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Why We Invest in Royalty Companies
February 26, 2015

600 Million Reasons to Keep Our Eyes on India“Much of the gold mining industry is underwater and can’t make money with these prices. We’ve seen capital programs being significantly cut back, in terms of companies looking to expand and build new mines.”

That’s according to Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), who was interviewed recently for the latest edition of our Shareholder Report.

He continues:

“Those companies have been sufficiently scared enough that, even when gold prices do recover, they’re going to hold off on expansions because they might have lost the appetite to risk capital on new projects.”

This is where royalty companies come in.

As a refresher, royalty companies basically serve as specialized financiers that help fund cash-strapped miners’ exploration and production projects. In return, they receive either royalties on whatever the mine produces or what’s known as a “stream,” which is a commitment to an agreed-upon number of ounces of gold or other precious metal per year.

From an investors’ point of view, royalty companies just have a superior business model. I’ve discussed this on numerous occasions, most recently during this week’s Gold Game Film, which we shot in Fort Lauderdale following the 2015 Gold Stock Analyst Investor Day.

Attractive Risk/Reward Profile

Royalty compannies enjoy many of the upsides of being in the precious metals industry but face very few of the risks There are several reasons why Ralph and I find these companies so attractive.

For one, they’ve typically remained well-diversified. Whereas any given mining company might own only one or two mines—which may or may not be operational—royalty companies can stay profitable by receiving regular streams of revenue from multiple sources. Toronto-based Silver Wheaton, the world’s largest precious metals streaming company, has secured the right to purchase silver at a very low fixed cost from 18 operating mines in North and South America and Europe.

Another reason why these companies have outperformed is because, simply put, they’re not the ones getting their hands dirty. Their only obligation is to lend capital. They don’t build the mine’s infrastructure; they’re not responsible for cost overruns or maintenance; they don’t experience capital cost inflation; and they don’t have dozens of miners and other personnel on their payrolls. Royalty companies, therefore, enjoy many of the upsides of being in the precious metals industry but face very few, if any, of the risks.

To elaborate on one of the points already made, these companies have extremely low overhead compared to miners. Silver Wheaton is run by 30 people at most, and yet it generates around $500 million in revenue. On average, that’s $16 million per employee! It’s very possibly the world’s most profitable company on a revenue-per-employee basis.

Other royalty companies that have been good to our precious metals funds are Royal Gold and Franco-Nevada. Both have huge cash flow, wide profit margins and pay dividends. Since Franco-Nevada went public in December 2007, it’s torn past both spot gold and most gold equity benchmarks.

Franco-Nevada Ahead of the Curve
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As of now, royalty companies make up about 13 percent of USERX and 12 percent of UNWPX.

Diversify and Rebalance

As always, I recommend a 10-percent weighting in gold: 5 percent in gold jewelry or bullion, the other 5 percent in gold mining stocks. Remember to rebalance once a year.

“You might also get some additional benefits by rebalancing quarterly,” Ralph says. “That’s like playing chess with the market as opposed to rolling craps.”

In the meantime, look for the Shareholder Report, arriving soon in mailboxes all across the nation! Inside you’ll find articles not just on gold but also topics ranging from growth in India and Turkey to our Near-Term Tax Free Fund (NEARX), which has delivered 20 straight years of positive returns.

NEARX, in fact, is the focus of our next webcast, to take place next Wednesday, March 4. We hope you’ll join us!

 

Sign me up for the webcast!

 

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.

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.

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.

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

The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.

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, World Precious Minerals Fund and Near-Term Tax Free Fund as a percentage of net assets as of 12/31/2014: Silver Wheaton Corp. 1.36% Gold and Precious Metals Fund, 0.45% World Precious Minerals Fund; Royal Gold, Inc. 5.99% Gold and Precious Metals Fund, 1.51% World Precious Minerals Fund; Franco-Nevada Corp. 6.97% Gold and Precious Metals Fund, 1.32% World Precious Minerals Fund.

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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Why Bad News Is Good News in Europe—7 Charts Showing What You Really Need to Know
February 23, 2015

There’s little denying that the U.S. economy is on the upswing since the recession. Manufacturing is strong, jobless claims are falling and wages are rising. Delta Air Lines, which we own in our Holmes Macro Trends Fund (MEGAX), recently announced that it will be giving its 80,000 employees $1.1 billion in profit sharing, while Wal-Mart, held in our All American Equity Fund (GBTFX), unveiled plans to hike its minimum wage to $9 an hour in April.

