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China’s Economy Is Undergoing a Huge Transformation That No One’s Talking About
August 31, 2015

The photo you see below was snapped recently in Beijing. It might not be that special to some readers, but in my 25 years of visiting the Chinese capital, I’ve never seen a blue sky because it’s always been blotted out by yellow smog. Beijing is clearly undergoing a massive transformation right now. This might please proponents of the green movement, but it’s ultimately harmful to the health of China's manufacturing sector.

Blue skies ahead? A cyclist pedals through Tiananmen Squar in Beijing

On the other hand, blue skies could be ahead for China’s service industries.

Misconception and exaggeration are circling China’s economy right now like a flock of hungry buzzards. If you listen only to the popular media, you might believe that the Asian giant is teetering on the brink of economic disaster, with the Shanghai Composite Index’s recent correction and devaluation of the renminbi held up as “proof.”

Don’t get me wrong. These events are indeed significant and have real consequences. They also make for some great, sensational headlines, as I discussed earlier this month.

But what gets hardly any coverage is that China’s economy is not weakening so much as it’s changing, much like Beijing’s skies. Take a look at the following two charts, courtesy of BCA Research:

China's Economy is Shifting Away from Manufacturing More Towards Services
click to enlarge

You can see that the world’s second-largest economy has begun to shift away from manufacturing and more toward consumption and the service industries. While the country’s purchasing managers’ index (PMI) reading has been in contraction mode since March of this year, the service industries—which include financial services, insurance, entertainment, tourism and more—are ever-expanding. The problem is that the transformation has not been fast enough to offset the massive size of the manufacturing sector.

the Czech Republic's PMI came in at an impressive 57.50 in July up from 56.90 in June

Just as a refresher, the PMI is forward-looking and resets every 30 days. It helps investors manage expectations. Consider this: The best-performing country in our Emerging Europe Fund (EUROX) is the Czech Republic—which also happens to have one of the highest PMI readings. Coincidence?

In China, overseas travel, cinema box office revenue and ecommerce are all seeing “explosive growth,” according to BCA. The country’s once-struggling real estate market is also robust. The government just relaxed rules to permit more foreigners to purchase mainland property.

But you’d be hard-pressed to come across any of this constructive news because it’s not particularly good for ratings.

A recent Economist article makes this point very clear:

The property market matters far more for China’s economy than equities do. Housing and land account for the vast majority of collateral in the financial system and play a much bigger role in spurring on growth. Yet the barrage of bearish headlines about share prices has obscured news of a property rebound. House prices have perked up nationwide for three straight months. Two months after the stock market first crashed, this upturn continues.

“Commodity Imports Have Actually Been Quite Strong”

Again, China’s transformation from a manufacturing-based economy to one that focuses on consumption has real consequences, one of the most significant being the softening of global commodity prices. As I told Daniela Cambone on last week’s Gold Game Film, gold’s Love Trade has become not a No Trade, but a Slow Trade. We’ve seen demand cool along with a decline in GDP per capita, the PMI readings and China’s M2 money supply growth.

Below you can see the relationship between China’s M2 money supply growth and metal prices. Since its peak in late 2009, money supply growth has been dropping year-over-year, driving down metal prices.

China's falling money supply since 2009 peak has driven down metal prices
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Money supply growth tends to be a “first mover.” When it has contracted, the PMI has usually followed. Recently, this has hurt economies that depend on China as a net buyer of raw materials, including Brazil, which supplies the Asian country with iron ore, soybeans and many other commodities, and Australia.

Australian Dollar and Brazilian Real Retreat with Drop in China's Money Supply
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When M2 money supply growth and the PMIs are rising, commodity prices can also rise. But that’s not what’s happening. It’s important to recognize that when new orders for finished products fall, there’s less consumption of energy to manufacture and ship. Again, this might make the greenies happy, but it’s ultimately bad for manufacturing.

