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

The "Black Swan" Author Just Issued a Powerful Warning About Global Debt
November 5, 2018
The Black Swan author Nassim Taleb
By Photo:flickr/Joe Loong | Creative Commons Attribution 2.0 Generic

The world is more fragile today than it was in 2007. That’s the opinion of former derivatives trader Nassim Taleb, whose bestseller, The Black Swan, is about how people make sense of unexpected events, especially in financial markets. True to form, he made a whole lot of money after predicting the global financial crisis more than a decade ago.

Speaking with Bloomberg’s Erik Schatzker last week, Taleb said the reason why he has reservations about today’s economy is that it suffers from the “same disease” as before. The meltdown in 2007 was a “crisis of debt,” and if anything, the problem has only worsened.

Indeed, debt is on the rise. By the end of the first quarter, the total amount the world owes climbed to a record $247 trillion, according to the Institute of International Finance (IIF). That’s up almost $150 trillion over the past 15 years.

A lot of this debt, Taleb said, may have moved to different places since the financial crisis—it’s shifted from housing to governments and corporate balance sheets—but the debt “is still there.” Student loan debt in the U.S., for example, stands at about $1.5 trillion today, or nearly $33,000 per borrower. After mortgages, student debt is now the largest form of debt in the U.S.

Just look at the federal government’s balance sheet. Gross debt has more than doubled from pre-recession levels, meaning Washington now owes slightly more than the entire size of the U.S. economy.

US government debt situation has only worsened since the financial crisis
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Higher Debt Levels Pose an “Economic Threat”

President Donald Trump said last week that “we’re going to start paying down debt.” But all the signs appear to say otherwise. The Treasury Department estimates that it will issue some $1.338 trillion in debt this year—more than twice the amount as last year. And the Office of Management and Budget (OMB) recently reported that the government is set to run trillion-dollar deficits for the next four years, despite a roaring economy.

The Black Swan author Nassim Taleb
Photo: Gage Skidmore | Creative Commons Attribution-Share Alike 3.0 Unported license

According to Taleb, the U.S. government is now in a “debt spiral,” meaning it must borrow to repay its  creditors. And with rates on the rise, servicing all this debt will continue to get more and more expensive.

Did you know that the government could soon pay more in interest than on defense? Interest costs are projected to become the third largest category in the federal budget by 2026, according to the Peter G. Peterson Foundation’s analysis of Congressional Budget Office (CBO) data. By 2046, these payments could become the second largest category; and by 2048, the single largest category.

“It is a fact that when your national debt gets to the level ours is, that it constitutes an economic threat to the society,” National Security Adviser John Bolton said last week in Washington, D.C. “And that kind of threat ultimately has a national security consequence for it.”

Spending reform, especially entitlement spending reform, is politically unpopular and will require bipartisan support, according to Senate Majority Leader Mitch McConnell.

“I think it’s pretty safe to say that entitlement changes, which is the real driver of the debt by any objective standard, may well be difficult if not impossible to achieve when you have unified government,” McConnell told Bloomberg last month.

The U.S. isn’t alone in its budget woes, of course. Several European Union (EU) members are facing big budget crunches of their own, with Belgium, Spain and Italy leading the way. Last month, Moody’s Investors Service reported that “rising mandatory spending and slowing economic growth have left a number of euro area governments with less budget flexibility than before the financial crisis a decade ago.”

So how will this all play out, and what can investors do?

Could the “Barbell Strategy” Whip Your Portfolio Into Shape?

We all know what happened in 2007 and 2008, after debt levels became unsustainable. During the interview, Taleb stopped short of predicting another such crash, but he stressed the importance of paying attention to the risks.

As for his current allocations, he’s invested in real estate, short-term Treasuries and gold, “just in case.” If you own stocks, he said, make sure you have some kind of put protection. Readers of his books might recognize this approach as the “barbell strategy.” Here he is in The Black Swan:

If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed… then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments… you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasuries—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios. That way you do not depend on errors of risk management.

