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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.

Silver Wheaton: The Ultimate Streaming Service
May 2, 2016

Silver Wheaton CEO Randy Smallwood (right) with USGI portfolio manager Ralph Aldis

“There’s a healthy appetite for streams right now.”

That’s according to Randy Smallwood, CEO of Silver Wheaton, who stopped by our office last week during his cross-country meet-and-greet with investors.

Randy should know about the appetite for streams. His company had a phenomenal 2015—“the best year we ever had,” he says—highlighted by two successful stream acquisitions, strong production and fully-funded growth. Silver Wheaton stock is up more than 51 percent for the year. And the company just received the Viola R. MacMillan Award, presented by the Prospectors & Developers Association of Canada (PDAC), for “demonstrating leadership in management and financing for the exploration and development of mineral resources.”

We were one of Silver Wheaton’s seed investors in 2004. In the summer of that year, the company was spun off from Wheaton River, a producer that took its name from a stream in the Yukon where one of its mines, the Luismin property, produced silver. It was founded by Ian Telfer, chairman and CEO of Wheaton River, and the company’s then-chief financial officer, Peter Barnes, who later headed up Silver Wheaton management. My friend, the mining financier and philanthropist Frank Giustra, also had a hand in its conception.

As the only pure silver mining company, Silver Wheaton couldn’t have been founded during a more opportune time. The commodities boom was still young. I remember that when the idea for the company was shared with me, what I found most attractive was that it had virtually no competition. Franco-Nevada, which had been acquired by Newmont in 2001, wouldn’t be spun off for three more years. It was a no-brainer to put capital in this new endeavor.

Wheaton River was eventually bought by Goldcorp—the entire story is told at length in the book “Out of Nowhere: The Wheaton River Story”—and today, Silver Wheaton is the world’s largest precious metals streaming company, with a market cap of over $9 billion.

But Wait, What’s a “Stream”?

A “stream,” in case you were wondering, is an agreed-upon amount of gold, silver or other precious metal that a mining company is contractually obligated to deliver to Silver Wheaton in exchange for upfront cash. (The company’s preferred metal is silver because, as Randy puts it, it’s a smaller market and has a higher beta than gold.) The payment generally comes with less onerous terms than traditional financing, which is why miners favor working with Silver Wheaton (or one of the other royalty companies such as Franco-Nevada, Royal Gold and Sandstorm.)

Overview of Royalty and Stream Financial Model
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Streaming allows producers to “take the value of a non-core asset and crystallize that into capital they can invest into their core franchise,” Randy explains in a video prepared for the PDAC awards.

With operating costs mounting and metals still at relatively low—albeit rising—prices, royalty and streaming companies have become an essential source of financing for junior and undercapitalized miners. Between 2009 and 2014, operating and capital costs per ounce of gold rose 50 percent, from $606 to $915 per ounce, according to Dundee Capital.

Gold and Silver at 15-Month Highs

Paradigm Capital estimates that between 80 and 90 percent of global miners’ operating costs are covered when gold reaches $1,250 an ounce. The metal is now at this level—it’s currently at $1,298, up 22 percent so far this year—but as recently as December, prices were floundering at $1,050, which cut deeply into producers’ margins.

Royalty and streaming companies, on the other hand, get by with a materially lower cost of $440 an ounce.

From only 11 stream sales in 2015, miners collectively raised $4.2 billion, which is double the amount they raised in 2013.

These partnerships are a win-win. The miner gets reliable, hassle-free funding to cover part of its exploration and production costs, and the streaming company gets all or part of the output at a fixed, lower-than-market price. A 2004 streaming arrangement made with Primero on the San Dimas mine in Mexico entitles Silver Wheaton to buy all of its silver for an average price of $4.35 an ounce. With spot prices now at more than $17.89 an ounce, up 29 percent year-to-date, the San Dimas property is one of Silver Wheaton’s more lucrative assets. (The mine represents an estimated 15 percent of Silver Wheaton’s entire operating value, according to RBC Capital Markets.)

As part of its contracts, Silver Wheaton gets the added value of optionality on any future discoveries. This is important, since an estimated 70 percent of all silver comes as a byproduct of other mining activity, including gold, zinc, lead and copper. According to Randy, all of Silver Wheaton’s silver is byproduct.

