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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.

This Election Year Could Have a “YUGE” Effect on Markets
March 10, 2016

Who's it gonna be? Presidential Elections 2016

Ready or not, here they come. Only four months remain before we find out who the next presidential nominees will be and a mere eight months before we elect one of them to lead the world’s largest economy. That means there’s no better time than now to start thinking about how this whole process could affect your investments—and how to prepare.

The theory of the presidential election cycle was devised in the late 1960s by investment advisor Yale Hirsch and first described in the indispensable Stock Trader’s  Almanac, now edited by his son Jeffrey Hirsch. Although some of the specifics of Yale’s theory have been called into question over the years, its essence remains rock solid—namely, there’s a strong correlation between the election cycle and market performance. Like all major cycles, from seasonality trends to the weather, the election cycle helps us manage our expectations by giving us an idea of how markets might behave in certain circumstances. The past can’t guarantee what will happen in the future, but it’s a good place to start.

2016: An Atypical Election Year

According to market data going back to 1928, stocks have annually gained an average 7.5 percent, and in election years, they’ve done slightly worse, at 7 percent.

But 2016 isn’t a typical election year, and not just because our nominees could be Donald Trump, a billionaire real estate mogul and reality-TV celebrity, and Bernie Sanders, a self-described democratic socialist. If we look just at the eighth and final years of two-term presidencies going back to 1928, stocks have lost an average 4 percent.

Stocks Have Stumbled in Second-Term Election YearsThere could be a few reasons why this has been the case, one being that presidents in their eighth year aren’t eligible for reelection, making their actions a little less predictable than usual. As we all know, President Barack Obama will soon complete his second and final term, and there’s uncertainty as to who will succeed him (whether or not you’re happy to see him leave). With new leadership comes new government policies, and it’s this uncertainty that might contribute to investor jitters.

You might think that this is bad news for the market—especially after a weak 2015—but it’s worth pointing out that the data is pretty scarce. Since 1928, there have been only four presidential elections in which the incumbent was ineligible to run again: 1960, 1988, 2000 and 2008. (We’re not counting Presidents Coolidge and Johnson, who chose not to seek second full terms.) Therefore, an unusually large move in either direction will have a significant impact on the average—think 2008, when the S&P 500 Index plummeted 36 percent.

Anticipate Before You Participate

Of course, 2016 could still very well present many attractive buying opportunities. Since 1932, May has been a good entry point ahead of a summer rally during election years. (The chart below shows the monthly averages for all election years, not just those when a new president must be chosen.)

Monthly S&P 500 Returns During the Election Year
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As I often say, it’s not the party that matters so much as the policies. In Republican and Democratic administrations alike, the market has both climbed and tanked, often for reasons largely outside the president’s control. The global economy is monumentally important, as is the composition of Congress, which, after all, writes our laws and holds the nation’s purse strings.

It's the Policies, Not the Party
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The point is, reading the market tea leaves isn’t nearly as simple as looking at which party’s candidate is occupying the Oval Office.

No doubt you feel as if November can’t come soon enough, but until then, it’s essential to follow the same basic fundamentals of investing and not get too caught up in the theater of this unique election season.

 

 

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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Airlines Start Their Engines as Scheduled Service Returns to Cuba
February 17, 2016

For millions of tourists every year, Las Vegas is the premiere travel destination for luxury hotels, glitzy nightclubs and extravagant casinos. But for a time, hordes of high-rolling American celebrities and affluent vacationers were beckoned also by the sultry nightlife of Havana, Cuba. Dozens of regularly scheduled flights by the day carried pleasure-seekers from Miami to the glittering shores of the Cuban capital.

This all came to an end, of course, once the U.S. imposed a strict embargo on the Caribbean nation, following the coup led by Fidel Castro, whose rise to power devastated Cuba’s once-thriving economy.

Now, more than 50 years later, this market is set to open up once again, and airlines couldn’t be more delighted. The U.S. and Cuba both agreed this week to reestablish scheduled air service, authorizing up to 120 commercial flights a day—20 between the U.S. and Havana, another 10 between the U.S. and nine other Cuban cities.

