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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.

“America Works… Never Bet Against America”
January 23, 2017

America works and I think it'll work fine under donald trump... never bet against America. Warren Buffett

And like that, it happened. Despite the polls, despite what anyone believed was possible, including many of his own supporters, billionaire developer Donald J. Trump was sworn in as the 45th President of the United States.

Whether you agree with him not, he’s now leader of the world’s largest economy and commander of history’s most powerful military force.

This is something that could only happen in the U.S.

President Trump and now-former President Barack Obama couldn’t be more different in their backgrounds, visions and leadership styles—more so than any other two men whose administrations happen to adjoin the other’s.

And yet the transition went remarkably smoothly and orderly.

I don’t believe there’s ever been such a meaningful and potentially consequential transfer of power in U.S. history, with the incoming president all but promising to undo every last policy of his predecessor, line by line. That Obama peacefully and cordially handed over the executive office to a man who led the charge in questioning his legitimacy for a number of years is a testament to the strength and durability of our democratic process.

It’s a process that’s key to America’s exceptionalism.

Although I don’t always agree with Trump, it saddens me to see so much negativity about him in the media and protests in the streets. Now that he’s president, the time has come to unite behind him and root for his success. If he succeeds, America succeeds. If he fails—as many seem to hope for—America fails.

Take Warren Buffett. He backed Hillary Clinton throughout the primaries and general election. And yet on the eve of Trump’s inauguration, he said he supported the new president and his cabinet “overwhelmingly,” adding that he’s confident America “will work fine under Donald Trump.”

I think what Buffett recognizes is that the vast majority of people who voted for Trump did so for the right reasons. Throughout his campaign, Trump’s promise to bring back American jobs and secure the nation’s borders resonated with everyday folks who have begun to feel overlooked. Entrepreneurs, small business owners and those working in the financial industry found hope and encouragement in his pledge to lower corporate taxes and roll back regulations.  (Just today, Trump told a room full of CEOs that he promised to cut regulations “by 75 percent, maybe more.”) I believe most Americans, regardless of political ideology, want these things—which is why we saw such a large number of people who previously voted for Obama give Trump their vote this time.

As I often say, government policy is a precursor to change, and we’re likely about to see some sweeping changes. But as investors, it’s as important as ever that we don’t panic or get distracted by the noise. Instead, continue to focus on the fundamentals and keep your eyes on the long-term prize.

Inflation Plays Catch-Up

Inflation, as measured by the consumer price index (CPI), got a strong jolt in December, rising 2.1 percent year-over-year, its fastest pace in at least two-and-a-half years. Higher gasoline prices—which rose more than 8 percent in December—and health care costs were the main culprits, with medical bills surging the most in nine years.

Good for Gold: U.S. inflation climbs above 2% in December
click to enlarge

Although they might hurt your pocketbook, pricier goods and services have historically been constructive for gold, as I’ve explained many times before. In August 2011, when gold hit its all-time high of $1,900 an ounce, inflation was running at 3.8 percent and the government was paying you an average 0.23 percent on the 2-year T-Note. That means investors were earning a negative 3.5 percent return, which helped boost gold’s “safe haven” status.

I expect CPI to continue to climb throughout this year and next, supported by additional interest rate hikes—two or three in 2017 alone—and President Trump’s protectionist policies.

The metal’s investment case could be strengthened even more now that Trump has officially been sworn in. His personal shortcomings and public office inexperience might raise more than a few “unknown unknowns” for some investors, prompting them to seek an alternative to stocks and bonds. Scotiabank hinted at this in a recent note, saying it expects gold holdings “to increase as investors look to diversify their portfolios in what seems likely to be a challenging year for investors.”

On Inauguration Day, gold rose a little under 1 percent to close at $1,210.

Whether you support the new president’s policies or not, it’s still prudent to maintain a 10 percent weighting in gold, with 5 percent in gold stocks, the other 5 percent in coins and bullion.

Another Gold Rally in the Works?

Look at the chart below. It’s indexed at 100 on the day the Federal Reserve raised rates in 2015 and 2016 (December 16 and 14, respectively). Although past performance doesn’t guarantee future results, gold prices so far this year appear to be tracking last year’s performance pretty closely, suggesting further upside potential. 

gold prices are tracking last year's performance since rate hike
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In the first half of 2016, gold rallied more than 31 percent, from a low of $1,046 in December 2015 to a high of $1,375 in July. With mid-December 2016 as our starting point, a similar 31 percent move this year would add close to $360 to the price of gold, taking it to above $1,520 an ounce.

