Share this page with your friends:

Print

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.

Copper Well Positioned to Lead the Next Resource Cycle
May 6, 2019

Summary

  • Ivanhoe’s high-grade Kamoa-Kakula copper mine to come online soon.
  • Once again, bitcoin won’t replace gold.
  • Peak gold is closer than you think.

Ivanhoe Mines' high-grade Kamoa-Kakula copper project in the Democratic Republic of Congo

The world is on a path to vast shortages in copper, nickel, lithium and other important minerals that are necessary to build the batteries in electric vehicles. So says Tesla’s global supply manager, according to Reuters.

The comment comes as the electric car maker broke ground in Shanghai for its first overseas “Gigafactory.” Tesla’s first battery factory, in Reno, Nevada—the largest in the world—is still in expansion mode and aims to produce as many as 105 gigawatt hours (GWh) of battery cells and 150 GWh of battery packs by next year.

All combined, that’s a lot of copper that will need to come down the pipeline very soon.

But some analysts now say that capacity isn’t quite there yet to feed global demand, and the industry could be running in deficit by 2021. Commodities analyst firm CRU Group expects copper supply to be short some 41,000 tons that year and 270,000 tons a couple of years later.

Meaning: We could be looking at another commodities super-cycle, with the red metal leading the way.

Global Copper Market is Expected to Go into deficit in 2021
click to enlarge

“You’re going to need a telescope to see copper prices in 2021,” my friend Robert Friedland, billionaire founder and executive chairman of Ivanhoe Mines, told us last year during a visit to our office.

I had the opportunity to hear Robert speak last week at the Royal Bank of Canada (RBC), where he explained that investment in metals and mining must increase to meet the unique demands of the future. I also caught up with Ivanhoe executive vice chair Egizio Bianchini, who previously served as vice chair and co-head of metals and mining at BMO Capital Markets.

visiting with ivanhoe mines executive co-chairman robert friedland (left) and executive vice chairman egizio bianchini

Robert and I are in agreement: The trend toward mass electrification—of everything from vehicles to renewable energy—favors copper, and investors might want to consider getting in now.

Ivanhoe remains my favorite way to get copper access. I own the stock personally. The Vancouver-based miner is nearing the start of production at its long-awaited, high-grade Kamoa-Kakula project in the Democratic Republic of Congo, which has recently gone through leadership change. Ore grades are off the charts. The Kamoa-Kakula deposit—“unquestionably the best copper development project in the world,” as Robert describes it—was fast-tracked after China’s CITIC Metal invested more than $450 million, or nearly $3 a share, late last month.

If fears of a bear market or economic recession are keeping you up at night, I think high-quality resource stocks like Ivanhoe are where you want to be because they’ve historically held up very well.

Ivanhoe Mines is testing its 52-week high
click to enlarge

I’m also heartened to hear that infrastructure might soon be moved to the top of the U.S. government’s priorities, which would be a boon to copper and other base metals. President Donald Trump recently met with Democratic congressional leaders and tentatively agreed to a $2 trillion infrastructure package to overhaul U.S. roads, highways, bridges, railroads and waterways. Where this money will come from, I don’t know, but it’s a start.

India’s prime minister, Narendra Modi, made a similar pledge in April, promising as much as $1.44 trillion in infrastructure spending should he win reelection later this month.

Once Again, Bitcoin Won’t Replace Gold

Moving on to another metal, a new TV and social media ad blitz is urging investors to “drop gold” in favor of bitcoin. Maybe you’ve seen it. The ad, from crypto investment firm Grayscale, tries to make the case that investing in gold is tantamount to “living in the past,” and that bitcoin is the more logical investment in today’s digital world.

Nonsense.

I’ve commented on the comparison between the two asset classes before. As much as I believe bitcoin has a bright future, I couldn’t agree less with the idea that it will replace gold in people’s portfolios.

Gold is a tangible, time-tested commodity and currency—the best possible candidate for money among all of the known elements, in fact. It’s highly liquid. In 2018, daily trading volume averaged an incredible $112 billion, the sixth largest of any asset class for the year. Gold transactions don’t require electricity or computer technology, and it has a number of other applications besides trading and investing—think jewelry, electronics, dentistry and more.

The same can’t be said of bitcoin or any other digital coin.

That’s not to demean bitcoin. I’m only saying that the two assets are very different. It baffles me that some people continue to try branding bitcoin as a digital replacement for gold. This isn’t the same as upgrading from analog VHS to 4K Blu-ray.

As you know by now, I recommend a 10 percent weighting in gold, split evenly between physical bullion and gold mining stocks. I wouldn’t advise the same percentage weighting in bitcoin, which is much more speculative and volatile. Whereas gold has a daily standard deviation of only ±1 percent—approximately the same as the market—bitcoin’s is closer to ±5 percent. The difference in volatility is even greater for the 10-day, as you can see in the table.