Competition to secure route access is likely to become red hot. American Airlines, United and JetBlue have already expressed interest, with American saying it “looks forward to submitting a Cuba service proposal.” But expect many more carriers to submit counter proposals in an attempt to gain the first-mover advantage.

Once regular service begins, possibly as early as this summer, an estimated 1.5 million American tourists will make their way to Cuba within the first year alone. This raises the question of whether the island’s tourism infrastructure is ready for such an influx of visitors, representing a huge opportunity for not just airlines but also car rental companies, food and beverage companies and hotel chains. To prepare for this explosion of visitors, the Cuban government is already seeking foreign investors.

It’s important to point out here that the embargo has been lifted for all forms of travel to Cuba except pure tourism. Americans can currently visit for up to 12 different approved reasons—including business, family, education and religious activities—but if policy continues to evolve at its current rate, pleasure should also be included one day.  

American Business Returns to Cuba

Just as American tourists once flocked to Havana, so too were American businesses deeply entrenched in Cuba. Before the embargo, U.S. financial interests were involved in Cuban mines, utilities, railways, sugar production and more.

That’s set to change too, as the U.S. government just granted an Alabama company permission to build a small factory in Cuba—the first to do so in over half a century, it’s believed. The company, Cleber, will produce affordable tractors designed for the Cuban market.

With normalization between the U.S. and Cuba being restored, and populations trending younger, many Americans are starting to abandon their Cold War-era attitudes. Since 1996, Gallop has polled Americans on their overall opinion toward Cuba, and for the first time this year, a majority of respondents—54 percent—held a favorable view of the island-nation.

Majority of Americans View Cuba Favorably for First Time
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Favorability has been rising steadily since 2006, in fact, which suggests that Americans increasingly see Cuba as a potential place to visit and do business in. This is what U.S. airlines, not to mention companies in other industries, are hoping to capitalize on.

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2015: American Airlines Group Inc., United Continental Holdings Inc., JetBlue Airways Corp.

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Trump: We’re Getting Railed by High Taxes and Regulations
February 16, 2016

Donald Trump: High taxes are stunting job growth and economic developmentDuring this month’s Republican presidential primary debate in New Hampshire, businessman Donald Trump took high taxes to task for stunting job growth in the U.S., claiming that “we’re the highest taxed country in the world.”

Several critics and pundits were quick to find fault with The Donald’s comment, pointing out that many other countries have a higher tax rate than the U.S. If you look at tax revenue as a percentage of GDP, the U.S. actually ranks 27 among 34 developed countries, according to the Organization for Economic Cooperation and Development (OECD). (Denmark tops the list, followed by France, Belgium, Finland and Italy.)

The U.S. Corporate Statutory Tax Rate is the Highest in the Developed World

It’s not the first time Trump has made a wild claim, but in this case he’s right, by one very important measure—the corporate statutory tax rate. Since 1990, this rate has hovered around 39 percent, making it the highest among OECD nations, and for the largest GDP in the world.

Even when compared to 162 other countries, the U.S. still has the third highest corporate tax rate, following the United Arab Emirates (55 percent) and Chad (40 percent), where collecting taxes formally is very difficult.

To his larger point, Trump is right again. High taxes—both in the U.S. and abroad—stand in the way of global growth and create economic friction. But these taxes aren’t the only hurdle, and lowering them would be just the first step in a series of steps to lighten the burden placed on businesses.

The other hurdle is what the Competitive Enterprise Institute (CEI) calls the “hidden” tax—regulation. Complaining about income taxes is an American pastime in its own right, but regulatory costs run much higher, eating up 11 percent of the country’s $17.4 billion GDP.

The $2 Trillion Hidden Pathogen, with No End in Sight

The CEI calculates that in 2014, the annual cost of federal regulation and intervention amounted to a jaw-dropping $1.8 trillion, a figure that exceeds the $1.3 trillion collected in federal income taxes that year. Nearly $400 billion had to be spent on economic regulation alone, $316 billion on tax compliance.

