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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.

My Conviction in Gold Royalty Companies and Bitcoin
November 13, 2017

Bitcoin

Some of you reading this might already be familiar with the “Parable of the Talents,” but it’s worth a brief retelling. The story, which appears in the gospels of Matthew and Mark, involves a master who entrusts three servants with some of his “talents,” or gold coins, while he’s away on business. Two of the servants take a risk by putting the money to work and end up doubling their master’s wealth. The third servant, however, buries his share to “keep it safe” and so doesn’t generate any returns. (Indeed it likely loses value because of inflation.)

When the master returns, he’s so pleased at how the first two servants grew his wealth that he puts them in charge of “many things” and invites them to share in his own success.

The third servant, though, he calls “wicked and lazy” and says he might as well have deposited the money in a bank while he was away—at least then he would have received a little interest. The servant is punished by having his share of the talents given to the two who faithfully grew their master’s money, leaving him with nothing.

The lesson here should be plainly obvious, and we can express it in a number of different ways: There can be no reward without risk. You must spend money to make money. You reap what you sow. This should resonate with investors, entrepreneurs and any true believer in the power of capitalism.

Jesus’ parable applies not just to individuals but to corporations as well. Companies must grow to keep up with the rising cost of labor and materials and to stay competitive. To do that, they must put their money to work just as the two servants do.

And just as the two servants were invited to share in their master’s success, corporate growth has a multiplier effect—for the company’s employees and their families, shareholders, the local economy, strategic partners, companies up and down the supply chain and much more.

A Bonanza for Precious Metal Royalty Companies as Exploration Budgets Have Declined

I think the business model that best illustrates the meaning of the “Parable of the Talents” is the one practiced by gold and precious metal royalty companies. As much as I write and talk about royalty companies, I still encounter investors who aren’t aware of how significant a role they play in the mining space.

As a refresher, these firms help finance explorers and producers’ operations by buying royalties or rights to a stream. Because miners have had to slash exploration budgets since the decline in metal prices, the kind of financing royalty companies provide has only grown in demand—as evidenced by the mostly positive earnings reports last week.

Chief among them is Franco-Nevada, which had a very strong third quarter, reporting earnings of $55.3 million, or $0.30 a share, up 3.4 percent from the same three-month period last year. The Toronto-based company, having also recently diversified into the oil royalties space, closed its purchase of an oil royalty for C$92.5 million, bringing the number of its oil and gas assets up to 82. Including precious metals and other minerals, the total number of assets Franco-Nevada had in its diverse portfolio as of the end of the quarter stood at 341.

Here’s the multiplier effect: Not only do the miners benefit from the deals, allowing them to continue exploration and other operations, but shareholders are also rewarded handsomely. Since the company went public nearly 10 years ago, it’s raised its dividend each year and its share price has outperformed both gold and relevant gold equity benchmarks. After its earnings announcement last Monday, Franco-Nevada stock closed up more than 6 percent on the New York Stock Exchange (NYSE), its best one-day performance in nearly a year and a half. Shares hit a fresh all-time high last week.   

Precious metal royalty names have outperformed gold and gold producers
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Other royalty companies’ reports were just as impressive and show the rewards of putting your “talents” to work. Sandstorm Gold, reporting higher operating cash flow of $11.9 million, has acquired as many as 10 separate royalties since the end of September on properties in Peru, Botswana and South Africa that collectively cover more than 2.4 million acres.

Osisko Gold Royalties bought a $1.1 billion portfolio of 74 precious mineral royalties, including a 9.6 percent diamond stream. The company reported record quarterly gold equivalent ounces (GEOs) of 16,664, up 65 percent from the same quarter last year, and record quarterly revenues from royalties and streams of $26.1 million, up 48 percent.

Royal Gold also had a strong quarter, reporting operating cash flow of $72 million, an increase of 30 percent from last year, and returned as much as $16 million to shareholders in dividends.

Wheaton Precious Metals, the world’s largest precious metal streaming company, showed a sizeable decline in profits in the third quarter, but it continued to generate strong cash flow and looks poised to meet its end-of-year production guidance.

Although some investors might not realize how important these companies are to the industry, many other investors are opting to place their bets on royalty names, seeing them as having ample exposure to precious metals without some of the risks associated with producers. In its review of the third quarter, the World Gold Council (WGC) reported that global gold demand fell to an eight-year low as investment in gold ETFs slowed to 18.9 metric tons, down from 144.3 metric tons in last year’s September quarter. This could be a consequence of the media’s continued negative coverage of gold, despite its competitive performance against the S&P 500 Index. Whatever the cause, in this environment, there was no lack of love for royalty names, as you can see in the chart above.

