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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.

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

Gold and the ticking time bomb of debt

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

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

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

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

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

Get Ready for Higher Consumer Prices

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

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

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

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

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

Gold Has Done Well in Times of High Inflation

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

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

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

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

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

My Journey Through the Blockchain and Cryptocurrencies

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

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

ICOs have raised more than 1 billion for past three months
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Last year, $6.5 billion was raised through ICOs, according to Token Report, and it looks as if that amount will be exceeded in just the first few months of 2018. As I wrote back in October, more and more companies are opting to raise funds through ICOs instead of going public to bypass many of the restrictive rules and costs associated with getting listed on an exchange. And unlike with private equity, smaller retail investors can participate, though I must stress that this is a very speculative trade.

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

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

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

HIVE Involved in Minting Virgin Coins

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

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

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

 

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.

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

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2017.

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

Cobalt produced globally batteries power consumer electronics electronic vehicles

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

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

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

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

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

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

Cobalt Supply Shortage Could Boost Prices Even More

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

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

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

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

Apple to Buy Cobalt Directly from Miners

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

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

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

Glencore Announces $2.9 Billion in Dividends in 2018

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

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

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

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

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

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

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

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.

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 12/31/2017: Glencore PLC.

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5 Things Investors Should Know About China this New Year
February 20, 2018

Chinese New Year 2018 Earth dog

Last Friday marked the first day of the Chinese Lunar New Year, also known as the Spring Festival, China’s most important holiday. The fire rooster struts off-stage, clearing the way for the loyal earth dog. According to CLSA’s tongue-in-cheek Feng Shui Index, health care, consumer and paper products are favored to outperform early this year, followed by internet, utilities and tech leading into the summer.

Around this time I always pay close attention to transportation and industrials. “Chunyun,” which translates to “Spring Festival Transportation,” is a 40-day travel season that’s known as the world’s largest human migration. This year, as many as 390 million Chinese travelers—more people than live in the U.S. and Canada combined—are forecast to put roads, highways, passenger trains and airlines through their paces as they visit families, go on vacation and travel abroad. Airlines alone are expected to serve 65 million passengers, a 10 percent increase from last year.

Record number of Chinese New Year travelers to take to the skies in 2018
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As the size of China’s middle class continues to surge and incomes rise, this upward trend in flight demand and overall consumer spending appears sustainable, creating some very attractive investment opportunities.

Below are five additional things I think investors should know about China and the surrounding region in the New Year.

1. China is a veritable wealth factory.

China surpasses the US as the worlds largest crude oil importer 2017

Speaking of disposable income: Last year, the China region added more new billionaires than the U.S. for the first time ever. UBS and PricewaterhouseCoopers’ (PwC) annual report on billionaires found that the total number of Asian billionaires rose to 637, followed by the U.S. (563) and Europe (342). China alone minted 67 new billionaires in 2017 and is now home to nearly 320.

Combine this with a surging middle class—already the largest in the world—and the consequences on consumption could be huge.

As I’ve shared with you before, China is still in the early stages transitioning from a manufacturing to a consumption and services-based economy. According to the World Economic Forum (WEF), Chinese household income is projected to grow around 5 percent annually between now and 2027, elevating approximately 180 million people into the middle-income bracket. This will contribute to greater demand for everything from appliances to smartphones to automobiles to luxury goods.

Gold jewelry demand, for instance, grew 10.35 percent year-over-year in 2017. And it wasn’t just the super wealthy making purchases, the China Gold Association reported. Less affluent consumers also had an appetite, helping China maintain its ranking as the world’s largest buyer of gold for the fifth straight year.

Heavier spending is also showing up in Macau casinos, which saw revenues jump an incredible 36.4 percent year-over-year in January. This was the gaming territory’s 18th straight positive month and its largest such increase in nearly four years, suggesting Macau is well on its road to recovery after Chinese president Xi Jinping’s anticorruption crackdown.

Macau casinos could continue to regain momentum in 2018 after three year slump
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This month, Macau welcomed its newest casino resort, the $3.4 billion MGM Cotai, increasing MGM’s gaming table count in the territory nearly 30 percent to 552, according to Reuters.