Indeed, things are shaping up here in the U.S., but unfortunately this has not been the case in Europe. From Greek drama to Russian aggression, bad news seems to be the order of the day.

Until now.

Because of central banks’ monetary easing, weakening currencies and low fuel costs—courtesy of the American fracking boom—Europe is finally showing signs that it’s ready to turn the corner and set a path toward lasting economic recovery.

Europe-Recovery-Globe

1. Emerging Europe PMIs Swinging Up

The Purchasing Managers’ Index (PMI), as I’ve often said, is a highly effective tool that we use to forecast manufacturing activity six months out. Any reading above 50 indicates growth in manufacturing; anything below, contraction. This allows us to manage our expectations and get a good sense of where to position our funds.

As you can see, the European Union (EU) as a whole has recently improved, but emerging countries such as the Czech Republic, Poland and Hungary are posting very solid numbers in the mid-50s range. Much of this is due to low fuel costs and weaker currencies, which make exports more attractive.

Purchasing-Managers-Index-PMI-European-Union-vs-Emerging-Europe-Countries
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2. Growth in the Eurozone Is Good for the Globe

Our investment team’s research has shown that when the one-month reading for the global PMI crossed below the three-month moving average, there was a significant probability that materials, energy and commodities would fall six months later. Conversely, when it crossed above, manufacturing activity would ramp up, which greatly improved the performance of commodities such as copper and crude oil, not to mention the materials and energy sectors.

Commodities-and-Commodity-Stocks-Historically-Rose-Fell-Six-Months-After-PMI-Cross-Above-Below
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It’s very welcome news, then, to see growth in the eurozone, since its PMI readings are factored into the global score. Last week we learned that the preliminary Flash Eurozone PMI advanced to 53.5 for the month of February. This is huge. Not only is it a seven-month high for the eurozone, but it’s also nearly in line with the U.S. reading, which came in at 54.3. Even France—a perennial and disappointing laggard in manufacturing—posted its best results in three-and-a-half years.

3. Surprise! Europe Is Beating Expectations

The Citi Economic Surprise Index, simply put, tells you if a country or region’s economic news is beating—or, conversely, falling below—analysts’ expectations. The higher the number, the more it indicates that economic data is exceeding forecasts.

Eurozone-Economic-News-Beating-Expectations-While-the-US-Trailing-Expectations
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You can see above where the eurozone has surprised consensus. For most of 2014, the region was in a declining trend, whereas the U.S. was headed higher. More recently, though, we’ve seen a huge advancement in Europe, despite negative news coming out of areas such as Greece—which last week managed to strike a deal with its euro-partners to extend the Mediterranean country’s bailout program by four months.

4. GDP Growing

If you look at Europe’s GDP as a whole, it’s expected to grow slightly over 1 percent in 2015. But the GDP in Eastern European countries such as the Czech Republic, Romania, Poland and Hungary is expected to grow double that or more.

Central-Eastern-European-CEE-Countries-GDP-Growth-Outperforms
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These countries are benefiting from the broad recovery, for sure, but they also have their own dynamics. As emerging markets, they have more room to run and grow. 

5. No Lack of Confidence in Consumption

Another sign that the European recovery is underway is the recent uptick in spending habits. Not only does the consumer confidence index (CCI) for the eurozone far exceed its long-term average, but it’s also at its highest reading since soon before the financial crisis.

Eurozone-Consumer-Confidence-at-89-Month-High
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6. Russia, the Not-So-Bad News Bear?

Nearly every day we’re reminded of Russia’s political and financial troubles, but the worst is likely behind us. It appears as if Russia’s market and currency, the ruble, bottomed in mid-December. This is also the first time since the summer that the MICEX Index crossed above its 50-day moving average, breaking through resistance.

Russian-MICEX-Index
click to enlarge

The situation in Ukraine is not pretty, but global investors understand it and are getting comfortable putting their money in Russia again because it’s inexpensive. The bad news has been priced in, and it looks as if the market is willing to move higher.