Because these numbers are so large, they can be hard to conceptualize. It isn’t until you look at cost per employee that you realize just how burdensome these hidden taxes really are. In 2012, the last year such data is available, companies in every industry paid an average $9,991 per employee per year. That means if you run a business with 100 employees, you pay close to $1 million every year just to comply with federal laws and regulations. That’s $1 million you could be putting instead toward salaries and benefits and new business growth.

This has helped fuel runaway legal and compliance costs. The Wall Street Journal reported last week that fees at some of the nation’s largest corporate law firms have climbed to an unbelievable $1,500 per hour. That’s 200 times the minimum wage of $7.25, and includes only salaries, not benefits or options.

And the rules keep piling up. The chart below shows the number of proposed regulations that cost more than $100 million per year. In 2000, for instance, there were 87 new regulations costing upwards of $100 million, to say nothing of those costing less.

Major Regulations Soaring
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Following the 2008-2009 financial crisis, regulations in the banking sector spiked exponentially, as you can see in the Deutsche Bank chart below. The increase in regulations, not to mention legal costs associated with them, has caused fiscal drag and prevented the formation of capital.

More and More Banking Sector Regulation
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In a 2014 survey conducted by the Centre for the Study of Financial Innovation, global financial leaders cited regulatory pressure as the number one impediment to financial growth right now. We have excessive anti-money laundering laws mandating that every transaction be scrutinized and accompanied by supporting documentation. It’s currently easier to buy marijuana in Colorado than it is to open an investment account. If government can streamline the purchase of weed, why can’t it do the same for investing? The regulators seem to be saying there’s more risk in investing than in smoking dope.

But this is a global phenomenon, a contagion that knows no borders. The countries that place the heaviest burden of regulation on businesses, according to the World Economic Forum, include many in Europe (Serbia, Croatia, Italy) and South America (Argentina, Brazil, Venezuela). As money managers, we see fiscal drag all over the globe as a direct result of taxation through regulation, which tends to favor government work and compliance, not innovation. Private businesses end up paying the price.

The U.S. should be a leader in this area and commit itself to reducing the blockades that impede growth and innovation. A good model for such a task is Canada’s “One-for-One Rule,” introduced in April 2012 during former Prime Minister Stephen Harper’s administration. The rule requires that when a new or amended regulation is introduced, another must be removed.

However it’s accomplished, the time has come to reverse this economy-dragging trend. We also remain encouraged by the Trans-Pacific Partnership (TPP), which promises to eliminate 18,000 tariffs around the globe and unleash trade.

Gold Fear Trade Crackles as Recessionary Worries Hit Market

In times of economic uncertainty and market turmoil, investors have tended to reposition into so-called “safe haven” assets, including gold and municipal bonds. Today is no exception. With talk of a global recession rattling markets around the world, gold had its best start to the year since 1980, putting to rest last year’s speculation that the yellow metal has lost its haven appeal.

Gold is currently up 20 percent year-to-date, compared to a loss of 10 percent for the S&P 500 Index, which adds weight to the belief that the metal works well as a diversification instrument.

Stocks Tank, Gold Soars
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Fears of negative interest rates have also spurred record gold investing and retail buying, as the metal acts as a better store of value in an environment where it costs interest to have the government hold your money. Negative rates seem to be the new favorite trick of central banks, from Sweden to Switzerland to Japan, and during her Congressional testimony last Thursday, Federal Reserve Chair Janet Yellen commented that negative rates in the U.S. “aren’t off the table.” Gold shot up $50 by the end of the day.

Demand was robust in 2015, with investment up 8 percent from the previous year, according to the World Gold Council (WGC). Central banks continued to add to their reserves, resulting in the second highest annual demand in the WGC’s records. In the fourth quarter, central bank purchases, led by China and Russia, were up an impressive 25 percent over the same quarter in 2014.

Mark Cuban just bet big on gold.

The smart money seems to think this gold rally isn’t over. As of February 2, money managers’ net long positions surged to a three-month high while short bets declined dramatically, according to data from the Commodity Futures Trading Commission (CFTC). And last week billionaire Mark Cuban, owner of the Dallas Mavericks and “Shark Tank” investor, told CNBC that he had just bought “a lot” of call options in gold, saying: “When traders don’t know what to do, they go where everybody is. And I thought that would be gold.”

