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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.

Frank Talk Turns Eleven Years Old!
April 24, 2018

Eleven years ago, U.S. Global Investors launched the Frank Talk blog as a way to share my experiences traveling the world and the investment insights I pick up along the way. After thousands of blog posts, we continue to cover the latest market news and educate investors. We’re one of the few sources online today that strives to take a balanced approach on gold investing, emerging markets and a handful of other topics.

One of our values at U.S. Global is having a “curiosity to learn and improve” and I feel starting a blog was a great tool to help our shareholders understand the nuances of global investing. In fact, my CEO blog was one of the first produced by a mutual fund company. Since the first Frank Talk blog post was published in 2007, it’s now widely read around the world and regularly appears on a number of financial news outlets. Over the years the Frank Talk blog and our other educational content have won many STAR Awards from the Mutual Fund Education Alliance (MFEA).

In the eleventh year of Frank Talk, we decided to challenge ourselves and develop a supplemental video series for our readers. This video series, appropriately named Frank Talk Live, allows me to dig even deeper into the material I write about and connect with viewers on a personal level. In this digital age, we believe it’s important to educate our viewers using a variety of mediums, such as video.

In case you haven’t seen a Frank Talk Live yet, I’d like to share with you the most viewed ones so far:

  • Understated Inflation Could Be Good for Gold – At the beginning of the year I like to give my price forecast for gold, in addition to updating it throughout the rest of the year. In this video I talk about gold and its relationship with inflation.
  • Electric Car Demand Set to Drive Copper Sky High – My good friend Robert Friedland, founder and CEO of Ivanhoe Mines, visited the U.S. Global offices and I shared with viewers his insights on the copper market and how electric car demand might send copper prices soaring.
  • Chinese New Year and Gold’s Love Trade – I like to talk about Chinese New Year every year, since it’s a big contributor to gold’s seasonal trading patterns, which I call the Love Trade.

I invite you to subscribe to our YouTube page to receive notifications when a new Frank Talk Live is released.

Thank you to my loyal Frank Talk subscribers, and welcome to those of you who are new. If there is ever a topic you’re curious to learn more about, please drop a note to editor@usfunds.com.

Happy Investing!

 

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 links above, you may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 3/31/2018: Ivanhoe Mines Ltd.

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Commodities Are Flashing a Once-in-a-Generation Buy Signal
April 23, 2018

Everything is bigger in Texas

Since the commodities supercycle began unwinding 10 years ago, many investors have been waiting for the right conditions to trigger mean reversion and lift prices. I believe those conditions are either firmly in place right now or, at the very least, in their early stages. Among them are factors I’ve discussed at length elsewhere—a weaker U.S. dollar, a steadily flattening yield curve, heightened market volatility, overvalued U.S. stocks, expectations of higher inflation, trade war jitters, geopolitical risks and more.

In addition, nearly 60 percent of money managers surveyed by Bank of America Merrill Lynch believe 2018 could be the peak year for stocks. A recent J.P. Morgan survey found that three-quarters of ultra-high net worth individuals forecast a U.S. recession in the next two years.

All of this makes the investment case for commodities, gold, and energy more compelling than at any other time in recent memory.

Exhibit A is the chart below, which I’ve shared before but recently updated with new data. Relative to equities, commodities are as cheap right now as they’ve been in decades. This is literally a once-in-a-generation opportunity that investors with a long-term view should seriously consider. For perspective, had you invested in a fund tracking the S&P GSCI or an equivalent commodities index in 2000, you would have seen a compound annual growth rate (CAGR) of around 10 percent for the next 10 years, according to Bloomberg data.

Commodities at most undervalued level in decades
click to enlarge

We all know that past performance is no guarantee of future results, but it’s doubtful you’re going to get a clearer or resounding signal that now could be an ideal time to add to your commodities exposure. If you feel as if you’ve been stuck at a traffic light these past few years, just waiting to put your foot on the accelerator, you can breathe a sigh of relief because the light may have just turned green.

Goldman: Time to Overweight Commodities

us steel demand by industry

I'm not alone in my bullishness. In a note last week, analysts at Goldman Sachs wrote that “the strategic case for owning commodities has rarely been stronger.” The bank recommends an overweight position, estimating that commodities will yield at least 10 percent over the next 12 months, with most of the gains being made by crude oil and aluminum.