Gold Has a 100-Year History of Outperforming All Major Currencies

In its 2017 outlook, the influential World Gold Council (WGC) listed six major trends that will likely support gold demand throughout the year, including heightened geopolitical risks (Brexit, Trump, the global rise of populism), a potential stock market correction, rising inflation expectations and long-term Asian growth.

The group also calls out currency depreciation. Over the past 100 years, gold has strongly outperformed all major currencies. Whereas global gold supply grows at an annual average of only 2 percent, there’s no limit to how much fiat money can be printed.   

all major currencies have depreciated over the past century relative to gold
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Inflation and currency depreciation are among the Fear Trade’s triggers that I often write and speak about.

Spending Watchdog: U.S. Is on an “Unsustainable Fiscal Path”

This point about currency depreciation is especially relevant in light of an alarming new report from the U.S. Government Accountability Office (GAO), the nation’s watchdog. According to the report, the federal government’s spending is “unsustainable,” and if no action is taken to rectify the problem, the debt-to-GDP ratio will soon exceed its historical high of 106 percent, set in 1946.

To be clear, that means our nation’s debt will be larger than its economy.

an unsustainable fiscal path debt-to-gdp ratio expected to surpass its historical high
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The federal deficit increased to $587 billion in 2016, after six years of declining deficits. Spending increases were driven by entitlement programs such as Medicare and Medicaid, which surged 4.9 percent and 5.3 percent, respectively, during the year.

Whether Trump can change any of this, we’ll just have to wait and see. He seems interested in lowering costs and bringing some fiscal sanity to the government, as demonstrated by his criticism of Boeing over the perceived cost of Air Force One. At the same time, massive tax cuts, coupled with a $1 trillion infrastructure package, will likely drive up deficit spending even more.

All the more reason to have a portion of your portfolio invested in gold and gold stocks.

In the meantime, I wish President Trump all the best!

 

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 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.

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 12/31/2016: The Boeing Co.

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American Small Businesses Party Like It's 2004
January 17, 2017

France reported last week that its summer hosting of Euro 2016, Europe’s soccer championships, added $1.26 billion to its economy.

This is good news, for sure, and worth celebrating.

But here’s the thing: Why doesn’t France put as much effort into supporting its businesses and markets as it does its soccer franchises?

After all, the country has an entrepreneurship problem—as in, business growth and its labor market are struggling.

A lot of the blame lies at the feet of its labyrinthine web of regulations, which the Organization for Economic Cooperation and Development (OECD) once called “unnecessarily complex.” Barriers to entry in several key industries, including architecture, accounting and legal services, are prohibitively high, which has decimated the country’s labor market in the last few years. More than 25 percent of all working-age French under the age of 25 are unemployed right now, a meaningfully higher rate than for youth in the European Union (18 percent unemployment), United States (10 percent) and Japan (4 percent). Household savings rates are skyrocketing, consumer confidence is on life support and investments growth has been sluggish.

Investments Growth France Among Slowest 2020
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As a result of all this, economic growth in France is among the worst for major EU economies. There it will remain, sadly, unless officials commit to strengthening competition by streamlining its tax system and reforming regulations. But at least it has some great soccer clubs.

Surging Demand for California Munis

By comparison, look at California, whose economy just surpassed France’s in size. Say what you will about the state and some of its colorful residents, it’s successful because it recognizes talent and fosters an environment in which innovation and entrepreneurism can thrive. Silicon Valley is seeing a boom right now, which has helped the state government generate budget surpluses. Debt is being paid down, and the state’s rainy-day savings account is growing. This has contributed to California enjoying its highest credit rating since the turn of the century, Bloomberg reports, and caused demand for its municipal debt to climb.

At the same time, California munis can be volatile because state revenue depends on wealthy taxpayers whose incomes are tied closely to the stock market. According to Bloomberg, the top 1 percent of earners paid half of the state’s income tax revenue in 2014.

It shouldn’t come as a surprise to anyone, then, that California has one of the highest Gini coefficients, a measure of economic inequality, in the nation. Although some might balk at this, I think it’s proof there are huge, life-changing opportunities in California, and in the U.S. in general, that can turn “regular folk” into billionaires almost overnight.

Speaking of which, check out our latest slideshow, “10 Living, Self-Made Billionaires.”