Many investors, sensing additional risk in stocks, are likewise seeking shelter and tax-free income in muni bonds. Munis also come equipped with attractive tax advantages, shielding investors from taxes at the federal level and often at the state and local levels too. That means they can help “Obamacare-proof” your interest from the 3.8 percent Affordable Care Act (ACA) tax on investment income (applicable to those who make more than $200,000 in taxable income per year).

In 2015, munis, as represented by the Barclays Municipal Bond Index, were actually the top fixed-income asset class, beating both Treasuries and corporate debt. But they also outperformed S&P 500 stocks, gaining more than double what equities delivered.

Muni Bonds Outperformed Other Major Bond Categories in 2015
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Billions of dollars fled domestic equity funds on a near-weekly basis in 2015 as investors anticipated a rate hike, which the Fed finally implemented in December. Meanwhile, muni fund inflows have been positive since October, according to Morningstar, with no signs of slowing in the near-term.

 

Learn more about this $3.7 trillion 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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.

Diversification does not protect an investor from market risks and does not assure a profit.

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10 Numbers to Know for the Chinese New Year
February 8, 2016

Happy Chinese New Year! 2016: Year of the Fire Monkey

For decades now, China has been the leading driver of global growth, consuming unfathomable amounts of raw materials and commodities.

Today, the Asian giant is undergoing dramatic changes, as its government deepens reforms and opens the country’s economy up to foreign investment. The size of its middle class is rapidly expanding in size, giving a huge boost to domestic consumption. And with the creation of the Asian Infrastructure Investment Bank (AIIB) and the renminbi’s inclusion in the International Monetary Fund’s (IMF) reserve currency, China’s role in global financial markets is growing in importance.

No one can deny that challenges lie ahead, but opportunities are still abundant.

With this in mind, I’ve put together 10 figures to know as China enters a new year.

9th

As the ninth animal in China’s 12-zodiac cycle, the monkey is considered confident, curious and a great problem-solver. But 2016 is also the year of the Fire Monkey, which adds a layer of strength and resilience.

2.9 Billion

It’s been called the world’s largest annual human migration. “Chunyun,” or the Spring Festival, refers to the period around the Chinese New Year when people travel by plane, train and automobile to visit friends and family. Between January 21 and March 3, nearly 3 billion trips will be made, exceeding the number of Chinese citizens. Close to 55 million of these trips are expected to be made by air.

Chinese Tourists will take 2.9 billion domestic trips during this year's spring festival - U.S. Global Investors

For the third straight year in 2015, China topped the list of international outbound travelers, with 120 million people heading abroad. Collectively, they spent $194 billion across the world.

6 Million

Not all destinations are within China’s borders, however. According to CTrip, a Chinese online travel service, Spring Festival tourists have booked a record 6 million outbound trips. As many as 100 different countries will be visited, with the farthest region being Antarctica.   

180 Tonnes

A shaky stock market, depreciating renminbi and low global prices have spurred many Chinese consumers to turn to gold. Imports of the yellow metal are way up. Last month I wrote that 2015 was a blowout year, with China consuming more than 90 percent of the total annual global output of gold. In December, the country imported 180 tonnes from Switzerland alone, representing an 86 percent increase over December 2014. This news supports the trend we’ve been seeing of gold moving West to East.

The Great Tectonic Shift of Physical Gold From West to East

The precious metal is currently trading at a three-month high.

49.4

For the month of January, the Chinese government purchasing managers’ index (PMI) eased down from 49.7 in December to 49.4 in January, indicating further contraction in the country’s manufacturing sector. The reading remains below its three-month moving average. More easing from China’s central bank, not to mention liberalization of capital controls, could be forthcoming this year to stimulate growth and prop up commodities demand.

Chinese Manufacturing Sector Continues to Shrink
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$6.5 Trillion

Although manufacturing has cooled, 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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109 Million

One of the main reasons for this surge in consumption is the staggering expansion of the country’s middle class. In October, Credit Suisse reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durable and luxury goods, vehicles, air travel, energy and more.

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

But middle-income families aren’t the only ones growing in number. The World Economic Forum estimates that by 2020, upper-middle-income and affluent households will account for 30 percent of China’s urban households, up from only 7 percent in 2010.  