A Changing Financial Landscape

We were one of Wheaton Precious Metals’ seed investors in 2004, when it was then known as Silver Wheaton. Because Franco-Nevada wouldn’t be spun off from Newmont Mining for another three years, Wheaton had first-mover advantage. It was something new, something different. This, coupled with what I recognized as a superior business model, gave me the conviction to allocate capital into the fledgling company, a move that turned out to be highly profitable.

Today I have the same conviction in blockchain technology and digital currencies. As of the end of October, the initial coin offering (ICO) market had raised $3 billion so far this year. That’s more than seven times the amount generated in crowdfunding in all of the previous years before 2017. And Bloomberg just reported that Google searches for “buy bitcoin” recently surpassed searches for “buy gold.”

Search queries for buy bitcoin surged past buy gold
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With bitcoin’s market cap having grown past that of Goldman Sachs and Morgan Stanley, cryptocurrencies can no longer be written off as a curiosity. Major financial institutions have become bullish, having filed approximately 2,700 patents in blockchain technology.

Abigail Johnson, the youthful chairman of Fidelity, was quoted as saying, “Blockchain technology isn’t just a more efficient way to settle securities, it will fundamentally change market structures, and maybe even the architecture of the internet itself.” Johnson allegedly has a crypto-mining computer rig in her office, and Fidelity accountholders are now able to see their bitcoin holdings on the brokerage firm’s online platform. USAA, the massive financial firm used by millions of U.S. military personnel and their families worldwide, provides a similar service.

Bitcoin

This all comes as Coinbase, a leading digital currency broker, saw a record number of people opening new accounts on its platform recently, doubling the number of accounts from the beginning of the year. In one 24-hour period, 100,000 new accounts were opened.

Millennials Driving Interest in Blockchain Technology and Cryptocurrencies

A lot of this growth in demand is thanks to millennials, the largest U.S. generation. Forget the stereotype of the “entitled” millennial in the workplace and the misconception that they’re all wasting their money on $10 avocado toast. Consulting firm Deloitte estimates that by 2020, millennials will make up 50 percent of the workforce and control between $19 trillion and $24 trillion. Many are savvy investors and were found to be more likely to be aware of their brokerage account fees than older generations, according to Charles Schwab’s Modern Wealth index.

In some ways, millennials are reshaping our living habits. Many of them choose to rent instead of own to stay mobile. They’re more likely to get their news from Twitter than from TV. Online dating apps have helped foster today’s hookup culture, but while young people now might have more sex partners than before, they’re having less sex overall than their parents or grandparents might have had at their age.

It’s little surprise, then, that millennials are among the earliest and most enthusiastic adopters of blockchain technology, bitcoin and digital currencies in general—none of which existed even 10 years ago. A poll conducted by Blockchain Capital found that large percentages of millennials would prefer $1,000 in bitcoin to $1,000 in other assets. More than a quarter said they would prefer bitcoin to stocks, while nearly a third preferred it to bonds.

Percent of millenials who would prefer 1000 in botcoin to 1000 in
click to enlarge

What I find especially encouraging is that only 4 percent of those who took the poll owned or had owned bitcoins. I say encouraging because this suggests there’s quite a lot of upside potential for bitcoin ownership, which in turn could raise prices further. As I shared with you recently, Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes. Consider Facebook. The social media giant has more than 2 billion active users. That’s 2 billion pairs of eyes Facebook is able to charge top dollar for advertisers to reach, helping it deliver record profits in the third quarter.

We could see the same thing happen across the blockchain and cryptocurrency network as more and more businesses and people embrace this new form of exchange.

Ploughing Capital into Blockchain

It should be clear by now that something is changing in financial markets, and this is what inspired me to make a strategic investment in a company with first-mover advantage in the cryptocurrency space, just as we did with Silver Wheaton years ago. As the “Parable of the Talents” teaches us, no reward can come to you without some risk-taking. Doing nothing is not an option.

That company is HIVE Blockchain Technologies, a blockchain infrastructure company involved in the mining of virgin digital currencies. The first company of its kind to sell shares to the public, HIVE began trading on the TSX Venture Exchange on September 18.

I’m very excited about this new chapter in our company’s history. If you weren’t on today’s earnings call, you can download the slide deck here to learn more about our deal with HIVE and what it means for our investors and shareholders.

