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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.

Use This Tax Strategy Like the Top 1 Percent
September 8, 2016

Use This Tip to Help You Avoid Taxes Like the Top 1 Percent

Many people might have the impression that the top 1 percent of society—those making over $521,411—deal mainly in exotic investments such as derivatives, fine art and rare French wines.

The truth is actually a lot less exciting.

It’s well documented that high-net worth individuals (HNWIs), in many respects, tend to be more practical in their spending habits than most folks. They appreciate a good deal, and they’re finely attuned to saving money where they can—one of the biggest contributors to how they got where they are.

“What are the three words that profile the affluent?” ask Thomas Stanley and Willian Danko in their bestseller The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. The answer? “FRUGAL FRUGAL FRUGAL.”

This penny-pinching attitude extends to their investment decisions.

So if they’re not investing in Picassos and Renoirs, or $20,000 bottles of Romanée-Conti, what are they investing in?

Munis.

That’s the finding of Rick Fleming, the SEC’s top investor advocate, charged with analyzing how regulations might impact investors and their investments. Muni bond income, after all, is entirely exempt from federal and often state and local taxes—a feature that should appeal not just to money-saving HNWIs but to all investors.

Avoiding Income Tax with Tax-Free Municipal Bonds

At an SEC summit held August 25, Fleming revealed some statistics he finds both “interesting” and “disturbing.”

“The wealthiest one-half percent of U.S. households,” Fleming said, “now own 42 percent of all municipal bonds, as compared to ownership of 24 percent in 1989.”

Meanwhile, “The bottom 90 percent of U.S. households, as measured by net wealth, now hold less than 5 percent of muni bonds, falling from almost 15 percent in 1989.”

Wealthiest U.S. Households Own an Increasing Share of Municipal Debt
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Let’s do the math. The muni market is currently valued at $3.71 trillion. Using Fleming’s data, that means a very small percentage of muni investors holds around $1.5 trillion—a vast sum of money for so few people. On the flip side, a great number of people—nearly all muni investors, in fact—collectively hold “only” $185 billion worth of muni debt.

This is indeed disturbing.

Muni bonds’ favorable tax exemption was created a little over 100 years ago to attract investors of all stripes, not just those at the very top of the socioeconomic ladder, to help boost infrastructure spending. Although HNWIs have historically been more drawn to munis than investors in lower tax brackets, the spread has widened alarmingly in recent years.

Fleming sees this as a problem, and you should too. I always say to follow the smart money, and in the case of municipal bonds, it’s clear the smart money has spoken.  

HNWIs are unfazed by the perception that munis are “boring” or “plain vanilla.” They don’t care about that. What they do care about is a reliable, tax-free income stream, not to mention a history of stability in times of economic and political uncertainty—both of which munis can deliver.

No Loss of Momentum

To be clear, muni investment is not in decline. Quite the contrary. There’s a clear uptrend in the amount of money that’s flowing into muni bond funds on a weekly basis, fueled by not just the appetite for tax-free income but also a need to preserve capital. For the 48th straight week as of August 31, muni bond funds, excluding ETFs, attracted net new money—a spectacular run, according to Investment Company Institute (ICI) data.

Net New Cash Flowing Into Municipal Bond Funds
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Meanwhile, capital continues to leave domestic equity funds as investors de-risk in the face of global macroeconomic uncertainty and the possibility of rising interest rates in the U.S. this year.

What I find most interesting is that, although investors are increasingly moving capital from actively-managed equity funds to ETFs, they still prefer actively-managed muni bond funds. For the 12-month period ended in July, active muni funds collected $48.7 billion. That’s eight times more than what passive funds brought in over the same period, according to a recent Bloomberg story.
In this case, I think what muni investors seek is a manager who knows how to conduct deep credit research, adjust for duration and monitor the market for risks and opportunities. That appears to be investors’ demand, whether they’re in the top 1 percent or not.

 

EXPLORE OPPORTUNITIES IN MUNI BOND INVESTING

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the 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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Apple Gets a Shakedown from the EU. Is Ireland Next to Bail?
September 6, 2016

$5,009 Apple Stores' sales per square foot per year--the most of any store

“Total political crap.”

