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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.

Russia Is Defying Expectations
June 25, 2018

Russian president Vladimir Putin holding the FIFA world cup trophy at a pre tournament ceremony in Moscover in September 2017

 

Before being defeated today by Uruguay at the 2018 FIFA World Cup, Russia surprised experts and fans alike. Expectations were low at best. Because of recent setbacks, including a disastrous performance at the 2016 UEFA European Championship and injuries sustained by key players, the federation ranked a dismal 66th place among Fédération Internationale de Football Association teams—its lowest position ever. The only reason it didn’t have to qualify to compete was because Russia is the host nation. (This is the first time in its 88-year history, by the way, that the World Cup has been held in Eastern Europe.)

And yet Russia has defied predictions that the federation would be eliminated right out of the gate.

It’s managed to advance to the knockout stage, but that’s likely as far as it will get when it goes up against either Spain or Portugal on July 1. As for which team might win the Cup, sophisticated predictive models using portfolio theory and the historical performance of players are pointing to France beating Spain in the final.

Russian Airports Could Be Biggest Beneficiaries of Hosting World Cup

This is the second time in the past five years that Russia has hosted a major international sports tournament, and questions have surfaced about what economic benefits, if any, doing so affords.

As I shared with you back in February, the Eastern European country spent as much as $50 billion, a record-breaking sum, to host the 2014 Winter Olympics in Sochi. It seems insurmountable, but Fitch Ratings concluded that the debt was “manageable,” citing the reduction of interest rates to 0.5 percent and noting that the cost is less than 2.5 percent of Russia’s gross domestic product (GDP).

There’s also evidence that the investment had been well made. Four years later, Sochi is still full of tourists, and locals even have a nickname for the old Olympic Park, now a resort town: “Sochifornia.”

Hosting the World Cup has set Russia back an estimated $14 billion—again, a record amount for the competition. And like the Olympics, the Cup could produce some modest net economic benefits—in the short-term, at least—according to experts.

Back in April, tournament organizers predicted that, as a result of increased tourism and large-scale spending on infrastructure, the competition would add nearly $31 billion to Russia’s economy in the 10 years between 2013 and 2023. (FIFA selected Russia as the host nation in 2010.)

Russian airports such as Moscow Domodedovo Airport are among the biggest long-term beneficiaries of World Cup-related capital spending.
"Moscou" by OliBac Licensed under a Creative Commons Attribution 2.0 Generic (CC-BY2.0). https://flic.kr/p/ovkQad

Analysts with Moody’s Investors Service were slightly less upbeat, writing that they see “very limited economic impact at the national level.” Among the beneficiaries are food retailers, hotels, telecommunications firms and transportation, as “better public infrastructure will likely generate additional tax revenue and reduce capital spending needs for the hosting regions in the coming years.” But the greatest long-term beneficiary, Moody’s says, are Moscow-based international airports, since “upgraded facilities will support higher passenger flow, even after the event.”

Russia’s Recovery Gathering Pace

Besides its soccer prowess, Russia is defying expectations in other ways—and equity investors should be taking notice.

Having emerged last year from a two-year recession that was triggered by the collapse in oil prices and imposition of sanctions following its annexation of Crimea, the country is now in full-on recovery mode. In a note to investors last week, Capital Economics senior emerging markets economist William Jackson says that GDP growth in May picked up to more than 2 percent year-over-year, up from 1.3 percent in the first quarter. Most of the changes, according to Jackson, came in manufacturing, which he estimates to be growing by more than 5 percent year-over-year, compared with only 1 percent previously.

“This all supports the point we’ve been making for some time,” he writes, “that Russia’s recovery was likely to resume and gather pace this year.”

Once almost entirely reliant on oil exports, the government of the world’s leading oil producer has lowered the structure of exports from 70 percent energy in 2013 to 59 percent last year, according to the World Bank. Today, the budget is back in surplus, and government debt stands at a remarkable 33 percent of GDP, the lowest among G20 nations.

