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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 Many Uses of Gold
March 14, 2018

The many uses of gold

As our loyal readers know, at U.S. Global Investors we carefully monitor the price of gold. We pay close attention to the macro drivers moving the yellow metal, like government policy and cultural affinity spurring demand globally. We also monitor the micro drivers, like company management and quant factors that make one gold stock superior to the next.

Gold’s qualities make it one of the most coveted metals in the world and a popular gift in the form of jewelry – this is what I call the Love Trade. From the beginning of the Indian wedding season in September until Chinese New Year in February, the price of gold tends to rise due to higher demand from the two biggest consumers of gold, China and India.

The Love trade China and India gift gold for weddings and other celebrations

On the other hand is the Fear Trade, driven by negative real interest rates and the fear of poor government or central bank policies that could result in currency devaluation or inflation. This fear triggers people to buy gold as a hedge against possible negative returns in other asset classes, which in turn, pushes the gold price higher. 

For more on gold’s seasonal trading patterns, download the free whitepaper Gold’s Love Trade.

Gold in a Portfolio

We believe gold is an essential part of a portfolio due to its history as a protector against inflation. I’ve always recommended a 10 percent weighting in the metal, 5 percent in gold bullion or jewelry, and 5 percent in gold stocks, mutual funds and ETFs.

In fact, current economic conditions make an even greater case for gold. The stock market is still on a historic bull run, and the tax reform bill is helping ratchet up share prices. It’s important to remember that the precious metal has historically shared a low-to-negative correlation with equities. For the past 30 years, the average correlation between the LBMA gold price and the S&P 500 Index has been negative 0.06.

Gold has also performed competitively against many asset classes over the past few decades, as seen in the chart below. This makes the metal, we believe, an appealing diversifier in the event of a correction in the capital markets or an end to the bull market.

Gold has performed very competitively against a number of asset classes over the years
click to enlarge

Our investment team brings knowledge and experience in a variety of fields, with one of the most notable being gold. As such, we have written numerous pieces about the precious metal. One of our most popular is the Many Uses of Gold slideshow that outlines eight different uses of gold, other than in your portfolio. From dentistry to electronics and space travel to currency, gold remains widely used in everyday life.

We believe it’s important to truly understand the asset class you are investing in, and we hope this slideshow does just that. Explore gold’s many uses here!

Explore the many uses of gold slideshow

 

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

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

The LBMA Gold Price is the global benchmark prices for unallocated gold delivered in London. The auctions are run at 10:30 am and 3:00 pm London time. The final auction prices are published to the market as the LBMA Gold Price AM and LBMA Gold Price PM.

Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management. Correlation is computed into what is known as the correlation coefficient, which has value that must fall between -1 and 1.

The Bloomberg Barclays Short Treasury Bill Index tracks the market for Treasury bills issued by the U.S. government.

The Bloomberg Barclays US Aggregate Bond Index, which until August 24, 2016 was called the Barclays Capital Aggregate Bond Index, and which until November 3, 2008 was called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Bloomberg L.P. since August 24, 2016, and prior to then by Barclays which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. 

The MSCI USA Net Total Return Index is a market capitalization weighted index designed to measure the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the United States.

The MSCI EAFE Net Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.

The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones-UBS Commodity Index (DJ-UBSCI) in 2009, when UBS acquired the index from AIG. The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.

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

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The Historic Bull Market Faces Off Against Steel Tariffs
March 12, 2018

the historic bull market faces off against steel tariffs

Friday marked the ninth anniversary of the stock bull market, the second longest since World War II following the spectacular run in the 1990s that finally met its match when the tech bubble burst in March 2000. The current expansion, which some consider the “most hated bull market in history,” has largely been fueled by extraordinarily accommodative monetary policy in the form of massive money printing and near-zero interest rates. It’s withstood a number of significant headwinds, including a relatively slow economic recovery, the collapse in the price of oil and other commodities, ongoing conflict in the Middle East and an especially nasty presidential campaign cycle. If it can avoid dropping more than 20 percent in the next six months, it will become the longest-lasting ever.

can this bull market become the largest in history
click to enlarge

No doubt you’ve heard before that bull markets don’t die of old age. I can’t say for sure what will end this particular business cycle—no one can—but we’re seeing huge shifts in monetary and fiscal policy right now that investors can’t afford to ignore. As I often say, government policy is a precursor to change.