Whereas crude traders are responding primarily to concerns that output could be disrupted by intensifying conflict in the Middle East, specifically oil producer Syria, aluminum prices have skyrocketed following the imposition of fresh U.S. sanctions against a number of Russian firms. Among them is United Company RUSAL, the world’s second-largest aluminum company, responsible for producing as much as 6 percent of global supply.

WTI Testing $70 Resistance

Since its low of $26 per barrel in February 2016, the price of West Texas Intermediate (WTI) crude has surged nearly fivefold and is currently at its highest level in more than three years. Last Wednesday, oil jumped nearly 3 percent on reports that U.S. inventories had fallen more than expected, suggesting the global glut continues to recede. And on Thursday, WTI tested resistance at $70, a level we haven’t seen since November 2014.

WTI crude surges to highest level since november 2014
click to enlarge

But prices retreated again Friday after President Donald Trump blasted OPEC on Twitter, proving once again how quants comb through social media at lightning speed and use sentiment analysis to inform their trades. “With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” the president said.

As I shared with you earlier this month, OPEC and Russia are planning to work more closely together to limit output for a number of years, possibly as many as 10 or 20. Such an agreement would help support oil prices—Saudi Arabia, in particular, seeks higher prices to take Saudi Aramco, the world’s largest energy company, public—but it’s likely American shale producers would ramp up production to fill the void. The U.S. is now the number two oil producer in the world, having overtaken Saudi Arabia late last year.

Will We See $3,000 Aluminum?

Aluminum is likewise enjoying a strong rally, jumping sharply more than 23 percent since the White House announced sanctions against select Russian firms and oligarchs in response to the Eastern European country’s alleged interference during the 2016 presidential election. In nine of the past 11 trading days through Thursday, the metal posted positive gains, surging nearly 6 percent on Wednesday alone.

Can aluminum hit 3,000 dollars
click to enlarge

Aluminum soared to $2,715 per metric ton in intraday trading Thursday, the highest we’ve seen since April 2011. The rally may have further to run, writes Goldman Sachs, which forecasts a price range of between $2,800 and $3,000 this year.

Australian-British multinational Rio Tinto and Melbourne-based BHP, two of the world’s top aluminum producers, were both upgraded to “BUY” this week by CLSA, partly in response to rising aluminum prices but also because they maintain strong balance sheets and are expected to generate favorable free cash flow (FCF) this year.

China’s One Belt, One Road Still Needs Biblical Amounts of Materials

Also bolstering the commodities investment story is China’s massive ongoing “Belt and Road” megaproject, also known as the Silk Road Economic Belt. In a note last week, CLSA reminded us that the infrastructure initiative is still in its infancy, expected to be completed by 2049. It will cut through as many as 68 countries across Asia and Europe, affecting an estimated 62 percent of the world’s population. China has already spent approximately $180 billion to complete various projects, but many billions more will go toward building roads, ports, dams, high-speed rail, airports and more—all to “enhance regional connectivity,” as President Xi Jinping put it, and strengthen China’s economic clout.

To give you some scale as to how monumental and historic this undertaking truly is, the graphic below, courtesy of BHP, compares the development to the U.S. Marshall Plan, then one of the most expensive projects in human history. The Belt and Road initiative could eventually cost 12 times as much or more, with total spending estimates ranging between $4 trillion and $8 trillion.

Barrick gold reported lowest quarterly output in 16 years
click to enlarge

Estimates of how much energy and natural resources will be needed during the development phase vary wildly, but I think it’s fair to assume that demand will continue to be supported for some time.

Gold Supply Concerns Highlight It's Rarity

Gold ended last week down slightly, the first time in three weeks it’s done so. It looks as if gold investors took some profits late in the week after the yellow metal came close to breaching $1,360 on Wednesday.