Key inflation is currently running at a record low of 2.4 percent year-over-year, well below the Central Bank of Russia’s (CBR) target of 4 percent. Food inflation, in particular, is near zero percent.

russian inflation is at a record low level below central banks target
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Unemployment continues to decline. In May it fell to 4.7 percent, a record low since the collapse of the Soviet Union in 1991.

unemployment in Russia fell to a record low in May
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Because of low inflation and a near-full employment jobs market, real wages are expanding healthily across all sectors. This is helping to drive stronger private consumption and investment. In May, retail sales grew 2.4 percent compared to the same month last year.

real wages in Russia are growing across all sectors
click to enlarge

Government Policy Supportive of Future Growth

The Russian government is currently enacting or considering policy that should help sustain the economy’s recovery. For one, it recently moved to raise the retirement age to reduce the cost to the state budget on an aging population, the Financial Times reports. (The median age in Russia is nearly 40, compared to around 30 for the entire world.) The pension age for men will increase from 60 years to 65 years in 2028, while for women it will increase from 55 years to 63 years in 2034.

The reform could help the government save an estimated $27.3 billion a year, according to a Russian think tank.

The government is also reportedly working on a plan to invest more in infrastructure and reduce “unnecessary regulation that is holding back private investment.” That’s according to Morgan Stanley’s Clemens Grafe, who adds that plans for “national projects” will be drawn up by October “that should help Russia to become one of the five largest economies in the world.”

Time to Consider Investing in Moscow?

Some might consider that fanciful thinking, but it doesn’t take away from the fact that Russia is an attractive place to invest right now, especially compared to the U.S. market.

Besides an economy in recovery, consider the following: Whereas the S&P 500 Index is up a little more than 13 percent for the 12-month period, the MOEX Russia Index has seen gains closer to 22 percent. That comes with an appealing 6.46 percent dividend yield, compared to 1.94 percent for U.S. stocks.

The price is right too. Russia trades at an inexpensive 6.39 times earnings, the U.S. at 21.08 times earnings, according to Bloomberg data.

Interested in learning more about emerging Europe? Watch this brief video featuring U.S. Global research analyst Joanna Sawicka as she describes her favorite three countries in this fast-growing region.

 

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.

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. The MOEX Russia Index  is the main ruble-denominated benchmark of the Russian stock market.

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.

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Basic Materials Seem to Be on Sound Footing with Home Construction Boom
June 21, 2018

U.S. Housing starts roared to an 11-year high in May

Thirty-year mortgage rates might have ticked up in the past 12 months, but for now that doesn’t seem to be weighing on new home demand.  According to the Commerce Department, housing starts climbed to an 11-year high of 1.35 million units in May, a clear sign that the market has continued to improve following the subprime mortgage crisis a decade ago. This is constructive—pun fully intended—not only for the economy but also consumption of building materials, energy and resources.

U.S. Housing starts roared to an 11-year high in May
click to enlarge

According to home-construction services firm Happho, for every 1,000 square feet of new housing, nearly 8,820 pounds of steel are required, as well as 400 bags of cement, 1,800 cubic feet of sand and 1,350 cubic feet of gravel and other aggregate. This doesn’t begin to touch on finishers such as brick, paint and tiles, or fittings such as windows, doors, plumbing and electrical.

I believe metal miners and manufacturers of basic materials could very well be beneficiaries of the construction surge. For the 12-month period through June 20, a basket of industrial metals such as aluminum, copper and nickel are already up 21 percent, with technical support on a clear uptrend.

indusrial metals testing support
click to enlarge

Is the Rental Housing Explosion Over?

One sign that the growth in homebuilding might be sustainable is that the rate at which Americans are renting instead of buying appears to be slowing. For the first time since 2004, the number of renter households actually declined last year, according to a report by the Joint Center for Housing Studies of Harvard University.