Nassim Taleb's Barbell Strategy

I share Taleb’s unconventional allocation strategy with you not because I fully endorse it but simply as food for thought. It evokes the discussion I had earlier in the week about investing vs. speculating, with gold and government bonds on one end, venture capital and digital currencies on the other. And although I believe your portfolio should leave room for equities—domestic as well as emerging market—there is some merit to Taleb’s idea that you should be both incredibly defensive and incredibly aggressive.

You can watch the full Bloomberg interview by clicking here.

The Fear Trade and Love Trade Make Gold Look Compelling

Speaking of gold, the Fear Trade moved prices in October, the “jinx month,” as volatility spiked and stocks lost most of their gains for the year. The yellow metal managed to notch its first positive month since March, despite still being under pressure from a stronger U.S. dollar and higher yields.

gold had its first month of gains since march as stocks tumbled
click to enlarge

The third quarter was a solid one for gold’s Love Trade, according to the most recent report by the World Gold Council (WGC). Total demand in India was up 10 percent from the same time a year ago, just ahead of this week’s Diwali festival. Chinese demand increased at about the same rate, with jewelry sales up during the Qixi festival, China’s equivalent of Valentine’s Day.

Purchases made by central banks, meanwhile, were very robust in the third quarter, up an impressive 22 percent from a year ago. At 148.8 metric tons, the amount was the highest for any quarter since the end of 2015.

I’ve pointed out before that global gold demand has benefited from a rise in wealth, which we’re seeing today. A recent report by UBS showed that wealth shared among the world’s billionaires enjoyed its greatest-ever increase in 2017, rising 19 percent to a new all-time high of close to $9 trillion. China, however, was the clear standout, with wealth among its now-373 billionaires climbing 39 percent to $1.12 trillion. That’s double the global rate.

the number of chinese billionaires has exploded this century
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The Asian giant minted two new billionaires per week last year, according to UBS, an incredible feat for an economy that had only one billionaire at the beginning of the century.

It’s the Policies, Not the Party

On a final note, midterm elections are tomorrow. Historically, the president’s party has lost Congressional seats in his first term, but it’s important to temper whatever expectations you might have with some perspective. When evaluating the macro investment climate, it’s not the party that matters so much as the policies, and so I’m a firm believer that there are ways to make money no matter which party is in control. I’ll definitely be sure to share with you my thoughts on the election results!

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

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

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Investing vs. Speculating: Why Knowing the Difference Is Key
October 31, 2018

Investing vs Speculating Why Knowing the Difference Is Key

As the stock market bull potentially nears the end of its run and we head into the last two months of 2018, many investors are making adjustments to their portfolios. Over the course of my travels and in conversations with other industry experts, I’m constantly reminded the importance of:  1) understanding the difference between investing and speculating, and 2) understanding risk tolerance.

These are two primary points for any investor seeking to make sound decisions with their money to understand.

1. Know the Difference in Investing vs. Speculating

All definitions vary slightly, but most are along the same lines. An investment is an asset or item acquired with the goal of generating income or appreciation in the future. Speculation is a financial transaction that has substantial risk of losing all value, but with the expectation of a significant gain.

Notice how the definition for investment doesn’t include the word “risk.” Of course, every investment carries some level of risk; however, the potential of losing the entire principal investment amount is largely what differentiates investing from speculating. Other factors to consider include time horizon, decision criteria and investor attitude.

Examples of well-known and popular investments include the stock market, bonds, U.S. Treasuries and mutual funds. Assets that fall into speculative territory include options, futures, foreign currencies, startup companies and cryptocurrencies.

Investment speculation table
click to enlarge

Take cryptocurrencies, for example. These digital coins, such as bitcoin and ethereum, surged in popularity late last year and are known for having high volatility, or price swings. Many consider cryptos as speculative assets due to their relatively short existence in the financial world, absence of sound regulation and the many unknowns surrounding trading patterns.