Seventy Percent of Silver Is a Byproduct of Other Mining Activity

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Huge Rewards, Minimal Risk

Investors find royalty companies such as Silver Wheaton attractive for a number of reasons, not least of which is that they have exposure to commodity prices but face few of the risks associated with operating a mine.

They have minimal overhead and carry little to no debt. Franco-Nevada, in fact, added debt for the first time ever last year to buy a stream from Glencore. By year-end, the company had already paid down half this debt, and it plans to tackle the rest this quarter.

Royalty companies also hold a more diversified portfolio of mines and other assets than producers, since acquiring new streams doesn’t require any additional overhead. This helps mitigate concentration risk in the event that one of the properties stops producing for one reason or another.

Royalty Companies Hold a More Diversified Portfolio of Assets

Consequently, margins have historically been huge. Even when the price of gold and gold mining stocks declined in the years following 2011, Franco-Nevada continued to rise because it had the ability to raise capital at a much lower cost than miners. And with precious metals now surging, royalty companies are highly favored, with Paradigm Capital recommending Franco-Nevada, which has “exercised the most buying discipline among the royalty companies,” and the small-cap, highly diversified Sandstorm.

Gold Royalty Company vs. Gold Bullion vs. Gold Miners
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With only around 30 employees, Silver Wheaton has one of the highest sales-per-employee rates in the world. According to FactSet data, the company generates over $23 million per employee per year. Compare that to a large senior producer like Newmont, which generates “only” $200,000 per employee.

Royalty Companies Have a Superior Business Modelclick to enlarge

Royalty companies can often minimize political risk because they don’t normally deal directly with the governments of countries their partners are operating in. This is especially valuable when working with miners that operate in restrictive tax jurisdictions and under governments with high levels of corruption. Silver Wheaton’s contract with Brazilian miner Vale, for instance, stipulates that Vale is solely responsible for paying taxes in Brazil, which are among the highest in Latin America. Vancouver-based Silver Wheaton pays only Canadian taxes.

Political risk is still a thorny issue, however. When government corruption is too pervasive, or the red tape too tortuous, the miner’s corporate guarantee is obviously threatened. In cases such as this, Silver Wheaton can simply elect not to work with the producer, as it had to do recently with an African producer.

A key risk right now is Silver Wheaton’s ongoing legal feud with the Canadian Revenue Agency (CRA), regarding international transactions between 2005 and 2010. Randy says the company might finally be nearing a resolution to the dispute.

“We do have resource risk. We do have mining production risk,” he says. “But with that risk comes rewards, and I think if we’re selective in terms of our investments, the rewards far outweigh the risks. I think we’ve been really successful making sure we invest in good quality, high-margin mines. We really put a strong focus on mines that are very profitable.”

A New Precious Metals Upcycle Has Begun

Want more on silver, gold and other precious metals? I’ll be speaking at the MoneyShow in Las Vegas, May 9 – 12. Registration is completely free. I hope to see you there!

 

MoneyShow Las Vegas Frank Holmes

 

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.

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

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.

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 3/31/2016: Silver Wheaton Corp., Goldcorp Inc., Franco-Nevada Corp., Royal Gold Inc., Barrick Gold Corp. 

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If You’re Not Following this Energy Trend, You’re Being Left in the Dust
April 18, 2016

Investor and author Gianni Kovacevic visited USGI office this week. My Electrician Drives a Porsche book

Last week our office was visited by my friend, investor and author Gianni Kovacevic, who is at the halfway point of a cross-country book tour to promote the latest edition of “My Electrician Drives a Porsche?” As part of the tour, he’s driving a Tesla Model S from Boston to Palo Alto, California—Tesla’s hometown—to demonstrate the potential of green energy and spread his message that “the future is now.”

His book features a successful young man—the titular electrician, and an analogue of Gianni himself—who instructs his older family doctor on how to invest in the rise of the new spending class. Not only is “Electrician” a fact-filled, convincing treatise on the importance of following long-term trends in China, copper and other “financial soap operas,” it’s also a real page-turner. I urge you to grab a copy and check it out.

Copper: Beneficiary of Unprecedented Number of New Consumers

Central to the book’s thesis is a concept that is both simple and yet profound: As the size of the world’s middle class continues to grow, demand for “things that come with an electrical cord” will surge. Below is a brief excerpt:

My point is that once a group of people make the move from rural to urban, from peasant to worker and on to consumer, their way of life changes. Subsistence disappears from their vocabulary and their lives begin to revolve around the three Cs: comfort, convenience and communication. And in order to achieve any of those things, it takes a whole lot more stuff than ever before. We get a dishwasher to free up time and a television to waste it. We get an air conditioner to stay cool and a heater to stay warm. Then later on, we get other luxuries like solar panels on our roofs and newer, more modern cars. When a society achieves its very own consumer revolution, as China and the developing world are undergoing right now, life becomes less about needs and more about wants. With an unprecedented number of new consumers, these luxuries need way more stuff to make them possible.

