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These Are the 8 Busiest Airports in the World
May 28, 2015

I spend a lot of time in airports as I travel to and from speaking engagements and other events. Recently I spoke at the Asia Mining Congress in Singapore, and next week I’ll be in Vancouver to speak at the Canadian Investor Conference.

As bustling as airports already are, they’re about to get a whole lot busier, if the analysts are correct.

Industry trade group Airlines for America estimates that 222 million passengers will fly on U.S. carriers between June 1 and August 31, surpassing the previous record set in 2007. Among those passengers will be an unheard-of 31 million people on international flights. This will push up the number of travelers passing through airports all over the world.

With that in mind, I highlighted the eight busiest airports around the globe in terms of total passenger traffic, according to the latest data from Airports Council International. Together, they serviced over 603 million people in 2014, with many more expected this year.

Charles de Gaulle Airport

8. Charles de Gaulle Airport (CDG)

No. of Passengers (2014): 63.8 million

Owner & Operator: Aéroports de Paris

Named for the former French general and president, Charles de Gaulle Airport was completed in 1974 after eight years of construction and is now the second-busiest airport in Europe. Terminal 1 is known for its unique rotunda design, encircled by seven satellite buildings. The airport serves as the principal hub for Air France and is a major European hub for Delta Air Lines.

Chicago O'Hare International Airport

7. Chicago O’Hare International Airport (ORD)

No. of Passengers (2014): 69.9 million

Owner/Operator: City of Chicago/Chicago Department of Aviation

The hometown hub for United Airlines, Chicago O’Hare is actually the busiest airport in the world in terms of takeoffs and landings; over 888,000 aircraft movements took place during the 12-month period ending April 21. Chicago O’Hare has consistently been one of the busiest passenger hubs in the world after opening in 1955. It serves close to 40 different airlines and provides direct flights to more than 60 international destinations.

Dubai International Airport

6. Dubai International Airport (DXB)

No. of Passengers (2014): 70.4 million

Owner/Operator: Government of Dubai/Dubai Airports Company

As the premier airport in the United Arab Emirates, Dubai International enjoys many impressive distinctions. For starters, it’s the world’s busiest airport in terms of international passengers; in 2014 it served nearly 70 million travelers from abroad, surpassing London Heathrow’s 68 million. Dubai Duty Free, which operates out of DXB, is the most successful airport retailer in the world, generating sales of $1.8 billion in 2013 alone. And when Terminal 3 was completed in 2008, it was the world’s largest building at 18.4 million square feet, an honor it held until 2013 when the New Century Global Center in Chengdu, China was built.

Los Angeles International Airport

5. Los Angeles International Airport (LAX)

No. of Passengers (2014): 70.6 million

Owner/Operator: City of Los Angeles/Los Angeles World Airports

Not only is LAX the fifth-busiest airport in the world, but it’s also the busiest origin and destination airport. This means that, relative to other airports, many more travelers begin or end their trips in Los Angeles than use it as a connection. With a 6-percent year-over-year increase in passengers between 2013 and 2014, LAX has one of the strongest traffic growth rates in the world.

Haneda International Airport

4. Haneda International Airport (HND)

No. of Passengers (2014): 72.8 million

Operators: Japan Civil Aviation Bureau, Japan Airport Terminal Co., Tokyo International Air Terminal Corp.

Also known as Tokyo International, Haneda Airport is the second-busiest in Asia, able to handle 90 million passengers a year. It might soon reach that level, as it saw a remarkable 5.7-percent year-over-year growth in passenger traffic between 2013 and 2014. Having won the bid for the 2020 Summer Olympics, the Japanese government plans to increase airport capacity even further. Haneda is the primary base for Japan Airlines and All Nippon Airways, among others.

London Heathrow Airport

3. London Heathrow Airport (LHR)

No. of Passengers (2014): 73.4 million

Owner/Operator: Heathrow Airport Holdings/Heathrow Airport Limited

For years, London Heathrow was the world’s busiest airport in terms of international passenger traffic, a distinction that Dubai International finally claimed last year. Serving 185 destinations in 84 countries on 80 different airlines, the British airport sees a high rate of international travelers—93 percent in 2014. Formerly called London Airport, it received the name “Heathrow” in 1966, after the medieval hamlet that was demolished in 1944 to make room for the airport.