Bitcoin and Ethereum Are More Volatile Than Gold and the Stock Market
Standard Deviation For One Year as of 3/31/2019
  One Day Ten Day
Gold Bullion ±1% ±2%
S&P 500 Index ±1% ±3%
Ethereum ±5% ±16%
Bitcoin ±4% ±12%
Past performance does not guarantee future results. Source: Bloomberg, U.S. Global Investors

What’s Supporting Gold Right Now?

Gold tested its 2019 low of around $1,266 an ounce this week, but some recent developments should be supportive of prices going forward.

For one, the pool of negative-yielding government bonds in Europe continues to surge. So far this year, it’s climbed some 20 percent to around $10 trillion, the highest level since 2016, according to Deutsche Bank. And it’s not just government debt. According to Tradeweb, nearly a quarter of the $3.6 trillion worth of investment-grade corporate debt in Europe carries a negative yield. This is constructive for gold, which has been trading closely with the amount of negative-yielding debt.   

rising negative yielding debt in europe should support the price of gold
click to enlarge

Gold prices jumped a bit last week following the news that the manufacturing sector, both in the U.S. and abroad, continues to slow on global trade concerns.

The Institute for Supply Management (ISM) reported that its U.S. manufacturing index fell sharply in April to 52.8, 2.5 points down from the March reading of 55.3. This is the lowest reading since Donald Trump was elected president in November 2016. Meanwhile, a closely watched barometer of manufacturers in the Chicago metropolitan area fell even more dramatically in April to 52.6, down 6.1 points from 58.7 a month earlier. The WSJ Dollar Index fell a marginal 0.2 percent to 90.45 on the news, which helped support the gold price.

U.S. Manufacturers Grew at Their Slowest Pace in April Since Trump Was Elected
click to enlarge

Peak Gold Is Closer Than You Think

Looking more long term, I think the idea of “peak gold” still makes the case for investing in gold very compelling. This is something I’ve been writing about since as far back as 2010.

Although global gold output is expected to hit a new record high this year—to the tune of 109.6 million ounces, according to S&P Global Market Intelligence—production is seen falling steadily every year thereafter. The only major gold-producing country to increase its production between now and 2024 is expected to be Canada. As a result, it could become the second largest producer after China.

production from major gold producing countries, 2014 - 2024
click to enlarge

South Africa is currently on an extended losing streak—it recorded its 17th straight month of declines in gold production in February—but Australia is expected to fall the most over the next five years, thanks to faster-than-anticipated depletion of older mines such as St Ives, Paddington, Telfer and others. Today Australia is the second largest gold producer, but by 2024 it could edge down to number four.

The largest Australian gold miner, Newcrest Mining, reported lower production in the first quarter of 2019 relative to the previous quarter. Output stood at more than 623,000 ounces, about 5 percent down from 655,000 ounces in the December quarter.

Central Banks Aren’t Done Adding Gold to Their Reserves

The yellow metal is a finite commodity, one of the many reasons why it’s so highly valued, and it’s about to get even more finite. Demand, meanwhile, is only increasing, as evidenced by central banks’ insatiable consumption.

According to the latest report by the World Gold Council (WGC), gold purchases by central banks totaled 145.5 tonnes in the first quarter. Not only was this the strongest first quarter since 2013, but on a rolling four-quarter basis, demand reached an all-time record high of 715.7 tonnes.

Perhaps the central bank chiefs didn’t see Grayscale’s ad to “drop gold.”

Missed my review of legendary small-cap resource investor Bob Moriarty’s new book? Read it now by clicking here!

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance.

The ISM Manufacturing Index is a widely-watched indicator of recent U.S. economic activity. Based on a survey of purchasing managers at more than 300 manufacturing firms by the Institute for Supply Management (ISM), the index monitors changes in production levels from month to month.

The Chicago Business Barometer is also known as Chicago PMI. It is calculated based on a survey of purchasing managers in the Chicagoland area. Respondents are polled to assess production volume, new orders, backlogs, unemployment and supplies in their firms. Instead of providing a quantitative measure, respondents provide a relative assessment of changes in the currents month: whether the situation has improved, worsened or has not changed.

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 (03/31/2019): Ivanhoe Mines Ltd.

Share “Copper Well Positioned to Lead the Next Resource Cycle”

Hard Truths in Resource Investing, According to Bob Moriarty
May 1, 2019

"The day you start thinking you are smarter than the market, you have made a giant mistake that will cost you dearly.”

“All debts get paid… They are paid either by the borrower or by the lender.”

“The mob is always wrong. All you have to do is figure out what they think and then do the opposite.”