Unintended Consequences of Steel Tariffs

For one, the decade-long era of easy money is coming to an end. The Federal Reserve is unwinding its enormous balance sheet, its enormous balance sheet, which carries some risk.

us steel demand by industry

Meanwhile, the Trump administration is ratcheting up its protectionist trade policies. After surprising markets in recent days with plans to impose tariffs on steel and aluminum imports, President Trump signed the authorization Thursday afternoon, applying taxes broadly to all countries except Canada and Mexico. It was greatly feared that Canada, the number one supplier of steel and aluminum to the U.S., would be included, but it appears someone managed to change the president’s mind. When former President George W. Bush imposed a steep 30 percent tariff on steel imports in 2002, Canada was likewise spared.

The 2002 tariff, by the way, had some serious unintended consequences that critics of Trump’s policy hope are not repeated. A report put out by the Consuming Industries Trade Action Coalition (CITAC) found that about 200,000 Americans, in every U.S. state, lost their jobs in 2002 as a result of higher steel prices, representing some $4 billion in lost wages. More people, in fact, lost their jobs than the total number of people working in the domestic steel industry itself. Not surprisingly, a quarter of lost jobs occurred in steel-consuming industries such as machinery and equipment, automotive and parts manufacturers.

To be clear, U.S. steel companies did benefit from the tariffs, with profits in the first three quarters of 2002 rising $2.1 billion. This growth was offset, though, by a $15 billion decline in profits for steel-consuming companies.

Today, representatives of those same industries warn that the current tariffs could do more harm than good.

Roy Hardy, president of the Precision Metalforming Association, claims that they “will damage downstream U.S. steel and aluminum consuming companies.” Hardy estimates the tariffs could cost the U.S. economy 146,000 jobs this year alone, a figure that—as was the case in 2002—outnumbers the 140,000 Americans currently employed by the domestic steel industry.

As many as 107 House Republicans expressed deep concerns last week, writing in an open letter to the president that the “new taxes in the form of broad tariffs would undermine” the “remarkable progress” made by the tax overhaul. Meanwhile, outgoing Republican Senator Jeff Flake of Arizona said he would introduce a bill that would block Trump’s tariffs.

The tariffs come at a time when domestic steel producers’ balance sheets are steadily improving. According to Bloomberg data, the industry posted net profits totaling $2.5 billion in 2017, up from $60 million in 2016. The group lost a whopping $2.5 billion in 2015, with Pittsburgh-based U.S. Steel contributing the heaviest losses at $1.6 billion. 

domestic steel industry has seen three straight years of rising profits
click to enlarge

In the coming days and weeks, the tariffs should serve to boost domestic steel production and employment. The Wall Street Journal reports that U.S. Steel has plans to reopen a blast furnace in Granite City, Illinois, and call back 500 workers. This follows an announcement by Century Aluminum that it will double its workforce to 600 at a Kentucky smelter.

I’m pleased to hear this news but remain skeptical on the long-term impact. The U.S. now faces retaliation from its trading partners, from China to the European Union.

A Recession in the Near Term Doesn’t Look Likely

Despite some of the negativity, I see no cause for alarm with regard to the U.S. economy. The country added a whopping 313,000 jobs in February, the most since July 2016 and the 89th straight month of gains—a new record. Economists had anticipated only 200,000. Earlier, Moody’s chief economist Mark Zandi called the job market “red hot,” adding that with “government spending increases and tax cuts, growth is set to accelerate” even more.

One of the most historically reliable economic indicators currently looks very healthy. The Conference Board Leading Economic Index (LEI) opened 2018 on sure footing, posting a 108.1 in January, up a full percent from the previous month. The reading reflects “an economy with widespread strengths coming from financial conditions, manufacturing, residential construction, and labor markets,” the Conference Board writes.  

According to FactSet, a record number of S&P 500 companies have issued positive earnings per share (EPS) guidance for 2018. The financial data firm classifies positive guidance as an EPS estimate that’s higher than the mean estimate before the guidance was issued. As many as 127 companies shared positive EPS guidance for the year, more than double the 10-year average of 49 companies for the same period. FactSet attributes this optimism to tax reform, an improving global economy and weaker U.S. dollar.

record number of s and p 500 companies issued positive guidance for 2018
click to enlarge

And it’s not just large S&P 500 companies that are feeling confident. January’s Small Business Optimism Index found that a record percentage of small business owners are eager to expand. Thirty-two percent of owners said that “now is a good time to expand,” the highest such reading in the survey’s 45-year history.

Could Fertility Be a Leading Economic Indicator?