This could be the result of an improved economy and the unemployment rate being at historically low levels. After nearly a decade, consumers may finally feel financially secure enough to get out of their apartments and make a down payment on a new home.

after a decade of expansion the pace of growth in renter households has slowed
click to enlarge

Likewise, we see the homeownership rate in the U.S. beginning to recover after hitting a floor in the second quarter of 2016. From its peak in October 2004, the rate fell to a 50-year low of only 62.9 percent. It might be too early to tell if this marks a significant rebound, but the upturn suggests at least that the homeownership rate has stabilized.

homeownership rate in U.S. finally beginning to recover
click to enlarge

Lumber Prices Appear to Have Peaked

A strong headwind to further demand growth right now is higher material prices. A forest fire in Canada last summer severely disrupted the lumber supply chain, while the Trump administration’s tariffs on imports of Canadian softwood lumber, aluminum and steel have somewhat softened homebuilders’ confidence.

But lumber prices appear to have peaked and are currently in decline. After hitting $651 per 1,000 board feet in mid-May, prices have dropped close to 20 percent and have posted losses in seven of the last eight trading days through June 19.

Curious to know what factors we use to select companies in our Global Resources Fund (PSPFX)? Watch this brief video featuring Frank Holmes, CEO and chief investment officer, and Sam Pelaez, chief investment officer at Galileo Global Equity Advisors, as they discuss the fund and its investment objectives.

 

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.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. 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 Bloomberg Industrial Metals Subindex is composed of futures contracts on aluminum, copper, nickel and zinc. It reflects the return of underlying commodity futures price movements only. You can’t invest directly in an index.

U.S. Global Investors owns a 65% interest in Galileo Global Equity Advisors. The mutual fund mentioned in this piece is open to U.S. investors only.

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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Take the Long-Term View in a Late-Cycle Market
June 18, 2018

rebalance, stick to a plan and remember: get invested and stay invested. J.P. Morgan's Samantha Azzarello

The U.S. inflation story made further inroads this month, with year-over-year price growth for consumers and producers alike hitting multiyear highs. U.S. consumer prices expanded at their strongest pace in more than six years, climbing to an annual change of 2.8 percent in May. Prices for final demand goods, meanwhile, grew 3.1 percent, their strongest annual surge since December 2011.

annual consumer prices advance the most in six years
click to enlarge

As you might expect, energy was the greatest contributor to higher prices in May, with fuel oil jumping more than 25 percent from the same month a year ago. The current average price for a gallon of regular gas nationwide was just under $3.00, compared to only $2.33 in June 2017, according to the American Automobile Association (AAA).

Inflation is set to get an even bigger jolt now that President Donald Trump has formally approved 25 percent tariffs on as much as $50 billion of Chinese goods. China has already announced retaliatory action. While I agree some targeted tariffs are welcome to address intellectual property theft, tariffs at the wholesale level are essentially regulations that threaten to undermine all the work Trump has done to supercharge the U.S. economy. They act as headwinds to further growth, which in turn makes gold look attractive as a safe haven investment.

Blaming OPEC

Let’s return to energy for a moment. Hot off the success of his historic summit with North Korea leader Kim Jong-un, Trump took a stab at foreign oil producers last week, tweeting: “Oil prices are too high, OPEC is at it again. Not good!”

The president isn’t wrong, but I believe he may be overselling the Organization of Petroleum Exporting Countries’ influence here. In May, the 14-member cartel added an extra 35,000 barrels per day (bpd) in output compared to the previous month, to reach a total of 31.8 million bpd. This is down from the average 32.6 million and 32.4 million bpd OPEC collectively produced in 2016 and 2017.

Venezuela’s output deteriorated once again, falling more than 42 percent in May to 1.4 million bpd, which is less than half of what it produced 20 years ago.

The beleaguered South American country didn’t have the biggest monthly decline among OPEC members, however—that title belonged to Nigeria, which saw its April-to-May production tumble 53.5 percent to 1.7 million bpd. Analysts predict output could fall further to 1.4 million bpd by July—a level not seen since 1988—as the country’s Nembe Creek Trunk Line (NCTL) has had to be closed recently to address product theft along its route.

OPEC will meet later this month and is widely expected to loosen production curbs as global demand strengthens. In the meantime, the U.S. continues to pump even more oil on a monthly basis, and by 2019 it could be producing more than 11 million bpd for the first time ever. This would make it the world’s top oil producer, above Russia. 