Back in 2014, Microsoft founder and philanthropist Bill Gates predicted that by 2035, there will be “almost no poor countries left in the world.” You might scoff, but for a moment let’s imagine this turns out to be the case. What effect would that have on energy demand? Millions more people joining what Gianni calls the spending class will increase the demand for millions more things—dishwashers, air conditioners, smartphones, cars—and necessitate the production of thousands more megawatts of electricity than the world currently generates.

All of which is a boon for copper. However energy is produced, the red metal is needed for conductivity. In fact, even more copper wiring is used in new energy technologies than in traditional sources. An electric car such as the Tesla Model S uses three times as much copper wiring than an internal combustion engine vehicle.

Each New Generation of Car Needs More Copper Wiring
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It was reported this week that China imported 39 percent more copper (and 13 percent more crude oil) in March than in the same time last year, a sign that the Asian giant’s appetite for commodities and energy remains strong. Despite a slowdown in GDP growth, China is still the number one importer of metals and number two consumer of oil.

China's Copper Imports Surge in March
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Shipments out of China also rebounded the most in a year, rising 11.5 percent in the first quarter. This suggests its economy fared much better than what analysts were predicting.

China Exports Surge 11.5 Percent in First Quarter
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The country’s manufacturing industry saw very welcome improvement last month as well, with the purchasing managers’ index (PMI) coming in at 49.7—still below the key 50 threshold, but the highest reading since February of last year. The PMI was also above its three-month moving average for the first time since October.

Chinese Manufacturing Edges Close to Expansion
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The Rise of the Chinese Spending Class

Consider the dramatic difference in size between college graduates in older and younger Chinese generations. According to Gianni’s book, there are 160 million people aged 56 to 65, yet this cohort has only one million graduates. Meanwhile, millennials are 415 million strong—100 million more than the entirety of the U.S. population—and of those, 107 million have college degrees. So far. As this number rises, so too will incomes as well as the desire to live a more “Western” lifestyle filled with stuff.

This new generation is not only big in size, but also big in aspirations

You can check out the entire Visual Capitalist infographic on Gianni’s website.

The Asian country’s middle class is already larger than America’s. In October, Credit Suisse reported that there are more than 109 million middle-class consumers in China, compared to 92 million in the U.S.

109 Million. For the first time, the size of China's middle class has overtaken the U.S., 109 million compared to 92 million.

Indeed, domestic consumption in China is following a staggering upward trajectory. In 2015, total retail sales touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.5 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum.

By 2020, Chinese Private Consumption Will Have Grown $2.3 Trillion
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The new Chinese spending class is still very concentrated along the country’s highly-urbanized eastern coast, in megacities such as Shanghai, Beijing, Guangdong and Shenzhen. But this is changing rapidly, with 39 percent of middle-class growth shifting inland toward more rural areas by 2022, according to McKinsey & Company. This will introduce new investment opportunities as these areas will require modern roads, railways and—most important—energy infrastructure.  

Chinese Middle-Class Growth is Shifting Inland

It’s estimated that between 2010 and 2025, 300 million Chinese citizens—a little less than the entire population of the U.S.—will migrate from rural areas to cities. As Gianni points out, lifestyles drastically change when this occurs, shifting from one of subsistence to one that revolves around convenience and comfort.

Tesla Disrupts the Auto Market

Key to this migration is transportation. In 1979, there were only 60 privately-owned automobiles in China. (That’s according to a 2006 report by legendary Canadian investment strategist Don Coxe, and cited in “My Electrician Drives a Porsche?”) Fast forward to today and China is now the world’s largest auto market. More than 21.1 million passenger cars were sold in the country last year, a 7.3 percent increase from 2014. Compare that to the U.S., the number two car buyer, where sales totaled 17.5 million, an all-time record.

By the way, 2015 sales of the Toyota Corolla, one of the top-selling sedans in the U.S., were a little over 350,000. That’s slightly more than the number of preorders for the Tesla Model 3, the company’s first mass-produced vehicle, within a single week of its unveiling on March 31. In a blog post, Tesla promptly proclaimed it “the week that electric vehicles went mainstream.”