Russian credit default swaps (CDS) are also looking better. CDSs allow sellers to assume and buyers to reduce default risk on a bond. The swap spreads improved in February, indicating the market is looking past current events such as international sanctions and the ceasefire in Ukraine and seeing Russia’s risk declining in the future.   

7. Low Valuations, High Dividend Yields

Emerging European equities, like Russian stocks, are trading at a big discount relative to those in U.S. and Western European markets. 

Emerging Europe Cheap Relative to Developed Markets
Country Index P/E Ratio Dividend Yield
Western Europe Stoxx 600 23.6 3.6%
United States S&P 500 Index 18.4 2.0%
Poland WIG 20 15.5 3.9%
Romania Bucharest BET Index 9.9 3.6%
Turkey BIST 100 Index 9.6 1.8%
Russia MICEX Index 9.0 4.1%

Many of the emerging European countries are currently trading at less than 10 times. Therefore, you get that winning combination of low valuation and high dividend yield.

We’re definitely starting to see the early signs that Europe is reflating its economy. Attractive PMI data, positive economic surprises and growing consumer confidence all point to a strong recovery, one that should bode well for global investors in general and our Emerging Europe Fund (EUROX) specifically. 

In case you missed this week’s webcast on this very topic, you can still listen to the replay on demand and download the slideshow.

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.

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

The Eurozone Purchasing Managers' Index is produced by Markit and is based on original survey data collected from a representative panel of around 5,000 companies based in the euro area manufacturing and service sectors. National manufacturing data are included for Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece. National services data are included for Germany, France, Italy, Spain and the Republic of Ireland. The flash estimate is typically based on approximately 85%–90% of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data.

The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance been beating consensus. The indices are calculated daily in a rolling three-month window.

The Consumer Confidence Index (CCI) is an indicator which measures consumer confidence in the Economy.

The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

The STOXX 600 Banks (Price) Index (SX7P) is a capitalization-weighted index which includes European companies that are involved in the bank sector. 

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

The WIG20 Index is a modified capitalization-weighted index of 20 Polish stocks which as listed on the main market. The index is the underlying instrument for futures transactions listed on the Warsaw Stock Exchange.

The Bucharest Exchange Trading Index (BET) is a capitalization weighted index, comprised of the 10 most liquid stocks listed on the BSE tier 1. The index is a Price index and was developed with a base value of 1000 as of September 22, 1997.

The Borsa Istanbul 100 Index is a capitalization-weighted index composed of National Market companies except investment trusts. The constituents of the BIST National 100 Index are selected on the basis of pre-determined criteria directed for the companies to be included in the indices.

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 12/31/2014: Delta Air Lines, Inc. 1.28% Holmes Macro Trends Fund; Wal-Mart Stores, Inc. 1.14% All American Equity Fund.

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

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.

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Mind-Blowing: China Consumes More Gold Than the World Produces
February 19, 2015

From All of Us at U.S. Global Investors - We wish you good health and lasting prosperity

Welcome to the year 4713. Or, if you prefer, the Year of the Ram.

The Chinese New Year, which kicks off today, is the largest and most widespread cultural event in mainland China, bringing with it massive consumer spending and gift-giving. During this week alone, an estimated 3.6 billion people in the China region travel by road, rail and air in the largest annual human migration.

Chinese New Year Spending Double That of U.S. Thanksgiving Spending in 2014Imagine half a dozen Thanksgivings and Christmases all rolled into one mega-holiday, and you might begin to get a sense of just how significant the Chinese New Year festivities and traditions are.

According to the National Retail Federation, China spent approximately $100 billion on retail and restaurants during the Chinese New Year in 2014. That’s double what Americans shelled out during the four-day Thanksgiving and Black Friday spending period.

As I’ve discussed on numerous occasions, one of the most popular gifts to give and receive during this time is gold—a prime example of the Love Trade.

Can’t Keep Gold Down

Most loyal readers of my Frank Talk blog know that China, along with India, leads the world in gold demand. This Chinese New Year is no exception. Official “Year of the Ram” gold coins sold out days ago, and since the beginning of January, withdrawals from the Shanghai Gold Exchange have grown to over 315 tonnes, exceeding the 300 tonnes of newly-mined gold around the globe during the same period.

China, in other words, is consuming more gold than the world is producing.

What’s not so well-known—but just as amazing—is that China’s supply of the precious metal per capita is actually low compared to neighboring Asian countries such as Taiwan and Singapore.

