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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Indian Gold Jewelry Sales Set to Hit a Four-Year High
October 17, 2016

Indian households have the world's largest private gold holdings at 23,000 tonnes

Just as April showers bring May flowers, plentiful monsoon rains in India tend to drive up demand for gold jewelry among rural, income-flush farmers, who make up a third of the country’s consumption of the yellow metal.

It’s a relief to hear, then, that India just had its best monsoon season in three years, with heavy rains washing away people’s fears of yet another drought.

Add to that the fact that the yellow metal is now trading in the affordable $1,250 to $1,260 range—a sizeable discount from only a month ago—and gold jewelry sales are expected to surge as much as 60 percent over last year, according to the India Bullion and Jewellers Association.

That would take sales to a four-year high as we near Diwali—traditionally a time when gold-buying is considered auspicious—which would help support prices.

Following Diwali comes the important Indian wedding season. It’s almost impossible to exaggerate how massive this industry is, with one India-based research firm expecting it to hit 1.6 trillion rupees ($24 billion) by 2020.

I’ve shared with you before that between 35 percent and 40 percent of a typical Indian wedding’s expenses is devoted to gold jewelry. If we use the higher estimate, that means close to $10 billion could be spent on gold alone.

But for spending like this to happen, a strong monsoon is needed, which farmers in many parts of India got this year.

A Longstanding History of Driving the World Gold Market

For millennia, gold has played a key role in Indian culture, valued not only for its beauty and durability but also as financial security. That’s no less true today. A 2013 survey conducted by the Federation of Indian Chambers of Commerce & Industry (FICCI) found that more than three quarters of Indians view the precious metal as a “safe investment.”

The same FICCI study also found that gold is a regular line item in most Indian households’ budgets, comparable to what they spend every year on medical expenses and clothing.

Gold is Among Indian Households Regular Expenditures
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It should come as little surprise, then, that Indian households have the largest private gold holdings in the world. Standing at an estimated 23,000 tonnes, and worth close to a whopping $1 trillion, the amount surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

Analysts: Gold Is Setting Up for a Big Comeback

After logging its best first half of the year in 40 years, gold is now trading range-bound while we await the Federal Reserve’s decision to raise rates in December. Most, but certainly not all, of the recent economic data seems to be pointing in this direction, with initial jobless claims at a four-decade low, voluntary quits at pre-recession levels and household income finally on the rise.

The week before last was especially brutal. With markets in China, the world’s largest consumer, closed in observance of Golden Week, the short sellers had free rein, driving the price down more than 3 percent on Tuesday alone.

Despite the weakness, inflows into gold ETFs continue to pour in, as savvy investors recognize that real, or inflation-adjusted, Treasury yields are still in negative territory. I use the 2-year yield here because it’s what many currency traders look at.

Low to Negative Treasury Yields Have Helped Drive Up Gold
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But now some analysts see gold ready to turn again, perhaps prefacing a rally that could carry the metal to an all-time high.

In a note last week, UBS said that as long as the Fed doesn’t hike rates too quickly, gold should resume its upward momentum. And remember, the bull market was triggered last December after the Fed raised rates for the first time in nearly a decade.

Gold Performance Around September FOMC Meetings, 2015 and 2016
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Meanwhile, London-based investment firm Incrementum suggested last week that gold could reach a new record within the next two years, supported by higher consumer prices, low to negative government bond yields and a lack of confidence in central bank policy.

“In this uncharted territory, with big monetary experiments going on, it just makes sense” to hold bullion, Ronald Stoeferle, a managing director at Incrementum, told Bloomberg.

Peak Platinum and Palladium Demand?

Consensus suggests gold has a positive long-term outlook, but platinum and palladium might be looking at an uncertain future.

Platinum and Palladium Under Pressure
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As you probably know, the platinum-group metals (PGM) are used predominantly in the fabrication of automobile catalytic converters, which are responsible for reducing emissions. Platinum is used in diesel-powered engines, palladium in gasoline-powered engines.

With vehicle sales in China rising rapidly, demand for PGMs is still strong. In fact, demand for palladium rose 3 percent this year, hitting a fresh all-time high, according to CPM Group.

Pallladium Usage on a Global Scale

But trouble could be brewing as more and more automakers deepen their shift toward battery-electric vehicles (BEVs) in an effort to comply with international environmental regulations and meet growing consumer demand. Since these vehicles don’t have an internal combustion engine, there are no emissions, meaning PGMs are not needed.