“Listening to liars gets very expensive.”

I could keep going, but these are just some of the kernels of wisdom and hard truths I came across while reading Robert Moriarty’s latest book, Basic Investing in Resource Stocks: The Idiot’s Guide. I’ve known Bob for many years, and if there’s one thing he’s proven about himself time and again is that he doesn’t mince words.

Nor should he. Bob’s accomplished far too much in his life to worry about tiptoeing around the truth. Many people reading this right now probably know Bob best from his highly popular resource websites 321Gold and 321Energy. 321Gold, I should point out, has done a lot over the years to bring U.S. Global Investors to people’s attention, and I’m grateful to Bob for that.

Besides extreme contrarian resource investing, Bob also has a place in the history books as an aviator. Not only was he the youngest naval combat pilot, at 20 years old, during the Vietnam War, but he still holds the time record for flying from Paris to New York and back again, in 1981. Three years after that, he famously flew his Beechcraft Bonanza V35 under the Eiffel Tower.

But back to the book.

Beware of False Prophets

Perhaps what I admire most about Basic Investing is how refreshingly open it is. Again, Bob doesn’t mince words, and he’s more than willing to share what he describes as his own past errors so that readers might learn from them. (To be perfectly honest, though, the longer anyone spends in the capital markets, the more likely it is that he or she will make a bad bet or 10. No one gets it right all of the time.)

Just as he does in his 2016 bestseller Nobody Knows Anything,  he makes the case that you should be skeptical of anything the “experts” and “gurus” tell you. Otherwise, you could get seriously burned. In Bob’s experience, that’s amounted to placing too much trust in a junior resource company’s management team, some of whom go on to squander the money they raised.

“If you find a company with a story so compelling, so bulletproof that it simply cannot fail, rest assured that the village idiot is right around the corner looking for a job,” he colorfully writes. “When you believe [the company] would work even if someone spent 24 hours a day, seven days a week trying to screw it up, you will find that the village idiot ends up running the company and puts in a lot of overtime.”

No Alternative to Gold and Precious Metals

Despite the risk of having to deal with the occasional ineffective or destructive CEO, Bob says, “investing in resource shares may be the only logical investment for those looking to hedge other potentially more dangerous alternatives.”

Government, corporate and household debt are all at record highs, and the “Yellow Vest” revolution in France threatens to spill over into the rest of the world. The coming financial meltdown could make 2007-2008 look like a dress rehearsal, and Bob sees gold “as a solution to our continuing financial chaos. It worked for much of history and nothing says it won’t work again.”

“If you don’t own some gold (or silver or platinum or palladium or rhodium) that you can lay your hands on, you may regret it. Precious metals are the most secure insurance policy that you can buy to protect your financial house, even as it begins to burn down.”

Trading Metals and Resource Stocks 101

Bob’s book is rich with practical advice on trading precious metals and resource stocks. Timing is key on both sides of the trade, and Bob uses a number of tools to help him make as large a profit as he can. Obviously you want to buy low and sell high, but sometimes that’s easier said than done. That’s where metal price ratios come in.

In the chart below is the gold-to-silver ratio. What it shows is the number of ounces of silver it takes to buy one ounce of gold. Since January 2000, the average has been about 64. But in the past few months, it’s spiked up to an incredible 85 or 86—meaning silver is “dirt cheap” relative to gold. Buying silver at this time, then, might make a lot of sense if you believe silver prices will soon go up or gold prices will go down.

Silver is dirt cheap relative to gold
click to enlarge

“All commodities deviate from the mean at times, and always regress to the mean,” Bob writes. “Prices naturally go up and naturally go down, but they always go back to the mean eventually.”

Chapter 14 of Basic Investing includes a helpful list of other tools and websites Bob uses on a regular basis to track commodity prices and trends, and to time his trades.

Hard truths, practical guidance, invaluable insight. It’s all there in Bob’s book, which, I should add, is also a delightful, often humorous read. Order your copy today!

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 standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. Mean reversion is a theory used in finance that suggests that asset prices and historical returns eventually return back to the long-run mean or average level of the entire data set.

Share “Hard Truths in Resource Investing, According to Bob Moriarty”

3 Things Driving Oil Prices Right Now
April 29, 2019

Gold is the second best performing asset class since 1999

We’ll get to talking about oil and energy in just a moment, but first I have something important to share with you all.

As many of you know, aside from being the chief executive of U.S. Global Investors, I also serve as the interim chairman and interim CEO of HIVE Blockchain Technologies, the first publicly listed company engaged in the mining of cryptocurrencies.

I’m incredibly honored to play a role in this emerging and very promising digital industry, and it’s a responsibility I take very seriously. The search for a new HIVE CEO is underway, but in the meantime, I’m committed to the company’s success, and I see no greater duty than fulfilling my fiduciary obligation to all shareholders equally. On top of all this, I haven’t taken a salary as interim CEO.