I still believe gold could hit $1,500 an ounce this year on rising consumer and producer prices, which I think are understated. This is more than apparent when you compare the official U.S. consumer price index (CPI) and alternative measures such as the New York Fed’s Underlying Inflation Gauge (UIG). And as Dr. Ed Yardeni points out in a recent blog post, the word “inflation” appeared as many as 106 times during the latest Federal Open Market Committee (FOMC) meeting, a sign that Fed members could be getting more and more concerned about mounting inflationary pressures.

Recent reports also suggest gold production is slowing, which could help support prices long-term. Exploration budgets have been declining pretty steadily since 2012 after the price of gold peaked, and fewer and fewer large-deposit mines are being discovered.

Last week the China Gold Association announced that the country, the largest producer of gold, produced 98 metric tons in the March quarter, down some 3 percent from the same period last year. This comes after total Chinese output in 2017 fell 6 percent year-over-year to 426 tons. Granted, miners have been pressured by Beijing to curtail production as part of the government’s enforcement of tougher environmental protection policies, but the decline in output is part of a downward trend we’re seeing across the board, especially among major producers.

Take a look at the declining quarterly output of Barrick Gold, the world’s largest gold miner. According to its preliminary results for the first quarter, Barrick produced a total of 1.05 million ounces from its 10 projects. That’s only a 2 percent decrease from the same quarter last year, but a far cry from where it was seven years ago.

Barrick gold reported lowest quarterly output in 16 years
click to enlarge

Since the news hit April 11, shares of Barrick are up about 3 percent, even after a Friday selloff.

While some investors might view the lower output as disappointing, others no doubt see it as a reminder that gold is a finite resource, one of the many reasons why it’s remained so highly valued for centuries. As I’ve written before, the low-hanging fruit has likely already been picked, making the task of mining the yellow metal more difficult as well as expensive. Supply isn’t growing nearly as fast as it once did.

And yet demand continues to climb. Not only do the peoples of India, China, Turkey and other countries have a strong cultural affinity to gold—an obsession that will only intensify as incomes rise—but the metal still plays a vital role as a portfolio diversifier in times of economic and political uncertainty.

Franco-Nevada IPO at 10

us steel demand by industry

On a final note, Franco-Nevada, one of our favorite players in the gold space, recently celebrated it's 10- year anniversary as a publically-traded company. As if to commemorate the occasion, the company reported record sales and profit in 2017, not to mention a record $167.9 million in dividends paid—all while staying debt-free.

“I am pleased that Franco-Nevada’s 10th full year since its IPO was its best year ever,” commented CEO David Harquail.      

I’d like to congratulate my good friends Seymour Schulich and Pierre Lassonde, who conceived of the gold royalty model and cofounded the company back in 1983. (As I’ve explained before, Franco-Nevada was the first IPO I worked on as a young analyst in Toronto.) Seymour and Pierre are true rock stars in the world of gold mining, and what they’ve managed to achieve is nothing short of legendary.

Read more about Franco-Nevada’s record year by clicking here!  

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. The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies.

The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.

Free cash flow (FCF) is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.

The Underlying Inflation Gauge (UIG) includes a wide range of nominal, real and financial variables in addition to prices and focuses on the persistent common component of monthly inflation. The UIG is defined as the persistent common component of monthly inflation.

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.

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.

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 3/31/2018: BHP Billiton Ltd., Barrick Gold Corp., Franco-Nevada Corp.

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

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These Two Funds Offer an Attractive Risk/Reward Profile
April 20, 2018

These Two Funds Offer an Attractive Risk/Reward Profile

Two of our mutual funds, the China Region Fund (USCOX) and Global Resources Fund (PSPFX), offered investors very attractive risk/reward profiles compared to their respective peer groups for the 12-month period ended March 31. I believe this is the result of our unique, actively-managed quant models and nimbleness to act based on market volatility, money flows and other factors.

Look at the scatterplot graph below. The y-axis measures the 12-month return, while the x-axis measures monthly standard deviation, or, more generally, risk. Ideally, for any given time period, you want your investment to appear in the upper-left quadrant, as this indicates you’ve received higher returns for a relatively low amount of risk.

For the 12-month period ended March 31, the China Region Fund (USCOX) delivered a noteworthy return of 37.06 percent, compared to its benchmark, the Hang Seng Composite Index, which rose 24.40 percent. Its return was also higher than the average for the China peer group. At the same time, USCOX had relatively lower risk than many of its peers, with a monthly standard deviation of between 3 and 4 percent.