Government policy has largely driven the emphasis on BEVs, with a few nations around the world committed to banning internal combustion engines from roads within the next 10 to 20 years.

Norway was the first, pledging to eliminate them by 2025, less than 10 years from now. The Netherlands is considering a similar ban, effective the same year. And India wants to be the first “100 percent electric vehicle nation” by 2030.

Last week, Germany—the world’s fourth-largest automobile manufacturer, home to Audi, BMW, Mercedes-Benz, Porsche and Volkswagen—voted to do away with all fossil fuel-powered vehicles within 15 years.

Pallladium Usage on a Global Scale

In its platinum and palladium outlook, Metals Focus writes that “for every additional 1 percent of global passenger car production that BEVs claim in 2020, our model suggests a loss of more than 100,000 ounces (3 tonnes) of combined PGMs offtake that year.”

All in all, not good for PGMs.  

However, it is good for copper. As I’ve pointed out before, BEVs use about three times as much copper wiring as traditional combustion engines vehicles.

It’s important to recognize that disruptive technologies have always changed markets. Right now, one of them is battery-electric vehicles. Embrace them or not, the decision is yours. But as investors, we must acknowledge which way the wind is blowing, and adapt—or be left behind.

Don’t Forget to Register for MoneyShow Dallas!

Speaking of disruptive technologies, virtual reality is quickly going mainstream, with Facebook’s Oculus Rift and other VR headsets likely to become one of the next must-have consumer items.

You don’t need one of these pricey rigs to enjoy the MoneyShow Dallas virtual event, though—just an internet connection. This week I’ll be at the MoneyShow, where I’ll be presenting and learning. And if you can’t be there physically, you can always be there virtually to hear from leading economists, premier money managers and top analysts, who will share their best insights, perspectives and strategies to grow your portfolio.

I hope you’ll join me!


The French Are at It Again

One final note: Last month, I shared with you the story that European regulators were going after big Americans companies such as Netflix, Facebook, Amazon and more. Their envy policies demand that, if they can’t build their own companies that are just as successful, they’ll tax and regulate them into non-competitiveness.

This socialist mindset is now taking aim at internet content providers.

Last week, according to Zero Hedge, the French parliament introduced a bill that, if enacted, would levy a 2 percent tax on all ad-generated revenue on sites that distribute free content—sites such as YouTube and Dailymotion (a France-based video-sharing site).

This is just the latest example of how Europe is undermining American companies. Why hasn’t Europe created its own Netflix or Facebook? Where’s its Silicon Valley? The continent’s miles of red tape and envy policies have essentially prohibited entrepreneurism and innovation. And instead of relaxing regulations, it chooses to punish U.S. firms for their success.


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.

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

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What We Look For When Picking Superior Gold Stocks
October 11, 2016

What We Look For When Picking Superior Gold Stocks

The ability to filter through hundreds of gold stocks, choosing those with the best relative value, among other things, is a skill that our portfolio management team at U.S. Global Investors has over 30 years of experience in. Our primary fiduciary responsibility as active managers is to sift, sort and prioritize these names in order to pinpoint the ones we believe can provide the best opportunities for our funds and to our shareholders.

Although we use several technical strategies to accomplish this, I have outlined some of the most important factors we focus on when classifying the best of the best gold stocks.

The Portfolio Manager’s Cube

For starters, the portfolio manager’s cube lays out the value drivers behind superior resource stock performance. It draws attention to the intersections among a resource company’s production, cash flow and reserves (rows) and relative value, momentum and event drivers (columns). Using this model, we compare stocks to find attractive opportunities and overpriced risks, particularly in mining companies.

We start off by looking at production, cash flow and reserves on a per share basis.

Production lets us know how much gold or minerals a company expects to produce in relation to others, which will directly impact its profitability.

Similarly, cash flow deals with the costs necessary to aid in production, and indicates the quality of a company’s income. Does the company have ample cash flow to finance the costly yet necessary infrastructure, equipment, geological analysis and manpower to extract the metal, not to mention pay dividends?

For exploration companies that do not have cash flow, we look at burn rate, which describes how long a company’s current cash levels will last before it has to return for additional financing. For example, if a junior exploration company has $15 million in cash reserves and is spending $3 million a month, it has five months to deliver enough reserves per share to convince capital markets it is worth the risk.