Small Business Optimism in the U.S. Is Soaring Right Now

As further proof that France should do more to open up its economy, look at what President-elect Donald Trump’s pledge to lower taxes and slash regulations is doing to business optimism here in the U.S. Last month, the Index of Small Business Optimism soared a phenomenal 7.4 points to 105.8, its highest reading since 2004. The National Federation of Independent Business (NFIB), which conducts the survey, reported that attitudes toward capital spending and job creation in particular surprised to the upside. Research firm Evercore ISI called it a “blowout report,” and I have to agree.

Gold Should Be Supported by Even Deeper Negative Real Rates
click to enlarge

In their commentary, the NFIB’s William Dunkelberg and Holly Wade expressed cautious optimism that the incoming administration could satisfactorily relax some of the regulatory burden on businesses.

“Politicians say they want to create jobs, but their regulations and laws… only increased the cost of hiring a worker, and that is not good for job creation,” they wrote.

(Consider compliance-related paperwork alone. In fiscal year 2015, Americans spent a jaw-dropping 9.78 billion—yes, billion—hours complying with federal rules and regulations, according to a recent report from the Office of Management and Budget (OMB). That’s up nearly 4 percent from 2014.)

Many chief executives of large multinationals have been very  receptive to Trump’s proposals, taking him at his word that he can succeed at fostering an improved business environment in the U.S. Ford recently scrapped plans for a Mexico factory, while Fiat Chrysler announced a $1 billion investment in Michigan and Ohio, expected to create up to 2,000 new jobs. After meeting with the president-elect this week, Jack Ma, founder and CEO of Chinese ecommerce site Alibaba, said he was committed to adding 1 million U.S. companies to his hugely popular online shopping platform. The chief executive of active wear company Under Armour told CNBC that it would be bringing jobs back to the U.S., specifically Baltimore, where it’s headquartered. And on Thursday, Amazon unveiled plans to grow the number of its full-time, U.S.-based jobs by 100,000—from 180,000 today to over 280,000 by 2018.

As I’ve said many times before, there’s a lot of uncertainty surrounding Trump, who will be sworn into office this Friday. At the same time, businesses and investors clearly like what they’re hearing. Appearing on CNBC last week, legendary economist Robert Shiller perfectly summarized this distinction, saying that “nervousness can go along with optimism.” Although he didn’t vote for Trump, Shiller acknowledges that animal spirits are running high, adding that he sees the Trump equities rally spilling over into the housing market this year.

Alexander Green of The Oxford Club

Joining Shiller in offering a balanced assessment of Trump is my old friend Alexander Green, whose writing skills I admire and opinions I greatly respect. In his most recent blog post, Alex makes a convincing case against Trump’s protectionism, which are “not good for the economy or the market” and “undermines American economic growth.” Although investors have moved billions into the stock market since the election, the Trump rally could easily turn into the Trump correction, Alex says, “unless he changes his tune” on international trade.

“Why does a flat-panel HDTV that cost more than $10,000 in 2003 cost less than $400 today? Globalization,” he writes. “How can you walk into a Marshalls store and buy a fine cashmere sweater for 35 bucks? Globalization. Why does an $8 million supercomputer from 20 years ago sit in your pocket and cost less than $200? Globalization.”

U.S. Economy Could Get a Boost in the Near Term

The World Bank contributed to the wave of good news last week, making encouraging projections for the U.S. economy in light of Trump’s business-friendly policies. In its flagship report on global economics, the financial institution explained that expansionary fiscal policies—including tax cuts and plans to upgrade America’s infrastructure—could boost U.S. economic growth as high as 2.5 percent this year and 2.9 percent in 2018.

This would be a welcome surprise, as growth slowed considerably in 2016 to 1.6 percent, down from 2.6 percent in 2015, according to the World Bank.

 

China Likely to Remain Top Engine of Global Growth

And the good news isn’t limited to the U.S. Across the Pacific Ocean, China saw its producer price index (PPI) in December rise 5.5 percent, its fastest pace in more than five years and fourth consecutive positive reading after 54 straight negative ones.

The country’s PPI, which measures prices received by producers at the first commercial sale, is strengthening on higher commodity prices. What’s more, there’s an 85 percent correlation between China’s PPI and its nominal GDP, according to Evercore ISI, so growth in the world’s second-largest economy should pick up some steam this year.

85 Correlation Chinas Nominal GDP PPI
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“Based on history, the PPI’s increase of +3.3. percent year-over-year (y/y) in the fourth quarter suggests +15 percent y/y nominal GDP growth,” the firm wrote. It estimates fourth-quarter growth to be more than 8.8 percent and more than 9.6 percent in the first quarter of this year.