If you’ve studied corporate law, you might be familiar with duty of care and duty of loyalty, the twin pillars of fiduciary duty. Whereas the former charges officers and directors to act prudently, the latter says that they should refrain from benefiting themselves at the expense of the company they serve.

To me, that means insisting on good corporate governance and transparency. I expect that from not only HIVE’s own leaders but also those at Genesis, HIVE’s strategic partner and largest shareholder.
Sadly, Genesis seems not to be of the same mind.

I won’t rehash all of the grievances here. Those curious can read the press release.

Suffice to say, though, that ideologies clashed the weekend before last, of all weekends, when many families were celebrating Easter or Passover. After months of what I believed were good faith efforts to get Genesis to disclose all costs for mining operations—leading to a breach of contract we value at around $50 million, as per the master service agreement (MSA)—Genesis tried to “resolve” the dispute by removing all HIVE directors who were independent of Genesis’ self-interests, including myself, and replacing them with their own officers and employees.

Ultimately, this boardroom dispute failed.

So why am I sharing this with you? One, I wanted to give you some insight into why HIVE stock fell some 40 percent over two days this week. Before the selloff, HIVE had been tracking Ethereum and was up nearly 200 percent for 2019. As Warren Buffett might say, Mr. Market was none too pleased with Genesis’ actions.

HIVE Blockchain Technologies trades closely with Ethereum
click to enlarge

And two, I take my role as interim CEO seriously. I believe that my fiduciary duties extend to all shareholders of HIVE, not just to Genesis. I seek and fight for good corporate governance. I manage conflicts of interest. And I demand transparency. These are qualities I admire in companies as chief investment officer of U.S. Global Investors.

Despite all this, I’m hopeful that a satisfactory resolution can be reached between the two parties, especially now as prices of digital currencies are stirring to life. In an exciting bit of news, bitcoin not only traded above $5,500 last week but also signaled a bullish “golden cross” for the first time since 2015. To read more, jump to the Blockchain and Cryptocurrency section by clicking here.

Now let’s talk about energy! Below are three things from last week that you should know about.

1. Goodbye, Iran Oil Import Waivers. Hello, Higher Energy Prices?

Besides Occidental Petroleum’s bidding war with Chevron for fellow producer Anadarko Petroleum, the big energy news from last week is that President Donald Trump, as expected, moved to end all sanction waivers for nations that import Iranian oil. Starting in May, countries that still buy oil from Iran could face U.S. penalties. In response, Brent crude hit $75 per barrel for the first time in six months.

Oil and natural gas are the Middle Eastern country’s most important export, so the policy is intended to hit Tehran where it hurts. The plan, announced last summer, appears to be working so far. Between January 2018 and January 2019, Iranian oil exports fell by nearly 700,000 barrels per day (b/d). (The data could be inaccurate, though, since Iranian oil tankers are believed to be turning off their transponders in an effort to conceal themselves from satellite tracking systems.)

US sanctions hav estedaily shrunk Irans oil exports
click to enlarge

It’s unlikely that all countries will immediately zero-out imports from Iran. I would be surprised to see China, the number one consumer, trim its imports much further. Iran is such a key strategic player connecting Asia and the Middle East as part of China’s Belt and Road Initiative (BRI).

So who will pick up the global slack if Trump’s plan succeeds and Iranian exports go offline? Trump suggests Saudi Arabia and the United Arab Emirates (UAE) will. Secretary of State Mike Pompeo also believes the U.S. can, but this would “be a stretch,” according to Bloomberg.

“Oil condensate from the Eagle Ford shale basin in Texas is similar, though a bit heavier than Iran’s light South Pars condensate. But the Eagle Ford produces only about 150,000 b/d of its product, compared with Iran’s daily output of 600,000 barrels in 2017,” the article reads.

2. U.S. Crude Inventories Climb More Than Expected

But maybe there’s something to what Pompeo says after all. Thanks to its fracking industry, the U.S. is producing oil at a breakneck pace. This is turning up in domestic inventories, which have been building steadily over the past seven months or so. For the week ended April 19, oil stocks rose by 5.5 million barrels, much more than what analysts had anticipated. At 460 million barrels, total crude stocks now sit at their highest level since October 2017.

US crude stockpile rose to its highest since October 2017
click to enlarge

The U.S. is already the biggest oil producer in the world, having overtaken Saudi Arabia and Russia last year. Looking ahead, U.S. output could equal that of both countries by 2025, according to International Energy Agency (IEA) estimates. And in January, the Department of Energy said that the U.S. will become a net exporter of energy in 2020—something it hasn’t achieved in almost 70 years.