I’ve said several times before that China is the 800-pound commodities gorilla, and it continues to be so. The country currently consumes about a quarter of the total global output of gold. For nickel, copper, zinc, tin and steel, it’s around half of world consumption. For aluminum, it’s more than half.

These are huge figures. But investors should know that Chinese imports of these important metals and materials still remain strong. Tom Pugh, a commodities economist at Capital Economics, told the Wall Street Journal last week that the market has it wrong about China, that the drop in demand has been overstated:

If you look at Chinese commodity imports over the last few months, they’ve actually been quite strong. A lot of it is just that people thought China would continue to grow at 10 percent a year, ad infinitum, and now people are just realizing that’s not going to happen.

Reuters took a similar stance, reporting that “there were at least 21 commodities that showed increases in imports greater than 20 percent in July this year, compared to the same month in 2014.” Weakening demand has been caused by a number of reasons, including “structural oversupply” and “the impact of the recent volatility in equity markets.”

But it’s important to keep things in perspective. Compared to past major market crashes, China’s recent correction doesn’t appear that bad.

China's Crash is Big, But Not the Biggest

Any bad news in this case can be seen as good news. I think that in the next three months we might see further monetary stimulus, following the currency debasement nearly three weeks ago. We might also see the implementation of new reforms in order to address the colossal infrastructure programs China has announced in the last couple of years, the most monumental being the “One Road, One Belt” initiative.

Dividend-Paying Stocks Helped Stanch the Losses

As investors and money managers, it’s crucial that we be cognizant of the changes China is undergoing. With volatility high in the Chinese markets right now, we’ve raised the cash level in our China Region Fund (USCOX), and after the dust settles somewhat and the right opportunities arise, we’ll be prepared to deploy the cash. We’re also diversified outside of China.

We managed to slow the losses during the Shanghai correction by being invested in high-quality, dividend-paying stocks.

According to daily data collected since December 2004, the median trailing price-to-earnings (P/E) ratio for the Shanghai Composite Index constituents currently sits at 48.6 times earnings. If it reverts to the mean, risk is 32 percent to the downside for the index. Currently, the P/E ratio of our China Region Fund constituents sits around 16 times. This suggests that USCOX has less downside risk and is cheaper than the Shanghai Composite.

Median Trailing Price-to-Earnings Ratio for Shanghai Composite Index Constituents
click to enlarge

We seek to take advantage of the trend toward consumption by increasing our exposure to the growing service industries—technology, Internet and ecommerce companies (Tencent is one of our top 10 holdings); financial services (AIA and Ping An Insurance); and enviornmental services (wastewater treatment services provider CT Environmental).

Golden State Warriors guard Klay Thompson unveiling the KT Fire ANTA EARLIER THIS YEAR

Rising sports participation among white collar workers in China is very visibile these days. Xian Liang, portfolio manager of USCOX, says that his friends back in Shanghai share with him, via WeChat, how they track their daily runs using mapping apps on their phones.

With that said, an attractive company is Anta Sports, an emerging, innovative sportswear franchise. Fans of the Golden State Warriors might recall that guard Klay Thompson endorsed its products earlier this year.

We believe the China region remains one of the most compelling growth stories in the world and continues to provide exciting investment opportunities. 

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 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.

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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.

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

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.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund and China Region Fund as a percentage of net assets as of 6/30/2015: Tencent Holdings Ltd. 6.52% China Region Fund, AIA Group Ltd. 1.92% China Region Fund, Ping An Insurance Group Co. 3.28% China Region Fund, CT Environmental Group Ltd. 0.52% China Region Fund, ANTA Sports Products Ltd. 0.57% China Region 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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Feeling Old Yet? Incoming College Freshmen Have Always Known Google
August 27, 2015

I use Google every day, and yet I still marvel at how amazing a tool it is. Part of this amazement stems from the fact that most of my life was spent in the dark ages before the search giant changed human knowledge forever. I appreciate it in a way 19th-century, transcontinental travelers must have appreciated steam locomotives’ ability to shave days and weeks from their covered-wagon travel time. Except Google is more like a rocket ship than a locomotive.