$1.6 Trillion

China's e-commerce consumption Set to Grow Over 160% Between 2015 and 2020

Consumption has also benefited from the emergence of e-commerce. Not only are younger Chinese citizens spending more than ever before, they’re doing it more frequently, as e-commerce allows for convenient around-the-clock spending. Such sales could grow from $0.6 trillion today to a massive $1.6 trillion by 2020.

Mobile payments will continue to play a larger role as well. Purchases made on a smartphone or tablet are expected to make up three quarters of all e-commerce sales by 2020.

24.6 Million

With a population of more than 1.3 billion, China is the world’s largest automobile market. The country certainly retained the title last year, selling 24.6 million vehicles, an increase of 4.7 percent over 2014. The U.S., by comparison, sold 17.2 million. According to China’s Ministry of Public Security, the Asian country added a staggering 33.74 million new drivers last year, which is good news for auto sales going forward.  

6.5 Percent to 7 Percent

Many China bears point out that GDP growth in the Asian country has hit a snag. There’s no denying that its economy is in transition, evidenced by the government’s 2016 growth range of between 6.5 and 7 percent, a demotion from 2015’s target of 7 percent. But it’s important to acknowledge that China is still growing at an enviable rate.

Here’s one way to look at it, courtesy of Jim O’Neil, the commercial secretary to the British Treasury and the man who coined the acronym BRIC (Brazil, Russia, India, China). O’Neil calculates that even if China grows “only” 6.5 percent this year, the value is still equivalent to India growing 35 percent or the United Kingdom growing 22 percent.

For this reason and more, China remains a long-term growth story, and “there are many reasons to expect that in 10 or 15 years, China will be a greater, not a lesser, power than it is today,” says Stratfor Global Intelligence.

To all of my friends and readers both here and abroad, I wish you copious amounts of happiness, health and prosperity this Chinese New Year!

 

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

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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Franco-Nevada: Royalty of the Gold Industry
January 6, 2016

Standing next to Pierre at Mines and Money London in December 2015

In 1983, my friends and early mentors Seymour Schulich and Pierre Lassonde founded Franco-Nevada Mining, the world’s first gold royalty company.

The two uniquely gifted money managers were on to something big. It was originally Seymour—then an oil analyst at the Canadian investment firm Beutel, Goodman & Company, where he and Pierre met—who recognized that the royalty model used in the oil and gas industry had some of the highest returns on capital.

At the time, no one had applied this business strategy to the precious metals industry. Venture capital was challenging to secure. But with Seymour’s fastidious money management and Pierre’s vast mining expertise, the two raised $2 million. (That’s according to “Get Smarter,” Seymour’s 2011 memoir aimed at mentoring young Canadian professionals, which I highly recommend.)

Fast forward more than 30 years, and Franco-Nevada now has a market cap of over $8.2 billion, making it the world’s largest and most successful gold royalty company.

Franco-Nevada was my first initial public offering (IPO) to work on as a young analyst at Toronto-based, boutique investment firm Merit Investment Corp. Even then, I recognized the superiority of the business model. For the next 20 years, until it merged with Normandy Mining and Newmont Mining in 2002, I watched the company return an average 38 percent to shareholders annually.

Ever since its second IPO—Newmont spun it off in 2007—Franco-Nevada’s stock has outperformed both gold bullion and global gold miners.

Franco-Nevada Ahead of the Curve
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Today, I’m just as convinced of Franco-Nevada’s business model. Its uniqueness allows the company and its royalty peers to generate high gross margins and ever-expanding dividends.

Class Acts in Philanthropy

I feel extraordinarily blessed to be able to call Seymour and Pierre my friends. The two are certified superstars of the resource sector. Pierre’s “The Gold Book,” published in 1990, is a seminal masterpiece on the topic of gold investing.

But beyond that, they’re just exceptional human beings, both of them loving husbands and fathers. Their differing personalities complement each other well. Whereas the frugal Seymour prefers to drive the same Lincoln for decades, Pierre enjoys the engineering and sleek design of a Ferrari.