Risk return analysis for the China region fund USCOX
click to enlarge

In USCOX we maintain overweight positions in consumer discretionary and technology. As we see it, these sectors are where the growth is, driven by innovative tech firms, from Sunny Optical to Tencent; automakers such as Geely Automotive; and casino names like Galaxy Entertainment and Wynn Macau.

Explore the China Region Fund (USCOX) by clicking here!

A Look at the Global Resources Fund (PSPFX)

Our Global Resources Fund (PSPFX) similarly had an attractive risk/reward profile for the one-year period ended in March. The fund returned 11 percent, well above many of its peers in energy and materials, and it was less risky than the group’s average.

Risk return analysis for the Global Resources fund PSPFX
click to enlarge

For PSPFX, our rigorous quant research process begins with 1,600 possible names in the energy and materials space. We immediately whittle this number down to around 700 or 800 after screening for net debt-to-enterprise value—we don’t want overly-leveraged companies—as well as liquidity and free cash flow growth.

Next, we look at enterprise value-to-EBITDA—or earnings before interest, taxes, depreciation, and amortization—meaning we seek companies that offer greater value in their sector relative to their peers. In other words, we compare oil producers to oil producers, not oil producers to, say, logging and timber companies.

Finally, we screen for return on invested capital (ROIC), one of the most widely-used factors, and free cash flow yield. We like to invest in companies that we anticipate will reward us.

This gives us the 50 or so names that eventually make it into PSPFX. It’s a process that we’re committed to and that we believe delivers highly competitive results.

Commodities on Sale

Another reason investors might want to consider commodities is that they’ve rarely been this cheap relative to stocks. The equities-to-commodities ratio, as measured by the S&P 500 Index and the S&P GSCI Index, is at its lowest level in nearly 50 years. This means that materials could be ripe for mean reversion, representing one of the most attractive entry points in recent memory.

Commodities at most undervalued level in decades
click to enlarge

Commodities are also responding to geopolitical jitters. With oil, aluminum and other materials making multiyear highs because of Russian sanctions and military action in Syria, Goldman Sachs recently issued a bullish statement, writing that “the strategic case for owning commodities has rarely been stronger.”

Of course, this is only one investment bank’s opinion, and there’s no guarantee that past events will end up being repeated. It’s possible a full recovery is still months or even years away. Proceed with caution, but I think it’s worth your time to at least consider adding to your commodities exposure.

Interested in gaining exposure to commodities and raw materials? Visit the Global Resources Fund (PSPFX) 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 www.usfunds.com 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.

Past performance does not guarantee future results.

Total Annualized Returns as of 3/31/2018:

Fund One-Year Five-Year Ten-Year Gross Expense
China Region Fund 37.06% 8.99% 1.80% 2.76%
Hang Seng Composite Index 24.40% 6.00% 2.48% n/a
Global Resources Fund 11.00% -8.30% -5.91% 1.85%

The Adviser of the China Region Fund has voluntarily limited total fund operating expenses (exclusive of acquired fund fees and expenses of 0.02%, extraordinary expenses, taxes, brokerage commissions and interest, and advisory fee performance adjustments) to not exceed 2.55%. With the voluntary expense waiver amount of 0.38%, total annual expenses after reimbursement were 2.36%. U.S. Global Investors, Inc. can modify or terminate the voluntary limit at any time, which may lower a fund’s yield or return. Expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies. 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. The Hang Seng Composite Index is a stock market index of the Stock Exchange of Hong Kong that has components of 200 companies.

Debt-to-enterprise value measures how much debt a company carries relative to its total value. Free cash flow (FCF) is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. Enterprise value-to-EBITDA, or EV/EDITDA, equals a company's enterprise value divided by earnings before interest, tax, depreciation, and amortization. Return on invested capital(ROIC) is a profitability ratio that measures the return an investment generates for those who have provided capital. ROIC tells us how good a company is at turning capital into profits. Free cash flow yield is an overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio is calculated by taking the free cash flow per share divided by the share price.