Gold Glitters on Inflation Fears and U.S. Budget Imbalance

gold surged to a four-week high after the fed raised rates a second time this year and signaled two more hikes in 2018

The inflation news helped support the price of gold, which traded as high as $1,309 an ounce last Thursday, its best intraday showing in four weeks.

The price jump came a day after the Federal Reserve lifted interest rates another 0.25 percent, the second time it has done so this year. Although rising rates have historically made the precious metal look less competitive, since it doesn’t offer a yield, gold markets could be forecasting slower economic growth as a result of higher borrowing costs, not to mention costlier servicing of corporate and government debt.

On that note, the Treasury Department announced last week that in the first eight months of the current fiscal year—October through May—the U.S. government deficit widened to a whopping $532 billion, or 23 percent more than the same eight-year period a year ago. That’s already more than the total deficits in fiscal years 2014 and 2015. Because of higher spending and lower revenues, it’s estimated that the deficit by the end of the fiscal year will balloon to $833 billion, which would be the greatest amount since 2012.

I believe this makes the investment case for gold and gold equities even more appealing as a store of value. In the chart below, notice how the price of gold has responded to government spending. I inverted the bars, representing surplus and deficit, to make the relationship more clear. In the years following the Clinton surplus of the late 90s, the difference between expenditure and revenue surged to new record amounts on the back of military spending in the Middle East and the multibillion-dollar bailouts of financial firms during the subprime mortgage crisis. Consequentially, the price of gold exploded.     

relationship between price of gold and u.s. government deficit spending
click to enlarge

How Close Are We to the End of the Business Cycle?

But back to the Fed. Besides lifting rates, the central bank has also signaled that we can expect two more hikes in 2018, suggesting it sees less and less need to accommodate a booming U.S. economy. Since the start of this particular rate hike cycle two and a half years ago, we haven’t yet seen four increases in a single calendar year.

This raises the question of how close we are to the end of the business cycle.

Rising rates, among other indicators, have often preceded the end of economic expansions and equity bull markets. Among other telltale signs: a flattening yield curve, record corporate and household debt, an overheated jobs market and increased mergers and acquisition (M&A) activity. So far this year, the value of global M&As has already reached $2 trillion, a new all-time high. The last two periods when M&As reached similar levels were in 2007 ($1.8 trillion) and in 2000 ($1.5 trillion), according to Reuters. Careful readers will note that those two years came immediately before the financial crisis and tech bubble.

Now, the world’s largest hedge fund, Bridgewater Associates, has reportedly turned bearish on “almost all financial assets,” according to one of its most recent notes to investors.

In the firm’s Daily Observations, co-CIO Greg Jensen writes that “2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed’s tightening will be peaking.”

Don’t Miss the Opportunities

Be that as it may, calling the end of the cycle would be a fool’s errand and could result in missed opportunities, as J.P. Morgan’s Samantha Azzarello points out in a recent note to investors. Late-cycle returns can still be quite substantial, she says. Take a look at the chart below, which highlights returns 24 months, 12 months, six months and three months leading up to the past eight market peaks. Obviously returns were higher in the longer-term periods, but even the three-month periods delivered some attractive returns—returns that would be left on the table if skittish investors exited now. According to Azzarello, it’s important to “rebalance, stick to a plan and remember: get invested and stay invested.”

S&P 500 Index Returns Leading up to Market Peaks
click to enlarge

As further proof that many investors still see plenty of fuel in the tank, the June survey of fund managers conducted by Bank of America Merrill Lynch (BAML) found that equity investors are overweight U.S. stocks for the first time in 15 months. Commodity allocations are at their highest in eight years. And two-thirds of managers say the U.S. is the best region in the world right now for corporate profits, which is at a 17-year high.

That’s not to say there aren’t risks, however. Forty-two percent of survey participants said they believed corporations were overleveraged. That’s well above the peak of 32 percent from soon before the start of the financial crisis. Fund managers cited “trade war” as the biggest “tail risk” for markets at present.

This is largely why we find domestic-focused small to mid-cap stocks so attractive right now. These firms are well positioned to take advantage of Trump’s high-growth “America first” policies, yet because they don’t have as much exposure to foreign markets, they bypass many of the trade war pitfalls large multinationals must face. Since Election Day 2016, the small-cap Russell 2000 Index has outperformed the large-cap S&P 500 Index by more than 8.5 percent.