The World Gold Council (WGC), in fact, calls China “a huge, relatively untapped reservoir of gold demand.”

This might all change as more and more Chinese citizens move up the socioeconomic ladder. Over the next five years, the country’s middle class is projected to swell from 300 million to 500 million—nearly 200 million more people than the entire population of the United States. This should help boost gold bullion and jewelry sales in China, which fell 33 percent from the previous year.

Chinese and Indian Growth Has Spurred Gold Market
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“I don’t see demand staying down because you have had structural changes,” commented WGC Head of Investment Research Juan Carlos Artigas in an interview with Hard Assets Investor. “One of them, emerging market demand from the likes of India and China, continues to grow, and we expect it to continue to grow as those economies develop further.”

New Visa Policy Promises Increased Chinese Tourism

The Year of the Ram has also ushered in a new visa policy, one that has the potential to draw many more Chinese tourists to American shores.

For years, Chinese citizens could receive only a one-year, multi-entry visa. Now, leisure and business travelers can obtain a visa that allows them to enter multiple times over a 10-year period. The visa application process has also been relaxed.

American companies to benefit from greater influx of Chinese touristsIn terms of overseas spending, Chinese tourists already sit in first place, just above their American counterparts. According to the United Nations World Tourism Organization, a record $129 billion was spent by Chinese travelers in 2013 alone. The average Chinese visitor spends between $6,000 and $7,200 per trip in the U.S.

This visa policy reform is an obvious boon to travel and leisure companies such as those held in our All American Equity Fund (GBTFX)—Walt Disney and Carnival Corp., for examples, not to mention retailers such as Kohl’s, Coach and The Gap.

Other beneficiaries include Chinese airlines such as Air China, which we own in our China Region Fund (USCOX). Global airline stocks are currently soaring as a result of low oil prices, increased seat capacity and more fuel-efficient aircraft. The new visa policy has the potential to give these stocks an even stronger boost.

On a lighter note, at least a couple of airports in North America are making the most of the Chinese New Year, hosting performances by Chinese musical artists and providing entertainment such as a lion dance through the terminal and calligraphy.

To our friends and shareholders here in the U.S. and abroad, I wish you all a Happy Chinese New Year!

 

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.

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 and China Region Fund as a percentage of net assets as of 12/31/2014: The Walt Disney Co. 1.16% All American Equity Fund; Carnival Corp. 1.18% All American Equity Fund; Kohl’s Corp. 1.17% All American Equity Fund; Coach, Inc. 1.18% All American Equity Fund; The Gap, Inc. 1.19% All American Equity Fund; Air China Ltd. 1.11% 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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Africa Could Mine Its Way to Prosperity if It Addressed Instability
February 17, 2015

Last week I attended the Investing in African Mining Indaba in Cape Town, South Africa, as both a presenter and a student seeking opportunities. One of the highlights of the conference was former Prime Minister Tony Blair’s keynote address, during which he offered some crucial advice to African governments: To attract and foster a robust mining sector, a commitment to fiscal stability must be made.

Goods Trade with Africa in 2013

Since 2009, Blair has run the Africa Governance Initiative, which counsels leaders in countries such as Rwanda, Sierra Leone, Liberia, Guinea and others.

Simply put, without fiscal stability and predictability in taxation, capital will be unwilling to flow into any country—African or otherwise—for exploration and production. If a government changes its tax policy every three years or so, that instability discourages the inflow of financing. This is bad for Africa.

“The mining sector remains absolutely vital for Africa’s future,” Blair said, “and even with the sharp declines in [commodity] prices, there are tremendous opportunities and there will be, no doubt, an adjustment and reshaping of the face of mining within Africa over these next few years.”

I shared the following map last week, but it’s worth showing again, as it supports Blair’s point. Central and Southern Africa, especially, are extremely commodity-rich and maintain a large global share of important metals and minerals such as platinum, diamonds and gold.

In 2014, China Channeled Over $100 Billion into 156 Countries and Regions Around the Globe
click to enlarge

Fiscal instability is also bad for investors in Africa. If foreign investment is not respected by a government, if it is punitively taxed or arbitrarily confiscated, further investment will not flow into that country. Politically, African nations need to recognize that seemingly faceless investment institutions represent real people’s hard earned dollars.

