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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.

The Real Truth About Millennial Investors
August 29, 2016

Millennials are expected to control up to $24 million by 2020

We’ve finally reached late August, meaning your Facebook newsfeed is probably brimming with children and teenagers sporting brand new sneakers and backpacks in preparation for their first day of school. Maybe one or two of your young ones are heading back this week or next. If so, I wish them all the best this year, and I hope you enjoy and cherish watching them grow.

It’s also around this time that hundreds of thousands of 18-year-olds will be attending their very first day of college or university. This cohort, born mostly in 1998, is among the youngest of millennials, the generation born between 1980 and 2000. According to Census Bureau data, millennials are now the most populous adult segment in U.S. history, 83.1 million strong as of last summer. (By comparison, baby boomers number 75.4 million.)

This is why I find it so crucial to keep up with the trends, lifestyles and spending habits of this important group (not least of all because my own two sons belong to it). Any investment manager would be wise to do the same. Millennials are often characterized as entitled, lazy and disengaged, but many of these perceptions fail to stand up to scrutiny when we consider what they’ve already achieved in the information technology space. If you regularly use Facebook, Airbnb, Uber, Pinterest, Dropbox or any number of other popular apps valued in the tens of billions, you benefit from the work and imagination of entrepreneurs who came of age sometime during George W. Bush’s eight-year presidency.

There’s no getting around it: Millennials are our future leaders, innovators, consumers and investors. By 2020—a mere four years from now—they will make up an estimated 50 percent of the global workforce. What’s more, they’re expected to control between $19 trillion and $24 trillion on a global scale, according to consulting firm Deloitte.

Twenty-four trillion dollars. Let that sink in for a moment.

The First Digital Natives

One of the best ways to get a clear sense of the world this group has come of age in, I’ve found, is the Beloit College Mindset List. Every August since 1998, Beloit College has put together a list of cultural touchstones that helped shape and influence the current incoming class of college freshmen.

Last year, I was fascinated to learn that the class of 2019 has always depended on Google to answer their questions, always treated Wi-Fi as an entitlement, always known marijuana as a legal therapeutic substance in a growing number of states.

This year’s list for the class of 2020 is no less eye opening. Below, I’ve selected several points that illustrate millennials’ close relationship with digital technology.

  • There has always been a digital swap meet called eBay.
  • They have never had to watch or listen to programs at a scheduled time.
  • If you want to reach them, you’d better send a text—emails are oft ignored.
  • Books have always been read to you on audible.com.
  • Bluetooth has always been keeping us wireless and synchronized.
  • Airline tickets have always been purchased online.  

Millennials are expected to control up to $24 million by 2020Taken together, these observations shed some light on the expectations millennials have of their brands and services—expectations such as convenience, immediacy, transparency and a strong sense of community. It doesn’t matter how iconic or longstanding a brand is. If it fails to deliver on these expectations, 83 million millennials will antiquate it. (Remember Blockbuster?) Word of mouth is as important as ever, but the scope has vastly been broadened since their parents and grandparents’ time, from a handful of neighbors and acquaintances to a digital sea of millions.

Social Responsibility Matters

More so than past generations, millennials are mindful of ethical business practices and base many of their spending and investment decisions on those practices.

A recent study conducted by marketing tech firm Adroit Digital found that 38 percent of millennial consumers will drop a brand for another if it’s alleged to be doing “bad business”—consciously polluting a river, for example, or mistreating workers.

That social awareness translates to the investment side, even among wealthy investors. A vast majority of younger high-net worth individuals (HNWIs), defined as those controlling wealth greater than $10 million, expect their money managers to “screen investments based on environmental, social and governance factors,” according to FactSet. Sixty-one percent of millennials see these factors as essential, more than double the rate of their 55-and-older peers.

Younger Investors More Interested in "Socially Responsible" Investments
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Proceeding with Caution

The 2008-2009 financial crisis had a huge, lasting impact on young investors, who might have seen the value of their parents’ 401(k)s and portfolios cut nearly in half. As a result, many twenty and thirtysomethings tend to be a bit more cautious and conservative with their finances than Mom and Dad.

Consider this: In December 2015, UBS surveyed 2,638 affluent investors, including 584 millennials, on their investment attitudes. As a group, millennials maintained a larger cash holding than older generations (41 percent on average, compared to Generation X’s 28 percent and baby boomers’ 20 percent) and were unsatisfied with how their portfolios were positioned. Only 15 percent claimed they were “very happy,” compared to 32 percent of Generation X and 50 percent of baby boomers.

This could partially explain why millennials also have a much greater propensity to rent instead of commit to buying—which, in turn, helps explain the meteoric rise of “sharing economy” pioneers such as Uber (now worth more than Ford and GM) and Airbnb (worth more than Hyatt and Wyndham Worldwide).