3. Oil Prices Were Headed for Overbought Territory… Until Trump Stepped In

Oil prices neared overbought territory, as you can see in the chart below, which shows oil’s 14-day relative strength index (RSI). When an asset’s RSI rises above 80, it typically means that it’s overbought, suggesting it might be time to take some profits. When it falls below 20, meanwhile, it often means that the asset is oversold, signaling a possible entry point.

Relative strength can help investors time their oil trades
click to enlarge

Again, oil prices looked to be on the overbought side, especially after the administration announced the end to sanction waivers. But the trend could reverse very rapidly.

Case in point: On Friday, the president, who favors lower energy costs, claimed that he “called up” OPEC and told the global oil exporting cartel: “You’ve got to bring [gasoline prices] down, you’ve got to bring them down.” Which, of course, is not in Saudi Arabia’s best interest.

In any case, the price of West Texas Intermediate (WTI) plunged close to 4 percent on Friday, its biggest one-day drop since mid-December. As a result, oil’s RSI sharply turned down to around 50, from nearly 72 on Monday.

Depending on what happens in the next few days, oil traders might be looking at another buying opportunity.

Get even more award-winning market commentary by subscribing to my CEO blog Frank Talk!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

The relative strength index is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period.

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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2019.

Share “3 Things Driving Oil Prices Right Now”

Invest in Optimism: A Conversation With Keith Fitz-Gerald
April 24, 2019

If you’re as much a consumer of financial news as I am, chances are very good you’ve seen Keith Fitz-Gerald as a regular contributor on Fox Business, CNBC and elsewhere. That, or read his invaluable market commentary online.

Nothing beats catching him in person, though, and I highly advise you do so if you get the opportunity.

Part investment guru, part motivational speaker, Keith manages to make you feel as if you can conquer the world… and have a great time doing it. I’ve had the privilege of seeing him present a number of times before—most recently at Money Map Press’ Black Diamond Conference in Delray Beach, Florida—and I’m always in awe not just of his depth of market knowledge but also the amount of energy he brings to the table.

The longtime writer of the popular Money Map Report and High Velocity Profits newsletters, Keith was gracious enough to chat one-on-one with me recently. Below are highlights from our conversation, during which we touched on a number of topics ranging from portfolio construction to the similarities between investing and the martial arts.

You have a unique story about how you first got interested in investing. If I remember, it began with your grandmother.

Thanks for remembering! We all called her Mimi. She was widowed at a very young age and turned a small life insurance settlement into everything she needed to live out the rest of her life and then some. She became a global investor long before that term even existed. When I turned 15, Mimi didn’t give me the usual books or sweaters other teenagers might have received. Instead, she got me subscriptions to Value Line and Forbes, and every Sunday afternoon we would meet over martinis and ham sandwiches to talk about the markets.

Mimi wanted me to understand that the world was much bigger than my garage. Our discussions weren’t necessarily about investing, but about the companies, products and services that were changing the world I would inherit. We talked about how and why that mattered and, of course, how to invest in markets that would change dramatically during my investing lifetime.

She often used to say “Get out there and see it.” Mimi traveled all over the world as a means of vetting her investments and that’s a habit I’ve kept up to this day. Eventually, Mimi got so good at translating what she saw into investment ideas that the Merrill Lynch brokers she worked with used to call her and ask for her thoughts.

Mimi was an exceptionally bright and astute observer of the world around her. Yet, at the same time, she was a very humble person. I miss her today but have no doubt she’s out there watching the markets carefully and looking, as she always did, ahead for cues as to what’s next.

Hopefully, those are traits that I’ve picked up. I am a big believer in “boots on the ground” when it comes to exploring potential investments. I’ve traveled widely all over the planet over the past 36 years, often on my motorcycle with my wife. I want to see the world around me so I can accurately ascertain where the best opportunities are because there is no proxy for firsthand knowledge.

Speaking of your wife… I understand she has two black belts? What’s that like?

That’s right, she does. I’ve been doing martial arts since I was 15 years old, and Noriko’s been doing it since she was about five, so we’re a good match. Practically speaking, I don’t worry very much about home security if she’s on the case! Noriko’s the  love of my life and we’ve been together nearly 24 fabulous years.

Many people don’t realize that the martial arts are not about defense or even attack. Instead, they’re really about personal growth and character—who you are as a person. One of the very first things you learn when you obtain a black belt, for example, is just how much you don’t know. In the Western world people commonly believe that a person with a black belt knows everything and must therefore be an expert. Yet, the first time you put one on, you realize just how much you don’t know and what a student of life you have become. In that sense, a black belt is really another door opening… to more advance and highly personal learning. And having married Noriko, and being exposed to the martial arts, and subsequently my life in Japan over the last 30-something years, I very much have that mindset.