London Heathrow Airport

2. Beijing Capital International Airport (PEK)

No. of Passengers (2014): 86.1 million

Operator: Beijing Capital International Airport Company Limited

Beijing Capital is easily Asia’s busiest airport, serving 13 million more people than Tokyo International in 2014. To prepare for the 2008 Summer Olympics, Beijing Capital added the mammoth Terminal 3, currently the sixth-largest building in the world. The airport serves as the main hub for Air China, which flies out of Beijing to more than 120 destinations.

Hartfield-Jackson Atlanta International Airport

1. Hartsfield-Jackson Atlanta International Airport (ATL)

No. of Passengers (2014): 96.1 million

Owner/Operator: City of Atlanta/Atlanta Department of Aviation

Almost 100 million domestic and international flyers passed through Atlanta last year. Opened in September 1980, Hartsfield-Jackson has remained the world’s busiest passenger airport since 1998; in terms of takeoffs and landings, it’s the second-busiest. Contributing to the airport’s prominence is Atlanta’s convenient location, a mere two-hour flight from 80 percent of the U.S. population. With Hartfield-Jackson as its main hub, Delta currently operates nonstop flights to more than 150 cities, 62 of those being international destinations in 42 countries.

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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 3/31/2015: Delta Air Lines Inc., Air China Ltd.,

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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Rate Hike Ahead? Here’s How to Get Your Portfolio Ready
May 26, 2015
Caution Rate Hike Ahead

Many experts and analysts believe a June rate hike seems very unlikely, but last Friday, Federal Reserve Chairwoman Janet Yellen hinted that one might happen as soon as the end of this year:

“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.”

In light of this possibility, the question on investors’ minds should be: “How should I prep my portfolio?”

To answer that, we first need to discuss core investing.

The definition of a core holding changes slightly depending on a person’s investment goals, but generally speaking, it’s a fund or other type of security that represents the principal foundation of a portfolio, one that requires little, if any, adjustments over the long-term. In other words, it behaves pretty predictably in a variety of economic climates.

Yellen says she expects rates to be raised sometime this year.

Such securities tend to be conservative and a little “boring.” Think of them as a plain ham sandwich: What it lacks in flavor, it makes up for in keeping you going during the day. Savvy investors take full advantage of core holdings because they’ve historically provided stability and peace of mind. Examples might include large-cap, dividend-paying value stocks or short-term municipal bonds.

Regular readers of Investor Alert and Frank Talk have no doubt already seen a version of the following chart, but it’s worth sharing again to illustrate the importance of having a reliable core holding. Whereas the S&P 500 Index twice fell 40 percent last decade, our Near-Term Tax Free Fund (NEARX) remained stable and ticked higher. Had you invested $100,000 in both an S&P 500 fund and NEARX in December 2000, it would have taken roughly 14 years for the equity fund’s growth to catch up with and exceed that of NEARX.

An investment in S&P 500 stocks has its place in most portfolios, of course, but think of NEARX as the stabilizer in times of extreme gains and losses such as we saw between 2000 and 2009.

Near-Term Tax Free Fund vs. S&P 500 Index
click to enlarge

It’s important to keep in mind, though, that the last decade was unique. We saw some serious market-rattling events—the dotcom bubble, 9/11 and the worst economic crisis since the Great Depression.

There will also be times when the equities market greatly outperforms the muni market. Take now, for instance. We’re in year six of one of the most durable bull runs in U.S. history.

This is what makes NEARX such an attractive core investment. Compared to the equities market, it displayed nowhere near the same amount of volatility in either good times or bad. It continued to climb and deliver positive returns, regardless of what the equities market was doing. 