Meanwhile, the country’s purchasing manager’s index (PMI) has remained at or above 50—indicating manufacturing expansion—for the past six months, which is bullish for commodity prices.

Chinese demand for commodities, which were up 25 percent in 2016, is indeed skyrocketing, with imports of oil, iron ore, copper and soybeans reaching all-time highs last year. This helped solidify the country’s role as the world’s top engine of economic growth once again, contributing an estimated 33.2 percent to global economic expansion, according to China’s National Bureau of Statistics.

China Estimated 33 Global Economy Expansion 2016
click to enlarge

It’s expected we’ll see a repeat of outsize commodity demand this year, which should support prices.

 

Looking at copper, further support should come in the form of market deficits, which are expected to widen until at least 2020. As investment bank Jefferies explained in a note, “unexpected disruptions”—including undercapitalization of mines and the risk of labor strikes at Chile’s Escondida, the world’s largest copper mine—will likely add to supply constraints.

Copper Market Deficit Expected Support Prices 2020
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“From a supply perspective, the outlook for mined commodities is very bullish,” Jefferies added.

That includes gold. As a friend recently reminded me, China’s official gold holdings account for only 2 percent of its foreign reserves. Two percent! That’s remarkably low, far lower than most large economies. (In the U.S., it’s around 75 percent, according to the World Gold Council.) China is obviously interested in supporting its currency, and since it sold off quite a lot of U.S. Treasuries in the past year—Japan is now the top holder of U.S. government debt—it will likely need to substantially build up its gold reserves.

The People’s Bank of China (PBoC) has been accumulating gold, even if the rate has slowed recently, but imagine if it decided to boost holdings up from 2 percent of foreign reserves to 10 percent, which is more in line with other countries. That would have a monumental impact on the price of the yellow metal.

At this point, there’s no evidence the PBoC plans to follow such a route, but the possibility is there, with huge implications for gold.

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 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 Producer Price Index (PPI) measures prices received by producers at the first commercial sale.  The index measures goods at three stages of production:  finished, intermediate and crude. The Purchasing Manager's Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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 09/30/2016: Ford Motor Co.

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New Year, New Models for Our Domestic Equity Funds
January 10, 2017

President Calvin Coolidge once said, “The chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world.”

True words, indeed. The U.S. has given rise to many of history’s greatest entrepreneurs—from Henry Ford and Walt Disney to Steve Jobs and Jeff Bezos—whose groundbreaking innovations the world can hardly imagine life without. These “mad geniuses” were fortunate enough to live and work in America, where they were free to pursue their larger-than-life dreams and ambitions.

We must ensure the U.S. remains the Land of Opportunity, and I sincerely believe that many of President-elect Donald Trump’s policies can help achieve that goal.

Trump has pledged to cut corporate taxes, slash regulations, boost infrastructure spending and repatriate overseas profits—all of which can help foster an industrious biosphere.

It’s also bullish for domestic equities.

Since Election Day, the S&P 500 Index has surged 6.5 percent, and although I’ve seen many headlines proclaiming the so-called Trump rally overdone, I believe there’s still plenty more upside potential. As the saying goes: “Equity bull markets don’t die of old age.”

We’re committed to taking advantage of this upside, which is why we’ve adjusted and dramatically improved the methodology for our two domestic equity funds, the All American Equity Fund (GBTFX) and the Holmes Macro Trends Fund (MEGAX).

Briefly, I want to talk a little about each of the fund’s new methodology to give you a better idea of how they’re set up to capture opportunity in the year ahead and beyond.

All American Equity Fund (GBTFX)

Among other new additions to our methodology, we seek to capture the performance of the “growthiest” companies in the fund’s benchmark, the S&P 500, by focusing on those whose most recent quarter’s sales per share is greater than the average of the previous four quarters. So if a company’s average sales per share for the past four quarters is $30, let’s say, it needs to show something higher than that in the current quarter to be considered.

Sampling of S&P 500 Companies Whose September Quarter's Sales Per Share Outpaced the Four-Quarter Average
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We want the most active, productive companies on a per-share basis, and we’ve found that sales per share (also known as revenue per share) is one of the best ways to measure this.

To screen for overleveraged firms, we eliminate companies with the highest debt to equity.

We also screen for companies whose cash flow return on invested capital (CFROIC)—one of Warren Buffett’s favorite factors—is above the average for the S&P 500 over the past 12 months.