In Zambia, for example, a huge 12 percent of the country’s GDP comes from mining, an industry that employs 10 percent of all Zambians. Yet its government has increased, rather than cut or at least eased, restrictive royalty taxes on mines. In the case of open pit mines, royalties were raised from 6 percent to a crippling 20 percent.

Speaking to Reuters, a mining industry spokesperson speculated: “Mining companies are not going to put another dollar in [Zambia]” if the government continues to be unreliable.

Less Friction, Fewer Disruptions

This is proof positive of what I frequently say: Government policy is a precursor to change. In the example above, the tax policy is leading to change that could very well hurt Zambia’s economy. With mining being such a strong contributor to its GDP, it seems the government would want to make it easier, not more challenging and costly, for international producers to conduct business there.

The less friction and fewer disruptions there are, the easier it is for money to flow.

But Zambia’s isn’t the only African government that’s placing roadblocks in front of miners. The Democratic Republic of Congo is in the early stages of hiking royalties on mines and revising its mining code. And in his recent State of the Nation Address, South African President Jacob Zuma announced that foreigners could no longer own land in the country, which raises the question of what implications, if any, this might have on U.S. and Canadian companies that own and operate South African mines. Zuma’s announcement comes at a time when persistent electricity shortages have stymied mining activity and rumblings of a miners’ strike similar to the one last year that brought platinum and palladium production to a five-month halt are intensifying.    

At the same time, many governments in Africa are waking up to see that they’re going to have to provide the sort of stability and consistency Prime Minister Blair outlined if they hope to attract the capital necessary to fund and develop their mining opportunities.

Miners Giving Back

A strong mining sector doesn’t just benefit the native country, either. It’s a global good that benefits all. In another presentation at the African Mining Indaba, Terry Heymann of the World Gold Council convincingly showed that the economic output of the global gold mining sector far exceeds the collective aid budget of world governments. Gold mining, he said, created and moved as much as $47.3 billion to suppliers, businesses and communities in 2013, compared to governments’ $37.4 billion.

Many gold mining companies take a more direct approach to helping the communities in the countries they operate in, including Randgold Resources, which works primarily in Mali. In an interview during the African Mining Indaba, CEO Mark Bristow detailed his company’s involvement in the fight against Ebola and other epidemics that have hit the West African country:

Our doctors, the Randgold doctors, run a technical committee meeting every day where we coordinate with the [Malian] health authorities, and we help manage the deployment of energy. Now that we’ve eradicated the second [Ebola] outbreak, our big focus is on prevention and education.
Goods Trade with Africa in 2013

Bristow explained that the company had sponsored the development of an educational film about Ebola, before highlighting other company achievements:

We were part of the Neglected Tropical Disease Initiative rollout… We’re very big on the AIDS programs around the country. We brought the malaria incident rate around our mines down by more than four times.

Because Randgold is the largest employer in Mali, Bristow suggested, he feels a moral obligation to partner with his host country and make it a healthier, safer place to live and work.

During the same interview, he insisted that Randgold, which we hold in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), has a “solid five years ahead of us,” citing the fact that the company holds no debt and managed to replace all the ounces it mined in 2014 at $1,000 long-term gold price. It also increased its dividend 20 percent.

Despite bullion’s price hovering just above the relatively low $1,230 range, Randgold has delivered 16 percent year-to-date.

This is in line with gold mining stocks in both the NYSE Arca Gold Miners Index and FTSE Gold Mines Index, which are outperforming the return on bullion.

Gold-Mining-Stocks-Outperforming-Bullion-Year-to-Date
click to enlarge

As I mentioned back in July, when mining stocks do well, bullion has tended to follow suit. This also shows that producers are successfully adjusting to a $1,200-per-ounce environment by scaling back on capital spending, selling off assets, putting exploration on hold and engaging in mergers and acquisitions—which in the past has signaled that a bottom in spot prices might be reached. B2Gold Corp. closed on its deal to buy Papillon Resources in October; we learned in November that Osisko Gold Royalties is taking over Virginia Mines; and last month it was announced that Goldcorp would be purchasing Probe Mines.