This year’s incoming college freshmen, on the other hand, have never not known the wonders of Google. To them, all human thought—whether in words, images or videos—has always been easily and instantaneously accessible. They’ve only ever known the rocket ship, never the covered wagon.

Google-Original-Homepage

This factoid is just one among many that appear on Beloit College’s latest Mindset List.

Published each August since 1998, the Mindset List was initially designed to provide professors with a snapshot of incoming freshmen and help them understand new students’ beliefs and values. It also inadvertently challenges the idea behind the encouraging expression “You’re only as old as you feel.”

Below are a few of my favorites from the list. They say a lot about how this particular cohort, the graduating class of 2019, perceives the world:

Hybrid automobiles have always been mass produced.

The therapeutic use of marijuana has always been legal in a growing number of American states.

They have grown up treating Wi-Fi as an entitlement.

Hong Kong has always been under Chinese rule.

Cell phones have become so ubiquitous in class that teachers don’t know which students are using them to take notes and which ones are planning a party.

TV has always been in such high definition that they could see the pores of actors and the grimace of quarterbacks.

They’re such simple facts, but they help us understand the behaviors and thought patterns of our future business leaders, politicians and investors. Being familiar with the world they grew up in sheds light on why they invest in, or will eventually invest in, certain companies and industries.

College-Graduating-Calls-2019-Hong-Kong-Always-Under-Chinese-Rule

Millennials, as you might imagine, are more likely to put their money in companies and brands that are important to their particular lifestyles. According to TD Ameritrade, some of the hottest companies for younger investors include Apple (an average 11.4 percent of their equity portfolios), Facebook (2.6 percent), Alibaba (1.5 percent) and Tesla (1.3 percent). Apple represents 6.3 percent of millennials’ first stock trade after opening a new account with the broker; Google is 1.2 percent.

Baby boomers, of course, invest heavily in these companies as well, but they tend to place more emphasis on tried-and-true stalwarts such as AT&T, Exxon Mobil, and Johnson & Johnson—what some millennials might describe as “boring.”

Young investors are also more likely to be attracted to “socially responsible” companies, as well as mutual funds that invest in such companies—those that treat not just their shareholders well but also employees, suppliers, customers and local communities. Between 1995 and 2014, total assets invested in these companies increased 11-fold, from $0.6 trillion to $6.6 trillion, according to the Forum for Sustainable and Responsible Investment. Millennial investors are largely to thank for this.

Finally, this group is surprisingly more willing to work with a financial advisor than boomers and more accepting of nontraditional asset categories, including exchange-traded funds (ETFs), hedge funds and commodities. That’s according to Natixis Global Asset Management, which conducted a survey earlier this year of 750 Americans with more than $200,000 in investible assets.

Check out the entire Mindset List, then take the poll below.

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 6/30/2015: Apple Inc., AT&T Inc., Exxon Mobil Corp., Facebook Inc., Johnson & Johnson.

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Gold Glimmers as Global Market Fear Grips Investors
August 24, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Gold last week broke above its 50-day moving average as a fresh round of negative news from around the globe rekindled investors’ interest in the yellow metal as a safe haven. The Fear Trade, it seems, is in full force.

Gold Breaks Above Its 50 Day Moving Average
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Below are just a few of the recent news items that have made some investors skittish, which has supported gold prices:

  • China, the world’s second-largest economy, continues to slow. Its preliminary purchasing managers’ index (PMI) reading, released on Friday, came in at 47.8, a 77-month low. This follows China’s decision to devalue its currency, the renminbi, close to 2 percent. For the first time in a year, the Shanghai Composite Index fell below its 200-day moving average.
  • Crude oil is on an eight-week losing streak, the longest in 29 years. West Texas Intermediate (WTI) slipped below $40 per barrel in intraday trading Friday, the first time it’s done so since 2009.
  • U.S. stocks are undergoing an ugly selloff. They just had their worst week since September 2011 and are on track to post their worst month since May 2012. The Dow Jones Industrial Average, down 10 percent since its all-time high, is nearing correction territory. All 10 S&P 500 Index sectors were off last week.