That’s how Apple CEO Tim Cook described the European Commission’s ruling that the iPhone maker must pay 13 billion euros ($14.5 billion), plus interest, in back taxes to Ireland, its longtime European host. Meanwhile, the island-nation is being accused of giving Apple an “illegal” sweetheart deal in exchange for jobs.

Political crap, indeed. I hate to say it, but I told you so.

June’s Brexit referendum, I’ve argued, was about so much more than immigration. U.K. citizens and businesses are fed up with mountains of rules and regulations from unelected bureaucrats in Brussels, controlled by French and German socialists, that trample on basic personal freedom. There are ludicrous laws on the books legislating everything from the kind of lightbulbs you can use to the wattage of your vacuum cleaner to the curve and length of your bananas and cucumbers to the color of your olives.

Now, Ireland is learning a similarly hard lesson on Brussels’ policies of envy.

It’s a plotline that should be reserved for the Theater of the Absurd: Party A is forced by Party B to pay Party C, in a transaction that neither Party A nor Party C had a hand in creating.

Apple insists it has no outstanding taxes. “We never asked for, nor did we receive, special deals,” Tim Cook wrote in an open letter last week. And yet an authoritarian, nontransparent “Commissioner of Competition” is ordering the company to shell out an arbitrarily exorbitant amount to the government of Ireland—which doesn’t even want Apple’s money.

And why would it? As you might imagine, Ireland fears risking a stain on its tax advantaged status that has succeeded in attracting hundreds of billions in foreign direct investment.

Eurocrats Envious of Ireland’s Competitive Advantage and America’s Ingenuity

Over the last 50 years, the country has carved out a reputation as a prime destination for multinationals seeking a competitive corporate tax rate. At 12.5 percent, Ireland’s rate is much more attractive than the U.S. rate, 35 percent, one of the highest in the world. (Other countries with similarly high rates include Argentina, Brazil and Venezuela—not exactly model examples of business-friendly regimes.)

Corporate Tax Rates in Select OECD Countries
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Consider what Ireland has achieved: PricewaterhouseCoopers (PwC) ranks it “the most effective country in the EU in which to pay business taxes.” For five years in a row, the country has topped IBM’s Global Location Trends report for its “continued ability to attract high-value investment projects in key areas.” The most recent IMD World Competitiveness Yearbook names Ireland first in the world for “investment incentives” and “financial skills.” According to the World Economic Forum, it’s the fastest growing European economy (followed by Romania, which I wrote about in July). The list goes on.

For these reasons and more, nine out of the top 10 global information and communications technology (ICT) companies have locations in Ireland, not to mention nine out of the top 10 global pharmaceutical companies and nine out of the top 10 global software companies, according to Ireland’s Industrial Development Agency.

The country’s relationship with American-based companies has been particularly beneficial to its economy and workforce. U.S. companies account for three quarters of Ireland’s inward investment, which totaled nearly $116 billion in the years from 2008 to 2014. That’s more than U.S. investment in the four BRIC countries combined over the same period. About a fifth of all private sector jobs in Ireland are in some way linked to American multinationals. Apple alone employs 6,000 Irish citizens, most of them in Cork, where Steve Jobs originally opened an Apple factory in 1980.

Ireland Most Favored Nation US Foreign Direct Investment 2008 2014
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Thanks to low corporate taxes that attract big multinationals, youth unemployment in Ireland is today among the lowest in the EU. Restrictive, labyrinthine labor laws elsewhere in the 28-member bloc have immobilized the jobs market, especially for young people, many of whom have little choice but to seek work abroad. In May, the Financial Times reported that the number of EU nationals working in the U.K. had climbed to 2.1 million, accounting for close to 7 percent of its workforce—a new high.

youth unemployment in ireland lowest among select european countries
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Both Apple and Ireland vow to appeal the European Commission’s ruling, a process that will likely take years.

Next Up: Irexit?