You cannot invest directly in an index.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund and Global Resources Fund as a percentage of net assets as of 3/31/2018: Sunny Optical Technology Group Co. Ltd. 10.62% in China Region Fund, 0.00% in Global Resources Fund; Tencent Holdings Ltd. 10.41% in China Region Fund, 0.00% in Global Resources Fund; Geely Automotive Holdings Ltd. 9.84% in China Region Fund, 0.00% in Global Resources Fund; Galaxy Entertainment Group Ltd. 2.67% in China Region Fund, 0.00% in Global Resources Fund; Wynn Macau Ltd. 2.05% in China Region Fund, 0.00% in Global Resources Fund.

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

 

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Which Has the Bigger Economy: Texas or Russia?
April 16, 2018

Everything is bigger in Texas

You’ve no doubt heard that everything’s bigger in Texas. That’s more than just a trite expression, and I’m not just saying that because Texas is home to U.S. Global Investors.

Want to know how big Texas really is? Let’s compare its economy with that of Russia, the world’s largest country by area. As you probably know, Russia’s been in the news a lot lately, so the timing of this comparison makes sense. The U.S. just levied fresh sanctions against the Eastern European country for its alleged meddling in the 2016 presidential election, and early last week President Donald Trump warned Russia that the U.S. military could soon strike its ally Syria in response to its use of chemical weapons—a promise he kept Friday evening.

The Russian ruble traded sharply down following the news, decoupling from Brent crude oil, the country’s number one export.

Russian ruble decoupled from Brent crude following US snactions
click to enlarge

But back to the comparison. Even though Russia has nearly five times as many residents as Texas, the Lone Star State's economy is more than $400 billion larger. Texans, therefore, enjoy a gross domestic product (GDP) per capita of around $58,000, whereas Russians have one closer to $8,700.

Texas Is So Much More than Oil Country

The Russian Federation is the largest single producer of crude in the world, pumping out 10.95 million barrels per day (bpd) in January, according to the country’s energy minister. Texas is no slouch, though, as its output came close to 4 million bpd in January. That’s the most ever for a January since at least 1981. And from December 2017 to February 2018, its oil and gas industry accounted for nearly 30 percent of the state’s employment growth, according to the Federal Reserve Bank of Dallas.

But whereas Russia’s economy is highly dependent on exports of oil and petroleum products, the Texas economy is broadly diversified. The state ranks first in the U.S. for not only oil production but also wind energy. It has a robust agricultural sector, and it’s a leading hub for advanced technology and manufacturing, aeronautics, biotechnology and life sciences. Austin, the state capital, is steadily emerging as the most dynamic U.S. filmmaking city outside of Hollywood.

Texas exports

All of this has helped contribute to Texas being among the fastest growing states in the U.S. In 2017, it grew by more than 1,000 new residents per day.

Meanwhile, Russia’s population is slowly shrinking because of low birth rates and low immigration. Its population peaked at 148 million in the early 1990s—right around when the Soviet Union fell—and by 2050, it’s estimated to sink to 111 million. 

Can Russia Root Out Its Corruption?

One area where Russia trumps Texas is in corruption. If you think Texas—or any other state—has a corruption problem, Russia takes it to a whole new level.

But Russia takes it to a whole new level. Last year, it ranked 135 out of 180 countries on Transparency International’s Corruption Perceptions Index (CPI), released in February. Among Eastern European countries, only Uzbekistan, Tajikistan and Turkmenistan ranked lower. Watchdog group Freedom House was similarly critical in its most recent analysis, giving the country an overall democracy score of 6.61 out of 7, with 7 being “least democratic.”

So notorious and widespread is Russia’s mafia that a number of movies have been made about it. One of the best among them is David Cronenberg’s excellent Eastern Promises (2007).

Having said all that, I believe it’s prudent for investors to underweight Russian stocks for the time being and overweight Western Europe. Because of U.S. sanctions, Americans have until May 7 to divest completely from a number of Russian names, including Rusal, En+ Group and GAZ (Gorkovsky Avtomobilny Zavod), all of which saw serious outflows last past week. The MSCI Russia Index, which covers about 85 percent of Russian equities’ total market cap, plunged below its 200-day moving average, but last Thursday it jumped more than 4 percent, its best one-day move in two years.