We can also add to this list the high levels of margin lending on the New York Stock Exchange (NYSE) right now. At the end of every month, the exchange discloses margin amounts, and it appears that everyone is leveraged. Real margin debt growth since 1995 is twice as much as real S&P 500 growth.

New-York-Stock-Exchange-Margin-Debt-at-All-Time-High
click to enlarge

Cartson Ringler is a market analyst and founder of Ringler Consulting and Research in Germany. Speaking with the Gold Report this week, he highlighted the precariousness of high margin debt in domestic equities:

We saw a huge bull market from 2009 to 2015 on the S&P 500 when it went to around 2,080 from 666. That market is really mature. One number that scares me is the high margin debt on NYSE. When the big market crash happened in 1987, we saw $38 billion in margin debt, but as of June 2015, NYSE margin debt was more than $504 billion. Everyone is dancing until the music stops. So I’m shorting the S&P 500, while building my basket of different precious metals producers.

Should the $504 billion—an all-time high, by the way—worry us, as Ringler suggests? Maybe, maybe not. It’s worth remembering, though, that high margin lending in China greatly contributed to the Shanghai Stock Exchange’s 30-percent correction just a month ago.

Margin-Lending-in-Trillions-of-Chinese-Yuan
click to enlarge

In its Friday newsletter, Kitco made note of many of these market-moving events and said that “optimism in gold should spill over next week. A strong majority among retail investors and market professionals expect to see higher prices the last full week of August.”

The Contrarian Case for Gold Is Scorching Hot

Earlier this month I shared with you that hedge funds are net short gold for the first time since U.S. Commodity Futures Trading Commission data began in 2006. Being short has become a very crowded trade, and many contrarian investors have seized upon this bearishness to add to their gold exposure. American Eagle gold coin sales rose an impressive 124 percent in July month-over-month.

Contrarian-Tool-Gold-Net-Position-for-Leveraged-Futures
click to enlarge

Last week, famed hedge fund manager Stanley Druckenmiller plunked down more than $323 million of his own money into a gold ETF, according to second-quarter regulatory filings.

Druckenmiller is the guy who consistently delivered 30 percent on an average annual basis between 1986 and 2010, the year he closed his fund to investors. He’s also responsible for making the call to short the British pound in 1992, which “broke the bank of England” because it forced the British government to devalue and withdraw the currency from the European Exchange Rate Mechanism (ERM).

And now he’s made a huge bet on gold. The $323-million investment, in fact, is the largest position in his family fund.

Demand among global central banks and retail buyers has also heated up. As I told Daniela Cambone in last week’s Gold Game Film, the Chinese government is now reporting monthly on its gold consumption to offer greater transparency and convince the International Monetary Fund (IMF) that the renminbi should be included as part of the special drawing rights. Last month, the Asian country purchased 54 million ounces. And in the first half of the year, demand in Germany, the third-largest gold market behind China and India, increased 50 percent over the same period in 2014.

Gold in Russian Ruble Terms Shows The Value of Hard Assets

The Russian ruble, meanwhile, has lost nearly 50 percent of its purchasing power from 12 months ago, following its invasion of Ukraine and the drop in oil prices. Over the same period, gold has risen about 54 percent.

Gold-in-US-dollar-vs-Russian-Rubles
click to enlarge

It shows that when a currency loses value and falls out of favor, gold has tended to benefit as investors seek real assets. Gold prices have then been able to soar, just as we saw in the months following the financial crisis, eventually reaching an all-time high of $1,921 per ounce in September 2011.