Rethinking Market Cap-Weighting

On a final note, I want to draw attention to a change we’ve observed in S&P 500 returns—specifically, the difference in performance between an equal-weighted basket of stocks and one that’s market cap-weighted. For the longer-term period, equal-weighting outperformed. But more recently, market cap-weighting has pulled ahead. This is the case for the one-year, three-year and five-year periods.

market cap-weighted has beaten equal-weighted more recently
click to enlarge

So why is this? Simply put, the phenomenally large FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have made the S&P 500 top heavy. Today, these five stocks represent a highly concentrated 12 percent of the S&P 500, nearly double from their share just five years ago. Apple alone represents 4 percent of the large-cap index.

Ten years ago, the FAANG stocks—excluding Facebook, which wasn’t public yet—had a combined market cap of $390 billion, according to FactSet data. In 2018, they’re valued at more than eight and half times that, or right around $3.32 trillion—a mind-boggling sum.

Market cap-weighted also means more money is disproportionately being reallocated to top winners such as Apple and Amazon, and so it becomes a self-fulling prophecy. This leaves you with too much exposure to companies that would be hardest hit in the event of a market downturn, and too little exposure to names and sectors that might rotate to the top in the next cycle.

 

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

The S&P 500 Index is a market capitalization weighted index of the 500 largest U.S. publicly traded companies by market value. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.

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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Top 10 Gold Producing Countries
June 12, 2018

top 10 gold producing countries australia gold mine pit

Gold is one of the rarest elements in the world, making up roughly 0.003 parts per million of the earth’s crust. But how much gold is the world digging up each year and what countries produce the most?

In 2017, global gold mine production was a reported 3,247 tonnes. This figure is down 5 tonnes from the previous year and marks the first annual drop since 2008, according to the GFMS Gold Survey 2018. The driving forces behind the drop in output were environmental concerns, crackdowns on illegal mining operations and rising costs.

This raises the question I’ve explored recently – have we reached peak gold? The idea is that all the easy gold has already been discovered and explorers have to dig deeper to find economically viable deposits. For example, South Africa was once the top gold-producing country by far, digging up over 1,000 tonnes in 1970, but annual output has fallen steadily since. On the other hand, several nations have emerged in the last few years as growing gold producers. China and Russia have both seen production in an overall upward trend.

global gold production fell slightly in 2017 world gold council data
click to enlarge

As seen in the chart below, China takes the number one spot of global gold producers by a wide margin, extracting 131 tonnes more than second place Australia. The top 10 rankings remained unchanged from 2016 to 2017, with the exception of Canada and Indonesia switching between fifth and seventh place, respectively. Of the top producers, Russia posted the largest annual gain, boosting output by 17 tonnes.

top 10 gold producing countries in 2017
click to enlarge

Below are more details on the top 10 countries with the largest gold production in 2017, beginning with the top producer and top consumer of bullion, China.

1. China – 426 tonnes

For many years China has been the top producing nation, accounting for 13 percent of global mine production. Production fell by 6 percent last year due to escalated efforts by the government to fight pollution and raise environmental awareness. However, production is expected to pick back up this year due to several mine upgrades at existing projects.

2. Australia – 295.1 tonnes

Although gold production increased 5 tonnes from the previous year in Australia, MinEx Consulting released a report detailing an expected drop between 2017 and 2057 unless the amount spent on exploration is doubled. The minerals industry produces over half of Australia’s total exports and generates about 8 percent of GDP.

top 10 gold producing countries australia gold mine pit

3. Russia – 270.7 tonnes

A massive 83 percent of European gold comes from Russia, which has been increasing its production every year since 2010. The nation increased output by 17 tonnes last year, even as the ruble appreciated 13 percent, which hurts producers with weaker revenue growth relative to the cost of production. Who is the largest buyer of Russian gold? The Russian government, of course, which purchases around two-thirds of all gold produced locally.