The real question now is whether the Apple incident will motivate Ireland to follow the U.K.’s lead and pursue its own “Irexit” from the European Union. In June, I asked if we’re nearing the end of the EU experiment. If officials continue to oppose competition and restrict member states from conducting business on their own terms, entrepreneurial countries such as Ireland will increasingly feel the pressure to file for divorce

Remember, Britain will soon be free to do what it pleases to attract foreign investment—possibly away from Ireland. London already sees an opening with Apple following the tax ruling. On Tuesday, Prime Minister Theresa May’s spokesman said the tech giant is welcome to relocate to the U.K. if things don’t work out between Ireland and the EU.

This would be a high price for Ireland to pay to retain its EU membership status.

Apple by the numbers infographic

Apple Just the Beginning

American multinationals are likewise in a difficult position, as they face mounting pressure from EU regulators and tax officials. Europe doesn’t have its own versions of Apple, Facebook and others, so its only course of action is to legislate them into being noncompetitive.

Successful US Companies Under Fire European Regulators

I previously shared with you the European Commission’s proposal to require streaming services such as Netflix and Amazon Prime Video to meet a content quota. Under the plan, at least 20 percent of all programs offered in their libraries would need to be produced in Europe.

Like Apple, Starbucks was ordered in October 2015 to pay up to $33 million in back taxes to the Netherlands, a ruling the Dutch government has already appealed. McDonald’s and Amazon’s tax arrangements in Luxembourg are also being scrutinized, and Google could be added to the list.

Speaking of Google, its Madrid office was raided in June by Spanish tax inspectors, who are accusing the search giant of tax avoidance.

In yet another case, Google and Facebook could both end up having to pay licensing fees to European newspapers, magazines and other publications every time their content ends up in their search results.

WhatsApp, the most-used messaging app in the world, and its parent company, Facebook, are both currently being investigated by EU privacy regulators.

This is just a sampling of what American companies must put up with in order to do business in Europe.

The question stands: Instead of attacking American innovation and ingenuity, why don’t Europeans develop their own competitive alternatives?

 

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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2016.

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11 Reasons Why Everyone Wants to Move to Texas
August 30, 2016

Texas Wind Power

As many of you know, I was born in Canada but moved to the great State of Texas 26 years ago when I bought a controlling stake in U.S. Global Investors. As a “Tex-Can,” I’m so proud of my adoptive state and grateful for all that it’s done to help our company flourish.

But you don’t have to be a business owner to love and appreciate Texas. As you’ll see, many people are moving to the Lone Star State to take advantage of its many employment opportunities, tax advantages and all-around greatness. Below are just 11 reasons why more and more people want to move to Texas!  

1. Check out Our Mettle

The 2016 Olympic Games in Rio de Janeiro now belongs to history, and by a very wide margin, American competitors walked away with the most medals: 121 altogether. Looking at gold medals, the U.S. still ranked first, with 46 won. But if we took away what Texas collected, the Land of the Free would have fallen to third place, behind the U.K. and China.

Texas would rank third in Olympic gold medals if it were its own country
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Houston was the winningest Texas city. Home to Olympic medalists Simone Biles, Simone Manuel, Kerron Clement and more, H-Town is now 10 gold medals richer.

2. Moneybags

Texas is competitive in more than just Olympic events, of course. The state has the second-largest gross domestic product (GDP) in the Union, following California. If it were its own country, Texas would clock in at number 12 in the world, snuggled in between Canada and Australia.

Texas would rank twelth in GDP if it were its own country
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3. Tex-Can

If Texas were its own nation, in fact, its economy would be about the same size as Canada’s.

The Global Scale of America's Economy
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4. This Is Oil Country

Another thing Texas has in common with Canada? Black gold. Barrelsful of it.

Last month, Oslo-based Rystad Energy shared a report that shows the U.S. as now having the world’s largest reserve of recoverable oil, with 264 billion barrels in existing fields, unconventional shale and as-yet undiscovered areas. This is the first time such a report has moved the country ahead of both Saudi Arabia and Russia.

Were it not for the contributions of oil-rich Texas, however, this might not be the case. Thanks in large part to fracking in prolific fields such as the Eagle Ford Formation and Sprayberry Trend, the state leads all others in crude production, annually gushing out more than a third of total U.S. output.