What about the lottery? The Mega Millions made headlines last week for ballooning to the second highest jackpot ever, after failing to find a winner in the 25 drawings since July. Approximately 15.7 million people bought tickets for a one in 303 million chance of selecting the right six numbers, and just one lucky person in South Carolina won the $1.54 billion prize. Is buying a ticket speculating? Or is it perhaps gambling?

I believe it all comes back to the level of risk.

Measuring Risk Through Volatility

Standard deviation, or sigma, is a probability tool that gauges a security’s volatility. Specifically, it measures the typical fluctuation of a security around its mean or average return over a period of time. I often refer to this as an asset’s “DNA of Volatility.”

Standard Deviation For One Year, as of 09/30/18
    One Day Ten Day
S&P 500 Index (S&P) 1% 1%
Gold Bullion 1% 2%
Bitcoin 6% 22%
Ethereum 6% 22%

Take a look at this table comparing an array of assets. Two of the most popular cryptocurrencies, bitcoin and ethereum, both have much higher volatility than the stock market, as measured by the S&P 500. On the other hand, gold bullion is only slightly more volatile than the S&P 500, and has actually outperformed the market since 2000.

At U.S. Global Investors we advocate investing in gold and gold equities due to its diversification potential. The yellow metal’s DNA of volatility is similar to that of the stock market, and as such we recommend allocating up to 10 percent of your portfolio in the space – we call this the Golden Rule.

Every security has a different sigma for a specific period of time, and as such your expectations as an investor should reflect these differences. An abnormally high sigma, such as those for many cryptos, can signal whether an asset falls into the investment or speculation category.

2. Determine Risk Tolerance and Investment Objectives

Texas is the top exporting state
click to enlarge

It’s no mystery that the investment portfolios of a 35 year old and a 65 year old should look noticeably different. As I’ve written about before, as a person gets older they should have a higher percentage of their money in bonds, for example, assuming their objective at that age is to protect the money they currently have saved for retirement and provide income. Investing in municipal bonds can be a good way to provide tax-free income for investors as they get older and move away from the stock market. A young person’s investment objectives differ significantly because they have a longer time horizon, particularly when it comes to recovering from any losses.

Highly speculative investments can indeed hold a place in some investors’ portfolios, but this should be based on their risk tolerance and goals. Depending on how much volatility you can comfortably withstand, it is prudent to adjust your portfolio accordingly when it comes to speculative investments.

No Risk, No Return

Many Americans haven’t been participating in the stock market bull run and using it to grow their savings. Saving should be a key goal for all, but so too should be growing wealth. Simply stashing away earnings in a savings account won’t protect against the destructive power of inflation, which is where investing and speculating come into play.

Even during increasingly volatile times with many asset classes, investors can still seek returns. We believe one way to potentially take advantage of the recent market turbulence is through active management, rather than passively managed index funds.

We believe informed investors make better investment decisions and that is why one of our core company values is a focus on education. I encourage you to stay updated on the latest market moves by reading our Investment Team’s weekly recap of gold, domestic equities, natural resources, emerging markets and more.

Subscribe to the free weekly newsletter by clicking here!

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

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

Diversification does not protect an investor from market risks and does not assure a profit.

Standard deviation, or sigma, 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.

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Take Advantage of Volatility with Active Management
October 29, 2018

Take Advantage of Volatility with Active Management

October was at it again last week. After Wednesday’s close, the S&P 500 Index, Dow Jones Industrial Average and small-cap Russell 2000 Index had all erased their gains for 2018, while the tech-heavy NASDAQ Composite dipped into correction territory.

I don’t believe there’s any single cause for the selloff. Investors are simply nervous, thanks to rising interest rates and the upcoming midterm elections, among other things.

Meanwhile, gold performed precisely as we would expect it to. The price of the yellow metal jumped above its 100-day moving average, a bullish sign that could mean further moves to the upside if market volatility persists. On Friday, gold was trading at a three-month high of $1,246 an ounce.