Remember, Druckenmiller just invested heavily into gold. Prudent investors such as him understand the dynamic between fiat currencies and gold, and they adjust their funds accordingly. Does he predict something happening to the U.S. dollar that might benefit gold?

Druckenmiller might have 20 percent allocated to gold, but it’s advisable to have closer to 10 percent—5 percent in gold stocks, 5 percent in bullion, then rebalance every year.  This should be strongly considered whether the economy is soaring or struggling.

I invite you to head over to Kitco and compare for yourself the price of gold in U.S. dollars to other world currencies.

Looking for Other “Safe Haven” Options in the Volatile Market?

Gold is indeed glimmering with safe haven appeal, but I encourage investors seeking an investment that has a history of less drama to check out municipal bonds. Our Near-Term Tax Free Fund (NEARX) invests heavily in high-quality munis that are on the short-end of the curve, ideal for when there’s interest rate uncertainty.  

Having provided investors with over 20 straight years of positive returns, NEARX holds five stars overall from Morningstar, among 185 Municipal National Short-Term funds as of 6/30/2015, based on risk-adjusted return.

Air Traffic Demand Continues Its Upward Ascent

On a final note, Jeffries released its latest air traffic demand growth numbers yesterday, and the results were very positive. According to the group:

The July Jefferies Air Traffic survey registered a 6.4-percent year-over-year growth rate for our sample. The IATA (International Aviation Transport Association) report for July could show traffic growth of about 8.5 percent, strong vs. 5.9 percent year-to-date. Financial market turmoil and weak commodity prices don’t appear to be hurting demand.

July demand is up from 4.8 percent in June, Jefferies also notes. The strong traffic results serve as further justification for the group’s year-end demand growth estimate of 6 percent.

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.

Total Annualized Returns as of 6/30/2015:
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fund 1.88% 2.48% 3.04% 1.08% 0.45%

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/184
3-Year/184
5-Year/160
10-Year/110

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 6/30/2015

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 Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

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.

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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These Billionaire Investors Just Made Massive Bets on Gold and Airlines
August 20, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

I always advise investors to follow the smart money, and two people high on the list are Stanley Druckenmiller and Warren Buffett.

Second-quarter regulatory filings show that Stanley Druckenmiller, the famed hedge fund manager, just placed more than $323 million of his own money into a gold ETF, at a time when sentiment toward the yellow metal is in the basement. Meanwhile, Buffett announced this week that Berkshire Hathaway is purchasing aircraft parts supplier Precision Castparts for $32 billion.

Investors should take note!

Stan-Druckenmiller-Buys-Gold-Warren-Buffett-Buys-Aerospace

Druckenmiller Sees Gold as a “Home Run”

Druckenmiller has commented in the past that if he sees something that really excites him, he’ll bet the ranch on it.

“The way to build long-term returns is through preservation of capital and home runs,” he said. “Grind it out until you’re up 30 to 40 percent, and then if you have the convictions, go for a 100-percent year.”

While I have always advocated for a diversified approach, this all-in approach has served him well. Between 1986 and 2010, the year he closed his fund to investors, Druckenmiller consistently delivered 30 percent on an average annual basis. Thirty percent a year! That’s a superhuman, Michael Jordan-caliber performance—or Ted Williams, if we want to stick to baseball imagery. The point is that words such as “legendary” and “titan” were invented with people like Druckenmiller in mind.

During his career, the man has made some now-mythic calls, the most storied and studied being his decision to short the British pound in 1992. This bet against the currency forced the British government to devalue the pound and withdraw it from the European Exchange Rate Mechanism (ERM), which is why many people say the trade “broke the Bank of England.” It also made Quantum, George Soros’s hedge fund, $1 billion.

And now he’s making a call on gold. The $323-million investment is currently the single largest position in Druckenmiller’s family fund. It’s twice as large, in fact, as its second-largest position, Facebook, and amounts to 20 percent of total fund holdings.