The future, as Gianni says, is indeed now.

 

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.

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 12/31/2015: Microsoft Corp.

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Gold Had Its Best Quarter in a Generation. So Where Are the Investors?
April 4, 2016

Best Quarter in 30 Years - Gold Has Risen 16.5% Year-to-Date

The last time gold had a quarter this strong, Ronald Reagan was a year into his second term as president, the Soviet Union was taking its final gasp and the U.S. was still reeling from the Challenger explosion. In the first quarter, the yellow metal rose 16.5 percent, its best three-month performance since 1986, mostly on fears of negative interest rates and other global central bank policies.

Gold Just Had Its Best Quarter in 30 Years
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Bloomberg writes that the current gold rally has “cemented its status as a store of value.” Before now, a  gold bear market persisted not because the metal had lost its status necessarily, but because of the strong U.S. dollar and, more significantly, positive real interest rates. According to Pierre Lassonde, cofounder of Franco-Nevada, gold is the fourth most liquid asset in the world.

As I’ve mentioned many times before—during interviews and in the Investor Alert and my CEO blog Frank Talk—gold has historically performed best when real rates turned negative. We were one of the earliest to discuss this important relationship on a regular basis, and now I’m starting to see it covered frequently in the mainstream media.

To get the real rate, you subtract the current consumer price index (CPI) reading, or inflation, from the government bond yield. When yields are low—or negative, as they are now—it encourages smart investors to seek other stores of value, including gold.

Below, you can see that when gold prices peaked at $1,900 per ounce in August 2011, real interest rates were close to negative 4 percent. A five-year Treasury bond yielded only 0.9 percent—and that’s before inflation took 3.8 percent. (Decades ago, when I was a young analyst in Canada, we would compare everything to the five-year government bond yield.) But as real rates rose, gold prices fell. Now the reverse is happening. 

Gold Rebound Linked to Fall in Interest Rates
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Double the Gold Returns under Negative Real Rates?

Most investors look only at nominal interest rates. This is only the tip of the iceberg. The British author and playwright Oscar Wilde wrote: “Nowadays people know the price of everything and the value of nothing.” Along those lines, smart investors know that money flows to the highest real interest rate.

I call this the Fear Trade.

“When real rates are negative, gold returns tend to be twice as high as the long term average,” the World Gold Council (WGC) writes its latest report. “Even if real rates are positive and as long as they are not significantly high (4 percent in our study), average gold returns remain positive.”

Negative rates erode confidence in fiat currencies, which typically has benefited gold. A currency itself, gold is “the only one that is not targeted directly by, and doesn’t respond negatively to, expansionary monetary policies,” the WGC writes.

The chart below shows the difference in the nominal and real yield curves for government bonds in a number of advanced economies. When you factor in inflation, investors of shorter-term government debt are actually paying the government to hold their money, a proposition that’s hard to swallow.

Low and Negative Government Bond Yields Convince Investors to Look Elsewhere
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The WGC points out that about 30 percent of global sovereign debt is now trading with subzero yields. That’s $8 trillion! A further 40 percent has yields below 1 percent.

United States of America gold eagle coin

This is just the latest reason why investors have been losing faith in central banks. In its most recent quarterly report, the Bank for International Settlements (BIS) notes that investors’ “confidence in central banks’ healing powers has—probably for the first time—been faltering,” as it becomes more and more clear that room for additional policymaking is narrowing. If asset-buying programs, helicopter drops of money and negative interest rate policies fail to reverse the economic slowdown, what more is there?

These conditions have led to a surge in gold coin and bullion sales around the world. American Eagle consumers bought 83,500 ounces of the coin in February, a 351 percent increase from the 18,500 ounces sold in the previous February. The Perth Mint in Australia is also reporting huge sales volumes.

Retail Investors Missing out on the Gold Rush

Interest in gold bullion, however, hasn’t seemed to translate fully into renewed interest in gold miners. So far this year, inflows into the SPDR Gold Trust (GLD), which invests in physical bullion, have accelerated as investors chase the rally.

where are the gold investors?