The price of gold jumped above its 100 day moving average
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So can we expect additional volatility going forward? In a recent note to investors, Citibank says it estimates that “some more volatility is likely through December” due to the impact of trade disputes on growth, rise in U.S.-Saudi Arabia tensions and Brexit stalemate. Analysts point out, though, that the present slowdown doesn’t necessarily signal the end of the historic bull market. Compared to the start of the previous two bear markets, in 2000 and 2007, only four out of 18 factors are flashing “sell” right now on Citi’s “bear market checklist.” Among those factors are overinflated global equity valuations, a flattening yield curve and high debt levels.

The bull is “tripping, not dying,” Citi says.

But Is It the End of “Buying the Dip”?

The bull market might not be dead, but we could be facing the end of “buying the dip.” According to a report last week by Morgan Stanley, buying the S&P 500 after a week of negative returns was a profitable strategy from 2005 through 2017. That may no longer be the case, as you can see in the chart below. Buying the dip in 2018 has resulted in an average loss of around 5 basis points.

Average daily sp 500 return if previous week return was negative
click to enlarge

So what’s changed? I think the most significant difference between now and the past decade or so is that, for the first time since the financial crisis, central banks are finally starting to withdraw liquidity. This means cheap money is no longer as plentiful as it once was, for investors and corporations alike.  

Some might disapprove of President Donald Trump's criticism of Federal Reserve Chairman Jerome Powell for raising rates—Powell “almost looks like he’s happy raising interest rates,” Trump said—but he’s not wrong in expressing concern about the ramifications. I’ve shared with you before that a majority of recessions and bear markets in the past 100 years were preceded by monetary tightening cycles.

And there could be something else roiling markets right now.

Get Ready for $7.4 Trillion in Passive Index Selling

Last month I wrote about what I see as an imminent “passive index meltdown.” Over the past decade, billions of dollars have poured into ETFs and other passive investment products. This has led to a number of unexpected consequences, including price distortion and trading based not on fundamentals but on low fees. I said then that when these multibillion-dollar ETFs automatically rebalance, sometime at the end of this year or the beginning of next year, a correction of between 10 percent and 20 percent could be triggered.

JP Morgan sees 7 trillion dollars passive selling pressure in downturn

Now, other people are starting to recognize the risk this poses. Speaking to CNBC last week, Goldman Sachs CEO David Solomon said that this month’s selloffs have been prompted by “programmatic trading.”

According to Solomon, “some of the selling is the result of programmatic selling because as volatility goes up, some of these algorithms force people to sell.”

Remember the 2010 Flash Crash? In the days following the May 6 incident, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) found that ETFs “suffered a disproportionate number of broken trades relative to other securities.” Of the securities that fell 60 percent or more that day, approximately 70 percent were ETFs.

But that was in 2010. Passive investing accounted for less than 30 percent of the assets under management (AUM) in actively managed funds. Today, that figure falls somewhere between 80 percent and 90 percent, representing some $7.4 trillion in “big selling pressure” concentrated in large- to small-cap equities, according to a report last week by J.P. Morgan.

“This is something worth noting at this late stage of a cycle given that passive investing seems to be trend following, with inflows pushing equities higher during bull markets, and outflows likely to magnify their fall during correction,” J.P. Morgan analysts Eduardo Lecubarri and Nishchay Dayal wrote.

The asset class with the greatest exposure to passive indexing, and therefore “momentum selling during market downturns,” is large-cap stocks, which have 10 times the passive AUM as small- and mid-cap stocks.

So how can investors prepare themselves?

Look at How Much Ultra-Short Treasuries Are Yielding Now

With riskier assets starting to look shaky, it might be time to ensure you have an adequate position in fixed income.

For the first time in over a decade, the three-month Treasury bill—the closest proxy we have for hard cash—is yielding more than the three main measures of U.S. inflation. That includes the headline consumer price index (CPI), which measures volatile food and energy prices. Bond yields and prices move inversely to interest rates, remember.