His conviction in gold can be traced to his criticism of the Federal Reserve’s policy of massive money-printing and near-zero interest rates. Such ongoing low rates push investors and central banks alike into other types of assets, including physical gold.

Concerns over government policy is why prudent investors hope for the best but prepare for the worst. I’ve always advocated a 10-percent weighting in gold: 5 percent in gold stocks, 5 percent in bullion, then rebalance every year. This is the case in good times and in bad.

Trump on Gold

Love him or hate him as a presidential candidate, Donald Trump has the same attitude toward owning gold in today’s easy-money economy. After leasing a floor of the Trump Building to Apmex, a precious metals exchange, he agreed back in 2011 to accept three 32-ounce bars of gold as the security deposit, according to TheStreet.

The U.S. dollar, Trump says, is “not being sustained by proper policy and proper thinking.” Accepting the gold “was an opportunity… to show people what’s happening with the dollar so we can do something about it.”

Trump and Druckenmiller aren’t the only ones adding to their gold positions right now. As I told Daniela Cambone on this week’s Gold Game Film, the Chinese government is now reporting its gold consumption on a monthly basis. In July it purchased 54 million ounces. This is significant in the country’s march to become a world-class currency that’s supported by the International Monetary Fund (IMF) for special drawing rights.

Both of our precious metals funds, Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), aim to offer protection against the sort of monetary instability Druckenmiller and Trump have warned us about.

Buffett Makes the Biggest Deal of His Career in Airlines

Many investors know that Warren Buffett has been hard on the airline industry in the past, even going so far as to say, in his 2008 letter to Berkshire Hathaway investors, that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville [Wright] down.”

But since then it appears as if he’s come around—in a huge way. At more than $32 billion, his purchase of Precision Castparts is the largest-ever takeover in the aerospace sector, not to mention the largest deal Buffett’s ever been involved in.

More than that, though, the deal implies that Buffett, 85, sees great opportunity in the sector where previously he didn’t.

Indeed, the Wall Street Journal writes that the acquisition comes “as airlines’ seemingly insatiable appetite for new fuel-efficient jets in the past several years has left Airbus Group SE and Boeing Co. with combined orders on the books for over 10,000 jets.”

A couple of months ago, I shared with you Boeing’s estimate that $5.6 trillion in new aircraft orders will be placed over the course of the next 20 years. In the infographic below, courtesy of World Property Journal, you can see that Boeing’s world fleet is set to double in size during this period, from 21,500 units to 43,560. Click the image to make it larger.

Precision-Castparts-Stock-Surges-19-After-Berkshire-Hathaway-Takeover-Announcement
click to enlarge

Precision Castparts, based in Portland, Oregon, manufactures parts used in gas turbines and aircraft engines. Its stock flew up 19 percent on the announcement.

Precision-Castparts-Stock-Surges-19-After-Berkshire-Hathaway-Takeover-Announcement
click to enlarge

“We’re going to be in this business for the next 100 years,” Buffett told CNBC’s Squawk Box.
Follow the money!

 

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.

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.

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 6/30/2015: Facebook Inc. 0.00%, Apmex Inc. 0.00%, TheStreet Inc. 0.00%, Airbus Group SE 0.00%, Boeing Co. 0.00%, Precision Castparts Corp. 0.00%.

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China Not Immune to Contagious Quantitative Easing and Massive Printing of Cheap Money
August 17, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Renninbi

First it was the U.S. Federal Reserve. Then, in 2013, Japan launched what became known as Abenomics. The European Central Bank (ECB) followed suit in 2014. And now the People’s Bank of China has joined the parade.

All of them in some way stimulated economic growth by initiating monetary quantitative easing (QE) programs.

The media and politicians applauded them for their QE plans. All of them, that is, except for China. Instead, we’ve only seen a flurry of negative headlines.