The colorful interior of the Pavillons Lassonde de I'Ecole polytechnique MontrealBoth are among the most generous philanthropists alive today, responsible for donating hundreds of millions of dollars to various causes in Canada as well as abroad. Pierre is a benefactor of the Lassonde Entrepreneur Institute at the University of Utah, which pairs faculty members with business, engineering and science students and helps them write business plans. In 2011, he donated a massive $25 million to expand the School of Engineering at York University, where the Computer Science & Engineering Building was renamed the Lassonde Building in honor of his generosity over the years.

At the École Polytechnique de Montréal, Canada’s top engineering school—and where Pierre received one of his many degrees—a series of buildings named for Pierre and his late wife Claudette house the library and departments of computer and electrical engineering. In 2004, these buildings received the coveted Pilier d’or—Canada’s highest award for philanthropy in the French-Canadian community—for their “respect for the environment, efficiency objectives with a focus on sustainable development, technological innovation and innovative energy use,” according to the university.

In December 2015, Pierre received Mining Journal’s Lifetime Achievement Award at the Mines and Money conference in London.


Similarly, Seymour is a benefactor of several schools and organizations, including the Schulich School of Business at York University in Toronto, which offers the Kellogg-Schulich Executive MBA program—ranked #1 in the world by The Economist—as well as the Schulich School of Medicine and Dentistry at Western University. He’s also benefactor to the Schulich Heart Centre at Sunnybrook and Women’s College Health Sciences Centre in Toronto, the Library of Science and Engineering at McGill University and many others across Canada and the U.S. McGill, in fact, renamed its music program the Schulich School of Music in September 2005 in recognition of Seymour’s gift of $20 million, the largest such gift in the history of the university.

The schulich School of Business at York University, recognized as one of the world's most beautiful business schools.

“My main focus now is a $100 million project called the Schulich Leader Scholarships, which go to students pursuing science, technology, engineering and math studies,” Seymour told The Globe and Mail in January 2015. “The scholarships amount to $80,000 over four years. You can’t believe these kids. They are going to be the future of this country.”

Each year, the Schulich Leader Scholarships fund 50 undergraduates in the fields of engineering, science, technology and math. In 2000, Seymour was awarded the Order of Canada, the highest honor a Canadian citizen can receive. It’s comparable to being knighted (in the UK) or receiving the Presidential Medal of Freedom (in the U.S.).

I still remember being invited by Seymour to accompany him during one of his famous Sunday morning, two-hour walks. As we strode along, he shared with me the topic of a book he was reading, “Learned Optimism” by University of Pennsylvania professor Martin Seligman. He explained in detail that just as people can learn helplessness, so too can they cultivate optimism.

Similarly, many resource investors right now might feel discouraged by low commodity prices. But Franco-Nevada gives us reason to feel optimistic.

Blue Skies Ahead: Superior 14 Percent Dividend Growth Rate

As a refresher, royalty companies basically serve as specialized financiers that help fund cash-strapped producers’ exploration and production projects. In return, they receive either royalties on whatever the project produces or rights to a “stream,” a commitment to an agreed-upon amount of the commodity per year. 

Royalty companies have a history of rewarding their investors handsomely, even during economic downturns. Between 2007 and 2014, Franco-Nevada, Silver Wheaton and Royal Gold—the “Three Amigos”—had a combined dividend growth rate of 14 percent. Compare that to 5 percent growth for S&P 500 Index companies and between -3 and 3 percent for precious metals miners.

Royalty Companies Provided Better Dividend Growth than
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Since 2011, Franco-Nevada has raised its dividend incrementally from $0.04 per share to $0.21 per share—a phenomenal increase of 424 percent. What’s even more amazing is that it’s managed to do this even as spot gold has declined 38 percent.

Like other royalty companies, including the new kid on the block, Osisko Gold Royalties, Franco-Nevada has a much lower total cash cost than miners do. Dundee Capital Markets estimates that whereas gold miners produce at a breakeven cost of $1,087 per ounce, royalty companies get by with a materially lower cost of just $441 per ounce.

They’re just better allocators of capital and very aware of the risks of dilution and value factors on a per share basis. The mining companies, on the other hand, have diluted the value of their reserves and cash flow on a per share basis with poor acquisitions.