Meanwhile, younger and lower-income Americans are less likely than their older peers to participate in investments such as mutual funds.

Younger, Lower-Income Americans Less Likely to Invest in Mutual Funds
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This is worrisome, especially since they themselves are skeptical of Social Security’s longevity. According to the Transamerica Center for Retirement Studies (TCRS), as many as 80 percent of millennials fear Social Security will no longer be around by the time they retire.

Fortunately, we have a solution.

Dollar-Cost Averaging

For many cautious millennials, taking a more long-term, disciplined approach to investing makes sense. This can be achieved through dollar-cost averaging, an investment technique that lets you invest a fixed amount in a specific investment at regular, automatic intervals—often just $100 per month.

Think of it like dipping your foot into a lake inch-by-inch, instead of taking a running leap off a 20-foot cliff.

That’s the case with our popular ABC Investment Plan, which allows investors to fund their financial goals more affordably. Of course, no investment plan can guarantee a profit or protection against a loss in a declining market, and you should evaluate your financial ability to continue in such a program in view of the possibility that you might have to redeem shares in periods of rising and declining share prices.

But for younger investors who might feel hesitant to make the plunge all at once, the ABC Investment Plan is an option worth considering.    

 

 

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.

Fund 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 of U.S. Global Investors Funds as of 6/30/2016: Ford Motor Co., Wyndham Worldwide Corp.

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Go Gold!
August 15, 2016

Last Friday marked one week since the start of the Rio de Janeiro Olympics, and it’s been nothing short of amazing. Michael Phelps, whose name should forevermore be synonymous with the Olympics, won his 22nd overall gold medal. He also was awarded his 13th individual gold, effectively breaking a record last set in 152 B.C. by legendary runner Leonidas of Rhodes.  

What I find most remarkable about Phelps’ success is that he’s had to overcome strong personal challenges to reach the level he’s at. He was diagnosed with attention deficit hyperactivity disorder (ADHD) at a young age, and when he chose to get off his medication, he turned to swimming. More recently, he’s dealt with alcoholism, which landed him a DUI in 2014. His is a quintessentially American story of otherworldly success born out of failure, of meeting the obstacles that block his path to his goals head on.

When Phelps made the decision to compete in his fourth Olympics, he reteamed with his longtime swim coach Bob Bowman and set his mind to training harder than he ever had before—which, at his “advanced” age of 31, would be necessary if he hoped to have a shot at winning the gold.

The most decorated Olympian in history, Phelps, like all winners, focuses on winning. Losers, on the other hand, focus not on winning but on the winners in front of them. They’re more concerned about the short-term noise, at the expense of their long-term goal. The image at the top is a perfect illustration of this, with Phelps’ competitor clearly more concerned with “the Baltimore Bullet” than his own performance.

But many investors, I’ve found, are the same way. Today there’s a lot of noise and distraction, which can influence investment decisions. Much of that distraction is coming from the presidential election, which is already turning out to be one of the most negative and highly contentious in American history.

Trump Self-Sabotages

Someone who could benefit from Phelps’ steadfastness and commitment to his craft is the Republican presidential candidate, Donald Trump, who all too often sabotages his own campaign with controversial and incendiary remarks.

We saw this happen last week. While speaking to the Detroit Economic Club, Trump promised that, if elected, he would place a “temporary moratorium” on any new financial regulation. Further, he would repeal the Dodd-Frank Act and reform the tax code to include only three income-tax brackets, down from the current seven.

These are solid proposals, appealing to not only everyday taxpayers but also many of the CEOs I speak with on a regular basis. After all, they’re the ones who must deal with regulations on a daily basis.

The problem, though, is that Trump can’t stay on message. In the opening image, Trump is more like the guy who’s distracted by Phelps rather than Phelps himself. Trump invariably will say something inflammatory soon after making a sensible remark on policy, thereby effectively resetting the news cycle. In last week’s case, it was his comment on “Second Amendment people”—a veiled threat against Hillary Clinton, some interpreted—that dominated the headlines, taking all attention away from the moratorium on financial regulations.  

Research Firm: Get Ready for Madam President Clinton

The cover of TIME’s August 22 edition displays a striking likeness of Trump melting like an Air Wick candle. A single word punctuates the stark image: “Meltdown.” Whether or not you support the New York billionaire, you must admit that the “Trump train” has repeatedly jumped the track since the Republican convention. What’s more, we just learned that GOP Chairman Reince Priebus is being pressured by dozens of Republican insiders to withdraw all party support, including campaign financing, from Trump’s candidacy.

Things aren’t looking good. Even regression analysis now appears to show that Trump’s chances are retreating.

In a new report, investment research firm Ned Davis makes the case that, based on historical precedent, economic as well as stock and bond market performance so far this year is pointing to an incumbent party victory in November. The chart below shows that the upward trajectory of the Dow Jones Industrial Average in 2016 more closely resembles the average performance seen in all years when the incumbent party—Republican or Democrat—held on to office.