I often tell investors to follow the money, which currently is cheap to borrow. Cheap money is good for stock prices, but not for retired folks who have most of their savings in term deposits with low interest yields.

Most important for commodity investors is the powerful correlation between China’s money supply and commodity prices. The money supply peaked in 2011 and has been falling along with commodity prices.

On Monday, China unexpectedly trimmed the value of its currency, the renminbi, 2 percent, the most in two decades. In the days since, many analysts and “experts” have irrationally turned sour on the Asian country, similar to the extreme bearishness toward gold in the last month.

But investors last week came home to the yellow metal after China announced it had increased its gold reserves by an additional 19 tonnes in July, boosting its total holdings to 1,677 tonnes (nearly 54 million ounces). This helped prices rally 1.4 percent on Wednesday to reach $1,124.46, a three-week high.

Investors should likewise return to China when they realize that the global reaction to the renminbi devaluation has been hugely overblown. I agree entirely with my friend Addison Wiggins, who writes in his Daily Reckoning newsletter:

The market is up in arms about this currency move. And frankly most things that I read from the market have it all wrong…

They make China out to be the big, bad villain—calling this move manipulation or a “currency war.” And while EVERYTHING that central banks do is indeed manipulation or a “currency war”—why don’t we hear those terms thrown around the ECB or the U.S. Fed?

To help cut through the noise and get a more balanced picture of devaluation's causes, effects and possible ramifications, I chatted with our resident Asia expert Xian Liang, portfolio manager of our China Region Fund (USCOX). Below are some of the highlights.

As you know, we follow currencies very closely in our investment team meetings because we’re aware that government policy is a precursor to change. Having said that, why did China decide to devalue the renminbi?

There are several possible reasons, the first one being economics—specifically, to stimulate economic growth and ease liquidity in the financial sector. A weaker renminbi can help make Chinese exports cheaper for foreigners and imports dearer for locals, creating the incentive for a “net inflow” of money. July data shows that economic activity remains worse than expected. China’s purchasing managers’ index (PMI) reading for the month is one example, but fixed-asset investments, power generation and exports were all down.

chinas-manufacturing-pmi-falls-to-two-year-low-in-july
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Deflationary pressure also intensified in July, and the renminbi in trade-weighted terms—that is, against a whole basket of major trading partners’ currencies, not just the dollar—has soared to record highs. This is because of a de facto peg to the dollar, making Chinese goods and services uncompetitively priced to world customers.

Another reason is domestic politics. Chinese policymakers want to resurrect their reformist image among domestic intellectuals and the middle class by yielding more power to market forces to determine its currency exchange rate, which offers some compensation for July’s aggressive, command-and-control intervention in the A-Share market.

And then there’s international politics. It’s well known that China wishes its currency to be included in the International Monetary Fund’s special drawing rights basket, along with the U.S. dollar, euro, British pound and Japanese yen. Chinese policymakers are actively demonstrating to the IMF their commitment to “a more market-determined exchange rate,” a critical step toward eventual renminbi internationalization.

Many countries have devalued their currencies lately—Japan, Germany, France and others. Business Insider, in fact, just shared a Goldman Sachs chart showing how miniscule the renminbi’s depreciation really is compared to other emerging countries’ currencies. And yet China gets singled out in the media! Why is everyone so hard on China?

Renminbi-depreciation-not-nearly-significant-as-other-emerging-markets-currencies
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What’s usually not mentioned in all the news and editorials we’ve seen is that China hasn’t resorted to currency devaluation in 20 years. For the last decade, the renminbi was largely moving in a single direction—up—because China was tired of being dubbed a currency manipulator and it would like to foster consumerism.

As the second-largest economy in the world, China is interested in transforming its growth model from investment-driven to consumer-driven, and some investors might wonder how the devaluation will affect consumption. Today, the richer Chinese middle class is made up of big spenders, both home and abroad, and a weaker renminbi translates to weaker purchasing power for them. It might also have larger implications for global tourism, global consumer goods and global property. So the difference between China and, say, France is pretty significant.