Short term yields higher than all main measures of inflation for first time in decade
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Ultra-short yields stood at 2.34 percent as of Friday, compared to a 2.27 percent change in consumer prices over the same period last year. This means that cash is finally yielding a positive real return for the first time in over 10 years, without inflation having to turn negative

What’s more, the three-month yield is well above the dividend yield for the much more volatile S&P 500 Index.

Short term yields higher than sp 500 index dividend yield
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With interest rates on the rise, it’s important to stay on the short end of the yield curve. Retail investors seem to agree. Last month, rate-sensitive investors poured more than $4.7 billion into actively managed ultra-short bond funds, which have an average maturity of just six months, according to Morningstar data.

Passive instruments are attractive because of low fees, but it’s important not to discount actively managed funds just yet, and especially now as volatility is spiking. As Wells Fargo put it in the most recent Monthly Market Advisor,“late-cycle market characteristics could present many opportunities for investors who hold quality actively managed funds.”

Mining & Investment Latin America Summit

On a final note, I’m pleased to share with you that Texas Governor Greg Abbott last week retweeted my article, “6 Reasons Why Texas Trumps All Other U.S. Economies.” Governor Abbott has done a fabulous job keeping Texas on a pro-growth trajectory, making the Lone Star State the very best in the U.S. to do business in, I believe. If you didn’t get a chance to read the article, you can click the screengrab below.

Greg Abbott Twitter Texas Frank Talk

Lastly, I’m incredibly honored to be the keynote speaker this week at the Mining & Investment Latin America Summit in Lima, Peru. My presentation will focus on how metals prices are being impacted by a combination of global growth and macro volatility. I’ll also be moderating a discussion on the political landscape in Latin American and its implications for the mining industry. I’ll be sure to share insights and observations from the conference in the days ahead!

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

The S&P 500 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 Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. The personal consumption expenditure measure is the component statistic for consumption in gross domestic product collected by the United States Bureau of Economic Analysis. It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. 

The dividend yield is a financial ratio that indicates how much a company pays out in dividends each year relative to its share price. 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.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

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6 Reasons Why Texas Trumps All Other U.S. Economies
October 23, 2018

6 Reasons Why Texas Trumps All Other U.S. Economies

As many of you reading this know, I’m what you would call a Tex-Can. I was born and raised in Canada, but I’ve called Texas home for nearly 30 years. I can’t picture U.S. Global Investors headquartered anywhere else, even after traveling to all parts of the country and, indeed, the world. Texas just “gets it,” which is why I think CNBC recently named the $1.6 trillion economy the best state for business in 2018—the first time, in fact, a state has won four separate times since the network began ranking them 12 years ago.

Below are six reasons why I think Texas trumps all other U.S. economies.

1. Texas is a manufacturing powerhouse

Everything’s bigger in Texas, and that includes manufacturing. Last year, total manufacturing output from the Lone Star State was $226.16 billion, or about 10 percent of total U.S. manufacturing goods, according to the Federal Reserve Bank of Dallas. The industry supports more than 865,000 jobs in Texas, or about 7.1 percent of its workforce. And the average annual compensation for manufacturing was $82,544, compared to $46,642 for all nonfarm jobs, which helps boost the state’s gross domestic product (GDP). Finally, at a time when global manufacturing expansion is slowing, the sector in Texas continues to grow at a healthy pace.

Texas manufacturing sector continues to expand
click to enlarge

2. Texas is the largest exporting state

Texas is also known as the top exporting state in the nation, responsible for almost 20 percent of total U.S. exports. And they continue to grow at an impressive rate. According to the Dallas Fed, Texas exports rose sharply in July and were up 16 percent year-to-date, or about three times faster than U.S. exports, which increased 5.2 percent for the same period. Much of the growth in the Lone Star State is due to its monster oil and gas industry, which exported more crude than it imported for the first time ever in April, according to an August report by the U.S. Energy Information Administration (EIA).