Dow Jones Industrial Average Performance Pointing to Incumbent Party Win in November
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According to Ned Davis strategists Ed Clissold and Victor Jessup, “When the economy has not been in a recession, the odds of the incumbent party retaining control of the White House has jumped to 71 percent.” Since 1900, presidential elections have landed during recessions five times. In four of these instances (1920, 1932, 1960 and 2008), the incumbent party lost. The exception was 1948 when Harry Truman won—just barely, if you remember your history—but the recession began the same month as the election.

The group points out, however, that it’s extremely rare for a two-term Democrat to pass the baton to a new Democrat via election. How rare? The last time this happened was in 1836, when Andrew Jackson—the very first Democratic president—was succeeded by Martin Van Buren.

Hillary for Precious Metals

I’m very often asked which candidate will be better for gold: Trump or Clinton? The honest truth is that the answer changes week-to-week. Sometimes it’s Trump because he has demonstrated unpredictability and unpreparedness. Other times, it’s Hillary because she has proposed policies that were clearly inspired by the socialist leanings of Bernie Sanders, who still remains very popular among far-left Democrats. In her economic address last week, she laid out her plan to make college “debt-free” and tuition absolutely “free” to children from families who earn less than $125,000 a year.

To make this plan happen, of course, income taxes will most likely need to be hiked. And if history tells us anything, it’s that gold demand has increased when socialist policies threatened economic growth. The price of gold is inversely correlated with the five-year and 10-year Treasury yields, which fall when the economy is floundering. This makes the yellow metal all the more attractive to investors.

That’s why I always recommend a 10 percent weighting in bullion and gold stocks, in both good and bad times. Gold has a history of holding its value even during economic turmoil, which is why it’s prudent to maintain an allocation in your portfolio.

Alibaba Beats Expectations. Is China Next?

Last Thursday, giant Chinese ecommerce site Alibaba posted spectacular numbers, suggesting a turnaround for the world’s second biggest economy possibly isn’t too far behind. Alibaba—whose 2014 IPO stands as the largest in U.S. history, according to Renaissance Capital—posted quarterly revenues of $4.8 billion, a whopping 60 percent increase from the same time last year, and the biggest ever since before the company went public.

This is constructive news for China. Alibaba works with a reported 8.5 million sellers, from mom-and-pop-type shops to multibillion-dollar, international corporations, making for a good cross-section of the Chinese economy. (You could argue the same of Amazon and the U.S. economy.) That Alibaba’s sales are up indicates that consumption in China is stronger than perhaps analysts anticipated. Indeed, Beijing reported that retail sales grew nearly 11 percent in the second quarter  year-over-year, beating estimates of 9.9 percent.   

 

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

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2016.

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The Olympic Games Reflect Our Love of Gold
August 11, 2016

a gold laurel wreath dating from the 3rd or 4th century BCE

Every child knows Olympic gold medals are for first place, silver for second and bronze for third. But where does this tradition come from?

Like most everything else relating to the Olympics, we can trace the tradition back to the ancient Greeks, who assigned metals (not medals) to different Ages of Man. First among them was the Golden Age, characterized as a peaceful time when humans and gods lived in harmony and food was plentiful. The Greeks believed this to be the pinnacle of our existence, after which it all went downhill. Following that golden period came the Silver Age, when childhood lasted 100 years. Then, the Bronze Age, a time of violence and destruction among warring tribes.

The Greeks weren’t alone in their reverence of gold, of course. It fascinates me that nearly every ancient people, no matter the continent or region, imbued the precious metal with the same degree of sacredness and purity. One of the earliest known metals, gold was valued for its resemblance to the sun, itself worshipped as a powerful deity in many cultures. The ancient Incans, in fact, referred to gold as “sweat of the sun.” When you held a gold nugget, it was believed, you held a piece of the gods themselves.

Michael Phelps showing off his Olympic gold medals on the August 2008 cover of Sports IllustratedAlthough most of us no longer believe gold emerged from the sweat glands of great celestial beings, we nevertheless still hold the metal in very high regard. This is what I often refer to as the Love Trade, the proof of which can be seen all around the globe—from beautiful gold wedding rings in the U.S., to finely crafted bridal jewelry in India, to gold coins given to newborn babies in South Korea. So high is our regard for gold that we reward the world’s most gifted athletes—our modern day Greek gods and goddesses—with a small disk of the stuff.

More or less.

Alas, today’s Olympic gold medals contain only a small trace of the yellow metal. According to Kitco News, they’re about 95 percent silver and 1.2 percent gold, making them worth nearly $570 at current prices. (Of course, the real value is much higher. A gold medal earned by an obscure athlete can go for $10,000 at auction, and the price goes up from there. Jesse Owens’ gold medal, awarded during the 1936 Berlin Games, sold for $1.47 million in 2013.) The last (and only) time medals were 100 percent pure was during the 1912 games in Stockholm.