At the other end is the Market Vectors Junior Gold Miners ETF (GDXJ), which holds junior gold equities such as Northern Star, OceanaGold and Evolution Mining. Despite an increase in share price, we’ve seen a net decrease in shares outstanding. Year-to-date, outflows have totaled $84 million. Flows out of the Market Vectors Gold Miners ETF (GDX), which holds senior gold stocks, have been even more dramatic, at $94 million.   

Retail Investors Bullish on Bullion, Bearish on Gold Stocks
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This could be explained by investors taking profits off the table, unease with the volatile swings in the gold market lately or mistrust in mining stocks. In any case, many investors could be missing out on one of the most impressive gold rallies in a generation. Since the start of the year, Goldcorp has gained 38 percent, Randgold 45 percent, Barrick Gold 84 percent, Harmony Gold 300 percent.

Good News! Global Manufacturing Turns Up

Another concern investors have right now is over the health of the global economy. Since February 2014, we’ve seen the J.P.Morgan Global Manfacturing Purchasing Managers’ Index (PMI) trend steadily downward.

For March, however, the PMI came in at 50.3, a slight improvement from the neutral February reading of 50. The monthly reading also rose above the three-month moving average, a bullish signal.

March Global Manufacturing PMI Reading above Three-Month Moving Average
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We use PMI data as a gauge for commodity price movements three and six months out, and I write about PMI often.

The U.S. Manufacturing ISM—the American version of PMI—showed improvement, rising from 49.5 in February to 51.8 in March, the first time it expanded in seven months. New Orders strengthened in particular, gaining 6.8 percentage points to register 58.3 last month. Meanwhile, the Markit Eurozone Manufacturing PMI edged up slightly to 51.6, from 51.2 in February.

China, on the other hand, continues to exhibit deterioration. Although the Caixin China General Manufacturing PMI rose to 49.7 in March from 48 in February, the reading is still below the key 50 benchmark that separates contraction and expansion.

In Memoriam: Ian McAvity

Ian McAvity speaking with Kitco's Daniela Cambone in 2012. Ian passed away March 16.

It’s with a heavy heart that I share with you the passing of one of my friends and mentors, Ian McAvity. Ian spent his career in minerals and mining, most recently in the role of president and CEO of Toronto-based exploration company Duncan Park.

In past years, I quoted often from Ian’s insightful and widely-read newsletter, “Deliberations on World Markets,” which he began writing in 1972 and for which he was known as a “chartist extraordinaire.” He was an occasional contributor to some of our publications and in 2010 he joined me on a webcast following the midterm elections.

Most people remember Ian as a witty writer and speaker—he coached me on my public speaking—and as a regular contributor to Barron’s Roundtable, the Contrary Opinion Forum, “Louis Rukeyser’s Wall Street” and other well-regarded investment publications and associations, along with industry giants such as Gary Shilling, Ned Davis and Ray Dalio.

What many might not know about him is that he was a gifted athlete, a World Doubles Champion in squash during the 1970s. The first time I went skiing was with Ian, in fact. I fell down so many times, but he would always pause and wait for me to catch up.

Not only did Ian guide me in my public speaking but he also stressed to me the importance of technical analysis on a macro level, from moving averages to relative strengths of countries. He also cultivated my interest in gold. I read Roy Jastram’s “The Golden Constant,” a seminal work on the economics of the precious metal, just so I could keep up with Ian—like skiing. He was just one of those great influencers who taught me much of what I know today, and I only have gratitude for his wisdom and guidance. 

 

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

Holdings 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 12/31/2015: Northern Star Resources Ltd., OceanaGold Corp., Randgold Resources Ltd.

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

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

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Is Economic Growth in Its Final Innings?
March 30, 2016

Is economic growth in its final innings?

The start of baseball season is still several days away, but a recent survey conducted by Bank of America Merrill Lynch found that 59 percent of U.S. fund managers believe the current stretch of economic growth is in its “final innings.” This is the highest reading since the financial crisis in 2008.

As if to support this outlook, the Commerce Department released economic data last Friday that shows fourth-quarter 2015 corporate profits fell at their fastest rate since—you guessed it—the same period in 2008.

Even though year-over-year GDP growth in the fourth quarter was revised to 1.4 percent, up from 1 percent, profits tanked a substantial 11.5 percent. For the entire year, pretax earnings declined 3.1 percent.

This could end up being a speedbump for the U.S. economy. In the past, significant drops in corporate profits have acted like gravitational tugs on jobs growth, with companies cutting positions and putting a freeze on new hiring. We have yet to see this play out—jobs growth has been steady for 72 straight months, jobless claims have been falling and confidence in the labor market is at a nine-year high—but the divergence between profits and employment is something to keep an eye on.    