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 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 index benchmark value was 500.0 at the close of trading on December 20, 2002. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

The Modern Wealth Index tracks how well Americans across the wealth spectrum are planning, managing and engaging with their wealth. Developed in partnership with Koski Research and the Schwab Center for Financial Research, the Modern Wealth Index is based on Schwab’s Investing Principles and composed of 60 financial behaviors and attitudes, each assigned a varying amount of points depending on their importance.

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.

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE 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. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 09/30/2017: Franco-Nevada Corp., Royal Gold Inc., Osisko Gold Royalties Ltd., Sandstorm Gold Ltd., Wheaton Precious Metals Corp., Newmont Mining Corp.

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Oil at Two-Year Highs as Saudi Arabia Engages in Its Own “Game of Thrones”
November 9, 2017

Oil at Two-Year Highs as Saudi Arabia Engages in Its Own “Game of Thrones”

Recently I identified five agents of change that I believe investors should know about right now. I’d like to add one more to the list: Mohammad bin Salman. The crown prince of Saudi Arabia, 32, was little known outside the region before this past weekend when he jailed members of the royal family, presumably in an attempt to consolidate power ahead of taking the throne. Resembling a plotline from an episode of “Game of Thrones,” the mass detentions signal a seismic change in Saudi leadership—which, in turn, is putting upward pressure on global oil prices.

Saudi Arabia is the world’s second-largest oil producer and single biggest oil exporter, so any development that might alert investors that the kingdom’s production levels or oil policy could be disrupted has historically had a profound effect on prices. When the country’s former king, Abdullah bin Abdulaziz Al Saud, passed away in January 2015, oil jumped more than 8.6 percent for the week.

And so was the case on Monday, after news broke of the shakeup. West Texas Intermediate (WTI), the American benchmark for crude, closed above $57 a barrel for the first time since June 2015, adding nearly 35 percent from its summer 2017 low. A weaker U.S. dollar, down about 3.2 percent from the same time last year, is also providing support, as is slower U.S. supply growth following Hurricanes Harvey and Irma.

crude oil trading at more than a two-year high
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Mike McGlone, commodity strategist at Bloomberg Intelligence, points out that 2017 marks the first year since 2013 that the median price of WTI crude is higher than the previous year’s. (This is assuming WTI will trade range bound or higher between now and the end of 2017.)

The last time we saw Brent do this was from 2011 to 2012. On Monday, the European benchmark closed above $64 a barrel, more than a two-year high. As of November 5, Brent crude had made positive weekly gains in 10 out of the past 11 weeks.

is oil staging a turnaround?
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Taken together, this has the bulls excited. Hedge funds are currently building record or near-record net long positions in oil, indicating they’re betting prices will continue to climb. According to Reuters, bullish positions in Brent stood at a record 587 million barrels as of Friday, with a record 530 million of those net long.

“Most investors appear to believe prices are moving into a new and higher trading range and want to ride the rally until the new price ceiling is discovered,” says Reuters.

Saudi “Game of Thrones” Could Be More than Mere Palace Intrigue

But let’s return to Saudi Arabia and Mohammad bin Salman, known to many as “MBS.” The official explanation for the detainments—which involve at least 11 princes, including well-known billionaire investor Prince Alwaleed bin Talal, four ministers and “dozens” of ex-ministers—is that they are part of an ongoing crackdown on corruption. According to the BBC, this is only “phase one,” meaning we can probably expect to see more to this process.

MBS’s fight brings to mind Chinese President Xi Jinping’s anti-corruption efforts, which have been ongoing since Xi assumed power five years ago and have led to the detainment or punishment of an astonishing 1.4 million party members, according to multiple sources.  

The implications of Saudi Arabia’s own sweeping crackdown, unprecedented in the kingdom’s 85-year history, understandably have many investors spooked. Dennis Gartman, editor of the widely-read Gartman Letter, told CNBC this week that he thought MBS’s actions were “terribly detrimental to crude oil prices” in the long run.

MBS has a supporter in President Donald Trump, though, who tweeted on Monday that he has “great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing… Some of those they are harshly treating have been ‘milking’ their country for years!”

crown prince mohammad bin Salman visiting President Trump in the Oval Office in march 2017

But there’s more to the story than mere palace intrigue. The richest country in the Middle East is undergoing radical changes as outlined in its “Vision 2030” plan, unveiled in April 2016. Among its goals, headlined by the young MBS, is a push to reform the government’s role in everyday life. Today it’s estimated that around 80 percent of Saudi household income depends on government subsidies, supported by vast oil revenues. The hope is to shrink this dependency, especially now that the price of Brent has fallen significantly since its all-time high of $140 a barrel in 2008. Many state-run industries could be privatized in the coming years, including its behemoth oil industry.