If this seems disappointing, it’s better than it once was. In ancient Greece, winners weren’t awarded a medal of any kind. Instead, they were crowned with wreaths of olive branches, a tradition that was observed in the first modern Olympics, the 1896 Athens Games. It wasn’t until the 1904 St. Louis Games that the current practice of awarding gold for first, silver for second and bronze for third was standardized.

Gold Has Taken the Gold Compared to Most Major Asset Classes

the first Olympic gold medal was awarded during the 1904 Games in St. Louis Besides the pageantry and superhuman athleticism, fans and viewers are drawn to the competitiveness that’s on display at the Olympic Games. Athletes have trained for countless hours to prepare for their events, often costing their families tens of thousands of dollars in the hopes that they will stand atop the winners’ podium and be awarded the gold medal.

Likewise, many investors, myself included, gain a lot of pleasure (and heartache) watching their favorite asset classes perform in global markets—including gold.

There was much heartache indeed during the recent bear market that sunk gold from its 2011, all-time high of $1,900 an ounce to its trough of $1,053 near the end of 2015. Since the start of the year, however, the yellow metal has rallied more than 26 percent, leading many analysts and brokers— including Paradigm Capital, HSBC, RBC Capital Markets and the World Gold Council (WGC)—to declare this the beginning of a new upcycle, as uncertainty over central bank policy is deepening.

gold has outperformed most asset classes
click to enlarge

According to the WGC, gold has outpaced other major benchmarks and asset classes for both the one-year (horizontal axis) and year-to-date (vertical axis) periods of return. In addition, the metal’s volatility has been fairly comparable to S&P 500 Index stocks. (In the chart above, volatility is represented by the size of the circles.) The Love Trade is still strong globally, but much of gold’s appeal right now stems from investors’ concerns that unconventional monetary policies have not been effective at jumpstarting growth.

Gold is up not just in U.S. dollars. It’s also rising steadily in countries with a major presence in the gold-mining space, including the U.K., Turkey and Russia. Note the huge spike in pound sterling-priced gold following the Brexit vote and subsequent currency drop.

gold returns priced in various currencies
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These Gold Funds Are Built to Compete

That doesn’t mean all gold funds have provided the same level of performance. Like a highly trained Olympian, our Gold and Precious Metals Fund (USERX)and World Precious Minerals Fund (UNWPX) have demonstrated a competitive edge in a cutthroat competitive space.

Check out the stats: According to Morningstar data, the Gold and Precious Metals Fund ranked five out of 73 Equity Precious Metals funds for total return for the one-year period as of June 30, 2016. The fund also ranked six out of 69 and 35 out of 50 such funds for total return for the five- and 10-year periods.

As for the World Precious Minerals Fund, it ranked two out of 73 Equity Precious Metals funds for the one-year period, 44 out of 69 funds for the five-year period and 47 out of 50 funds for the 10-year period as of June 30.

What’s more, USERX and UNWPX have BOTH been recognized by Morningstar, with USERX earning four stars overall among 71 Equity Precious Metals funds and UNWPX receiving five stars for the three-year period among the same number of funds.

Morningstar Rating
    Gold and Precious Metals Fund   World Precious Minerals Fund
  Overall/71 Overall/71
  3-Year/71 3-Year/71
  5-Year/69 5-Year/69
  10-Year/50 10-Year/50

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: June 30, 2016

Don’t settle for the bronze! I invite you to explore the performance and holdings of the Gold and Precious Metals Fund and World Precious Minerals Fund.

SHOW ME THE WAY TO GOLD INVESTING!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end here or by calling 1-800-US-FUNDS.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Ratingä based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts. The Barclays High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included. The Barclays 1-3 Month Treasury-Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturely of less than 3 months and more than 1 month, are rated investment grade and have a $250 million or more of outstanding face value. The Barclays U.S. Credit Bond Index represents publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity and quality requirements. To qualify, bonds must be SEC-registered. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial and Finance, which include both U.S. and non-U.S. corporations.

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.

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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
click to enlarge

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

click to enlarge

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.

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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 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
click to enlarge

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
click to enlarge

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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Net Asset Value
as of 06/15/2018

Global Resources Fund PSPFX $5.83 -0.08 Gold and Precious Metals Fund USERX $7.61 -0.07 World Precious Minerals Fund UNWPX $3.89 -0.06 China Region Fund USCOX $11.80 -0.04 Emerging Europe Fund EUROX $6.72 -0.10 All American Equity Fund GBTFX $25.97 0.05 Holmes Macro Trends Fund MEGAX $20.22 No Change Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change