Chinas-Central-Bank-Trims-the-Renminbi-2-After-10-years-of-Gains
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A lot of people think the Federal Reserve will hike interest rates this year—maybe even as early as September—though I’ve expressed doubts about that. Will the devaluation have any effect on the Fed’s decision?

To the extent that it weakens its own currency, China exports deflation to the U.S. and can help the dollar’s strength. Lower inflation and a stronger dollar reduce the incentive or rationale for any imminent Fed rate hike. So yes, you can almost say this is China’s silent protest against the widely anticipated September hike. China seems to be reminding Janet Yellen that in today’s interconnected world, unilateral monetary policy action by the U.S. without first considering global dynamics might not be the smartest thing to do. In effect, it’s saying: “Here’s a preview of what could happen if you insist on hiking rates this year.”

Is this a sign of further reforms? What else can we expect?

The devaluation does indeed herald back to the days of major Chinese reform. In fact, it occurred one day after China approved a comprehensive plan to reform its state-owned enterprises to make them more market-driven, similar to those in Singapore. So at least the government welcomes the perception that the devaluation has more to do with long-term structural reform and less to do with short-term expediency.

Investors are being bombarded with bad news about China right now. There have been some very negative headlines. Where’s the good news in all this?

Here’s the simple answer: A weaker currency not only helps Chinese exporters but also U.S. consumers. Whether you buy things made in China or are planning your next vacation there, you’ve got money to save now. Opportunities have also been expanded for U.S. retailers and manufacturers that source from China, not to mention U.S. airlines. And if you’re in the camp that believes this devaluation is the start of a new “currency war,” then it might be time for gold to shine.

Gold’s Safe Haven Status Never Disappeared

Countries with largest gold holdings

Indeed, gold tends to benefit the most when there are global currency fluctuations. Last week was no exception, as the metal had its best week since June. Many analysts, it seems, prematurely declared that gold has lost its safe haven status because it fell to five-year lows during the height of Greece’s and Puerto Rico’s debt crises.

But as I explained last month, gold is behaving this way not because it’s lost anything. Instead, there are external forces at work here, including the strong U.S. dollar, fears of rising interest rates and a slowing global economy, not to mention possible price manipulation. Despite these powerful headwinds, gold managed to hold strong the week before last as media giants’ stock plummeted, erasing $60 billion in stock value.

Speaking of gold and mining, I’ll be in Lima, Peru during the first week in November to attend the Mining & Investment Latin America Summit, where I’m scheduled to deliver the opening keynote address. I’ll be speaking on mining around the world, macro trends and opportunities and challenges in the upcoming year. For those of you interested in attending, you can register here. I’d love to see you there!

Airports Get 400,000 Views!

As you might imagine, I spend a lot of time in jets and airports. Last year I took over 100 flights, and this year it looks as though I’ll take just as many, if not more. I’m not the only one, as Airlines for America, an industry trade group, estimates that 222 million passengers will have flown on U.S. carriers this summer. It’s for this reason we created a colorful slideshow that celebrates the eight busiest airports in the world. As of this writing, it’s been viewed on Business Insider nearly 400,000 times! Check out the slideshow for yourself and then share with us your favorite airport story.

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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 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.

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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Net Asset Value
as of 09/01/2015

Global Resources Fund PSPFX $4.85 -0.12 Gold and Precious Metals Fund USERX $4.75 -0.06 World Precious Minerals Fund UNWPX $3.99 -0.04 China Region Fund USCOX $7.04 -0.21 Emerging Europe Fund EUROX $5.39 -0.14 All American Equity Fund GBTFX $25.63 -0.72 Holmes Macro Trends Fund MEGAX $19.25 -0.49 Near-Term Tax Free Fund NEARX $2.24 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change