It sounds like there’s a lot of crossover between martial arts and investing.

Absolutely. I think about that every day, in fact. I’ll give you a great example. There’s a Japanese proverb—and I’m paraphrasing here—the bamboo that bends is stronger than the oak that resists. That’s just as true in martial arts as it is in the markets. If you try to block a punch or a kick straight on, chances are you’re going to have to take the blow and risk getting hurt. But redirect that energy or sidestep it before impact, and now you’ve got the upper hand.

Investing is very similar. You will lose money if you remain inflexible. Success and big profits come from constantly adapting to changing conditions rather than trying—as a lot of investors do—to second-guess the unguessable.

You’ve been in the capital markets for a while now. What’s the hardest lesson you’ve had to learn during that time?

That’s an interesting question with many possible answers. However, if I had to choose just one, the single toughest lesson is learning to pay attention to the environment around you. And I don’t just mean reading the headlines or the internet either. I mean really becoming a student of what’s happening around you and why.

You can’t ignore the past like a lot of investors do. History won’t repeat, but it rhymes, and the markets have a very defined upward bias, which means that you can align your money with some really super profit potential if you understand how, why and where the move “fits.” The other thing people don’t realize, because they get so focused on the trees that they cannot see the forest, is that the financial markets have a very defined preference for moving forward. That’s why there are future-looking valuation methods. And if you’re trapped in the past making decisions on data that’s based solely on the past, on emotion, on stuff that should be in the rear-view mirror, you’re going to miss the opportunities.

You’re known for the 50-40-10 portfolio, among other things. Describe that for us.

Thanks for pointing that out. Let me start by saying that conventional thinking about diversification is, I believe, badly flawed. The theory is a lot like throwing spaghetti against a wall and seeing what sticks. The proposition is that you have lots of great stocks that don’t go up and down at the same time, but the reality is that it’s more like rearranging the deck chairs on the Titanic in today’s highly computerized markets, when correlation is higher than it’s been at any point in financial history.

If you want to get ahead and diversify your portfolio, the irony is that you don’t spread it all over. You don’t, for example, see buildings named after “diversifiers,” but you do see ‘em named after people who have made a boatload by taking well-reasoned, calculated risks. If you can do that, the returns—the giant profits, really—will come.

The simplest way to describe the 50-40-10 portfolio is to think of your money like a food pyramid. The stuff at the bottom is what I call the “50”—the 50 percent, the Base Builders—that’s like the stuff your mother told you to eat even though it tastes like wallpaper because it’s good for you. The stuff in the middle, the 40 percent, is what I call Global Income and Growth. That’s the stuff that you wouldn’t mind having another helping of because it actually tastes good and it’s good for you and your money. But then you get to the 10 percent, the Rocket Riders. That’s the chocolate ice cream, the beer, the chips—whatever your favorite indulgence is.

This structure gives you unprecedented stability, lowers your risk… yet keeps you profit-oriented at all times even in market conditions that send other investors packing.

the 50-40-10 portfolio

Unfortunately, many investors “invert” the pyramid. They think that they’re investing but find out the hard way they’re speculating, and when the markets go against them, they lose a lot of money. That’s because instead of having 10 percent in speculative stocks, they’ve got 50, 60, 70 or even 80 percent in speculative stocks. And then they get slammed up one side and down the other. Emotion takes over and they sell out, often at huge losses they’ll never make up.

But if you’re using the 50-40-10, even on the market’s worst days you can confidently stride into the future knowing that the bulk of your money is built on a solid foundation. Your volatility is lower and you have the freedom to screw up every now and then. Plus, periodically rebalancing means you are forcing yourself to buy low and sell high over time.

In today’s market, what are some examples of speculative stocks?

Defining that term depends on how you view the future. I view the future through a very simple lens that I’ve developed over the years and which builds upon the 50-40-10 portfolio model I’ve just described. I divide the world into companies using two categories… those making “must-have” products and services you can’t live without and those that make “nice-to-have” products and services. The former is what you want to own every chance you get while the latter is usually a risk you can do without.

Examples of nice-to-haves today would be Lyft or Uber. Those companies are nothing more than glorified taxi companies with software to help you hail a ride. They’re no different from picking up the yellow pages 50 years ago, except now you’re using your smartphone.

Compare that to a company like Becton Dickinson (BDX), which makes billions of single-use syringes at a time when the population is aging and insulin injections are made more and more.

Both groups have their ups and downs, but Becton Dickinson is far more stable and will continue to pull ahead over time thanks to a combination of appreciation and income. Many investors underestimate the impact that yield can have on their money.

becton, dickinson & co. (BD) vs. the market
click to enlarge

Lyft and Uber, on the other hand, may never be profitable according to their own documents and information. Last time I checked, hope was not a viable investment strategy.