You can see how the fracking boom helped propel the state into the same league as major OPEC nations Iraq, Iran, United Arab Emirates and Kuwait.

Texas Oil Production Raced Up to OPEC Gulf States
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5. A Mighty Wind

Texas is more than oil, of course. The natural-resource-rich state is also known for its natural gas production (it leads the nation), coal, electricity (again, number one in the States) and renewable energy—specifically, wind energy.

Texas Wind Power

Thanks to Competitive Renewable Energy Zones (CREZ) and $33 billion in invested capital, Texas ranks first in the nation for installed wind capacity and the number of megawatts generated by wind. In 2015, close to 10 percent of the state’s electricity production came from wind, according to the American Wind Energy Association.

With an estimated 17,000 Texans already employed in the state’s wind energy industry, Texas is in the process of installing an additional 5,200 megawatts.

6. Men at Work

Speaking of employment, that’s something else you can find a lot of in the Lone Star State. The oil industry might have taken a hit from falling crude prices, but the Texas economy has proven resilient. As you can see, the 2007-2008 global financial crisis had much less of an impact on state unemployment rates compared to other major countries and regions such as Canada, Australia, the European Union and United States.  

Texas Currently Has Lowest Unemployment Rate Among Selected Countries and Regions
click to enlarge

7. All Roads Lead to Texas

Welcome to Texas, drive friendly The Texas Way

Important to keeping business and commerce flowing, as well as helping commuters travel to and from their work, are roads. Texas has them in spades. According to the U.S. Department of Transportation, the state is connected by 313,596 miles of public road, the most of any state. With 18 numbered interstate highways, it also has more interstate miles than any other does.

If it were its own country, Texas would rank 13th by road network size, somewhere between Germany and Sweden.

At only $0.20 per gallon, the Texas gas tax is among the most reasonable in the nation. And because almost that entire amount goes to public transportation—$0.05 is devoted to public education—Texas has some of the best roads in the U.S.

While we’re on the topic of transportation, Texas also boasts the most airports of any state—1,415, according to StateMaster. Two of the four major U.S. carriers, American Airlines and Southwest Airlines, are headquartered in the Lone Star State.    

8. No Income Tax

There are only seven states without an income tax, Texas among them. (Alaska, Florida, Nevada, South Dakota, Washington and Wyoming round out the list.) 

Average Income Tax by State
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Neither does the state impose a corporate income tax, and last summer, Governor Gregg Abbott approved $4 billion in tax cuts for businesses and homeowners.

9. Gold Star State

The Texas bullion depository will be first in the nation

Governor Abbott is also responsible for what will be a first in the United States. More than a year after he signed a law to repatriate $1 billion in Texas gold bullion from a private HSBC vault in New York, construction will soon begin on the Texas Bullion Depository. Such a state-run gold depository doesn’t currently exist anywhere else in the U.S. It’s hoped that it will help turn Texas into a “financial Mecca,” in the words of one state senator.

10. Population Destination

Low taxes are one of the main appeals driving Texas’ rapid population growth. According to the Census Bureau, five of the 11 fastest-growing U.S. cities by population can be found in Texas. Ranking number two in the nation is New Braunfels, a lovely town originally settled by Germans that lies midway between San Antonio and Austin.

Between July 2014 and July 2015, the Lone Star State added 490,036 new residents, the most of any state by a wide margin.

Texas Added More REsidents than any other STate
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To put this in perspective, the number of new Texas arrivals alone between 2014 and 2015 exceeds the total populations of several countries, including Malta (population: 429,366, as of December 2014), Brunei (411,900, as of July 2014) and Iceland (336,060, as of June 2016). 

11. Bet on Tech

Texas Leads the Nation in Technology Exports

It’s not just people moving to Texas, though. Companies are as well—specifically tech companies, and, to get even more granular, Silicon Valley tech companies. The San Francisco Chronicle reports that, in recent years, more than $1 billion in taxable income has flowed from the Bay Area to Texas, as tech firms have sought not just lower taxes but also simpler regulation.