Click here to learn more about underweighting Russian stocks.

Weaker Greenback and $1 Trillion Deficit Helps Gold Glitter

Gold is rallying right now, but as I told Daniela Cambone in last week’s “Gold Game Film,” it has little to do with Russian geopolitics, or even trade war fears, which have subsided somewhat in the past couple of weeks. Instead, the price of gold is responding primarily to a weaker U.S. dollar. For the 30-day period, the greenback has dipped close to 20 basis points—for the year, more than 11 percent.

I think what’s also driving the yellow metal right now are concerns over the U.S. budget deficit and ballooning government debt. This week the Congressional Budget Office (CBO) said it estimated the deficit to surge over $1 trillion this year and average $1.2 trillion each subsequent year between 2019 and 2028, for a total of $12.4 trillion. By the end of the next decade, then, debt held by the public is expected to approach 100 percent of U.S. GDP.   

US deficits projected to be larger than previously estimated
click to enlarge

According to the U.S. National Debt Clock, government debt now stands at over $21 trillion—or, put another way, $174,000 per taxpayer. Imagine what the interest payments on that must be.

The CBO, in fact, commented on this. Believe it or not, the government’s annual payments on interest alone, made even more burdensome by rising rates, are expected to exceed what it spends on the military by 2023. And remember, defense is one of the country’s top expenditures, alongside Medicare, Medicaid and other entitlement programs.

US government is expected to start spending more on interest than defense in 2023
click to enlarge

There was even more news last week on debt and the deficit, as Congress tried, and failed, once again to amend the Constitution by requiring a balanced budget. The amendment could not get the two-thirds support it needed.

You can probably tell where I’m headed with all of this. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction.

Gold is one such asset that’s been a good store of value in such times. As I’ve shown before, gold has tracked U.S. government debt up since 1971, when President Richard Nixon ended the gold standard. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in high-quality gold stocks, mutual funds or ETFs.

Asset Allocation Works

On a final note, I think it’s important that investors remember to stay diversified, especially now with volatility hitting stocks and geopolitical uncertainty on the rise. I’ve discussed Roger Gibson’s thoughts on asset allocation with you before, and I believe his strategy still holds up well today to capture favorable risk-adjusted returns.

Asset allocation works
click to enlarge

In the chart above, based on Gibson’s research, you can see that a portfolio composed of U.S. stocks, international stocks, real estate securities and commodity securities gave investors an attractive risk-reward profile between 1972 and 2015. This diversified portfolio, represented above by the orange circle, delivered good returns with a digestible amount of volatility, compared to portfolios that contained only one, two or three asset classes. Concentrating in only one or two asset classes could possibly give you higher returns, but you’d also likely see much greater risk, which many investors aren’t willing to accept.

I believe adding fixed-income—specifically short-term, tax-free municipal bonds—could improve these results. Munis with a shorter duration, as I’ve explained in the past, have a history of being steady growers not just in times of rising 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.

Learn more about the $3.8 trillion municipal bond market 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. 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 Corruption Perceptions Index (CPI) scores countries on how corrupt their governments are believed to be. A country's score can range from zero to 100, with zero indicating high levels of corruption and 100 indicating low levels.

The MSCI Russia Index is designed to measure the performance of the large and mid-cap segments of the Russian market. With 22 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Russia.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the US and Canada. With 927 constituents, the index covers approximately 85% of the free float-adjusted market.

The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

The Bloomberg Commodity Index, formerly the DJ-UBS Commodity Index, is a broadly diversified index that tracks the commodities markets through commodity futures contracts. Since its launch in 1998, it has emerged as a leading benchmark of commodity markets.

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).

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

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 3/31/2018.

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Try Not to Kick Yourself When You See this Fund's One-Year Return...
April 12, 2018

Try not to kick yourself when you see this funds one year return

I’m very pleased to share with you that our Holmes Macro Trends Fund (MEGAX) beat its benchmark, the S&P 1500 Composite Index, for the 12-month period as of March 31. Whereas the benchmark returned 13.73 percent for the period, MEGAX returned an impressive 17.15 percent. We also have very favorable expectations for the fund for the remainder of this year and beyond because of its model that emphasizes returns on invested capital (ROIC) and growing revenues.