Weak Currencies, Low Fuel Prices

Speaking with Kitco News’s Daniela Cambone during last Monday’s Gold Game Film, I commented on some of the macro events aiding gold mining companies such as Randgold:

Mark Bristow has just hit the ball out of the park. He benefits from a weak Mali currency and he benefits from a weak euro because everything is priced in euros. He’s also benefited from weak oil prices.

Indeed, many miners not operating in the U.S. are the beneficiaries of a weak local currency. The West African CFA franc, Mali’s currency, is off 20 percent; the South African rand, 40 percent; the Canadian dollar, 15 percent.

Low energy prices are also helping gold producers, just as they’re helping companies in other industries, airlines especially. In most cases, fuel accounts for between 20 and 30 percent of gold miners’ total operating costs. Because Brent oil is currently priced around $60 per barrel, gold producers are seeing significant savings.

The Gold Demand

This Thursday marks the Chinese New Year, a traditional occasion for gold gift-giving. Chinese demand for the yellow metal was strong in 2014, as 800 tonnes flowed into the country. Over half of the global gold demand, in fact, was driven by the world’s two largest markets, China and India.

Chinese-and-Indian-Growth-Has-Spurred-Market-Infrastructure-Development
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Historically low real interest rates are also driving investors into gold and gold stocks. As I told Daniela:

When you look at real interest rates out of the G7 and G10 countries, the only one with a modest increase is the U.S. dollar. Any time you get this negative real interest rate scenario, gold starts to rally in those countries’ currencies. Now what’s really dynamite is the gold mining companies like Goldcorp, which pays a dividend higher than a 5-year government bond.

Emerging Markets Webcast

Make sure to join us during our webcast tomorrow, February 18. USGI Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing reflationary measures in China and emerging Europe. Don’t miss it!

Time-Tested History of No Drama - Near-Term Tax Free Fund - U.S. Global Investors

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.

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.

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 NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

The FTSE Gold Mines Index Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold.

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. A fund’s yield may differ from the average yield of dividend-paying stocks held by the fund.

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, World Precious Minerals Fund and China Region Fund as a percentage of net assets as of 12/31/2014: B2Gold Corp. 0.28% World Precious Minerals Fund; Goldcorp, Inc. 1.03% Gold and Precious Metals Fund; Osisko Gold Royalties 0.00%; Papillion Resources 0.00%; Probe Mines 0.00%; Randgold Resources Ltd. 2.30% Gold and Precious Metals Fund, 1.43% World Precious Minerals Fund; Virginia Mines, Inc. 1.14% Gold and Precious Metals Fund, 10.35% World Precious Minerals Fund.

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Global Airline Stocks Soaring, and Not Just Because of Low Oil Prices
February 12, 2015

The airline industry is notoriously competitive. There’s even an old joke: If you want to make a million dollars in the airline business, you need to start with two million.

That joke might have run its course, however, as carriers all over the globe have been posting some of the most impressive earnings in commercial aviation’s 100-year history.

Airplane flying through pink sunset. Jets. U.S. Global Investors.

Revenue growth in the U.S. was “unusually strong” in 2014, achieving the best margin performance in the past 10 years, according to management consulting firm Oliver Wyman. The Dow Jones U.S. Airlines Index grew more than 87 percent during the year, and we’ve seen global airline stocks, as measured by the NYSE Arca Global Airlines Index, gain significant ground since 2012 and reach all-time highs.

Global Airline Stocks Posting All-Time Highs - Jets - U.S. Global Investors
click to enlarge

Some investors might approach this rosy news with a dash of skepticism. Oil prices have fallen over 50 percent since the summer, after all, and conventional wisdom says that as soon as they start to rise again, airlines will be one of the first industries to be negatively affected.

Although it’s true that fuel is carriers’ top operating expense—they collectively spent $48 billion on fuel in 2013—there’s more to the industry’s recent bull run than the low price of oil. In fact, airlines are in a better position now to manage an increase in oil prices than they have been in recent memory, for a number of reasons.

Additional Seating

It only makes fiscal sense. The more seats an airline has, the greater the likelihood is of generating more revenue in airfare. The decision to increase seat density has helped carriers significantly lower their cost per available seat mile (CASM).