Indeed, the Lone Star State has emerged as a formidable tech hub to rival Silicon Valley. Employing more than 270,000 people, the state’s tech industry supports firms ranging in size from hip Austin startups to massive Fortune 500 companies such as Dell, Texas Instruments and Rackspace Hosting (which just agreed to a $4.3 billion acquisition deal by private equity firm Apollo Global Management).

For the last three years, Texas has led the nation in high-tech exports—everything from semiconductors to communications equipment. Last year, in fact, the state’s total sales amount exceeded California’s by a whopping $6.3 billion.

No wonder so many people are choosing Texas as the place to hang their hat!

 

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 6/30/2016: American Airlines Inc., Southwest Airlines Co.

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The Real Truth About Millennial Investors
August 29, 2016

Millennials are expected to control up to $24 million by 2020

We’ve finally reached late August, meaning your Facebook newsfeed is probably brimming with children and teenagers sporting brand new sneakers and backpacks in preparation for their first day of school. Maybe one or two of your young ones are heading back this week or next. If so, I wish them all the best this year, and I hope you enjoy and cherish watching them grow.

It’s also around this time that hundreds of thousands of 18-year-olds will be attending their very first day of college or university. This cohort, born mostly in 1998, is among the youngest of millennials, the generation born between 1980 and 2000. According to Census Bureau data, millennials are now the most populous adult segment in U.S. history, 83.1 million strong as of last summer. (By comparison, baby boomers number 75.4 million.)

This is why I find it so crucial to keep up with the trends, lifestyles and spending habits of this important group (not least of all because my own two sons belong to it). Any investment manager would be wise to do the same. Millennials are often characterized as entitled, lazy and disengaged, but many of these perceptions fail to stand up to scrutiny when we consider what they’ve already achieved in the information technology space. If you regularly use Facebook, Airbnb, Uber, Pinterest, Dropbox or any number of other popular apps valued in the tens of billions, you benefit from the work and imagination of entrepreneurs who came of age sometime during George W. Bush’s eight-year presidency.

There’s no getting around it: Millennials are our future leaders, innovators, consumers and investors. By 2020—a mere four years from now—they will make up an estimated 50 percent of the global workforce. What’s more, they’re expected to control between $19 trillion and $24 trillion on a global scale, according to consulting firm Deloitte.

Twenty-four trillion dollars. Let that sink in for a moment.

The First Digital Natives

One of the best ways to get a clear sense of the world this group has come of age in, I’ve found, is the Beloit College Mindset List. Every August since 1998, Beloit College has put together a list of cultural touchstones that helped shape and influence the current incoming class of college freshmen.

Last year, I was fascinated to learn that the class of 2019 has always depended on Google to answer their questions, always treated Wi-Fi as an entitlement, always known marijuana as a legal therapeutic substance in a growing number of states.

This year’s list for the class of 2020 is no less eye opening. Below, I’ve selected several points that illustrate millennials’ close relationship with digital technology.

  • There has always been a digital swap meet called eBay.
  • They have never had to watch or listen to programs at a scheduled time.
  • If you want to reach them, you’d better send a text—emails are oft ignored.
  • Books have always been read to you on audible.com.
  • Bluetooth has always been keeping us wireless and synchronized.
  • Airline tickets have always been purchased online.  

Millennials are expected to control up to $24 million by 2020Taken together, these observations shed some light on the expectations millennials have of their brands and services—expectations such as convenience, immediacy, transparency and a strong sense of community. It doesn’t matter how iconic or longstanding a brand is. If it fails to deliver on these expectations, 83 million millennials will antiquate it. (Remember Blockbuster?) Word of mouth is as important as ever, but the scope has vastly been broadened since their parents and grandparents’ time, from a handful of neighbors and acquaintances to a digital sea of millions.

Social Responsibility Matters

More so than past generations, millennials are mindful of ethical business practices and base many of their spending and investment decisions on those practices.

A recent study conducted by marketing tech firm Adroit Digital found that 38 percent of millennial consumers will drop a brand for another if it’s alleged to be doing “bad business”—consciously polluting a river, for example, or mistreating workers.