Holmes Marco Trends Fund MEGAX beat its benchamrk
click to enlarge

MEGAX seeks to identify strong sectors, and within those sectors, to identify companies that have the greatest potential for growth. We like to lean toward the “growthier” small- and mid-cap components of the broader S&P 1500, which covers about 90 percent of total market capitalization of the U.S. stock market.

An Appetite for Well Managed Companies

Specifically, we focus on companies that have a high ROIC as well as revenues that appear to be growing faster than their peers. We overweight companies whose shares are currently being accumulated by institutional investors and underweight names that, according to our technical overlay, show investor appetite is waning.

Finally, we omit companies that have low margins and low revenue per employee.

Can the energizer rally keep going and going

As an example of how we put our strategy into practice, we added Energizer Holdings last quarter after the company reported strong net earnings in fiscal year 2017. After taxes, the Energizer bunny reported $201.5 million in sales, or an incredible $3.27 per share. That’s up 58 percent from $127.7 million in 2016 and after a net loss of $4 million the previous year. In 2017, gross margin as a percent of net sales was 46.2 percent, an improvement over the 43.6 percent margin in 2016.

The position was well made, as Energizer charged up nearly 25 percent in the first quarter, making it one of the top performing stocks in the mid-cap S&P 400 Index. Can the Energizer rally “keep going and going”? We’ll continue to study the bunny very closely.

Small Business “On Fire”

Our emphasis on smaller-cap, domestic-focused names has worked especially well as concerns over tariffs and global trade have lately hurt a number of shares of large multinationals with high exposure to foreign markets. As I shared with you just this week, small-cap stocks, as measured by the S&P 600 Index, finished positive for both the first quarter of 2018 and the turbulent month of March. They outperformed large-cap S&P 500 Index names as well as mid-cap stocks, represented by the S&P 400 Index. Please note, though, that small-caps, while they have higher returns here, also have a history of higher volatility than large- and mid-caps.

small-caps outperformed large- and mid-caps
click to enlarge

Consider what small business owners themselves are saying. The most recent monthly Index of Small Business Optimism, conducted by the National Federation of Independent Business (NFIB), came in at 107.6, the second-highest reading in the survey’s 45-year history. And 32 percent of small business owners say now is a good time to expand, the highest percentage ever. This optimistic comes in response to corporate tax cuts and the Trump administration’s pledge to roll back regulations.

Interested in learning more? I urge you to visit the Holmes Macro Trends Fund (MEGAX) page today!

 

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

Total Annualized Returns as of 3/31/2018:

Fund One-Year Five-Year Ten-Year Gross Expense
Holmes Macro Fund (MEGAX) 17.15% 8.69% 4.20% 1.68%
S&P 1500 Composite Index 13.73% 13.21% 9.68% n/a

Expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

The S&P 1500 is a composite index that includes securities that account for 90% of the total market capitalization of the United States' stocks. The index includes small, mid and large cap stocks. The S&P 500 measures the value of stocks of the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. Standard & Poor's intention is to have a price that provides a quick look at the stock market and economy. The S&P Mid-Cap 400 Index tracks a diverse basket of medium-sized U.S. firms. A mid-cap stock is broadly defined as a company with a market capitalization ranging from about $2 billion to $10 billion. The S&P Small-Cap 600 Index consists of 600 small-cap stocks. A small-cap company is generally defined as a stock with a market capitalization between $300 million and $2 billion.

You cannot invest directly in an index.

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.

Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund (MEGAX) as a percentage of net assets as of 3/31/2018: Energizer Holdings Inc. 2.47%.

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Net Asset Value
as of 06/18/2018

Global Resources Fund PSPFX $5.82 -0.01 Gold and Precious Metals Fund USERX $7.59 -0.02 World Precious Minerals Fund UNWPX $3.86 -0.03 China Region Fund USCOX $11.75 -0.05 Emerging Europe Fund EUROX $6.64 -0.08 All American Equity Fund GBTFX $25.97 No Change Holmes Macro Trends Fund MEGAX $20.15 -0.07 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change