The Short End of the Curve

Last week the Bureau of Labor Statistics reported that the consumer price index (CPI), less food and energy, rose 0.3 percent in April. This, along with an improved jobs market, is exactly what the Fed was seeking to justify raising rates.

Investors need to be aware that interest rates and bond prices have an inverse relationship. When one rises, the other falls, and vice versa.

The Longer the Duration, the More Bond Prices React to Interest Rates Changes

But that’s only part of the story. The longer a bond’s maturity, the greater its interest rate sensitivity; put another way, bonds that are more sensitive to changes in the interest rate environment will have greater price fluctuations than those with less sensitivity.

This means that in these times of uncertainty over when rates will rise, prudent investors should consider positioning their portfolios to focus on shorter average maturities, which have demonstrated less volatility than bonds with longer average maturities.

As you can see below in the hypothetical example using a two-year, 10-year and 30-year Treasury, the further out the maturity date and higher the rate hike, the more your security would be affected. Again, these are Treasuries, not municipal bonds, but munis could be similarly affected.

The Longer the Maturity, the Greater the Price Volatility

NEARX holds four stars overall from Morningstar, among 179 Municipal National Short-Term funds as of 3/31/2015, based on risk-adjusted return.

It’s also delivered over 20 years of positive returns.

Near-Term Tax Free Fund Annual Total Return
click to enlarge

This is a rare achievement indeed.

So rare, in fact, that out of 25,000 equity and bond funds, only 30 have accomplished the same feat of delivering positive returns for 20 straight years, according to Lipper. As such, NEARX enjoys one of the most envied track records among its peers.

Explore our Near-Term Tax Free Fund investment cases!

Can You Handle the Stress of Losing 40 Percent in the Market?
“Robert describes his fail proof plan to place $100,000 in an S&P 500 Index fund. The 1990s was a gangbusters decade, after all, and he sees no reason to believe that the upcoming decade will be any different.”

A Little Pillow Talk Turned Her Husband On to Bonds
“Karen hadn’t disregarded her husband’s foolproof plan for their money; in fact she acknowledged the impressive performance the S&P had been delivering. Investing would surely earn them more than their savings account would. But she was fearful of going ‘all in.’”

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. Distributed by U.S. Global Brokerage, Inc.

Past performance does not guarantee future results.

 

Total Annualized Returns as of 03/31/2015
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fund 2.38% 2.59% 3.10% 1.08% 0.45%
S&P 500 Index 12.73% 14.47% 8.01% N/A N/A

 

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through April 30, 2016, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). 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 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 at www.usfunds.com or 1-800-US-FUNDS.

Morningstar Rating

Overall/179
3-Year/179
5-Year/154
10-Year/109

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-term funds
Through: 3/31/2015

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 Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating 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.)

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

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

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

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

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What America Can Learn from China’s Infrastructure
May 22, 2015

As one of the greatest nations on the planet, the United States excels in a number of areas, innovation and entrepreneurship foremost among them. But something you might be hard-pressed to find at the top of anyone’s best-of list is infrastructure—specifically roads, rail and mass transit.

Quality, dependable infrastructure is essential for strong economic growth

In this department at least, the U.S. has some catching up to do with other parts of the globe. The World Economic Forum’s Global Competitiveness Report 2014-2015 ranks the U.S. 16th in “quality of overall infrastructure”—15th in quality of its rail system and 16th in quality of its roads.

Heavy news indeed for the country known for building the first-of-its-kind transcontinental railway and interstate highway system.

But if you’ve been keeping up with current events, this shouldn’t come as a shock. The recent and very tragic Amtrak derailment in Philadelphia is a somber reminder that America needs stronger infrastructure policies at every level of government. This will not only help save lives but also create jobs, boost the economy and make transportation more safe and efficient.

Civil engineers have been making this case for years. Following its most recent assessment of all forms of infrastructure, from energy to schools to drinking water, the American Society of Civil Engineers (ASCE) gave the U.S. a depressingly low overall grade of D+. Levees and inland waterways were the worst offenders, both slapped with a D-. According to the group, which releases its report every four years, a staggering $3.6 trillion will be necessary by 2020 to bring the nation’s infrastructure up to ideal conditions. Short of this investment, the ASCE says, $1 trillion in U.S. business sales could be lost every year, along with millions of jobs.