Texas is the top exporting state
click to enlarge

3. Texans enjoy the fastest income growth in the U.S.

Thanks to a robust business environment, and the fact that it’s one of only four states without a corporate income tax, Texas residents enjoyed the fastest personal income growth this year between the first and second quarter. According to the Bureau of Economic Analysis (BEA), incomes expanded a whopping 6 percent in the June quarter, compared to 4.2 percent for Americans on average. This was the best rate among all 50 states. Earnings increases were led by professional, scientific and technical services.

Texas ranked first in income growth
click to enlarge

4. Texas is a global oil superpower

In case you haven’t heard, Texas is oil country—the number one producer in the U.S., accounting for more than 40 percent of national output—and that’s been a blessing for the state’s economy. Employment in oil and gas has led growth among its major sectors. Since Congress removed the crude oil export ban, oil and gas exports have gone from making up 5.2 percent of state exports to the largest share at 18 percent, or $45 billion over the past 12 months, according to the Dallas Fed. Investment bank HSBC now predicts that Texas will surpass OPEC members Iran and Iraq next year to become the world’s number three oil producer, accounting for over half of U.S. production.

Texas now accounts for over 40 percent of US oil production
click to enlarge

5. Everyone wants to move to Texas

Two years ago I wrote a piece about how everyone wants to move to Texas, and since then nothing’s changed. People still want to move here. Can you blame them? Of the top 10 fastest growing cities in terms of population, four were in Texas, according to the Census Bureau. In the number one spot was San Antonio, home to U.S. Global Investors. Between July 2016 and July 2017, the Alamo City attracted more than 24,000 new residents, and it now boasts some 1.5 million people. If we look at the fastest-growing U.S. cities by percent change, Texas takes half of the top 10 spots. In numbers one, two and three are the Texas cities of Frisco (8.2 percent growth), New Braunfels (8 percent) and Pflugerville (6.5 percent).

Four of the top fastest growing US cities are in Texas
click to enlarge

6. Everyone wants a Texas home

More residents means more demand for housing. The Lone Star State mostly avoided the house price bubble a decade ago, according to the Dallas Fed. As such, housing markets are currently tight in most of the state, and median prices remain near record highs. Texas A&M University’s Real Estate Center reports that sales grew 3.8 percent in July, reaching a record level of 29,456 homes sold through a multiple listing service (MLS). What’s more, Texas was the national leader in home permits, accounting for 16 percent of the U.S. total.

Housing sales in Texas have outpaced those in the US
click to enlarge

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

America's Top States For Business CNBC, a division of NBC Universal, has been ranking state business climates annually since 2007. CNBC's state rankings are based on 10 categories: Cost of Doing Business, Workforce, Quality of Life, Infrastructure, Economy, Education, Technology & Innovation, Business, Friendliness, Access to Capital and Cost of Living.

The Dallas Fed conducts the monthly Texas Manufacturing Outlook Survey (TMOS) to obtain a timely assessment of the state's factory activity. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month.

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Here's How Hungary Reduced Risk Without Forfeiting Returns
October 22, 2018

Heres what Hungary just did to reduce risk without hurting returns

Hungary isn’t known today as one of the world’s top gold producing countries. There was a time, though, when it accounted for around three-quarters of Europe’s entire output of the yellow metal, if you can believe it. According to historian Peter Sugar’s A History of Hungary, the central European country was a “veritable El Dorado” in the 14th century, and its gold pieces circulated widely across the entire continent, competing with those minted in Italy and England.

It was this rich mining heritage that Hungary’s central bank evoked when it announced last week its decision to increase gold holdings tenfold, from 3.1 metric tons to 31.5 tons, taking gold’s share of total reserves to 4.4 percent. (Gold accounts for 73.5 percent of U.S. reserves, by comparison, the most of any country.) Hungarian central bank governor Gyorgy Matolcsy described the move as one of “economic and national strategic importance,” adding that the extra gold made the country’s reserves “safer” and “reduced risk.” This is the first time since 1986 that Hungary has increased its gold holdings.   