On a final note, a new study lends additional credibility to the theory of “wisdom of crowds,” which states that large groups of people are smarter and better at analyzing data than an elite few. In one recent example, I showed you how investors accurately predicted the election of Donald Trump as far back as July 2016.

But could declining fertility rates predict the next recession? A team of researchers from the University of Notre Dame thinks so, and they have some compelling evidence to support their idea.

Granted, there's nothing unique about the idea that birth rates drop during and after economic downturns. Married couples have tended to put off expanding their families when they see friends and neighbors being laid off and a greater number of foreclosed homes in their neighborhoods.

What makes this study worth discussing is that it suggests conceptions, those that result in live births, noticeably begin to drop months before a recession strikes. This pattern, according to the study’s authors, can be observed in recessions beginning in 1990 and 2001, as well as the Great Recession.

united states conception rates began to fall months before a recession
click to enlarge

Above, you can see the percent change in conception rates tumbled sharply sometime before GDP growth began to stall or even reverse course. Conception, then, could be used to anticipate recessions just as well as any other economic indicator.

In fact, conception rates could end up being even more accurate “in situations where employment significantly lags the overall economy, and where conceptions lead the economy,” the authors write.

So how are families able to anticipate and act on economic trends more reliably than professional economists? Again, the wisdom of crowds prevails. Everyday people no doubt sense the tremors before the earthquake by hearing things in their firms and comparing observations with friends and acquaintances. There’s no way to quantify this, of course, but live birth records in the U.S. are readily available.

You might be wondering what the data tells us about the economy’s health in the near term. Sadly, the study makes no mention of this. But in January, the Pew Research Center reported that U.S. fertility rates fell to 62 births per 1,000 women of childbearing age in 2017—a new all-time low.

Before you begin to panic, though, it’s important to know that there are different ways to measure fertility, which could skew the data. Also, the drop in fertility could just be further evidence that young adults are choosing to delay starting a family.

Regardless of the rate, people will continue to have babies, increasing the need for even more raw materials and resources.

Craving even more expert insight on global markets, gold, cryptocurrencies and behavioral finance? Join thousands of other curious investors like you and sign up to receive my award-winning CEO blog, Frank Talk! It's FREE!

 

 

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 stock market index that tracks the 500 most widely held stocks on the New York Stock Exchange or NASDAQ.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables.

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 12/31/2017.

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4 Big Reasons Why Short-Term Muni Bonds Should Excite You
March 6, 2018

4 Reasons why short term muni bonds should excite you

Municipal bonds might not be the first thing that comes to mind when you think of a sexy investment. They don’t typically command news headlines like the stock market or bitcoin.

That doesn’t mean investors should disregard short-term munis. In fact, munis play a very important role in any serious portfolio. Below are four big reasons why you should get excited about muni bonds.

1. Tax-free income!

As you might already know, muni bonds are debt instruments used primarily to finance state and local infrastructure projects. When policymakers introduced them in 1913, they wanted to make sure investors were amply incentivized to participate. To that end, the decision was made to reward muni investors with tax-free income at the federal level and, in many cases, at the state and local levels.

For residents of high-tax states such as California, New York, Oregon and others, this feature should be especially appealing.

How high are income tax rates in your state
click to enlarge

Even if you don’t live in one of those states, munis can help you preserve—and therefore compound—more of what you earn. Who doesn’t like getting something for nothing?

2. New tax law has actually boosted demand for munis.

But wait! Doesn’t the recently signed tax overhaul tarnish munis’ allure? Not so fast.

The new law, which went into effect January 1, caps the state and local deductions taxpayers can take at $10,000. That makes municipal bonds even more valuable as a portfolio diversifier, particularly for households with hefty tax bills.

Healthy inflows so far this year suggest demand for munis remains strong. For the week ended February 21, muni bond funds, including mutual funds and ETFs, took in $347 million of net new money, raising overall net inflows for 2018 to $6.8 billion.

Municipal bond funds continue to appeal to investors
click to enlarge

It’s still early in the year, but this puts the muni market on track for the fifth straight year of positive flows since 2013. That year, outflows totaled a record $64.2 billion on rising Treasury yields and the looming bankruptcy proceedings of Detroit and Puerto Rico.

3. Calm in times of rising interest rates.

You might think longer is always better, but in the case of munis, it pays to be short. That’s because short-term munis—those with a duration of around one or two years—are less sensitive to interest rate stimulation than longer-term instruments. (Bond prices fall when rates go up, and vice versa.)