Saudi Arabia is a youthful country—about 70 percent of its citizens are under the age of 30—and so the kingdom is also seeking to modernize its society and relax several restrictions that are believed to have held back economic growth. This past September, the country finally permitted women to drive, and there are targets in place to grow the number of women in the workplace.

Aramco: The IPO of the Century?

But possibly the most significant and ambitious goal in Vision 2030 is to wean the kingdom’s economy off of oil exports, which accounted for roughly 87 percent of total budget revenues as of December 2016. Toward this end, Saudi Arabia plans to privatize a part of the country’s crown jewel, Saudi Aramco, the largest energy company in the world by far. In its 2016 annual review, the state-run company said it produced an average 10.5 million barrels of crude a day. By comparison, the entire U.S. produced 8.6 million barrels a day on average in the same year.

Saudi Aramco Leads the world in oil production
click to enlarge

According to Forbes, Aramco generates more than $1 billion a day in revenues, which is a little difficult to fathom.

In an exclusive interview with Reuters, MBS said that Aramco was on track for a 2018 initial public offering (IPO) and that it could be valued at more than $2 trillion. This would make it the largest IPO in history. By floating only 5 percent of the company, MBS expects to raise as much as $100 billion, which would go into a public investment fund (PIF) to help finance other segments of the economy.

“The government should not be in control of the private sector,” Price Mohammad said. “You create opportunity, you create business, you create development, you hand it to the investor and start creating something new.”  

Not to wade into conspiracy theories, but the crown prince’s anti-corruption campaign and impending Aramco IPO could be related. Saudi Arabia wants oil support at $60 a barrel before the giant energy company goes public, and a royal shakeup of this magnitude could be one way of achieving that.

The Challenges of Getting Listed

As exciting as an Aramco IPO is, I wouldn’t put my full faith in it coming to fruition. For one, the Saudi Stock Exchange in Riyadh is simply too small and undeveloped to handle the massive trading volume the biggest IPO in history would require.

Getting listed in New York has its own challenges. Although President Trump is strongly urging Saudi Arabia to float shares on the New York Stock Exchange (NYSE), the kingdom is concerned that doing so would open itself up to litigation. In 2016, a bill was passed allowing victims of 9/11 or their families to sue the Saudi Arabian government.

On Monday, the Financial Times reported that the London Stock Exchange (LSE) has made a “very strong case” for Aramco to get listed in the U.K. In April, Prime Minister Theresa May visited the kingdom, accompanied by the LSE chief executive, presumably to pitch the idea of a London IPO to Saudi officials. In addition, the LSE has sweetened the deal by announcing it would loosen certain rules and restrictions on Aramco that apply to other companies.

However this plays out, we’ll certainly continue to monitor it, as well as the oil market. Because of the drama in Saudi Arabia and further extended production cuts planned by the Organization of Petroleum Exporting Countries (OPEC), Morgan Stanley just raised its forecast for the price of oil, estimating WTI to average $58 a barrel in the second quarter of 2018. It could be time for investors to consider oil equities again.

 

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

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5 Agents of Change Investors Need to Know About Now
November 6, 2017

the world is running out of gold mines, here's how investors can play it

The world is changing fast right now in ways that many investors might not easily recognize or want to admit. This could end up being a costly mistake. If you’re not paying attention, you could be letting opportunities pass you by without even realizing it.

With that in mind, I’ve put together a list of five agents of change that I think investors need to be aware of and possibly factor into their decision-making process. 

1. Xi Jinping

October cover of The Economist

At China’s 19th National Party Congress two weeks ago, Xi Jinping’s political thought was enshrined into the country’s constitution, an honor that, before now, had been reserved only for Mao Zedong, founder of the People’s Republic of China, and Deng Xiaoping. It was Deng, if you recall, who in 1980 established special economic zones (SEZs) that helped turn China into the economic powerhouse it is today.

But back to Xi. His elevation to Chairman Mao-status not only cements his place in the annals of Chinese history but also makes him peerless among other world leaders in terms of political and militaristic might, with the obvious exception of U.S. President Donald J. Trump.