Reserves are the economically mineable part of a mineral resource, usually demonstrated by an initial feasibility study. The average concentration of gold in the earth’s crust is 0.005 parts per million, making a substantial yield very rare. We want to see growth in reserves.

By evaluating these success factors, we have a better understanding of the management and productivity of a company, or its value. But how is it faring in relation to industry peers or its closest competitors? This is called relative value, another important point to consider.

Finally comes momentum. We want to know if a company is headed quickly and profitably toward the direction it’s aiming for. Can its upward movement last or are external factors at risk of causing a slowdown or pullback? Many times, results are event driven. This could be mergers and acquisition (M&A) activity, changes in management, new mine discoveries and the like. These are the types of events we keep a close eye on.

Using this type of explicit knowledge, along with “boots on the ground” experience, or tacit knowledge, helps us to look for and understand important events that could affect any of these success factors.

A Quant Driven Model for Stock Picking

We are practitioners of quantitative analysis. In combination with the portfolio manager’s cube, we screen mining stocks for the following factors. Each factor offers an important glimpse into how a company is handling its overall operations.


  • A mine’s ore grade is the proportion of the metal contained in the ore at the site. Higher-quality mines have higher ore grades and lower-quality mines have lower grades. We focus on stocks that are above median grade.
  • A company’s debt-to-equity ratio shows the amount of debt being used in order to finance its assets, relative to the amount of value represented in the shareholders’ equity. We look for companies with low debt-to-equity.
  • Modest growth in production is important. We want a mine that is producing, but recognize growth that is too extreme can be risky in the long run.
  • Cash flow return on invested capital (CFROIC) is a valuation metric for evaluating the earnings of a company, comparing its cash return to equity. We look for companies with above average CFROIC.
  • Enterprise value to operating cash flow is the ratio of the entire economic value of a company to the cash it produces.

Companies with high gross margins and enterprise value also rank well in our quant models. Gross margin is how much money a company has left after incurring costs related to producing the goods and services sold – the higher the percentage, the better.

Using technical stock screens and tacit knowledge of management teams can help us uncover hidden gems with attractive growth prospects. This is the value that our investment team at U.S. Global Investors provides for our shareholders and how we seek to generate alpha.


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

Cash Flow Return on Invested Capital (CFROIC) is defined as consolidated cash flow from operating activities minus capital expenditures, the difference of which is divided by the difference between total assets and non-interest bearing current liabilities. 

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

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No Love for Gold
October 10, 2016

Golds historical 30 year pattern
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There’s no other way to say it: Gold had a bad week. Last Tuesday alone, the yellow metal fell more than 3 percent, shuffling off $43, in its biggest one-day loss in three years. It broke below the psychologically important $1,300 mark and touched the 200-day moving average before rising again Friday.

Now Could Be Buying Opportunity Gold
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In the past, gold has surged in September and corrected in October leading up to Diwali, the Festival of Lights, in India. Consumers there are expected to take ample advantage of the gold discount’s timing, as it follows a strong monsoon season and comes just before Diwali and the wedding season, when gifts of gold are considered auspicious. The correction has been followed by a Christmas and Chinese New Year-driven rally.

The Love Trade in China was on hold last week, as markets in the world’s largest consumer of gold were closed in honor of Golden Week, when people celebrate the founding of the People’s Republic of China. The Asian giant has increasingly become a price-maker of gold—remember, it introduced a renminbi-denominated fix price in April—so when it’s not in the game, the shorts can easily bring the metal down. Many investors put in their trades the previous week, anticipating China’s closure.

Below, you can see gold edging close to negative 1 standard deviation, triggering a “buy” signal.

Gold 60 day percent change oscillator
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Goldman Sachs analysts, who normally hold a bearish outlook on the yellow metal, echoed the sentiment in a note last week, writing: “We would view a gold selloff substantially below $1,250 as a strategic buying opportunity, given substantial downside risks to global growth remain, and given that the market is likely to remain concerned about the ability of monetary policy to respond to any potential shocks to growth.”

As always, I recommend a 10 percent weighting in gold, with 5 percent in bullion and coins, the other 5 percent in gold stocks. Investors might be interested in using this time to rebalance. With China open for business again this week, I expect the metal’s performance to improve.

Like gold, the British pound took a hard beating last week, plunging more than 6 percent in early Asian trading to a three decade-low against the U.S. dollar.