The mayors of some of the largest U.S. cities emphatically acknowledge the relationship between quality infrastructure and strong economic growth. In a recent poll taken of several mayors, Politico magazine found that infrastructure sits atop their list of concerns. Thirty-five percent cited “better infrastructure” as the one thing that could help their city’s economy grow the most; 31 percent said that “deteriorating infrastructure” was the city’s greatest challenge.

U.S. Mayor Emphasize the Importance of Infrastructure and Education
click to enlarge

But public spending on infrastructure, at every level, has declined pretty rapidly as a percentage of GDP since the recession, falling well below its lowest point in the last 20 years.

total Public Construction Spending in the U.S. as a Percentage of GDP
click to enlarge

And now, some emerging regions, most notably China, are chugging ahead with large-scale construction projects, both domestic and international, that promise to kick-start business, strengthen trade routes and safely connect people from all corners or their borders.

One Road, One Belt… Big Opportunity

Whereas the U.S. spends less than 2 percent of its GDP on infrastructure, China currently spends around 9 percent on both domestic and foreign projects. Back in December, I pointed out that China has the most extensive network of high-speed rail in the world—approximately 7,000 miles’ worth, all told—with thousands more miles of track under construction. This will require untold amounts of natural resources.

And with China’s grand “One Road, One Belt” initiative underway, even more resources will be needed. The strategy, which harkens back to the famed Silk Road, is intended to open up new trade routes to Southeast Asia, the Middle East and Eastern Europe.

The flagship project of One Road, One Belt is the China Pakistan Economic Corridor, an elaborate series of roads, rail and pipeline that will cut lengthwise through Pakistan, giving China convenient access to ports on the Arabian Sea. Along the way, several energy projects are slated to be built.

the Proposed $46-Billion China Pakistan Economic Corridor
click to enlarge

If everything goes according to plan, the entire 2,000-mile corridor, expected to take 15 years to complete, should come in at around $46 billion, making it one of the most expensive infrastructure projects in human history.

It’s certainly the most China will have ever spent in another country. If you recall, it’s now investing more money outside its borders than it is domestically, having exceeded $100 billion for the first time in 2014. The country is investing so heavily in Africa, in fact, that some economists have nicknamed it “China’s Second Continent.”

One of the ways our China Region Fund (USCOX) is participating in the massive One Road, One Belt endeavor is through China Railway Construction, a top-10 holding.

Here’s hoping China sees huge returns on their investment.

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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. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Global Competitiveness Index, developed for the World Economic Forum, is used to assess competitiveness of nations. The Index is made up of over 113 variables, organized into 12 pillars, with each pillar representing an area considered as an important determinant of competitiveness: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2015: China Railway Construction Corp. 2.22%.

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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Wall Street Underestimates the Great American Earnings Machine
May 19, 2015

We’re only halfway through the month, but so far the old trading adage “Sell in May and go away” seems a little premature.

Last Thursday, the S&P 500 Index closed at new consecutive record highs, topping the previous record set on April 24 and further extending the six-year bull run. The surge came on the heels of weaker economic data last week, leading investors to believe that the Federal Reserve will refrain from raising interest rates this summer, if not this year.

All 10 sectors ended Thursday’s session in the black, with technology leading the rally. Apple, held in both our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX), and Facebook, held in MEGAX, made the widest gains.

Friday’s close came within just a few points of another new high, suggesting that a top has not yet been reached but that instead the market is looking to break out.

Lots of blue sky! Delta announced a 50-percent dividend raise and $5-billion  stock buyback program.

Dividend Growth at 15 Percent

With a little over 90 percent of S&P 500 companies having reported, average first-quarter earnings for the index rose a modest 2 percent. That might not seem significant, but as LP Financial’s Chief Investment Officer Burt White points out in a recent Barron’s piece, “given the steep uphill climb that corporate America faced due to the twin drags of the oil downturn and strong U.S. dollar, this is actually a good result.”