But whereas Trump has been criticized by some for setting the U.S. on a more isolationist path—shrinking the size of the State Department, just to name one example—Xi sees China emerging as the de facto global leader by 2050. To get there, his country is spending billions on the “Belt and Road Initiative” and other massive infrastructure projects, opening its doors to foreign investors, reforming state-run enterprises, weeding out corruption, investing heavily in clean energy and public transportation and expanding its middle class. And let’s not forget that the Chinese yuan, also known as the renminbi, was included in the International Monetary Fund’s (IMF) basket of reserve currencies in 2015, placing it in the same league as the U.S. dollar, British pound, Japanese yen and euro.

During his three-hour speech before the congress, Xi made reference to the “Chinese dream,” adding that the “Chinese people will enjoy greater happiness and well-being, and the Chinese nation will stand taller and firmer in the world.”

Xi has his own detractors, of course, who see China’s rise as a threat to established world order. But if his vision is to be realized, it might be prudent to recognize and prepare for it now. China’s economy grew a healthy 6.8 percent in the third quarter year-over-year, helping it get closer to meeting economists’ target of 6.5 percent for 2017. And although manufacturing expansion slowed in October, falling from 52.4 in September to 51.6, it was still well above the 50 threshold.  

China manufacturing power expanded at slightly lower pace in October
click to enlarge

Citing these indicators as well as strong medium and long-term bank lending to nonfinancial corporations, research firm BCA recommended that investors overweight Chinese stocks relative to the emerging market aggregate.

 

 

2. Poland

Besides China, another region I’m keeping my eye on is Poland. Already one of the fastest growing economies in Europe, the country was just upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September 2018. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany, Singapore and South Korea, the last country to have joined the club of top-ranking economies. Poland is the first Central and Eastern European (CEE) country to receive “developed” status.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank expects Poland’s economic growth in 2017 to reach 4 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Poland one of the fastest growing economies in th eEuro area
click to enlarge

Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy, according to the Financial Times. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

One of U.S. Global’s analysts, Joanna Sawicka, has seen the dramatic transformation firsthand. A native of Bialystok, Poland, Joanna has vivid memories of waiting in line for hours just to buy food and school supplies. After returning to the U.S. from a visit to her hometown in 2015, though, she was singing its praises:

“I saw big changes. There’s now a small business on every street corner. A lot of my old friends own businesses now. Poland is the largest beneficiary of European Union funds, and people are clearly taking advantage of having more money and better opportunities.”

 

 

3. Bitcoin

One of the most influential agents of change right now is bitcoin, and indeed the entire digital currency market. Cryptocurrencies are challenging underlying notions of the global monetary framework, upending the way many companies raise funds and disrupting the investment world.

All this from an asset class nobody even knew about 10 years ago.

For the first time last week, bitcoin traded above $7,000 a coin, bringing its 2017 gains to around 650 percent. Some are calling this a bubble, but I recently shared with you a chart that shows that, when placed on a logarithmic scale, bitcoin doesn’t appear to have found its peak yet.

Bitcoin broke above 7000
click to enlarge

 

Bitcoin can no longer be called a curiosity or niche investment. Large brokerage firms and financial institutions, including Fidelity and USAA, now allow clients to use their websites to check their holdings of bitcoin and other digital currencies alongside their more traditional assets. And just last week, the Chicago Mercantile Exchange (CME) announced it will be offering a bitcoin futures contract by the end of the year, giving investors an easier way to trade cryptos.

Following the announcement, Coinbase, a leading digital currency broker, saw a record number of people opening new accounts on its platform. Within a single 24-hour period, as many as 100,000 new users opened accounts, helping to double the number of Coinbase clients since the beginning of the year.

This explosion in interest hasn’t come without consequences in other markets, however. The U.S. Mint reported that this year’s sales of American Eagles, the popular gold coins, have fallen to their lowest level since 2007, presumably as investors who otherwise would have bought bullion have instead put money in bitcoin as a store of value.

4. U.S. Tax Reform

It’s been at least a generation at least since the U.S. has had meaningful tax reform. That might be about to change, though, as Congress and the president last week unveiled their plans to overhaul the tax code and deliver the “biggest tax cut in U.S. history,” according to Trump.

If passed and signed, the plan would consolidate the number of income brackets, currently at seven, down to only four, while also eliminating a number of tax credits and exemptions, including the alternative minimum tax (AMT). The fourth bracket, with a rate of 39.6 percent for the nation’s top earners, was added at the last minute to address concerns the new code would blow up the deficit. Many savers are no doubt relieved to learn that 401(k)s will be left alone, ending rumors that annual contribution caps would be lowered.