The British Pound Just Got Pounded
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I don’t know about you, but I find it interesting that the drop occurred mere hours after French President François Hollande told an audience that the European Union should take a “firm” stance against the U.K. for its Brexit vote, partially with the intent of discouraging other EU nations from leaving the bloc.

The Debt Hangover

This week, the International Monetary Fund (IMF) released an eye-opening report on the ticking time bomb that is global debt, warning the nations of the world that if they don’t deleverage—and soon— there could be grave consequences. At the very least, we could continue to see sluggish growth. In 2015, global debt of the nonfinancial sector, including governments, households and nonfinancial firms, stood at a mind-boggling $152 trillion, or 225 percent of world GDP, an all-time high.

Global Gross Debt All Time High
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Two-thirds of this amount, according to the IMF, comes from the private sector, which has lately gorged on cheap credit, especially since rates were slashed following the recession. This not only raises the possibility of another financial crisis, “but can also hamper growth even in its absence, as highly indebted borrowers eventually decrease their consumption and investment.”

In other words, debt plus slow growth leads to even more debt and even slower growth, creating a “vicious feedback loop” that becomes harder and harder to escape, the IMF writes.

$23,000 Gold?

In June 2015, I shared with you a thought experiment of what might happen to the price of gold if tomorrow it backed global debt 100 percent. Since it’s been more than a year since then, and because a few things have changed, I thought it might be interesting to revisit this idea.

According to the latest data from the World Gold Council (WGC), an estimated 186,700 metric tons (6.5 billion ounces) of gold have been mined in the history of the world. Based on today’s prices, this mountain of metal is worth $8 trillion.

Let’s imagine we wake up tomorrow morning and learn that all debt—all $152 trillion—were backed by gold. That means each ounce of the stuff would suddenly be valued at roughly $23,000. With one American gold eagle, then, you could buy a new family sedan and still be left with some pocket change.

Gold Debt

Now of course this is ridiculous, but that’s part of the experiment.

There was a time when most advanced nations’ currencies were backed by physical gold (and/or silver). And because gold is limited, so too was public spending. In 1970, a year before President Richard Nixon “closed the gold window,” the U.S. owed $370 billion. Today, it owes $19.5 trillion, or more than $163,000 per American taxpayer.

Had we stayed on something resembling a gold standard, it would have been highly unlikely, if not impossible, for our debts to climb so high.

I’m not saying we should—or even can—return to such a system, despite the endorsement of Donald Trump, Ted Cruz and several other prominent politicians. It would be challenging to find a single legitimate economist who supports a gold standard in today’s incredibly complex economic environment.

Central banks, on the other hand, continue to add to their gold reserves and drive demand.

According to a Macquarie report last week, banks added 27 tonnes to their reserves in August in an effort to diversify their assets and hedge against their own policies. As we’ve been seeing lately, Russia and China were responsible for a huge percentage of the buying, with Russia saying it has no specific target amount, according to the WGC.

In a survey of 19 central bank reserve managers, the WGC found that close to 90 percent of them have plans either to increase their gold reserves or maintain them at current levels.

Investors might consider doing the same, for the very same reasons.




Join Me in Dallas!

Next week, I’ll be speaking at the MoneyShow in Dallas. This year ought to be interesting, with notable speakers such as Art Laffer, Steve Forbes, Jeff Hirsch, John Mauldin and many more. Registration is absolutely free. I hope to see you there!

Join Frank Holmes at the MoneyShow in Dallas


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.

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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We Believe Congress Is About to Give this Asset Class a Huge Promotion
October 5, 2016

Second Longest Streak of Muni Bond Fund Inflows on Record

It appears there’s no shortage of investor love for municipal bond funds. September 28 was the 52nd straight week of inflows into state and local government debt, marking the second longest streak on record, according to the Investment Company Institute (ICI). Year-to-date, munis have attracted more than $48 billion in new cash.

Second Longest Streak of Muni Bond Fund Inflows on Record
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Although I can’t say how long this rally will last, the drivers for the $3.7 trillion muni market remain the same now compared to a year ago: stock market volatility; a thirst for tax-free income and capital preservation; and a need for safety in a world beset by perceived threats, from geopolitical uncertainty in the European Union to the upcoming U.S. presidential election, the most divisive and controversial in modern history.

And it isn’t just American investors who favor munis. With government debt still yielding negative rates in Japan, Germany, Switzerland and elsewhere, foreign investors continue to add to their muni holdings, even though they’re ineligible to receive the securities’ U.S. tax benefit.