4. United States – 230.0 tonnes

Gold output rose by 8 tonnes in the U.S. last year, marking the fourth consecutive year of annual increases. Production was supported by project ramp-ups at the Long Canyon project in Nevada and the Haile project in South Carolina. Around 78 percent of American gold comes from Nevada alone.

5. Canada – 175.8 tonnes

Starbucks CEO Schultz debt is the greatest economic threat to the United States

Canada inched up two spots on the list in 2017, producing 10 more tonnes of gold than the previous year. Toronto-based Seabridge Gold stumbled upon a significant goldfield in northern British Colombia after a glacier retreated and is estimated to contain a whopping 780 metrics tonnes. This could be a source of increased output in the coming years.

 

 

6. Peru – 162.3 tonnes

Gold output fell for the second consecutive year in Peru, by 6 tonnes, largely due to crackdowns on illegal mining operations in the La Pampa region. Mining is a significant portion of Peru’s economy and the nation is also number three in the world for copper production.

7. Indonesia – 154.3 tonnes

Production in the archipelago nation fell by 11.7 percent, dropping to number seven on the list of top global producers. The Indonesian government introduced a tax amnesty program that hoped to repatriate money from overseas, which led to production falling at new main sites as traders were reluctant to remain in the mining industry.

8. South Africa – 139.9 tonnes

Once the top gold-producer in the world by a wide margin, South Africa’s gold mines have been slowing every year since 2008, with the exception of 2013 when production rose by a few tonnes. The nation is still home to the world’s deepest gold mine, the Mponeng mine, extending 2.5 miles underground.

9. Mexico – 130.5 tonnes

Although production fell three tonnes from 2016 to 2017, Mexico remains a competitive gold source. Output has risen from just 50.8 tonnes in 2008 to over 130 tonnes last year, one of the largest increases in a nine year span. Mexico is an attractive place for mining due to a relatively low cost of regulation.

top 10 gold producing countries australia gold mine pit

10. Ghana – 101.7 tonnes

Ghana is Africa’s second largest producer of gold and is also known for its reserves of various industrial minerals. Bullion production rose 7 tonnes over the previous year and accounts for over 20 percent of the nation’s total exports.

 

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.

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 03/31/2018: Seabridge Gold Inc., Goldcorp.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

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Texas Gold Investors Just Got Their Own Fort Knox
June 11, 2018

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017

If you live in Texas and have any extra gold bars, coins and/or jewelry lying around that need safekeeping, you’re in luck. The Texas Bullion Depository, the first of its kind in the U.S., officially opened to the public in Austin last week, putting a cap on three years of planning and construction. The private firm managing the facility, Lone Star Tangible Assets, calls it the “world’s most advanced depository.”

This is wonderful news. Because Texas is such a trend-setting state, it might encourage other states to look into creating their own depositories. It also has the potential to attract even more investors to precious metals, which I believe are crucial components of any well diversified portfolio. As I’ve shown before, gold has little to no correlation with other assets such as equities, cash and Treasuries.

That makes the yellow metal especially favorable—now more than at any time since the financial crisis. We’re in the second longest economic expansion since World War II, and some experts see another recession as soon as 2020. A new survey by the National Association for Business Economics (NABE) finds that half a panel of 45 “professional forecasters” believe the next recession could occur between the fourth quarter of 2019 and the second quarter of 2020.

Although I don’t necessarily agree with this assessment, it’s important to recognize the risks and headwinds and prepare accordingly.

“Troubled” Deutsche Has $1.7 Trillion in Assets

Among the most headline-worthy risks is the uncertain survival of Deutsche Bank. Shares of Germany’s biggest lender have plummeted following a first quarter report showing net income fell some 80 percent from a year ago, as well as news that the Federal Reserve downgraded the bank’s U.S. operations to “troubled.”

could deutsche bank be another lehman
click to enlarge

Many analysts are already making the dubious comparison between Deutsche and Lehman Brothers, the storied American financial services firm whose bankruptcy nearly 10 years ago set off the global financial crisis. At the time of its filing, Lehman had approximately $639 billion in assets. As of the end of last year, Deutsche controlled more than double that amount — $1.7 trillion — meaning its failure could be catastrophic to global financial markets.

