457 at today’s prices. The wealthier the family, of course, the more gold they can afford to buy.

But gold is just as popular and valued—if not more so—among lower income families, many of whom depend on monsoon rains to nourish their crops. Here’s to a bountiful yield!

 

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.

Share “Gold Spending in India Is Set to Get a Boost from a Strong Monsoon Season”

Net Asset Value
as of 09/25/2017

Global Resources Fund PSPFX $5.78 -0.04 Gold and Precious Metals Fund USERX $8.02 0.06 World Precious Minerals Fund UNWPX $6.69 0.06 China Region Fund USCOX $10.96 -0.46 Emerging Europe Fund EUROX $6.94 -0.06 All American Equity Fund GBTFX $24.34 0.10 Holmes Macro Trends Fund MEGAX $19.99 0.03 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change