Indeed, when the earnings season began, economists were expecting to see a 3-percent drop because of depressed oil and the strong dollar. Of course, we’re now seeing a price reversal in both the commodity and currency.

Dividends from S&P 500 companies also rose, jumping about 15 percent in the first quarter, defying lackluster estimates. Delta Air Lines, also in MEGAX, announced this week that it would be raising its dividend 50 percent as well as buying back $5 billion in stock over the next couple of years.

What’s important for investors to recognize here is that the S&P 500 dividend yield is currently at 1.92 percent, ahead of the 1.50-percent yield on a 5-year government bond. And unlike the government bonds, equities give you potential growth. It’s these high dividend-paying companies that GBTFX and MEGAX seek to invest in.

Investors Shrug Off Weak Economic News

The week’s economic data suggests that the U.S. economy is growing at a slower rate now than in previous months.

According to the U.S. Census Bureau, retail and food service sales in April were little changed from March. Inventories are steadily creeping up.

On Friday, economists trimmed their forecast for the rate of jobs growth this year from 3.2 percent to 2.4 percent. Meanwhile, the University of Michigan consumer confidence index fell pretty dramatically from 95.9 in April to 88.6 in May.   

This soft economic news appears not to have dampened investors’ spirits too much, however, as it means the Fed will be more likely to keep rates low for at least the short-term.

You can see that the M1 money supply, the most liquid form of capital, began to ramp up with the first round of quantitative easing (QE) in late 2008, pulling the S&P 500 up with it. We called the bottom of the market in an Investor Alert from December 2008.

Follow the Money: Quantitative Easing and the S&P 500 Index
click to enlarge

After three cycles, QE officially wrapped up last October, but money continues to flow into the market, lifting all boats.

Lately, investors have been moving more of their money out of domestic equity funds and into internationally-focused funds, especially those focused on Europe, according to a Credit Suisse report. This is in line with the results of a Bloomberg survey I shared earlier in the month which shows that global investors are most bullish on the eurozone than any other region, a good sign for our Emerging Europe Fund (EUROX).

Significant Inverse Relationship Between the U.S. Dollar and Gold/Oil

The U.S. dollar lost more ground for the fifth straight week, falling to its lowest level since January. This has allowed crude oil to begin its recovery—it’s currently trading just below $60 per barrel—while gold marks time in the $1,200 range.

Year-Over-Year Percent Change Oscillator: U.S. Dollar vs. Oil Prices
click to enlarge

As you can see, the dollar reverted back to its mean after rising to close to three standard deviations as recently as mid-March. There’s plenty of momentum for the dollar to drop even further, which should help oil’s recovery.

Gold remains in a three-year bear market. In an interview with Jim Puplava on the Financial Sense Newshour, I explained that the domestic equity bull market has lately overshadowed the yellow metal as an asset class, but that when gold’s down, as it is now, it might be time to put money in gold and gold stocks.

This week we expect to see preliminary purchasing manager’s index (PMI) numbers for not only the U.S. and Europe but also China. Perhaps we'll see if the U.S. economy has really softened or if it’s simply taking a breather after months of steady growth.

Happy 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. Distributed by U.S. Global Brokerage, Inc.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

M1 Money Supply includes funds that are readily accessible for spending. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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

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. Note that stocks and Treasury bonds differ in investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund, Holmes Macro Trends Fund and Emerging Europe Fund as a percentage of net assets as of 3/31/2015: Apple Inc. 4.03% in All American Equity Fund, 5.34% in Holmes Macro Trends Fund; Delta Air Lines Inc. 1.93% in Holmes Macro Trends Fund; Facebook Inc. 3.23% in Holmes Macros Trends Fund.

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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“Wrestling with Something Else”: Why this Gold Bear Market Is Different
May 14, 2015

Earlier this week, I had the pleasure to appear on Jim Puplava’s Financial Sense Newshour radio program and discuss the state of the gold market. Along with my peers John Doody of the Gold Stock Analyst and Ross Hansen of Northwest Territorial Mint, I shared my thoughts on how we arrived in the current bear market, what factors might help us get out of it and the role real interest rates play in prices.