I’m a simple guy. That’s one of the things that I learned from Mimi. If you can’t explain a product, a service or even a company to your grandmother, then maybe it’s too complicated or too risky.

I think it was Einstein who said that if you can’t explain something simply, you don’t understand it well enough.

That’s my understanding. Take Fitbit and GoPro. Those are great examples of nice-to-have companies. I use their products myself. They’re interesting devices, but they’re not must-haves.

Apple, on the other hand, is transitioning from a nice-to-have to a must-have because it’s getting into medical devices. It’s making a medical pivot, really. Imagine the profit potential when doctors begin prescribing Apple devices—something I think is a very real possibility within the next few years. That’s a real game changer.

Some analysts sounded the warning bell in March when the yield curve inverted for the first time since the financial crisis. At the recent Money Map Press Black Diamond conference, though, you downplayed the significance of the inversion. Why aren’t you as concerned as some others are?

Well, you have to remember where they’re  coming from. Much of Wall Street wants you scared and confused because they know that you’ll trade more and generate hundreds of millions of dollars in commission for them.

Instead of doing that, let’s look at the data. It’s very clear. Just because you have an inverted or flat yield curve doesn’t mean you get a recession right away. In fact, one data source that I saw recently suggests it takes as many as 44 months before you get an actual recession. And during that time, the market may continue to rise another 70 percent—possibly more.

Pessimists rarely make money. How many times over the past 100 years have we heard that the end is near? Better run for the hills! All of those folks ended up looking pretty foolish when they took their money out of the market and it continued to run for another 20 to 50 months and they missed every penny of the profit potential.

Again, I’d rather concentrate on the upside potential in the must-have companies and the 50-40-10 model because I know those things can create huge profits year in, year out and in all sorts of market conditions. Missing opportunity is always more expensive that trying to avoid losses.

Playing devil’s advocate here, but let’s say a recession is imminent. Where would you recommend people be positioned right now?

The same way I’d recommend they’re positioned now. It’s logical to assume that we’re in a late stage of economic growth, but then again, people have been saying that since 2009 when they thought the end of the financial universe was upon us. But that’s where risk management comes in. If you’ve got it in place, then that concern goes away. Instead, you can concentrate on the pursuit of profits knowing your money is protected if the markets go against you. There’s no second-guessing required. I am particularly focused on dividend-paying stocks with global market share, well-known brands and the ability to protect margins. They’re going to run higher faster and be more stable if there’s a downturn for any reason. People will still buy the stuff they make if the you know what hits the proverbial fan.

You’ve been the chief investment strategist at Money Map Press since 2007. Talk a little about some of the newsletters you’re involved with there.

It’s a real honor. Coming from very simple beginnings oriented around a single publication, the Money Map Report, I think we are now the single largest private investment research publisher. Today we have a family of newsletters covering everything from structured long-term investing, like the 50-40-10 I advocate in the Money Map Report, to more sophisticated options, resources, cryptocurrencies, cannabis and more.

I personally still write the Money Map Report as well as High Velocity Profits and have recently launched Straight Line Profits. The latter are more active momentum-oriented services. I can also be found at Total Wealth Research, which is a free e-letter published three times a week. That’s where a lot of folks start as they get to “know” me and, eventually, our team.

Thank you for your time, Keith! It was a pleasure speaking with you.  

Thanks for including me! It’s a real honor.

 

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

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2019.

Share “Invest in Optimism: A Conversation With Keith Fitz-Gerald”

The Hunger for Muni Bonds (And Gold!) Is Real
April 22, 2019

Gold is the second best performing asset class since 1999

Another Tax Day has come and gone. Although it might be some time before we get the full picture of what Americans earned and paid in taxes last year, it’s probably safe to assume that the top 1 percent of earners shouldered most of the U.S. tax burden.

In 2016, the most recent year of available data, the top 1 percent was responsible for over 37 percent of all income taxes. Compare that to the bottom 50 percent, which was responsible for about 3 percent of all taxes.

Of course, the highest earners also paid the highest average income tax rate of 26.9 percent, which is seven times more than the rate faced by the bottom 50 percent.

This was the first year that Americans paid taxes under President Donald Trump’s tax cuts. And yet many filers—especially those living in high income tax states such as New York, California and New Jersey—saw their payments rise significantly due to state and local tax (SALT) deductions being capped at $10,000.

This change has been a boon for municipal bonds, which are exempt from taxes not only at the federal level but also, in most cases, state and local levels.