 

Holmes Macro Trends Fund (MEGAX)

The benchmark for MEGAX is the S&P 1500 Composite Index, which introduces small- and mid-cap stocks to our universe of investable companies. These stocks have been among the best performers since the November election because Trump’s more protectionist policy proposals bode well for companies that have less exposure to overseas markets than large, multinational blue-chip stocks. (The president-elect has threatened to impose a “big border tax” on American goods made overseas and shipped back into the U.S.)

Small- and mid-cap stocks are an exciting place to be right now. As you can see, they’ve rallied dramatically above the S&P 500 since the election, after performing in tandem with blue chips for the past few years.

Small and Mid-Cap Stocks Rally Following the 2016 Election
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Mid-cap companies are especially attractive because they’ve reached a point in their enterprise life cycle where the challenges inherent to smaller companies—raising capital early on and managing capacity growth, for example—are mostly behind them. At the same time, they remain dynamic enough for rapid growth to be possible.

That’s why mid-cap stocks account for 40 percent of our new MEGAX model. Meanwhile, 36 percent is in small caps, the remaining 24 percent in large caps.

To screen for the very best companies, we take a similar approach as GBTFX, focusing on those whose sales per share is greater than their average for the past four quarters.

Then, we do some trimming.

We remove the bottom fifth of companies with the lowest growth in the most recent quarter’s return on invested capital (ROIC). We do the same with those that have the lowest gross margins and lowest revenues per employee.

 

We’re very excited about the changes and have lots of confidence in them going forward. Happy New Year!

 

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

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 Holmes Macro Trends Fund may invest in small- and mid-sized companies, which involve greater risk than investing in more established companies. This risk includes difficulty in obtaining reliable information and financial data and low liquidity in the market, making it difficult to dispose of shares when it may be otherwise advisable.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P SmallCap 600 Index, more commonly known as the S&P 600, is a stock market index from Standard & Poor's. It covers roughly the small-cap range of US stocks, using a capitalization-weighted index. The S&P MidCap 400 Index, more commonly known as the S&P 400, is a stock market index from S&P Dow Jones Indices. The index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index in existence. The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600. The index was developed with a base value of 100 as of December 30, 1994.

Cash flow return on invested capital 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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund and Holmes Macro Trends Fund as a percentage of net assets as of 9/30/2016: Ford Motor Co. 2.05% in All American Equity Fund, The Walt Disney Co. 0.00%, Apple Inc. 0.00%, The Priceline Group 0.00%, Whirlpool Corp 0.00%, Amazon.com Inc. 0.00%, Tesoro Corp. 0.00%, FedEx Corp. 0.00%.

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

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Ringing in the New Year with a Bullish Case for Gold
January 9, 2017

Gold miners ended 2016 up 55%

You could say gold miners struck gold in 2016. The group, as measured by the NYSE Arca Gold Miners Index, finished the year up an amazing 55 percent, handily beating all other asset classes shown below.

Gold Miners Were the Best Performing Asset in 2016
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Miners were followed by commodities at 25 percent and silver at 15 percent. Gold finished up 8.6 percent, its first positive year since 2012, when it gained 7.1 percent. (Keep your eyes peeled for our forthcoming annual periodic table of commodity returns, one of our perennially popular pieces!)

I find it curious that many in the financial media continue to have a bias against gold, even though it generated better returns in 2016 than 10-year Treasuries and the U.S. dollar, which performed half as well. And when it was up as much as 28 percent in the summer, they still didn’t have anything positive to say, arguing it had gone up too much.

(Gold traders, on the other hand, have a much different opinion about the metal right now. A group of traders recently surveyed by Bloomberg revealed they are the most bullish on gold since the end of 2015, soon before it rallied in its best first half of the year since 1974. The traders cited geopolitical concerns, both in the U.S. and Europe, as well as stronger demand in 2017.)

President Obama: We are all now rooting for Trump's success.

And isn’t it interesting that the same media figures who are biased against gold are usually the same ones who seem to have only disparaging things to say about Brexit and President-elect Donald Trump? What they don’t realize is that if Brexit and Trump succeed, so too do the U.K. and the U.S. Are they hoping Brexit and Trump will fail so they can be proved right?

The smart people realize personal politics must be put aside. Despite supporting Hillary Clinton during the primaries, Warren Buffett now says he is behind the president-elect—because he knows that if the U.S. does well, he does well too. Despite campaigning hard against Trump, President Barack Obama says now we should all be rooting for Trump, regardless of our politics.