Below I’ve highlighted a few of my responses to Jim’s questions.

Q: Let’s begin with the bear market that began in 2011. Two questions I’d like you to answer. Number one: What do you believe caused it? Number two: Do you think this is cyclical or a secular bear market?

A: As I often say, two factors drive gold: the Love Trade and the Fear Trade.

In 1997 and 1998, the bottom of the emerging market meltdown took place. Four years later, we saw China and Asia starting to take off and GDP per capita rise. This is an important factor in this whole run-up that I would characterize as the Love Trade. A strong correlation is rising GDP per capita, and in China, India and the Middle East, they buy gold and many gifts of love.

We saw the Fear Trade starting to take place after 9/11. The biggest factor behind the Fear Trade is negative real interest rates. So when you had both—negative real interest rates and rising GDP per capita in the emerging countries—you had gold demand going to record numbers.

At the very peak of 2011, the dollar had just been basically downgraded by Moody’s and we had negative interest rates on a 10-year government bond. It was a record negative real rate of return, like in the ‘70s. You saw this spending from the Fear Trade, but this Love Trade was in negative real interest rates.

Negative Real Interest Rates Have Had a Positive Impact on Gold
click to enlarge

Since then, the U.S. has gone positive. But we’re seeing that in Europe, gold is taking off in euro terms, and in Japan it’s taking off in yen terms. They’re running at negative real interest rates the way we were on a relative basis up to 2011.

Gold Returns in Euros and Japanese Yen vs. U.S. Dollars
click to enlarge

Q: So would you define this bear market as a cyclical bear market, a correction in a long-term trend, or would you define it as secular very much in the way that we experienced the price of gold between, let’s say, the 1980s and 1990s?

A: I think that we’re wrestling with something else. When we look at the other basic metals, what drives the demand for iron, copper, anything that makes steel? It’s fiscal policies. Huge infrastructure spending and fiscal policies. What’s happened since 2011—and after the crash of 2008 but particularly in 2011—is that when the G20 central bankers get together, they don’t talk about trade. It’s all about tax and regulation. They have to keep interest rates low to try to compete, to try to get exports up, to drive their economies. That is a big difference on the need for all these commodities, and it seems to have ended the bull market. Until we get global fiscal policies up and increase infrastructure building, then I have to turn around and look the other way, and say it’s going to take a while.

I do think that gold is going through a bear market. A lot of it has to do more with the central bankers and everything they try to do to discredit gold as an asset class, at the same time try to keep interest rates low to keep economic activity going strong. That’s been a much different factor in driving the price of gold.

The other thing that’s been fascinating is this shift of gold from North America to Switzerland to China. The Chinese have a strategy for the renminbi. Not only do they have 200 million people buying gold on a monthly program throughout their banking system, but the government is buying gold because it needs to back the renminbi to make it a world-class currency of trade.

The Great Tectonic Shift of Physical Gold From West to East

Q: Explain two things: one, why we never saw the hyper-inflation that people thought we were going to see with the massive amounts of quantitative easing (QE), and two, investor preferences changing from hard assets into stocks.

A: Well first of all, a lot of money didn’t really go directly into the economy. We never had a huge spike in credit supply in 2011, ’12, ’13. Only in ’14 did we start to see it really pick up.

U.S. Bank Loan Growth is Nearing Pre-Recession High
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We never got this big inflation some expected because the money is so difficult, outside of getting a car loan or an extension on a house. Even Ben Bernanke, after he left the Federal Reserve, had trouble refinancing his house following his own procedures. It’s extremely onerous to get a loan.