2. But don’t count Chinese manufacturing out just yet.

Despite China’s de-emphasis on manufacturing as its main growth engine, a lot of value still remains. Chinese manufacturing began the year strong, expanding at a healthy clip with a purchasing manager’s index (PMI) reading of 51.3. This was down slightly from December but in-line with the previous January.

Chinas manufacturing sector still expanding at a strong clip
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Expectations are especially high for electric vehicle (EV) production and sales, as the Chinese government sweetened the incentive for families to trade in their gas-powered automobile for one that runs on a battery-powered electric motor. Those with a range greater than 400 kilometers (249 miles) on a single charge now come with a 50,000 yuan ($7,881) cashback incentive, up from 44,000 yuan ($6,937) last year, according to Bloomberg. The government also increased the number of kilometers a car must be able to travel on a single charge to qualify for the incentive, from 100 last year to 150.

“Sales volumes for new-energy vehicles exceeded 700,000 last year, and this number is further expected to increase to more than 2 million in 2020, and to more than 5 million in 2025,” Kevin Li, a senior analyst with Strategy Analytics, told CNBC early this week.

Several Hong Kong-listed carmakers and their suppliers had a fabulous 2017. Guangzhou ended the year up 97 percent while Geely gained more than 265 percent. The government’s policy change appears to be another tailwind.

Robotics and artificial intelligence (AI) is another space that China is expected to dominate. According to UBS, China overtook the U.S. and Japan in 2016 in installed robotics systems, and by 2020 it’s set to manufacture up to 40 percent of all robots globally. By 2030, its AI industry could be worth as much as $150 billion.

3. China has an insatiable appetite for energy, both clean and traditional.

As its generous incentive for EVs suggests, the Chinese government is serious about combating air pollution, especially in highly populated metro areas. As such, the country imported a record amount of natural gas, which burns more cleanly than coal. According to customs data, China consumed 68.57 million metric tons of the fossil fuel in 2017, up 27 percent from the previous year.

Chinas manufacturing sector still expanding at a strong clip
click to enlarge

That doesn’t mean the Asian giant is done entirely with other fossil fuels, though. The U.S. Energy Information Administration (EIA) reported last week that China imported more crude oil than the U.S. for the first time in 2017. It brought in an average 8.4 million barrels per day last year, compared to 7.9 million barrels per day for the U.S.

China surpasses the US as the worlds largest crude oil importer 2017
click to enlarge

As I shared with you last week, China is now the largest consumer of U.S. crude oil other than Canada, according to Reuters.

4. Nearly 40 percent of the world’s unicorns call China home.

As you probably know, a “unicorn” is a company valued at more than $1 billion that hasn’t been listed yet. Think Uber, Dropbox, Airbnb and more.

A September report by Deloitte and China Venture found that China is home to 98 of the world’s 252 unicorns, accounting for 38.9 percent of the total number. Only the U.S. has more at 106 unicorns, or 42.1 percent.

Like U.S. unicorns, the ones in China come mostly from information technology, including online payment services and e-commerce.

Among the largest is smartphone-maker Xiaomi, which is valued at a whopping $100 billion. It, and several others, are highly anticipated to go public this year, with a showdown brewing between Hong Kong and New York.

According to CNBC, close to 140 Chinese companies raised $32.2 billion in initial public offerings (IPOs) in 2017, a figure that could be exceeded this year if Xiaomi, Uber-competitor Didi Chuxing, content platform ByteDance and more decide to list.

5. China hosts the most and biggest bitcoin mining facilities. But for how long?

Another Chinese unicorn that could be eyeing a possible IPO soon is Bitmain, the world’s largest manufacturer of bitcoin mining rigs. It also operates Antpool, a cryptocurrency “mining pool” that generates digital coins using the pooled resources of a number of different miners. The Beijing-based Bitmain, whose valuation is reportedly “in the billions,” claims to have built around 70 percent of all mining rigs in operation around the world today.