Negative Real Rates Should Drive Gold Prices

But back to gold. Coming up on January 28, we have the Chinese New Year, when demand for the yellow metal historically has risen, along with prices. This will be the year of the fire rooster, one of whose lucky colors is gold.

Throughout 2017, the precious metal should be supported by even deeper negative real rates, which could fall to their lowest level in two years as inflation outpaces nominal interest rate increases, according to UBS. In October, Federal Reserve Chair Janet Yellen suggested there might be some benefit in allowing inflation to exceed the central bank’s target rate of 2 percent before another hike is considered, which is good news for gold. Numerous times in the past I’ve shown that the yellow metal has tended to rise when real rates—what you get when you subtract inflation from the federal funds rate—fell into negative territory.

Gold Should Be Supported by Even Deeper Negative Real Rates
click to enlarge

“Federal Reserve interest rate hikes could weigh on gold prices in the near term,” according to UBS’s house view. “But as real rates fall more deeply into negative territory through the next year, we expect prices to rise toward $1,350 an ounce.”

Gold Extremely Undervalued

Since Election Day, domestic stocks have rallied 6.5 percent while gold has dropped as much as 7.6 percent. What this means is gold is looking extremely undervalued compared to the S&P 500, which should appeal to value investors.

Look at the gold-to-S&P 500 ratio below. The lower the ratio, the more undervalued the metal is compared to blue-chip stocks. In fact, gold is at its most undervalued in at least 10 years right now.

Gold Most Undervalued in at Least 10 Years
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Technically, gold still appears oversold, down almost one standard deviation now. As you can see, it’s moving back to its mean for the 60-day period, but there’s still time to capture potential growth.

Gold is Reverting back to the mean
click to enlarge

 

Commodities Show Resilience Despite Strengthening U.S. Dollar

Commodities were the second-best asset class last year because manufacturers and trade are showing improvement.

Global manufacturing expanded for the fourth straight month in December, reaching 52.7, its highest reading since February 2014. The individual U.S., Germany, Japan, and eurozone PMIs all hit their highest posts in at least a year, building on a strengthening uptrend that’s been in place since September. International trade volume expansion hit a 27-month high, according to Markit. And despite the “negative” consequence of Brexit, the U.K. Manufacturing PMI posted an amazing 56.1, up from 53.4 in November.

global manufacturing climbs to 34-month high in december 2016
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As for commodities, I’m pleased they’ve shown resilience in the face of a strengthening U.S. dollar. CLSA analyst Christopher Wood touched on this very topic in his recent edition of “GREED and fear,” writing that “the renewed dollar strength post Trump’s victory has not been accompanied by renewed commodity weakness. Rather the reverse has happened, with copper rallying, for example, on presumed hopes of increased demand triggered by Trump’s infrastructure policies.”

China’s commodities trading volume has also been impressive, maintaining its rank as the world’s heaviest for the seventh consecutive year.

Of course, price appreciation for commodities and natural resources is inflationary for consumer goods. Because of possibly rising gasoline prices, U.S. drivers are expected to spend about $52 billion more at the gas pump this year compared to 2016, according to GasBuddy’s 2017 Fuel Price Outlook.  Three-dollar gas will likely become a reality again in several large cities, including New York, Los Angeles, Chicago and Seattle.

Whatever you end up paying, make it a point this year to stay optimistic. Not only does being optimistic help you stay healthy, both mentally and physically, but it also allows you to see the opportunities that others might not.

 

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Commodity Index is a broad measure of the commodity futures market that emphasizes diversification and liquidity through a simple, straightforward, equal-weighted approach.The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 23 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.

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

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

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Hope for the New Year
January 3, 2017

Happy New Year 2017 from your friends at U.S. Global Investors

In the early decades of the 19th century, a new cultural and philosophical movement emerged that embodies all that makes America great. Led chiefly by Ralph Waldo Emerson and Henry David Thoreau, American transcendentalism praises the purity of the individual and stresses the importance of self-reliance.

“The great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude,” Emerson wrote.

I recognized these uniquely American values early on when I made the move from Canada to Texas. Individualism, non-linear thinking, a rebellious streak—without them, the U.S. might not have been the birthplace of world-changing innovations such as the locomotive, automobile, airplane and microprocessor.

Today we have these same values to thank for the creation of Facebook, Amazon, Google and other tech giants, without which we can hardly imagine our lives now.