That social awareness translates to the investment side, even among wealthy investors. A vast majority of younger high-net worth individuals (HNWIs), defined as those controlling wealth greater than $10 million, expect their money managers to “screen investments based on environmental, social and governance factors,” according to FactSet. Sixty-one percent of millennials see these factors as essential, more than double the rate of their 55-and-older peers.

Younger Investors More Interested in "Socially Responsible" Investments
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Proceeding with Caution

The 2008-2009 financial crisis had a huge, lasting impact on young investors, who might have seen the value of their parents’ 401(k)s and portfolios cut nearly in half. As a result, many twenty and thirtysomethings tend to be a bit more cautious and conservative with their finances than Mom and Dad.

Consider this: In December 2015, UBS surveyed 2,638 affluent investors, including 584 millennials, on their investment attitudes. As a group, millennials maintained a larger cash holding than older generations (41 percent on average, compared to Generation X’s 28 percent and baby boomers’ 20 percent) and were unsatisfied with how their portfolios were positioned. Only 15 percent claimed they were “very happy,” compared to 32 percent of Generation X and 50 percent of baby boomers.

This could partially explain why millennials also have a much greater propensity to rent instead of commit to buying—which, in turn, helps explain the meteoric rise of “sharing economy” pioneers such as Uber (now worth more than Ford and GM) and Airbnb (worth more than Hyatt and Wyndham Worldwide).

Meanwhile, younger and lower-income Americans are less likely than their older peers to participate in investments such as mutual funds.

Younger, Lower-Income Americans Less Likely to Invest in Mutual Funds
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This is worrisome, especially since they themselves are skeptical of Social Security’s longevity. According to the Transamerica Center for Retirement Studies (TCRS), as many as 80 percent of millennials fear Social Security will no longer be around by the time they retire.

Fortunately, we have a solution.

Dollar-Cost Averaging

For many cautious millennials, taking a more long-term, disciplined approach to investing makes sense. This can be achieved through dollar-cost averaging, an investment technique that lets you invest a fixed amount in a specific investment at regular, automatic intervals—often just $100 per month.

Think of it like dipping your foot into a lake inch-by-inch, instead of taking a running leap off a 20-foot cliff.

That’s the case with our popular ABC Investment Plan, which allows investors to fund their financial goals more affordably. Of course, no investment plan can guarantee a profit or protection against a loss in a declining market, and you should evaluate your financial ability to continue in such a program in view of the possibility that you might have to redeem shares in periods of rising and declining share prices.

But for younger investors who might feel hesitant to make the plunge all at once, the ABC Investment Plan is an option worth considering.    

 

 

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 6/30/2016: Ford Motor Co., Wyndham Worldwide Corp.

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These Olympian Gold Royalty Companies Are Insanely Attractive
August 22, 2016

Why You Should LIke These Gold Medal Royalty Companies

In a note last week, UBS echoed its earlier assessment that gold has indeed “entered a new bull run,” as I shared with you last month. The precious metal had a spectacular first half of the year, with total global demand reaching 2,335 tonnes, the second-highest on record, according to the World Gold Council (WGC).

Despite this, gold is still under-owned, accounting for only 3 percent of total ETF assets under management, UBS writes. The group adds there is room for new or returning market participants who might have cleared out their gold positions during the recent bear market.

Driving the bull run, according to the group, are “a prolonged period of depressed real yields” and “elevated macro uncertainty.” These are themes I’ve returned to many times in the past six months, with global government bond yields continuing to drop below zero and economic and geopolitical unrest advancing following the Brexit referendum and ahead of the U.S. presidential election this November.

Confidence in monetary policy and appetite for government debt continues to erode. According to Zero Hedge, foreign central banks dumped a record $335 billion in U.S. Treasuries during the last year. The top seller in June was China, which cleared $28 billion in Treasuries off its balance sheet. Over the same period, the world’s second-largest economy added to its official gold reserves—500,000 ounces in June alone—in an effort to diversify its holdings.