As for corporate taxes, the plan is to slash them from 35 percent—the highest among any country in the Organization for Economic Cooperation and Development (OECD)—to a much more competitive 20 percent. This change would be both immediate and permanent.

Right now, as much as $2.5 trillion or more in cash is estimated to be held overseas by multinational corporations to avoid having to pay the steep rate. Lowering it would allow these firms to bring profits home and reinvest them in workers, new equipment and more. It would also encourage American companies to relocate operations back to the U.S., as we saw last week with semiconductor manufacturer Broadcom.

After failing to repeal and replace Obamacare, both Congress and the president need this win if they expect voters to give them another term.

5. Jerome Powell

For the final agent of change, I’m picking someone whom some readers might not agree reflects real change. Jerome “Jay” Powell, the person Trump has tapped to replace Federal Reserve Chair Janet Yellen—assuming he gets Senate confirmation—is being described as someone who’ll mostly hold to the status quo established by his two immediate predecessors, Yellen and Ben Bernanke. Powell appears to be dovish and supportive of the cautious interest rate hikes we’ve seen during Yellen’s tenure, which will come to an end in February 2018. 

Federal reserve chair Janet Yellens tenure
click to enlarge

There’s one huge difference, however—one that likely convinced Trump a change was needed, despite his previous acclaim for Yellen’s handling of the job. Whereas Yellen has expressed support for the raft of financial regulations that were introduced in the wake of the financial crisis, Powell generally seems to be in favor of deregulation, in line with Trump’s own agenda. On numerous occasions I’ve written that our industry needs more streamlined rules and laws, so I see this as very constructive. Although Powell, as head of the Fed, won’t have any policymaking authority to alter or reverse such rules, at least he’ll serve as an ideological ally of Trump’s.

On top of all this, Powell’s appointment will set new precedent. He’ll be the first Fed chair in decades not to hold an advanced degree in economics—he’s a former investment banker with the Carlyle Group—and he’ll also be the first in nearly as many years to replace someone before the end of their full 14 years.

In any case, I speak for everyone at U.S. Global by wishing Powell the best, once confirmed, and hope his policies can help the U.S. economy continue moving in the right direction.

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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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2017.

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Holidays Come Early for Investors as Consumer Spending Surges from Previous Year
November 2, 2017

Home Depot Up Nearly 24% Year-to-Date

American consumers were more willing to open their wallets in September, an encouraging sign of what Santa might bring for investors this year. According to the latest Bureau of Economic Analysis (BEA) data, consumer spending in the U.S. rose a robust 1 percent between August and September, the largest month-to-month gain since 2009.

For investors, I think this news bodes well for the consumer discretionary sector as we head toward the busy holiday shopping season, already expected to be strong  compared to last year’s.

U.S. consumer spending surged in september
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In its report, the BEA notes that consumption was driven primarily by new automobile sales and household utilities. Americans drove an impressive 18.5 million autos and light trucks off car lots in September, up 4.7 percent from a year earlier. Contributing to this, it must be pointed out, was the loss of an estimated 1 million vehicles as a result of Hurricanes Harvey and Irma.

Among the companies whose stock appreciated following the two devastating storms was Copart, a preowned vehicle auctioneer. The company has yet to report sales figures for the third quarter—which includes the period when Harvey and Irma struck the U.S.—but its July quarter saw attractive top and bottom growth year-over-year, with sales up 14 percent.

Copart, which just celebrated its 35th anniversary, is one of the top holdings in our Holmes Macro Trends Fund (MEGAX).

Leading vehicle reseller and auctioneer copart gained following august-september hurricanes
click to enlarge

Although the unusually high consumption rate partially reflected Americans’ need to replace vehicles and other durables in the wake of Harvey and Irma, total U.S. spending in September was also supported by rising household incomes and strengthening confidence in the U.S. economy.

According to the University of Michigan’s survey of U.S. households, consumer sentiment surged to 100.7 in October, up from 95.1 in September. This is the highest monthly level since 2004 and, amazingly, represents only the second time the survey has crossed above 100 since the end of the 1990s.

“Personal finances were judged near all-time record favorable levels due to gains in household incomes as well as decade highs in home and stock values,” the University of Michigan writes.

Americans Splurged on Home Improvement and DIY

Of particular note is the increase in spending at building, hardware and garden stores. The most recent Visa Retail Spending Monitor finds that consumption on home improvement and do-it-yourself (DIY) goods and services rose 12.8 percent in August compared to the same month in 2016.

Many Americans, according to Visa chief economist Wayne Best, “are opting to remodel rather than wait for the elusive housing market to pick up, a boon for building, hardware and garden sales.”