That’s especially relevant now, as we’re in a new rate hike cycle, with at least three increases projected for 2018. Although new Federal Reserve Chair Jerome Powell is not expected to differ much from his predecessor Janet Yellen with regard to monetary policy, no one knows for sure what steps he’ll take if inflation rises too quickly or the U.S. economy begins to overheat.

Below, you can see what might happen to Treasury yields with each successive rate hike. Note that the longer the maturity, the more wildly it changes. Munis could be similarly affected.

Municipal bond funds continue to appeal to investors
click to enlarge

4. Calm in times of market turmoil.

Municipal bonds have been steady growers not just in times of rising interest rates but also during market downturns. In the past 20 years, the stock market has undergone two massive declines, and in both cases, short-term, investment-grade munis—those carrying an A rating or higher—helped investors stanch the losses.

Case in point: In 2008, the S&P 500 Index fell nearly 40 percent, its worst annual performance since 1931. That same year, the Barclays Capital 3-Year Municipal Bond Index gained 5.5 percent.

More recently, munis outperformed the market in 2015 and were the best performing fixed-income asset, beating Treasuries and corporate bonds.

Still not convinced?

Imagine that in 1999 you had invested $100,000 in an S&P 500 fund and the same amount in a short-term muni fund. Because of the tech bubble rout, it would have taken your equity position 14 years to finally catch up with your debt position.

Short term munis vs domestic equities
click to enlarge

The S&P 500 is now further along than munis, based on that initial investment back in 1999, but if another significant correction were to happen, investors might be reassured to know that part of their portfolio was in short-term, high-quality municipal debt.

So again, although municipal bonds might not get the same amount of attention as stocks, cryptocurrencies and other hot assets, they nevertheless can play an indispensable role in a well-structured portfolio. When allocated appropriately, they can help you keep more of what you earn in your pocket, and really there’s nothing sexier than that.

Click here to explore investment opportunities in municipal bonds!

 

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.

The Barclays Capital 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.

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

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Are Trump's Steel and Aluminum Tariffs Good for America?
March 5, 2018

Gold and the ticking time bomb of debt

President Donald Trump’s proposed tariff on imported steel and aluminum, at 25 percent and 10 percent, is much more than a shot across the bow. Indeed, this could be the official kickoff of the trade war we all anticipated. The protectionist trade policy, announced last week as the president met with metals executives, raised fresh inflation worries and had an immediate impact on capital markets.

As expected, the winners were domestic steelmakers. AK Steel, the only manufacturer in North America that produces carbon, stainless and electrical steels, rose as much as 9.5 percent Thursday.

US steelmakers surged on Trump tariff news
click to enlarge

AK Steel CEO Roger Newport praised Trump’s decision, saying he fully supports “the actions he plans to take to stem the tide of unfairly traded steel imports that threaten the national security of our country.”

Newport wasn’t alone. Drew Wilcox, vice president of steel giant Nucor, called the tariffs “a clear message to foreign competitors that dumping steel products into our market will no longer be tolerated.”

Among the biggest losers from the news were automakers, which account for a little more than a quarter of steel demand in the U.S., according to the American Iron and Steel Institute (AISI). That makes the industry the second-largest consumer following construction. Ford, General Motors and Fiat Chrysler all fell more than 2 percent Thursday, and losses extended into Friday.

Get Ready for Higher Consumer Prices

Foreign trading partners could target American made goods such as bourbon after Trump imposes tariffs on steel and aluminum

To be clear, this is a huge deal, with serious inflationary implications. The U.S. is the world's largest steel importer, so it's very possible we could see retaliation from multiple trading partners on exports ranging from Florida orange juice to Kentucky bourbon to Wisconsin cheese. It's hard to imagine a scenario where this is not passed on to consumers.

Trump was reportedly advised to exempt select allies, but it appears he's chosen a no-exemptions option. Canada, the top supplier of steel and aluminum to the U.S., was spared in 2002 when former President George W. Bush imposed tariffs as high as 30 percent on steel.

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win, President Trump tweeted Friday morning.

The country with which the U.S. has the biggest trade deficit is China. In 2017, the deficit stood at $375 billion, which accounts for about 65 percent of the total U.S. trade deficit. The tariff on steel and aluminum should have a negligible impact, however, as the U.S. imports a relatively small percent of those metals from China.

Gold Has Done Well in Times of High Inflation

As I’ve explained numerous times before, one of the most prudent ways investors have positioned their portfolios in times of rising inflation is by adding to their gold exposure.