Global Bond Yields Still Underwater
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According to Bloomberg, foreign buyers held close to $90 billion in munis as of June 30, up from $74 billion during the same period in 2013.

Senators: Munis Are “High Quality Liquid Assets”

For these reasons and more, a group of U.S. senators introduced a bipartisan bill last week that would promote munis to the highest quality of assets.

The “high quality liquid assets” category currently includes cash, Treasuries and debt issued by government agencies such as Fannie Mae and Freddie Mac. The new bill, if passed and turned into law, would elevate municipal debt to this easiest-to-trade group.

This would give banks more reserve options, as they’re required by law to hold enough highly liquid assets to last them at least 30 days in the event of an economic crisis.

A similar bill has already passed the House. The Senate bill is sponsored by Mike Rounds (R., S.D.), Charles Schumer (D., N.Y.) and Mark Warner (D., Va.).

A Ringing Endorsement

I agree with the senators’ position on munis’ liquidity and comparative stability. In fact, it’s a wonder why this hasn’t happened before now. Moving munis into the “high liquidity” category would serve as sterling confirmation of what so many investors, from individuals to mutual funds to banks, already know about them.

Take our Near-Term Tax Free Fund (NEARX), which invests primarily in shorter term, high quality bonds. It’s delivered an incredible 21 straight years of positive returns, in various interest rate environments as well as equity bull markets and bear markets. According to Morningstar, out of more than 31,000 equity and bond mutual funds, only 39 have had positive returns every year during this time. NEARX is one of them.

Near-Germ Tax Free Fund Annual total Return
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What’s more, NEARX has edged out its benchmark, the Barclays 3-Year Municipal Bond Index, for the one-year, five-year and 10-year periods, as of August 31.

It’s unclear at the moment when the Senate bill might be put to a vote, but I’m hoping for a victory and that the president will sign it. When new details surface, I’ll let you know.

In the meantime, be sure to visit our Near-Term Tax Free Fund page.

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

Total Annualized Returns as of 6/30/2016
Fund One- Year Five-Year Ten-Year Gross
Near-Term Tax Free Fund (NEARX) 2.22% 2.13% 3.13% 1.09% 0.45%
Barclays 3-Year Municipal Bond Index 2.26% 1.66% 3.11% N/A N/A

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through April 30, 2017, 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 or 1-800-US-FUNDS.

Past performance does not guarantee future results.

Bond funds are subject to interest-rate risk, as their value declines as interest rates rise. They are also subject to default risks, and information about financial problems that affect the bond’s issuer has not always been readily available to investors. The current market value of municipal bond may be hard to determine because many municipal bonds trade infrequently. A bond's market value may change for reasons having nothing to do with the financial condition of the issuer, such as a change in interest rates. 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 Barclays 3-Year Municipal Bond Index is a total return benchmark designed for short-term municipal assets. The index includes bonds with a minimum credit rating BAA3, are issued as part of a deal of at least $50 million, have an amount outstanding of at least $5 million and have a maturity of 2 to 4 years.

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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Did OPEC Just Cry Uncle?
October 3, 2016


Last week I was in beautiful Toronto, where I presented the keynote address and participated in a panel discussion at the annual Mines and Money conference.  It was the first time the highly respected gathering of precious metals analysts and investors came to the Americas, and they couldn’t have chosen  a better city than my hometown. Toronto has long served as a major hub for mining finance and is home to some of the world’s largest gold producers.

Toronto is also one of the most multicultural municipalities on earth. According to its website, over 140 languages and dialects can be heard in the city, with a third of its population speaking a language other than English or French at home. This makes it an extremely attractive destination for professional millennials from all over the globe.

I had the pleasure of attending a Young Presidents’ Organization (YPO) event in Toronto as well. The YPO is the world’s preeminent group for global business leaders and executives, providing peer-to-peer learning and networking opportunities among its 24,000 members. The companies they lead generate an impressive $6 trillion in global annual revenue. The daylong event, titled “Culture Shock,” focused on the societal effects of disruptive technology, including advanced robotics, 3D printing, the internet of things and more.

Frank Holmes accepting the award for Best Americas Based Fund Manager, presented by the Mining Journal

While at the Mines and Money conference, the Mining Journal presented its Outstanding Achievement Awards. I’m humbled to share with you that Ralph Aldis and I were co-recipients of the Best Americas Based Fund Manager award. It’s a great honor to have been selected from among such an esteemed group of portfolio managers.