Hungary just boosted its gold reserves tenfold
click to enlarge

The country isn’t alone in its mission to diversify. This month we also learned that Poland became the first European Union (EU) member to increase its gold reserves in two decades. The Eastern European country added as much as 9 metric tons of hard assets between July and August of this year. Central banks in Russia, Turkey and Kazakhstan have also kept up their gold buying, representing close to 90 percent of the activity we’ve seen this year.

Meanwhile, the EU has continued to print paper money.

For more, watch emerging Europe analyst Joanna Sawicka’s full explanation by clicking here.

A Good Store of Value

So why should banks—or investors, for that matter—be interested in boosting their gold holdings? One reason is timing. Until recently, gold prices have been relatively affordable, trading at 52-week lows of around $1,180 an ounce in mid-August and at the end of September. Central banks’ investment was wisely made. From those lows, gold is now up more than 4 percent on stock volatility.

Check out the chart below. I think it’s fascinating to see the relationship between dramatic moves in the stock market and people’s interest in gold. When stocks sold off a couple of weeks ago, Google searches for “gold price” jumped to their highest in at least a month. This shows, I believe, that people recognize gold as a good store of value when market volatility reemerges.

Spike in Google searches for gold price corresponding with stock selloff
click to enlarge

Gold Has Helped Improve a Portfolio’s Risk-Adjusted Returns

Returning to what Hungarian central bank governor Matolcsy said about risk reduction, a certain amount of gold has been shown to improve a portfolio’s Sharpe ratio, according to the World Gold Council’s (WGC) most recent Gold Investor. The Sharpe ratio, in case you’re unaware, measures a portfolio’s risk-adjusted returns relative to its peers, based on standard deviation. The higher the ratio is over its peers, the better the risk-adjusted returns.

Performance of an institutional portfolio with or without gold
click to enlarge

Analysts at New Frontier Advisors found that an institutional portfolio with a 6 percent weighting in gold had a higher Sharpe ratio than one without any gold exposure. This means that volatility was reduced without hurting returns.

Although analysts were looking at Chinese portfolios in particular, the WGC’s Fred Yang believes these findings can just as easily be applied to portfolios that are invested in U.S.-, European- or U.K.-listed assets. The “research indicates,” Yang says, “that most well-balanced portfolios would benefit from a modest allocation to gold.”

I’ve often advocated for a 10 percent Golden Rule—with 5 percent in bullion, the other 5 percent in gold stocks—and so New Frontier’s research is illuminating. It also helps explain Hungary and Poland’s actions, as well as those of other net purchasers of gold.

Holding Firm Against Rising Treasury Yields

I’ve shown many times in the past that the price of gold is inversely related with real rates. The yellow metal has especially struggled when Treasury yields have outpaced inflation.

Gold price has remained strong despite a rising 2 year treasury yield
click to enlarge

The two-year Treasury yield, for instance, is just under 3 percent today, a more-than-10-year high. Because consumer prices are rising at 2.3 percent year-over-year, according to the latest report from the Labor Department, the two-year has a positive real yield—and this has historically weighed on gold.

You would think, then, that its price would be much lower than it is. I’m impressed with how well it’s held up.

Get more of my thoughts on gold’s performance by watching the latest Frank Talk Live! View it by clicking here!

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Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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

Diversification does not protect an investor from market risks and does not assure a profit.

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Net Asset Value
as of 12/12/2018

Global Resources Fund PSPFX $4.59 0.03 Gold and Precious Metals Fund USERX $6.46 -0.01 World Precious Minerals Fund UNWPX $3.03 -0.02 China Region Fund USCOX $7.97 0.06 Emerging Europe Fund EUROX $6.18 -0.01 All American Equity Fund GBTFX $24.18 0.06 Holmes Macro Trends Fund MEGAX $18.17 0.13 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change