The chart below, courtesy of the World Gold Council (WGC), shows that annual gold returns were around 15 percent on average in years when inflation was 3 percent or higher year-over-year, between 1970 and 2017. In real, or inflation-adjusted, terms, returns were closer to 8 percent. This is still higher, though, than average returns in years when inflation was lower.

Gold has historically rallied in periods of high inflation
click to enlarge

According to the WGC, "gold returns have outpaced the U.S. consumer price index (CPI) over the long run, due to its many sources of demand. Gold has not just preserved capital, it has helped it grow."

The most recent report from the Bureau of Labor Statistics (BLS) shows that consumer prices rose 2.1 percent year-over-year in January, but as I said earlier, real inflation could be grossly understated. 

To learn more about how gold could be the solution to high inflation, click here!

My Journey Through the Blockchain and Cryptocurrencies

Gold and metals were definitely top of mind last week at BMO Capital Markets Global Metals & Mining Conference, held in sunny Hollywood, Florida. I had the pleasure to be on a panel at the four-day event, which was attended by more than 1,500 curious investors and advisors, representing approximately 500 different organizations from 35 countries.

The panel I was on focused on blockchain technology and cryptocurrencies, which are reshaping how transactions are made and how companies raise funds across the globe. Startups raised more than $1.5 billion in February, the third straight month for initial coin offerings (ICOs) to generate over $1 billion.

ICOs have raised more than 1 billion for past three months
click to enlarge

Last year, $6.5 billion was raised through ICOs, according to Token Report, and it looks as if that amount will be exceeded in just the first few months of 2018. As I wrote back in October, more and more companies are opting to raise funds through ICOs instead of going public to bypass many of the restrictive rules and costs associated with getting listed on an exchange. And unlike with private equity, smaller retail investors can participate, though I must stress that this is a very speculative trade.

The head of the Securities and Exchange Commission (SEC), Jay Clayton, strongly agrees with that last point. In December, he issued a statement explaining why he believes certain ICOs should fall under the jurisdiction of federal securities law and, as such, be filed beforehand.

Up until this point, the agency has taken few actions, but it appears it’s ready to start getting more aggressive against fraud. The Wall Street Journal reported last week that the SEC has issued “dozens” of subpoenas and information requests to cryptocurrency firms and advisors.

You might think this would hurt cryptocurrencies, but the prices of a number of them were up following the news. Bitcoin jumped nearly 6 percent on Thursday, as the token has often been seen as a "safe haven" in the cryptocurrency market.

HIVE Involved in Minting Virgin Coins

As many of you reading this know, U.S. Global Investors made a strategic investment in HIVE Blockchain Technologies in September, and as of today, it remains the only publicly-listed company that’s engaged in the mining of virgin tokens. HIVE and its partner Genesis Mining—the world’s largest cloud bitcoin mining company—are the leading miners and owners of Ether, the “crypto-fuel” for the Ethereum network. None of these assets has been used in any transaction, just as a newly-minted U.S. dollar, hot off the press, has never been used.

I continue to be optimistic about cryptocurrencies and see a very bright future for blockchain technology. The sentiment was similarly good among many of the attendees of last week's conference. It's only just the beginning.

For timely, expert commentary on metals and mining, gold, cryptocurrencies and more, subscribe to our award-winning Investor Alert by clicking here!

 

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

Frank Holmes has been appointed non-executive chairman of the Board of Directors ofHIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly.

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 12/31/2017.

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The World's Cobalt Supply Is in Jeopardy
February 27, 2018

Cobalt produced globally batteries power consumer electronics electronic vehicles

Disney’s Black Panther is in theaters right now, breaking all kinds of box office records and wowing audiences. The film features a fictional, highly-advanced African country known as Wakanda, whose vast wealth and prosperity are derived almost exclusively from the mining of a rare, fantastical metal called vibranium.

In its own colorful way, Black Panther does an excellent job dramatizing mining’s important role in supplying the world with much-needed raw materials. Vibranium is the basis for everything in the film, from the title character’s flashy superhero suit to Wakanda’s otherworldly infrastructure and vehicles, to its futuristic medicine and weaponry.

Like Wakanda, the real Africa is rich in minerals and metals, many of them extremely valuable. Think platinum and palladium in South Africa, diamonds in Botswana, copper in Zambia and cobalt in the Democratic Republic of the Congo.