Ideas are currently being floated to save the distressed bank, including a German government bailout and a merger with rival Commerzbank, but nothing is guaranteed.

Record Student Debt

Starbucks CEO Schultz debt is the greatest economic threat to the United States

Something else I’m keeping my eye on is the ever-growing mountain of government and household debt. Howard Schultz, the outgoing billionaire executive chairman of Starbucks, told CNBC last week that he considered national debt to be the greatest threat to the U.S.

“I think the greatest threat domestically to the country is this $21 trillion debt hanging over the cloud of America and future generations,” Schultz said, adding to speculation that the former Starbucks chief is considering a presidential run in 2020.

I couldn’t agree more with Schultz on this point. I should add that higher interest rates are making servicing this debt even more costly than it already is. No one is off the hook.

Household debt is also ballooning out of control, and today, student loan debt stands at more than $1.5 trillion. Student debt is now the largest form of debt in the U.S. after mortgages. It’s bigger than auto loan debt and credit card debt. Even more alarming is that an estimated 20 percent of borrowers right now are behind on their payments.

US outstanding student loan debt now stands at 1.5 trillion dollars
click to enlarge

Negative Interest Rates in America?

Between Deutsche and student debt, the implications are enormous. They also highlight my recommendation that investors have approximately 10 percent in gold, with half of that in physical bullion and the other half in high-quality gold mining stocks, mutual funds and ETFs.

As I said earlier, the investment case for gold is highly appealing right now. Should another recession happen anytime soon, the Federal Reserve at present would be hamstrung to offer monetary accommodation.

That’s according to a recent post by my colleague James Rickards, who writes that it’s historically taken between 3 percent and 5 percent in interest rate cuts to pull the U.S. out of a recession.

The problem with this is that the federal funds rate currently sits at 1.75 percent. You do the math.

Were a recession to strike tomorrow, the Fed would have very little wiggle room to ease monetary policy. It could cut rates exactly 1.75 percent, but then it would hit zero and “be out of bullets,” as Rickards says.

Of course, the Fed could dip rates into negative territory, which—in theory—should spur consumer spending. Better to spend your cash on that new boat, the thinking goes, than be punished for letting it sit in the bank. But there’s evidence negative rates haven’t worked as expected to prop up the economies that have experimented with them—notably Japan, Switzerland, Sweden and the eurozone.

And because there’s really no easier way to destroy wealth than with negative interest rates, I would expect gold investment demand to get a massive jolt.

This is precisely why German investors have quietly become the world’s biggest buyers of gold. Until recently, Germany wasn’t known as a nation of gold bugs. But following the financial crisis, the European Central Bank (ECB) slashed rates, and banks began charging customers to hold their cash. Yields on German bonds went subzero. Today, the five-year bond will cost you more than 20 basis points.

For many Germans, the only reliable store of value was gold. Investors ploughed as much as $8 billion into gold coins, bars and exchange-traded commodities in 2016, the most recent year of available data. Demand for safety deposit boxes surged.

I’m curious to see if the same will happen at the Texas Bullion Depository.

Gold ETFs Have Attracted $1 Billion a Month So Far in 2018

The latest report from the World Gold Council (WGC) shows that inflows into global gold ETFs in May were mostly solid. European gold funds grew by 26 metric tons, or $1.2 billion, as geopolitical uncertainty weakened the euro against the dollar. And in Asia, gold ETFs rose by 21 metric tons, or $862 million, a phenomenal 20 percent increase from the previous month. These gains were offset somewhat by net outflows from North American funds as a strong U.S. dollar pushed the price of gold below $1,300 an ounce.

So far this year, gold ETFs have attracted nearly $5 billion, or approximately $1 billion per month.

gold ETF flows were strong in may despite subdued metal prices
click to enlarge

This pace can be maintained for the rest of year, I believe, especially now that it looks as if the U.S. dollar has peaked. Since its 2018 high on May 29, the greenback has already lost close to 1.5 percent. This affords gold more upside potential as we head closer to Diwali and the Indian wedding season, when gifts of gold jewelry are considered auspicious.

 

 

 

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