With greater seat density, carriers have had improved success at meeting and surpassing their breakeven load factors, or the necessary number of filled seats for companies to recoup operating costs. Currently, the breakeven load factor for large domestic airlines is 79 percent, meaning around three quarters of all available seats on every flight need to be filled. According to the most recent data from the U.S. Bureau of Transportation Statistics, the load factor was an exceptional 85 percent in 2014, an increase of 1.2 percentage points from the previous year and 12 percentage points from 10 years ago.

As you can see, this has resulted in the industry’s best annual performance for the 10-year period:

Domestic Airline Load Factor Exceeds Breakeven Load Factor - Jets - U.S. Global Investors
click to enlarge

Ancillary Revenue

Another way carriers have managed to beat expectations is through ancillary, or non-ticket, fees. Baggage fees, priority boarding, Wi-Fi, on-board meals and other fees are increasingly responsible for making up a large chunk of airlines’ earnings, allowing them to remain profitable in a highly competitive industry.

According to airline consulting group IdeaWorks, global ancillary revenue for 2013 was $31.5 billion. That’s up from $2.45 billion in 2007, which is about what Delta alone—which we own in our Holmes Macro Trends Fund (MEGAX)—generated in 2013 from such fees.

More so than major network carriers, low-cost value carriers increasingly depend on non-ticket fees to stay in the air, if you compare ancillary revenue as a percentage of total revenue in 2007 and 2013:

Ancillary Revenue as a Percentage of Total Revenue
Annual Results - 2013 Annual Results - 2007
Spirit Airlines 38.4% Ryanair 16.2%
Wizz Air 34.9% Vueling 14.2%
Allegiant Air 32.6% Allegiant Air 12.8%
Jet2.com 27.7% Air Deccan 9.0%
Ryanair 24.8% easyJet 8.8%

A Growing Middle Class

Arguably the most important factor contributing to airlines’ recent uptrend is the emergence and expansion of the middle class in the developing world. Air travel demand is strongly correlated with improved incomes. Spots around the world where we’re seeing some of the greatest surges in middle class growth are Africa, China, India and Southeast Asia.

Suvanaphumi Airport, Bangkok, Thailand. U.S. Global Investors. Jets.

This has led to advancement in worldwide revenue passenger miles, or the number of miles flown by commercial airlines. The most recent annual data from the Bureau of Transportation Statistics shows that over 1.1 billion miles were spent in the air in 2013, a 3.6-percent increase over the previous year.

The Organization for Economic Cooperation and Development (OECD) estimates that the middle class could increase from 1.8 billion people in 2010 to 5 billion in 2030.

Owing to a developing middle class as well as increased seat density and non-ticket fees, airlines are expected to post a collective profit of around $25 billion this year, up from $20 billion in 2014, according to the International Air Transport Association.

Also helping margins expand are low oil prices, which have stayed below $55 per barrel since the end of December. But even when prices do begin to rise, the industry should be in a good position to fly through the turbulence. 

Webcast

Registration for our next webcast, scheduled for February 18, is now available! Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing monetary easing policies in China and Emerging Europe.  Don’t miss it!

 

Sign me up for the webcast!

 

 

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.

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 Dow Jones U.S. Airlines Index measures the performance of the portion of the airline industry which is listed in the U.S. equity market. Component companies primarily provide passenger air transport. Airports and airplane manufacturers are not included.

The NYSE Arca Global Airlines Index is a modified equal-dollar weighted Index designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified as being in the airline industry and listed on developed and emerging global market exchanges.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund and China Region Fund as a percentage of net assets as of 12/31/2014: Delta Air Lines, Inc. 1.28% in Holmes Macro Trends Fund; Spirit Airlines 0.00%; Wizz Air 0.00%; Allegiant Air 0.00%; Jet2.com 0.00%; Ryanair 0.00%; Vueling 0.00%; Air Deccan 0.00%; easyJet 0.00%.

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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Net Asset Value
as of 02/27/2015

Global Resources Fund PSPFX $6.28 -0.01 Gold and Precious Metals Fund USERX $5.78 0.08 World Precious Minerals Fund UNWPX $4.93 0.06 China Region Fund USCOX $8.31 -0.02 Emerging Europe Fund EUROX $6.52 -0.04 All American Equity Fund GBTFX $28.63 -0.02 Holmes Macro Trends Fund MEGAX $20.78 -0.17 Near-Term Tax Free Fund NEARX $2.25 -0.01 China Region Fund USCOX $8.31 -0.02