I believe this could also be a boon for our Holmes Macro Trends Fund (MEGAX). Not only is consumer discretionary the fund’s largest sector weighting at 27.55 percent, as of September 30, but it also invests heavily in names associated with building and home improvement. Among the companies we own in MEGAX are Home Depot, the fund’s number one holding; Trex, a decking and railing company; Toro, which manufacturers turf maintenance equipment; and the WD-40 Company.

As with Copart, we’re eagerly awaiting Home Depot’s third-quarter earnings report, but its financials for the July quarter were especially solid. Basic earnings per share stood at $2.26, up more than 14 percent from the same three-month period in 2016, on sales of $28.1 billion.

Home Depot Up Nearly 24% Year-to-Date
click to enlarge

Will Santa Deliver Record Holiday Sales?

As I said earlier, expectations for the upcoming holiday shopping season are high. The National Retail Federation (NRF) estimates sales in November and December to grow between 3.6 and 4 percent year-over-year, which would equate to between $678.8 billion and $682 billion, an all-time high.

“The combination of job creation, improved wages, tame inflation and an increase in net worth all provide the capacity and the confidence to spend,” says NRF chief economist Jack Kleinhenz.

Consulting firm Bain & Company has a slightly less optimistic estimate, forecasting sales to grow between 3.5 and 3.9 percent.

Both firms note, though, that consumption could get an extra boost this year on account of there being 32 days between Thanksgiving and Christmas, as opposed to 31 last year, giving shoppers one additional day to browse in stores and online.

To learn more on consumer discretionaries with high growth potential, visit the fund page for our Holmes Macro Trends Fund (MEGAX).

 


 
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 University of Michigan Consumer Sentiment Index uses telephone surveys to gather information on consumer expectations regarding the overall economy. The preliminary report, which includes about 60% of total survey results, is released around the 10th of each month. A final report for the prior month is released on the first of the month. 

Visa’s Retail Spending Monitor provides a real-time window into how and where Americans are spending their money and its broader impact on the economy. With billions of transactions flowing through its payment network each day, Visa sees roughly 25 cents of every retail dollar spent in the United States. Using these actual transactions as a starting point, Visa has created a sophisticated, robust model that allows it to gauge overall spending activity across all forms of payment and across major spending categories, including retail, travel and entertainment.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund as a percentage of net assets as of 9/30/2017: The Home Depot Inc. 5.87%, Copart Inc. 4.05%, Trex Co. Inc. 3.69%, The Toro Co. 3.21%, WD-40 Co. 2.38%.

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The World Is Running out of Gold Mines—Here’s How Investors Can Play It
October 30, 2017

the world is running out of gold mines, here's how investors can play it

My good friend Pierre Lassonde, cofounder and chairman of Franco-Nevada, doesn’t know how we’ll replace the massive gold deposits of the past 130 years or so. Speaking with the German financial newspaper Finanz und Wirtschaft this month, Pierre says we’re seeing a significant slowdown in the number of large deposits being discovered. Legendary goldfields such as South Africa’s Witwatersrand Basin, Nevada’s Carlin Trend and Australia’s Super Pit—all nearing the end of their lifecycles—could very well be a thing of the past.

Over the medium and long-term, this could lead to a supply-demand imbalance and ultimately put strong upward pressure on the price of gold.

According to Pierre:

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. 

So few new large mines are being discovered today, Pierre says, mostly because companies have had to slash exploration budgets in response to lower gold prices. Earlier this year, S&P Global Market Intelligence reported that total exploration budgets for companies involved in mining nonferrous metals fell for the fourth straight year in 2016. Budgets dropped to $6.9 billion, the lowest point in 11 years. Although we’ve seen an increase in spending so far this year, it still dramatically trails the 2012 heyday.

Total nonferrous exploration budgets fell to an 11 year low in 2016
click to enlarge

And because it takes seven years on average for a new mine to begin producing—thanks to feasibility studies, project approvals and other impediments—output could recede even more rapidly in the years to come.

“It doesn’t really matter what the gold price will do in the next few years,” Pierre says. “Production is coming off, and that means the upward pressure on the gold price could be very intense.”

Have We Reached Peak Gold?

Frank Holmes standing next to Pierre Lassonde right at Mines and Money London in December 2015

What Pierre is talking about, of course, is the idea of “peak gold.” I wrote about this last year and suggested another factor that could be curtailing new discoveries—namely, the low-hanging fruit has likely already been picked. Gold is both scarce and finite—one of the main reasons why it’s so highly valued—and explorers are now having to dig deeper and venture farther into more extreme environments to find economically viable deposits.