Jobs and Corporate Profits are Beginning to Diverge
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This is no reason for investors to panic, however. When I look at the chart above, I see fairly regular cycles of economic activity, like the EKG readings of a reasonably healthy person. It’s possible we’re facing the final stage of this particular economic cycle, as a majority of fund managers suspect, but mean reversion could eventually bring conditions back to “normal.” Speaking to the Economic Club of New York on Tuesday, Federal Reserve Chair Janet Yellen called the U.S. economy “remarkably resilient,” and I agree with her.

Jobs and Corporate Profits are Beginning to DivergeIt’s also important to remember that this is the eighth year of a two-term presidency. Historically, stocks have performed above average during election years, but second-term election years have been the weakest going back to 1928, falling an average 4 percent. As I explained earlier this month, this might stem from the uncertainty of who will succeed the incumbent president, and what his or her policies will be.

Two Ways to Prepare: Gold and Munis

During her speech, Yellen stated that the Fed will proceed with a “cautious approach,” and investors should do the same. Gold has been used during times of inflation, currency weakness and other economic disruptions. This includes negative real interest rates, which drop the yield on a government bond below zero. The yellow metal rallied more than 1 percent following Yellen’s statements on Tuesday, after contracting last week.

I’ve also discussed in detail how municipal bonds have done well even when equity markets turn especially volatile, and now might be a good time to consider them with recessionary fears rising. Muni bond funds have seen 24 consecutive weeks of net inflows, according to financial services firm Baird, with $901.5 million moving into them in the week ended March 23.

Plus, the Fed has indicated it still plans to raise interest rates at least twice this year. Bond prices fall when rates rise, but short-term munis are less sensitive to rate fluctuations than longer-term bonds.

Last Chance to Register!

To learn more about muni bonds, I invite you to join us later today as fixed-income investment analyst Juan Leon and I discuss the power of tax-free, stress-free income. I hope you’ll be there!  

Tax-Free, stress-free income: the power of Muni Bonds - A Webcast Event

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

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

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Rising Global Taxes and Regulations (Indirect Taxation) Are Chipping Away at the Benefits of Low Interest Money
March 21, 2016

Fracking Now Half of U.S. Crude Oil Production

During a trip to New York last week I was able to talk gold and commodities on Bloomberg TV, and also had the pleasure of hearing Canadian Prime Minister Justin Trudeau address Wall Street investors in the Bloomberg studios the same day. Trudeau discussed his plan for new infrastructure spending of C$60 billion over the next 10 years, as a means to lift the country’s highly oil-dependent economy. Trudeau answered questions on his country’s federal fiscal deficit and I was able to ask him about the amount of Ontario’s debt in particular. Ontario has twice the debt as the state of California and only half of its population.

Canada Prime Minister Justin Trudeau speaks to Bloomberg in New York this weekIn the U.S., states are held to a strict balanced budget standard when it comes to fiscal taxation and spending, while the federal government can let the budget go into deficit spending. In Canada, however, it’s the opposite, and the provinces seem to have abused their debt levels, but Trudeau is ready to help.

The former Prime Minister of Canada, Stephen Harper, never smiled like Justin Trudeau. But he was a great defensive leader, and his conservative leadership allowed the country to successfully weather the financial crash of 2008. Now the current government can leverage that strong balance sheet to stimulate economic activity.

During the Bloomberg conference, Trudeau sought to reassure his audience that he will remain cautious on spending.

Creeping Taxation and Negative Interest Rates Ignite Global Caution

Compliance and regulation measures have intensified from the financial sector to the food industry, from the U.S. all the way to Brazil. Many CEOs of banks, as well as brokers that I have spoken with recently, have lamented on the financial burden of excessive regulation and the indirect taxation that comes along with this rise in rules on steroids. Regulations are fueled with good intentions; however, the unexpected consequences like slow global growth need to be adjusted.

In Brazil, the government promotes short-term government bonds to fund its bloated government workforce. The anti-capitalist nature of Brazil’s government extends to extreme limitations on public markets, where new companies can only go public by offering shares at $1,000. And I’ve shared with you before how Colombia’s citizens are taxed at every turn.