Take a look at how Franco-Nevada, Silver Wheaton and Royal Gold stack up against Newmont, the only gold company in the S&P 500 Index, and Goldman Sachs. When it comes to sales per employee, the royalty companies largely win out. Their balance sheets are also much less leveraged. Franco-Nevada, in fact, carries no outstanding debt. This helps eliminate many of the investment risks faced by operators such as Newmont, which typically have huge capital and operating costs. Franco-Nevada’s balance sheet and gross margins make it a much more attractive buying opportunity.

Royalty Companies vs. Newmont Mining & Goldman Sachs

It’s also worth pointing out that Franco-Nevada has a broader portfolio of royalties than its peers and pays its fair share of Canadian income taxes. One of the few risks involved with Silver Wheaton is its dispute with the Canada Revenue Agency, the “IRS” of Canada, which hopefully will be resolved sometime this year. Not all royalties companies are entirely risk-free, but their business model remains superior.

Another big value is the power of optionality. Royalty companies get an option on all future exploration and potential growth at no additional cost. In other words, mineral deposits are very often larger than what a royalty company pays for.

“The transaction price is largely determined by known reserves on the resource statement, as the royalty company is not going to pay a premium for undiscovered ounces,” explains USGI portfolio manager and precious metals expert Ralph Aldis. “However, the mining company is always incentivized to find more ounces, thus deferring the closing costs of the mine, which is beneficial to both parties.”

This is what’s known as “blue sky.” At the time of the deal, only the documented reserves and some portion of the defined resources are generally part of the valuation proposition. However, as time passes, the company will explore for new resources on the property. If anything is found, the royalty company will generally get paid for any future ounces, with some limitations.

Royalty Companies Dodge Many of the Risks Miners Face

Royalty companies avoid many of the industry’s most common challenges, including huge operating expenses, unions, liabilities and legal hurdles. They don’t build the mine’s infrastructure, experience capital cost inflation or have teams of miners and other personnel on their payrolls. (Franco-Nevada currently has fewer than 30 employees. Newmont, by comparison, has around 28,000.) They’re not responsible for cost overruns or maintenance.

Nor must they worry about mining in a country that operates under a completely different legal system. The U.S., Canada and Australia, home to some of the world’s largest mining companies, all follow common law. Yet many American, Canadian and Australian companies produce in civil law countries found mostly in Latin America and parts of Africa.

Common and Civil Law Countries

In civil law countries, the government has eminent domain over all mineral wealth of the country. Securing rights and permits is therefore much more bureacratic and arduous, and at any time, the government can attempt to revoke them. Surface rights and subsoil rights are often governed by entirely different sets of laws. And although they’ve improved since the 1980s, mining duties, income taxes and tax royalties still tend to be steep and unstable.

Is the “Smart Money” Telling Us that Gold Has Hit a Bottom?

When gold soared to $1,900 per ounce in 2011, many producers, expecting the good times to last, spent like crazy. The royalty companies, meanwhile, prudently kept their powder dry and built up their cash. Now that gold is hovering in the $1,085 range, down 38 percent since the all-time high, they’ve started deploying their massive reserves to buy streams from desperate sellers. Franco-Nevada recently agreed to pay $610 million for a portion of silver production from Teck Resources’ Antamina copper and zinc mine in Peru.

Many analysts call Franco-Nevada and the other two major royalty companies the “smart money” of the gold industry. I have to agree. They have huge intellectual capital and employ mining engineers, metallurgists, geologists and financial consultants. They’ve acted as bellwethers in the past, giving investors a good reading of where prices and sentiment could be headed.

Such is the case right now.

Investment dealer Paradigm Capital reports that the top three royalty companies have spent a collective $3.8 billion over the past half year of 2015.

“We doubt there has ever been such a spending period,” the investment group writes, noting that when you see this level of investing, it’s often a good sign of a bottom in prices.

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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.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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

Portfolios are actively managed, and 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 Funds as of 9/30/2015: Franco-Nevada Corp., Newmont Mining Corp., Silver Wheaton Corp., Osisko Gold Royalties Ltd.

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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