Other factors contributing to the decline include tougher regulations and higher production costs. And unlike with the oil industry, no “fracking” method has been invented yet to extract gold from hard-to-reach areas, though Barrick—the world’s largest producer by output—has been experimenting with sensors at its Cortez project in Nevada.

Take a look at how drastically annual output has fallen in South Africa, once the world’s top gold-producing country by far. In the 1880s, it was the discovery of gold in South Africa’s prolific Witwatersrand Basin—responsible for more than 40 percent of all gold ever mined in human history, if you can believe it—that helped transform Johannesburg into one of the world’s largest and most populous cities. Today, South Africa’s economy is the most advanced and stable in Sub-Saharan Africa, all thanks to the yellow metal.

In 1970, miners dug up more than 1,000 metric tons—an unfathomably large amount. Since then, production has steadily dropped. No longer in the top spot, South Africa produced only 167.1 tons in 2016, an 83 percent plunge from the 1970 peak. Meanwhile, miners in the notorious Mponeng mine—already the world’s deepest at 2.5 miles—continue to follow veins even deeper into the earth at greater and greater expense.

South Africa's gold output has been in steady decline for more than 45 years
click to enlarge

Australia could soon be seeing a similar downturn over the next four decades. A first-of-its-kind study conducted by MinEx Consulting and released this month, shows that Australia’s gold production is expected to see a significant drop between now and 2057. By then, all but four of the 71 currently operating mines in the country will be exhausted. Most of these will close in the next couple of decades. Any additional production will be dependent on new exploration success, which will become increasingly difficult if companies don’t invest in exploration and if the Australian government doesn’t relax rules in the mining space.

MinEx estimates that “for the Australian gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance.”

To be fair, large discoveries haven’t disappeared entirely. Back in March it was reported that Shandong Gold Group, China’s second-largest producer, uncovered a deposit in eastern China containing between 380 and 550 metric tons of the yellow metal. If true, this would make it the country’s largest ever by amount. The mine has an estimated lifespan of 40 years once operations begin.

In addition, Kitco reports this month that Toronto-based Seabridge Gold recently stumbled upon a significant goldfield in northern British Columbia. The find appeared, coincidentally, after a glacier retreated. It’s estimated to contain a whopping 780 metric tons.

“There’s no question that as glaciers retreat, more ground will become available for exploration and more discoveries could be made in that part of the world,” Seabridge CEO Rudi Fronk told Kitco.

The company already has the permits to begin mining.

Seabridge gold is up 15 percent for the three month period
click to enlarge

Exploration Budgets Jumped

Gold represents over half of global annual commodities exploration budgets

 

As I said earlier, we just saw an encouraging spike in the amount spent on exploration. According to S&P Global Market Intelligence, exploration budgets increased in the 12-month period as of September for the first time since 2012. Budgets jumped 14 percent year-over-year to $7.95 billion, with gold explorers leading the way. During this period, gold companies spent around $4 billion on exploration, which is roughly half the value of all nonferrous metals mining budgets.

But because exploration is getting more expensive for reasons addressed earlier, senior producers might very well decide instead to acquire smaller firms with proven, profitable projects.

This could create a lot of value for investors, so I would keep my eyes on juniors that look like targets for takeover. Dealmaking in the Australian mining industry, for example, is showing some growth this year compared to last, according to a September report by accounting firm BDO. Last year, Goldcorp finalized its deal to acquire Vancouver-based junior Kaminak Gold, and in May of this year, El Dorado announced it was taking over Integra Gold for C$590 million. I expect to see even more deals in the coming months.

In the meantime, I agree with my friend Pierre’s “absolute rule” that investors should hold between 5 and 10 percent gold in your portfolio. I would also add gold stocks to the mix, especially overlooked and undervalued names, and rebalance once and twice a 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.

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 9/30/2017: Franco-Nevada Corp., Seabridge Gold Inc.

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Net Asset Value
as of 04/25/2018

Global Resources Fund PSPFX $5.96 -0.02 Gold and Precious Metals Fund USERX $7.42 -0.07 World Precious Minerals Fund UNWPX $4.23 -0.05 China Region Fund USCOX $11.14 No Change Emerging Europe Fund EUROX $7.16 -0.08 All American Equity Fund GBTFX $25.15 0.16 Holmes Macro Trends Fund MEGAX $19.41 0.01 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change