Many Chinese bitcoin miners are looking at Canada rich in energy and cool in climate as a potential new site for their operations

It’s little wonder, then, that three-quarters of bitcoins globally are mined in China, according to a 2017 University of Cambridge study. Mining concentration is especially high in the southwestern province of Sichuan, where miners have managed to strike deals with hydroelectric power companies.

“China is the country that hosts most mining facilities and uses the highest power consumption of all countries for cryptocurrency mining,” the study’s authors write.

That could soon change, however. The Chinese government has already clamped down on bitcoin exchanges and banned initial coin offerings (ICOs), and now it seeks to shutter the mines themselves. Last month, a governmental taskforce on internet finance asked local authorities to assist in shutting down operations that produce cryptocurrencies.

At the moment, there doesn’t seem to be a deadline, but miners are already scouting the world for new mining locations. Bitmain, which also has a presence in Switzerland, is looking at potential sites in energy-rich Quebec, according to Reuters, and other miners could be following suit.

I want to wish all readers a happy Lunar New Year! May the year of the earth dog bring you joy, health and prosperity! Check out our infographic, “5 Things to Know About the Chinese New Year.”

 

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 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 12/31/2017: Geely Automobile Holdings Ltd., Guangzhou Automobile Group Co.

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Is American Energy on the Verge of a New Golden Age?
February 13, 2018

Oil rig

The U.S. has been a net importer of energy since 1953, but that’s set to change early next decade, according to the Energy Information Administration (EIA). In its highly anticipated Annual Energy Outlook 2018, the agency forecasts that the U.S. will become a net exporter of energy by as early as 2022, thanks in large part to the boom in shale oil and liquefied natural gas (LNG) production as well as the relaxation of export restrictions. A “golden age of American energy dominance,” as President Donald Trump described it back in June, could be upon us sooner than anticipated, putting the U.S. on a path to dethrone Saudi Arabia and Russia as the world’s top oil powerhouse.

US forecast to become a net exporter of energy by 2022
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The 40-year-old ban restricting U.S. oil exports was lifted in December 2015, and between then and October 2017, exports skyrocketed nearly 300 percent.

A US oil export boom 40 years in the making
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This has galvanized shale producers into doubling their efforts to meet growing demand. Earlier in the month, I told you the U.S. produced more than 10 million barrels of oil per day in November for the first time since 1970. And in the week ended February 9, the number of active North American oil rigs rose sharply from 765 to 791, the most in nearly three years.

North America Expected to Drive Global Growth

The EIA’s forecast is in line with those of independent analysts, who see the U.S., along with Canada, dominating global growth in well demand.

“North American shale activity is the primary mechanism driving growth globally,” writes energy consulting firm Rystad Energy in its January global well market outlook. The group adds that the number of wells “completed in North America increased 40 percent in 2017, and we expect 11 percent average annual growth toward 2020.”

North American shale activity expected to drive global well demand
click to enlarge

Sign of the Times: U.S. Import Terminal Preparing for First-Ever Exports

From Texas ports, the U.S. now exports crude to as many as 30 countries, seizing valuable market share from members of the Organization of Petroleum Exporting Countries (OPEC). Since November, China has become the largest consumer of U.S. crude other than Canada, according to Reuters. (Last year, in fact, China surpassed the U.S. to become the world’s largest overall importer of oil.) And in a surprising move that shows how the rise of American shale is reshaping the global market, the United Arab Emirates, a significant oil producer in its own right, purchased 700,000 barrels of oil from the U.S. in December, Bloomberg reports.

For the first time ever the Louisiana offshore oil port LOOP will export US crude

Now, for the first time ever, exports are set to be conducted from America’s only deepwater supertanker offloading terminal, the Louisiana Offshore Oil Port (LOOP). According to its website, LOOP has received more than 12 billion barrels of oil from foreign and domestic sources over the past three decades, but as an imports-only facility, it’s never been used to load an export cargo—until now.

If the trial run is successful, reports Bloomberg, “it will be a step change in America’s capacity to export the burgeoning production that’s roiled global oil markets.”