Meanwhile, central bankers around the world captured headlines last week, and it looks as if easy money is here to stay for the time being, as well as high taxes and regulations. The prevailing message was that global economic conditions have not improved well enough to support any significant changes to monetary policy, which now has interest rates around the globe at near-zero or, in some cases, subzero levels.

Janet YellenThe week before last, the European Central Bank (ECB) came out with deeper cuts to already-negative rates and steeper purchases of bonds, from 60 billion euros to 80 billion euros. This was followed on Tuesday by the Bank of Japan’s (BoJ) decision to leave negative rates unchanged as it assesses the impact of its controversial policy, which shocked global markets when it was unveiled in January. Likewise, the Bank of England decided on Thursday to keep interest rates at the historic low of 0.5 percent.

As I (and many others) expected, the Federal Reserve also put rates on hold, even as the U.S. economy is showing signs of improvement in employment, housing and inflation. According to Fed Chair Janet Yellen, a soft global economy made a rate hike too risky.

Be that as it may, our emphasis on central bank actions is way overdone and in many ways a distraction from what’s really important: balanced fiscal policy. Today, many investors expect central banks to jumpstart the global economy, and indeed their decisions can have huge consequences. But they can’t do it alone. What we need is a commitment to streamline regulation and relax taxes, with prudent spending on economy-boosting infrastructure, manufacturing and construction. Until that happens, it doesn’t matter how low policymakers drop rates or how much debt they purchase.

Tailwinds to Global Growth

I’ve written before about how we use the purchasing managers’ index (PMI) as a forward-looking indicator. It’s like using the high beams on your car, to see where the economy is headed three or six months from now. In the latest PMI update from February, the reading trended downward to 50.

Industrial production data came out last week down 0.5 percent in February. As I’ve discussed numerous times, industrial production is a subset of GDP, both of which indicate where the markets have been.

U.S. Industrial Production Heads Lower
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Regulations and high taxes are headwinds to global growth. Whether we are looking ahead or looking back, the data are showing slowdown in the global economy. We need a fiscal policy intervention to be the tailwind that pushes the economy in the right direction. We hope that the Trans-Pacific Partnership (TPP) will be signed soon, eliminating many tariffs and restrictions to trade, but it is currently held up by protests from unions. Once passed, we are optimistic the TPP will facilitate and accelerate global trade.

Gold is Smiling

The most welcome news was that the core consumer price index (CPI)—which excludes food and energy—rose 2.3 percent year-over-year in February, representing the fourth straight month of inflation and the highest rate since October 2008.

Good for Gold: Core Inflamation Heats Up
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As I’ve pointed out many times before, gold has tended to respond well when inflationary pressure pushes real interest rates below zero. To get the real rate, you subtract the headline CPI from the U.S. Treasury yield. When it’s negative, as it is now, gold becomes more attractive to investors seeking preservation of their capital. The yellow metal has risen more than 18 percent so far this year.

Other precious metals have also been strong performers in 2016, with silver up 13 percent, platinum 11 percent, and palladium 8 percent.

Good Ol’ American Ingenuity from Silicon Valley to U.S. Energy Fields

The U.S. Energy Information Administration (EIA) reported last week that hydraulic fracturing, or fracking, now accounts for a little more than half of current U.S. crude oil production. In 2000, fracking wells produced only 2 percent of the national total. Today, they make up over 50 percent of oil output—a figure that will likely continue to climb as technology improves.

Fracking Now Half of U.S. Crude Oil Production
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But since the end of 2015, overall oil production in the U.S. has begun to taper down. Last week I shared with you the fact that December’s year-over-year change in output turned negative for the first time in five years, a sign that U.S. producers are finally responding to low prices.

This decline in production is reflected in the chart below, which also shows that Iraq’s share of the global oil market has grown comparatively more than Saudi Arabia and Russia’s.

Incremental Oil Production since January 2014
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The anticipated production freeze between those two countries, therefore, probably won’t have as significant an impact on oil prices as markets are hoping for. It will only ensure that the two-million-barrels-per-day global surplus won’t get any worse.

Plus, there’s no guarantee such a freeze would stick, let alone could be agreed upon. Iran has already called the proposal “ridiculous” and plans not to reign in production until it reaches pre-sanction output levels, and Saudi Arabia is unlikely to let its chief political adversary in the region gain the upper hand.

As I’ve said before, short of geopolitics, the likeliest path to oil recovery is to coordinate a production cap on a global scale. The chances of that happening, however, are slim to none.

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

By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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

The 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 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