The award symbolizes U.S. Global Investors’ strong commitment to its investors and shareholders. It’s my firm belief that we’ve consistently been a leader in the metals and mining space. I’m deeply proud of what we’ve managed to accomplish over the years, starting almost 30 years ago when I bought a controlling interest in the company. Since then, our funds have been recognized numerous times by Lipper and Morningstar, two trusted independent financial authorities.

OPEC Decision Helps Oil Post Its Second Straight Month of Gains

You’ve probably heard by now that, in an effort to lift oil prices, the Organization of Petroleum Exporting Countries (OPEC) tentatively agreed to a production cut at its meeting in Algiers last week. The cartel, which controls more than a third of world output, plans to limit daily production to between 32.5 million barrels and 33 million barrels, down from 33.2 million barrels.

Saudi Oil Minister Khalid al-Falih pushed for product cuts

This comes more than two years since oil prices were kneecapped, wreaking havoc on several OPEC member nations’ economies. Saudi Arabia currently faces a steep budget deficit, as oil revenues make up close to 90 percent of the country’s budget. Meanwhile, Venezuela’s currency, the bolivar, has become so worthless that it’s now cheaper to use it as a napkin than to buy actual napkins. Airlines flying to the U.S. won’t even accept bolivars. (Of course, this has more to do with the government’s woeful mismanagement of the country than oil prices.)

It’s important for investors not to get too excited over OPEC’s decision. At the moment, none of this is set in stone. Some OPEC members are already wavering, with Iraq questioning output numbers and Nigeria moving to boost production.

Plus, American producers are likely to step into the void OPEC would create. Compared to last year, production is down only 535,000 barrels a day—and that’s with far fewer operating rigs. But it appears companies are eager to get back to work. In 12 of the last 13 weeks, North American drillers reactivated mothballed rigs. I expect to see the pace rise as it becomes clearer OPEC will make good on its resolution.

American Oil Producers Are REactivating Rigs
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Consolidation Could Ease the Pain

For the past two years, OPEC’s pump-at-will policies have flooded the market with cheap supply, causing economic pain for producers with higher cash costs, including those involved in fracking, the Canadian oil sands and deepwater drilling.

Since January 2015, more than 100 U.S. and Canadian producers have declared bankruptcy, representing a combined $67 billion in debt, according to Dallas law firm Haynes and Boone.

Number of North American Oil and Gas Bankruptcy Filings Exceeds 100
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To weather the low-price environment, global exploration spending has been slashed for two consecutive years. As Bloomberg reports, total investment in world oilfields stands at $450 billion, a significant 24 percent decline from last year. The International Energy Agency (IEA) expects the cost-cutting to extend into next year.

This has driven new oil discoveries to their lowest point since 1947.

It also underscores the need for industry consolidation. With exploration budgets down, major oil companies will rely on acquisitions to replace up to half of their reserves, according to energy consultancy firm Wood Mackenzie. When the airline industry was mired in bankruptcies a decade ago, we saw a huge wave of mergers and acquisitions, and we should expect to see the same in the oil patch.

A few big oil and gas deals have come out of the price rout—Royal Dutch Shell’s acquisition of BG, worth $70 billion, is the largest by far—but more will likely take place in the near term. Antitrust officials prevented energy giants Halliburton and Baker Hughes from realizing their $35 billion deal, announced back in November 2014.

America’s Gas Binge Hits a New Record

Oil inventories might be brimming all over the globe, but demand remains strong and expected to swell alongside the global middle class. As I told you in June, India is expected to have the fastest growing demand for crude between now and 2040, replacing China. 

But don’t count the U.S. out. Even with fuel efficiency improving in automobiles, Americans burned through a massive 406 million gallons a day in June, the most recent month of data from the U.S. Energy Information Administration. This sets a new record, beating the previous one set in July 2007, soon before the recession. The record might be short-lived, however, once the July and August data are released.

Americans Drove to REcord Gasoline Consumption in June
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Low prices have emboldened many Americans to purchase vehicles with lower fuel efficiency such as trucks, vans and SUVs, which has been great for auto companies and lenders.

People are also taking longer road trips. According to the Transportation Department, motorists logged 287.5 billion miles in July, the most ever for the busy summer travel month. That’s the equivalent of taking 3,000 round trips to the sun, which is what it feels like after all the flights I’ve taken recently.


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