Unfortunately, many African countries have not been managed as well as the one depicted in the film. Corruption and fiscal instability, coupled with inconsistencies in taxation and mining policies, make operating on the continent challenging for foreign producers, to say the least. Three years ago, I argued that Africa could mine its way to prosperity if only it addressed the hindrances that keep explorers and producers away. I stand by those words today.

Consider Congo, which produces roughly two-thirds of the world’s cobalt, an essential component in lithium-ion batteries. Lawmakers there recently voted to raise taxes and royalties on profits and metals produced. That includes cobalt, whose price has soared 180 percent in the past three years on red-hot electric vehicle (EV) demand. The country’s state-owned mining company, Gécamines SA, is also pushing the government to renationalize the entire mining industry.

CObalt prices continue to surge on electric car demand
click to enlarge

Admittedly, the fictional Wakanda appears to have a nationalized metals and mining sector. But because the country is so advanced and self-sustaining, it has no need for outside investment. That’s not the case with many real-life African nations, which are literally, in some cases, sitting on a gold mine.

Cobalt Supply Shortage Could Boost Prices Even More

But let’s focus on cobalt for a moment. Global demand for the brittle, bluish-white metal has skyrocketed in recent months, exceeding 100,000 metric tons for the first time last year, according to mining consultant CRU Group. Over the next 10 years, it’s projected to grow at a compound annual growth rate (CAGR) of 11.6 percent.

And because around two-thirds of the world’s supply is mined in the highly unstable Congo, a supply shortage is likely brewing.

“There just isn’t enough cobalt to go around,” George Heppel, a CRU consultant, told Bloomberg in January. “The auto companies that’ll be the most successful in maintaining long-term stability in terms of raw materials will be the ones that purchase the cobalt and then supply that to their battery manufacturers.”

Cobalt use in electric vehicles and other lithium ion battery apllications
click to enlarge

Apple to Buy Cobalt Directly from Miners

Automakers aren’t the only ones with this idea. Bloomberg reported last week that Apple, the world’s largest end user of cobalt, is in talks to buy the metal directly from miners. The move would help the iPhone-maker not only save many billions of dollars in the long term but also be more transparent about how the metal is sourced, as there have been concerns about illegal mining operations and the use of child labor.  

Details are scarce at this point, but Bloomberg writes that “Apple is seeking contracts to secure several thousand metric tons of cobalt a year for five years or longer.”

One of the miners the company is rumored to be speaking with is Switzerland-based Glencore, the 14th largest company in the world by revenue as of 2016, according to the Fortune Global 500. This would make sense, as Glencore—the best-performing London-listed miner last year, finishing up 41 percent—has been positioning itself as the go-to supplier of cobalt and other metals that are used in so-called clean tech, including copper, nickel, and zinc.

Glencore Announces $2.9 Billion in Dividends in 2018

Glencore stock jumped more than 5 percent last Wednesday after the company reported phenomenal performance in 2017 that CEO Ivan Glasenberg describes as “our strongest on record.” Earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 44 percent year-over-year, from $10.3 billion to $14.8 billion, led by higher commodity prices and “enhanced” mining margins.

Sure to make investors happy, the company also declared a distribution of $2.9 billion, or $0.20 per share, to be paid in two installments this year.

The earnings report made no mention of Apple—or smartphones, for that matter—but it did emphasize the high rate of growth in electric vehicle investment, which is expected to greatly benefit cobalt demand.

“Global automaker investments now total more than $90 billion, with at least $19 billion attributed to the U.S., $21 billion to China and $52 billion to Germany,” Glasenberg writes. “Volkswagen alone plans to spend $40 billion by 2030 to build electrified versions of over 300 models.”

Over the next three years, Glencore’s cobalt production growth is projected at 133 percent, followed by nickel at 30 percent and copper at 25 percent.

This year alone, the company believes it will produce as much as 39,000 metric tons of cobalt, up 42 percent from 27,400 tons last year.

Curious about investment opportunities in cobalt and other natural resources? Click here!

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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.

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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2017: Glencore PLC.

Share “The World's Cobalt Supply Is in Jeopardy”

Net Asset Value
as of 04/19/2018

Global Resources Fund PSPFX $6.09 No Change Gold and Precious Metals Fund USERX $7.65 -0.03 World Precious Minerals Fund UNWPX $4.42 0.02 China Region Fund USCOX $11.45 0.08 Emerging Europe Fund EUROX $7.35 -0.03 All American Equity Fund GBTFX $25.19 -0.04 Holmes Macro Trends Fund MEGAX $19.72 -0.33 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change