They’ve also helped make many people fabulously wealthy. Of the 400 Americans on Forbes’ wealthiest list, about two thirds can be labeled as self-made, including Jan Koum, a Ukrainian immigrant raised on food stamps who became an overnight billionaire when he sold his instant messaging app, WhatsApp, to Facebook in 2014.

Other countries have little choice but to emulate America’s economic and cultural biosphere that allows such innovations to flourish. In an effort to become a leader in autonomous driving, Germany-based Volkswagen is currently in the process of recruiting as many as 1,000 experts in artificial intelligence, virtual reality and big data—many of whom hail from Silicon Valley and other American tech hubs. According to Volkswagen Chief Information Officer Dr. Martin Hoffman, research teams in Berlin and Munich “work the Silicon Valley way. We have brought the Valley to Volkswagen… with over 20 experts from San Francisco and Boulder, Colorado.”

Volkswagen is in the process of hiring 1,000 IT experts, many of them from Silicon Valley

As I’ve pointed out many times before, the reason Silicon Valley must be imported from the U.S.—instead of built in-house—is largely because the European Union’s crushing regulations and policies of envy stand in the way of ingenuity and entrepreneurship. Their best brains, therefore, end up in the U.S., the land of opportunity.

“If anybody believes Europeans will create a better business environment than Americans, they’re completely dreaming,” Mark Tluszvz, CEO of a Luxembourg-based venture capitalist firm, told the Financial Times in 2015. “We don’t have this in our culture."

It’s essential we don’t lose it in our culture, either. Many U.S. lawmakers and bureaucrats, however, seem intent on significantly weakening our ability to innovate and stay competitive. The more rules and layers of regulations that businesses must contend with, the more the U.S. will resemble Brussels.

We can’t allow that to happen.

“Any fool can make a rule, and every fool will mind it,” Thoreau sagely wrote nearly 200 years ago.

Although “fool” might not be the word I would use, it must be recognized that the U.S. became the innovative powerhouse it is today not because of rules but because of the values of individualism espoused by the transcendentalists all those years ago.

Trump Pushing Back on New Rules

I’m convinced this is one of the key reasons why U.S. voters elected Donald Trump, despite his rough edges. Trump has pledged to streamline or altogether eliminate many financial regulations that have stymied the creation of capital over the years, from Dodd-Frank Wall Street Reform to the Sarbanes-Oxley Act (SOX). We add can to this list the Department of Labor’s (DOL) new Fiduciary Rule.

Signed by President George W. Bush, SOX seeks to prevent massive corporate fraud such as we saw from Enron and WorldCom in the early 2000s. Although a noble mission, SOX has had the unintended consequence of barring small to medium public companies from getting ahead. It’s also prevented retail investors from getting in on the ground floor. Because the requisite internal control procedures are so costly and cumbersome—necessitating additional compliance and accounting positions, not to mention hundreds of hours spent on compliance-driven tasks—smaller firms are inevitably at a disadvantage.

As a result, many small to mid-sized companies are delaying going public, or avoiding it altogether, to escape the regulatory burden. Before SOX, there were an average 528 IPOs a year. Since it was enacted, that number has fallen to 135, a decline of nearly 75 percent.

Sarbanes-Oxley Act Has Contributed to Fewer IPOs
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As for Dodd-Frank, signed by President Barack Obama, market experts ranging from Warren Buffett to Alan Greenspan support its repeal, with Buffett saying the legislation “has taken away the Federal Reserve’s ability to act in a crisis.” Many banks have done away with free checking, giving lower-income customers fewer and fewer banking options.

Joining the chorus in calling for deregulation is billionaire CEO of Koch Industries, Charles Koch. Speaking to ABC’s “This Week” back in April, he called our political and economic system rigged “in favor of [multibillion-dollar] companies like ours,” and criticized “corporate welfare that benefits established companies and makes it difficult for somebody to get started.”

Charles Koch: The system is rigged in favor of big corporations.

Protecting the Little Guy?

These rulings, among others, have been detrimental to the formation of capital, especially for the little guy, whom they purport to be protecting. But it doesn’t exactly help or protect the little guy if his investment, banking and business options are dramatically limited. See this chart I shared with you back in July, which shows how retail investors have been locked out of participating in the best-performing asset classes.