China Winding Down U.S. Treasuries, Loading Up on Gold
click to enlarge

Investors should take heed of the fact that even central banks have become net buyers of gold. It’s always been my recommendation to maintain a 10 percent weighting in your portfolio—5 percent in gold bullion, another 5 percent in gold stocks.

A Superior Way to Gain Exposure to Gold

One of the best ways to play gold, I believe, is royalty and streaming companies. As a reminder, these companies serve as specialized financiers to explorers and producers. In return for upfront financing, they can receive one of two different types of payments. In one way, they can receive a royalty, or percentage, on whatever future sales the debtor company makes during the life of the mine.

In another way, they can buy a stream of precious metals at a low, fixed price. Discounts on gold, for instance, could be as much as 75 percent. This has typically been the preferred method for paying back the royalty company.

Some of our favorite names in this space include Franco-Nevada Mining, Silver Wheaton, Royal Gold and Sandstorm Gold, all of which have outperformed underlying gold for the 12-month period. Click the hyperlinks to read my special reports on Franco-Nevada and Silver Wheaton.

Royalty Companies Outshining Gold
click to enlarge

Better Allocators of Capital

Royalty and streaming companies show great opportunity on the upside but avoid many of the risks and operating expenses that explorers and producers must deal with.

Interestingly, they all employ a small group of technically skilled mining geologists, engineers, metallurgists and financial mining executives to analyze and monitor their investments.

Because they’re not responsible for buying mining machinery and building, operating and maintaining mines, they have a much lower total cash cost per ounce of gold than miners do. (In this context, cash cost refers to operational expenses that are paid using cash, rather than credit.) Their overhead is kept at a minimum, and they have some of the highest sales per employee in the world. As you can see below, their debt per share is much lower than senior miners Newmont Mining and Barrick Gold—the Army to royalty companies’ more agile and tactical Navy SEALs. Last year, Barrick cut $3.1 billion in debt last year and is on track to pay down an additional $2 billion this year.

We Believe Royalty Companies Have a Superior Business Model
click to enlarge

Their margins have typically been much larger than traditional explorers and producers, allowing them to remain profitable even during gold bear markets.

Take Sandstorm, one of the younger royalty companies. Its second-quarter cash cost per ounce of gold was a mere $261, giving it operating margins of $994 per ounce.

Compare this to Barrick, the world’s largest gold producer. Barrick reported cash costs of $578 per ounce, nearly double that of Sandstorm—and Barrick has some of the lowest costs compared to other miners, according to Motley Fool.

Royalty Companies: Capturing the Upside, Avoiding the Downside
  Mining Companies Royalty Companies
Precious metals price upside X X
Exploration upside X X
Production rate upside X X
No sustaining costs   X
No exploration costs   X
No capital expense overruns   X
Fixed cash costs   X

Investors like royalty companies because they’re a skilled team of former miners and mining executives who generate substantially greater gross margins and have materially fewer employees, with less general and administrative expense.

Further, they offer spectacular optionality. They often buy an asset with a payload over 10 years. However, these deposits often extend for 30 years, so they have potential for a much bigger payback. If the mining company expands production, it’s free additional cash flow, and if they make a large discovery near the producing mine, the royalties have free upside growth.

For further reading, one of the strongest overviews of royalty companies is Streetwise Reports’ “Precious Metal Royalties: The New Landscape.”

A New Entrant

Just as there still might be ample scope for gold investors to participate in the market, one CEO is betting there’s still room for another entrant into the precious metals royalty company space. Long-time precious metals commentator David Morgan recently helped found Lemuria Royalties, which reported in June that it had acquired its first silver royalty from a Peruvian mine operated by a subsidiary of Fortuna Silver Mines.

In January of this year, Morgan summed up his reasoning for establishing a new royalty company: “We favor the streaming and royalty companies a great deal because the risk is very low relative to, let’s say, an exploration company or even a producing company.”

This is precisely why we continue to find the royalty business model very attractive.

 

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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 06/30/2016: Barrick Gold Corp, Fortuna Silver Mines, Franco-Nevada Corp, Newmont Mining Corp, Royal Gold Inc., Sandstorm Gold Ltd., Silver Wheaton Corp.

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Net Asset Value
as of 03/29/2017

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