Oil Majors Reward Investors

All the extra oil supply might have some shareholders worried about lower prices and sinking profits, but for many major explorers and producers, profits have returned to the days when oil hovered above $100 a barrel. That’s the result, according to Bloomberg, “of CEOs’ focus on squeezing more from each dollar by stalling projects, renegotiating contracts and reducing the workforce.”

Big oil is generating as much profit as 60 dollars oil as it was at 100 dollars
click to enlarge

The opportunity for shareholders here lies in these companies maintaining or increasing their dividend payout while pledging share buybacks to offset shareholder dilution that occurred during the slump.

“The bosses of the world’s biggest oil companies are prioritizing investors over investments,” Bloomberg writes, “channeling the extra cash that comes from $60 crude into share buybacks and higher dividends.”

Curious about how you can participate in the new “golden age” of American energy? Click 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.

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 12/31/2017: Chevron Corp., Royal Dutch Shell PLC, Exxon Mobil Corp.

 

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An Olympian's Guide to the Market Selloff: Seeking Rewards In High-Risk Situations
February 12, 2018

Frank Holmes Robert Friedland

Today I’d like to share a few words about the Olympics, but first, two words: Don’t panic.

The stock selloffs last Monday and Thursday were the two biggest daily point drops in the history of the Dow Jones Industrial Average, but in terms of percentage point losses, they don’t even come close to cracking the top 10 worst days in the past 10 years alone.

After a year of record closing highs and little to no volatility, it was expected that the stock market would need to blow off some steam. Last Monday, the CBOE Volatility Index, or VIX, surged nearly 116 percent, its biggest one-day increase since at least 2000.

volatility returns to the markets
click to enlarge

As I explained last week, the selloff appears to have been triggered by a number of things, including the positive wage growth report. This stoked fears of higher inflation, which in turn raised the likelihood that the Federal Reserve, now under control of newcomer Jerome Powell, will raise borrowing costs more aggressively than expected to prevent the economy from overheating.

Also contributing to the uncertainty was news from the Treasury Department that the U.S. government plans to borrow nearly $1 trillion this year, compared to almost half that last year. In the first quarter alone, the Donald Trump administration will issue $66 billion in long-term debt, the first such boost in borrowing since 2009, as the U.S. Treasury seeks to cover budget deficits brought on by higher entitlement spending, not to mention the recently passed tax overhaul.

On Friday, the S&P 500 Index briefly plunged below its 200-day moving average before rebounding in volatile trading.  

stocks plunge below their 200-day moving average
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With stocks down more than 8 percent from its closing high on January 26, we're closing to entering correction territory. Historically, it’s taken four months for stocks to recover from a correction, according to Goldman Sachs analysis. By comparison, a bear market, which is generally defined as more than a 20 percent drop, can take up to two years.

I’m not saying a bear market is imminent—only that it might be time to reevaluate your tolerance for risk and, if appropriate, act accordingly. It’s times like these that highlight how important it is to be diversified in a number of asset classes such as gold, commodities, municipal bonds and international stocks.

Diversity Is Key in Volatile Times

I remain bullish on the U.S. market, but there will always be risk—even in a booming economy. This is one of the biggest reasons why I recommend a 10 percent weighting in gold and gold stocks, with additional diversification in commodities, international stocks and other asset classes.

But to get the greatest benefits, it’s important to rebalance at least once a year, based on your risk tolerance.

Last week, gold was under pressure from surging Treasury yields. Since its 52-week low in September, the 10-year yield has increased almost 40 percent. Not only is it at a four-year high but it’s also above its five-year average of 2.1 percent.

north american shale activity expected to drive global well demand
click to enlarge

Keep in mind that fundamentals remain robust. The U.S. economy is humming along. Unemployment is at a 17-year low, and wage growth is finally bouncing back after the financial crisis. The global manufacturing sector began 2018 on strong footing, with the purchasing manager’s index (PMI) registering 54.4 in January.

Like an Olympic cross-country skier, take the long-term approach and keep your eyes on the prize.