Or consider the DOL’s new Fiduciary Rule. When it goes into effect in April 2017, it will inevitably limit the number of investment products available to retail investors. The ruling states that all retirement planners, advisors and broker-dealers must now “act in the best interests of clients” and charge only “reasonable” fees. This all sounds fine, but what’s naturally going to happen is financial professionals—in an effort to remain compliant with the rule—will recommend only the least expensive products, regardless of whether they’re a good fit. Many mutual funds—which might be better performing but have higher expenses than other investment vehicles—will fall off of brokerage firms’ platforms.

It would be like the DOL telling consumers they can only shop at Walmart and buy their coffee from Dunkin’ Donuts because anything more expensive—Target or Starbucks, say—is “riskier,” even though they’re of higher quality.

This type of anti-capitalist mindset is expected in the EU, not the U.S. Trump’s win certainly puts a target on the DOL’s Fiduciary Rule, which he has pledged to repeal, but like Sarbanes-Oxley and Dodd-Frank, we’ll have to wait and see.

And Yet, Business Owners Are Optimistic

Whether Trump can succeed at reversing some of these rules remains to be seen. If you remember, Obama failed to roll back—and, in fact, he extended—Bush-era legislation he strongly campaigned against, such as the Patriot Act and Bush tax cuts. The same might very well happen under Trump. Even Carl Icahn—whom Trump named as his special advisor on deregulation—has commented that Dodd-Frank is needed.

But Trump is a pragmatist, as Obama himself described him. “He is coming into this office with fewer set-hard-and-fast policy prescriptions than other presidents,” Obama said.

Indeed, Trump isn’t guided by ideology from the religious right, as Bush was, or the socialist left, as Obama was. Remember, he long identified himself as a Democrat and has supported Democratic candidates (including Hillary Clinton). So I think that, after 16 years of Bush and Obama, the pendulum is finally swinging back to the center. The question is: Can Trump make it work?

Many small to mid-sized business owners seem to believe he can. In a Business Journals survey taken the day after the election, 82 percent of businesses said they felt confident their prospects would improve over the next 12 months. That’s the highest reading in nearly a decade.

Small to Mid-Sized Business Owners Most Optimistic in Nearly a Decade
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How Markets Are Betting

As I’ve pointed out before, investors seem to be betting that, despite the uphill battle ahead, Trump can deliver on financial deregulation. Below, the chart shows sector performance before Trump’s election compared with performance since the election. As you can see, financials jumped seven places to become the top-performing sector. What’s more, health care turned positive, suggesting investors are confident Trump and the Republican-controlled Congress can dismantle Obamacare.

S&P 500 Sectors Before and After U.S. Election
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Small-cap stocks, as measured by the Russell 2000 Index, are also way up on bets that Trump’s protectionist policies will benefit domestics with limited exposure to foreign markets, more so than multinational blue-chip stocks.

Investors Bet on Domestic Small Caps Following Trump's Win
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It might be too soon to tell, but I expect these trends to carry on into 2017. 

Rising Rates Ahead in 2017

With economic conditions and expectations improving, especially since the election, it’s very likely the Federal Reserve will continue to tighten throughout 2017. Rate hikes will be limited, but 3 percent mortgage rates are probably a thing of the past.

Lenders are already slashing their refinance-volume expectations for 2017 and beyond, according to a mortgage lender sentiment survey conducted in December by Fannie Mae.

In addition, Kroll Bond Rating Agency (KBRA) believes we’ve likely seen peak lending: “While 2016 has been an excellent year for the U.S. mortgage industry, with almost $2 trillion in new loan originations, we believe that this year is also likely to be the peak in terms of lending volumes for years to come.”

Declining Mortgage Lending Volumes Ahead?
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As I’ve pointed out several times before, when interest rates are on the rise, short-term municipal bonds are the place to be, since they’re less sensitive to rate increases than longer-term bonds, whose maturities are further out.

I want to wish all of my loyal readers, investors and shareholders a most Happy New Year! As we begin a new American chapter in 2017, complete with a new series of challenges both big and small, remember to hold fast to H.O.P.E.—Have Only Positive Expectations!

 

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

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 9/30/2016.

Share “Hope for the New Year”

Net Asset Value
as of 03/29/2017

Global Resources Fund PSPFX $5.47 0.03 Gold and Precious Metals Fund USERX $7.63 0.04 World Precious Minerals Fund UNWPX $6.63 0.06 China Region Fund USCOX $8.49 -0.07 Emerging Europe Fund EUROX $6.18 0.01 All American Equity Fund GBTFX $24.45 -0.02 Holmes Macro Trends Fund MEGAX $18.99 0.01 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change