I think the biggest part is to follow the money. And where is the money going? It’s showing up in stocks. When I look at gold stocks, it’s amazing to see that the indexes are down since 2011, but a basket of the royalty companies is positive. So why is money finding its way to them? What are the factors driving that? Well, not only do they have free cash flow, but they also have a higher profit margin and they’ve been raising their dividends. Franco-Nevada again just raised its dividend. Since 2011, the dividend yield on Franco-Nevada and Royal Gold has been higher than a 5-year government bond and many times higher than a 10-year government bond. So money all of a sudden starts going for that yield and growth.

Q: What’s happened to the industry since the downturn began in 2011?

A: Well, when you take a look at the big run we had until 2006, we had very strong cash flow returns on invested capital. We had expanding free cash flow. And then a lot of the mining companies lost their focus on growth on a per-share basis. They kept doing these acquisitions, which made a company go from “$1 billion to $2 billion in revenue.” However, the cost of that meant that there was less gold per share in production and there were less reserves per share. You had this run-up in the cost for equipment, for exploration, for development. The result was you had seven majors lose their CEOs. And in the junior to mid-cap size, you probably had another 20 in which management was thrown out.

The new management is much more focused on capital returns. They have to be. Otherwise they get criticized. That will hold a lot of these managements accountable, and I think that’s very healthy. And now it’s starting to show up that the returns on capital are improving for several of these companies.

Today, gold mining company management is much focused on capital returns.

Q: What would you be doing with money right now if you were to be in the gold market? How much would you put in the gold market? How would you have that money invested.

A: I’ve always advocated 10 percent and rebalance every year. Five percent would go into gold bullion, coins, gold jewelry—you travel around the world and you can buy gorgeous gold jewelry at basically no mark-up compared to the mark-up on Fifth Avenue. The other 5 percent is in gold stocks, and if it’s a basket of these royalty companies, I think you’ll do well over time, and you rebalance.

If not, then you go to an active manager, like we have. Speaking from a buyer’s position, Ralph Aldis— portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX)—is a TopGun ranked in Canada as an active manager.

Q: Explain your caution in terms of gold in the percentage you recommend.

A: I’ve always looked at gold as being a hedge from the imbalance of government policies. Having that 10-percent weighting and rebalancing every year might help protect your overall portfolio. There are many studies going back 30 years that show that rebalancing helps.

It’s also advisable to put half your money in dividend-paying blue chip stocks that are increasing their revenue. When there are great years in the stock market, people often take some profits. And when gold’s down, as it is now, it might be time to put money in gold and gold equities.

For more, listen to the entire interview.

 

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Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 3/31/2015: Allied Nevada Gold Corp. 0.00%; Barrick Gold Corp. 0.06% in Gold and Precious Metals Fund, 0.06% in World Precious Minerals Fund; The Coca-Cola Co. 0.00%; Franco-Nevada Corp. 0.10% in Gold and Precious Metals Fund, 0.01% in World Precious Minerals Fund; Market Vectors Gold Miners ETF 0.00%; Market Vectors Junior Gold Miners ETF 0.00%; Nestle SA 0.00%; Newmont Mining Corp. 1.10% in Gold and Precious Metals Fund, 0.06% in World Precious Minerals Fund; Osisko Gold Royalties Ltd. 7.13% in Gold and Precious Metals Fund, 10.29% in World Precious Minerals Fund; The Proctor & Gamble Co. 0.00%; Royal Gold Inc. 2.52% in Gold and Precious Metals Fund, 1.00% in World Precious Minerals Fund; SPDR Gold Shares 0.37% in Gold and Precious Metals Fund; Yamana Gold Inc. 0.87% in Gold and Precious Metals Fund, 0.23% in World Precious Minerals Fund.

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Net Asset Value
as of 05/27/2015

Global Resources Fund PSPFX $5.92 -0.03 Gold and Precious Metals Fund USERX $5.76 No Change World Precious Minerals Fund UNWPX $4.72 -0.05 China Region Fund USCOX $10.13 0.06 Emerging Europe Fund EUROX $6.62 0.05 All American Equity Fund GBTFX $28.51 0.22 Holmes Macro Trends Fund MEGAX $21.24 0.26 Near-Term Tax Free Fund NEARX $2.24 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change