A Year for Olympic Record-Breaking

Before it even began, this year’s Winter Olympics was breaking records. A historic number of athletes, around 3,000, qualified to compete for an unprecedented 102 medals. For the first time ever, an African country—Nigeria—will be represented in the bobsled category, making this also the country’s first visit to the Winter Games. And not only is this South Korea’s first go-round hosting the Winter Olympics, but PyeongChang could be among the coldest host cities ever, with wind chills in some cases dropping temperatures to an arctic negative 25 degrees Celsius, or negative 13 degrees Fahrenheit.

pyeongchang winter olympics 2018

One record that won’t be broken, though, is the cost to host the Games. South Korea spent an estimated $13 billion to bring the rugged, mountainous ski destination up to Olympic standards, building not just stadiums and arenas but also rail, roads, energy infrastructure and more. Amazingly, newly-constructed wind farms in Gangwon Province will generate more than enough energy to power the 16-day event, according to Hyeona Kim, a project manager with the PyeongChang Organizing Committee for the 2018 Olympic Games (POCOG).

Thirteen billion dollars sounds like a lot, but it pales in comparison to the record-breaking $50-55 billion Russia spent to host the Sochi Olympics in 2014.

Sochi Gets Soaked in Debt

Sochi is the most expensive Olympics ever—Winter or Summer. But because Russia’s original price bid was $16 billion, it’s also among the most expensive in terms of cost overruns, according to a 2016 report by the University of Oxford. Looking just at Winter Games, only Lake Placid in 1980 has a bigger cost increase. (The 1976 Summer Olympics in Montreal is biggest of all at 720 percent over budget.)

five most expensive winter olympics by cost overruns
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To put Sochi’s overrun in perspective, the average cost per event is now estimated at $223 million, or a mind-boggling $8 million per athlete.

Contributing to the budget bust was Russia’s need to boost the region’s electricity capacity by as much as 800 percent, leading to the construction of 49 new energy projects. As one deputy minister put it, the undertaking was the country’s largest since Stalin’s time.

Of course, this all raises the question of what economic benefits, if any, hosting the Olympics brings to a city. It took Montreal 30 years to pay off its debt. The 2004 Summer Games in Athens—the birthplace of the Olympics—is now partially blamed for triggering the Greek debt crisis. And in Rio de Janeiro, Brazil, host of the 2016 Summer Games, a number of multimillion-dollar stadiums and arenas sit unused and have become eyesores. (PyeongChang, by contrast, plans to raze the stadium it built for opening and closing ceremonies after the Games are complete.)

Like any other type of investing, there’s no reward without some risk—and, as last week has proven, it’s all about how you manage it.

A Case Study in Good Financial Planning

One city that got it right was Los Angeles.

For many of you, California might not immediately come to mind as a shining example of good fiscal management. But when the city was awarded the Olympics for 1984, the reins were turned over to Major League Baseball (MLB) commissioner Peter Ueberroth, who had previously founded and run a successful travel company. Under his leadership, the 1984 Summer Olympics became the first privately financed Games. A committee was set up that operated more like a corporation. Financing came from private fundraising, corporate sponsorships, TV deals and more.

It certainly didn’t hurt that L.A. was already a highly developed metropolitan area with world-class infrastructure, but Ueberroth urged fiscal restraint and rationality. The results were better than anyone could have anticipated. Remember Sochi’s $8 million price tag per athlete? L.A. ended up spending only around $100,000 per competitor (in 2015 dollars), among the best records ever in Olympic history.

What’s more, the L.A. Games turned a tidy profit, netting the city more than $225 million, all of which was plowed back into the U.S. Olympic Committee. As recently as 2016, those profits were still helping athletes gear up for Olympic glory, according to Ueberroth himself.  

In 1984, Ueberroth was selected as TIME’s Person of the Year for developing “a new model for the Games” and proving that “in a free society, anything is possible.”

Last week I had the chance to speak with Peter Smyrniotis of Market One Media Group about cryptocurrencies, blockchain technology and initial coin offerings (ICOs). Watch the interview by clicking here!

 

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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