Muni bond funds, in fact, just had their best quarter of inflows since 2009, as you can see below.

muni bond funds had their best quarter of ivnestor inflows since 2009
click to enlarge

According to Morningstar data, tax-free muni bonds saw more than $8.8 billion in net flows in the three months ended March 31, beating U.S. equity funds ($6.2 billion) and international equity funds ($1.3 billion). This tells me that investors were seeking stability as well as a strategy to counteract the changes to the tax code.

Investors Prefer Actively Managed Muni Bond Funds

Actively managed muni funds were more popular than passively managed funds, including ETFs. Active funds attracted $7.5 billion, more than five and a half times more than passive muni funds, which saw only $1.3 billion in net flows, according to Morningstar.

As I told you in a previous post, I think the reason investors prefer active muni funds is that they want a manager who knows how to conduct deep credit research, adjust for duration and monitor for risks and opportunities. You don’t get that with a passive fund.

Muni Supply Has Tightened

Trump’s tax law supports the outlook for muni demand in more ways than one. The supply of municipal debt has been restricted thanks to the elimination of a category known as “advanced refunding issues,” which in years past accounted for about a fifth of muni bond issuances annually.

Any casual student of economics knows that tighter supply, combined with increased demand, creates investment opportunities. And since the tax law went into effect in January 2018, muni bonds have outperformed both 10-year Treasuries and investment-grade corporate debt.

Munis have been the best performing fixed income since tax law went into effect
click to enlarge

On a final note, I should point out that munis have a history of doing well in late-cycle environments, which we seem to be in right now. This, along with flat issuance and stronger demand for tax-free income, should help the asset class remain resilient throughout the year and beyond.

Gold “Lives Up to the Hype”

Another asset whose supply is forecast to tighten in the coming years is gold, due mainly to shrinking exploration budgets and the lack of large discoveries. As I told Streetwise Reports last week, the gold mining industry hasn’t seen any technological breakthroughs as there have been in oil and gas with fracking.

Also like munis, demand for the yellow metal remains strong and should continue to strengthen as incomes grow in emerging markets such as China, India and Turkey.

Last week, the price of gold fell to a 2019 low of around $1,270 an ounce as the 10-year Treasury yield ticked up and U.S. dollar stayed at elevated levels.

gold price has stumbled on a steady U.S. dollar
click to enlarge

Nevertheless, some analysts continue to see this as an “extremely attractive environment,” in the words of British banking firm Standard Chartered.

“We are very constructive on gold, both within our strategy teams and within our commodity research teams,” Standard Chartered’s Eric Robertson told Bloomberg. “Even with the recovery that we’ve seen in equity prices and nominal bond yields over the last few weeks, real or inflation-adjusted yields remain extremely low. And that’s a better indicator for gold.”

In a report last week titled “Gold lives up to the hype as a safe haven,” research firm Capital Economics said it sees gold rallying to $1,400 an ounce or more by mid-2019 on equity weakness.

“Given that we expect the S&P 500 to drop by roughly a fifth this year, we think gold’s safe-haven credentials will soon come to the fore again,” says commodities economist Ross Strachan, who goes on to explain that in seven out of eight times since 1990 in which the S&P declined more than 10 percent over a prolonged period, the price of gold rose 7.2 percent on average. 

Venezuela’s $400 Million Sale Weighed on Gold

Gold traded down following the news on Monday that Venezuela sold as much as $400 million of the metal, the South American country’s only remaining liquid asset. This comes after Venezuela opposition leader Juan Guaido in February urged the U.K. not to send cash to President Nicolas Madura upon sale of the country’s gold reserves, held in the Bank of England’s (BoE) vaults.

The recent sale could mean that President Maduro has found a way to sidestep sanctions, according to Bloomberg.

The report also points out that Venezuela’s central bank “has been operating with what it calls an emergency team of only about 100 workers of about 2,000 since a power outage left its headquarters without running water.” What Maduro has done to this once prosperous country and its people is nothing short of tragic.

In any case, the gold market should stabilize once Venezuela is done selling this quarter.

Frank Talk at 12

I’m delighted to share with you that my CEO blog, Frank Talk, turned 12 this month. Its mission is the same today as it was then—to educate curious investors about not just the whats but the whys in today’s marketplace, and to relay interesting insights I pick up along my global travels.

Something else that hasn’t changed is the joy it brings me to be able to communicate directly with you. To those who’ve taken this journey with me over the years, in whole or in parts, I say thank you! To those who only recently discovered Frank Talk, I say welcome!

No matter which category you fall into, I hope that you stick around because there’s so much more to come. Become a Frank Talk subscriber by clicking here!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

The S&P Municipal Bond Index is a broad, market value-weighted index that seeks to measure the performance of the U.S. municipal bond market. The S&P U.S. Treasury Bond Current 10-Year Index is a one-security index comprising the most recently issued 10-year U.S. Treasury note or bond. The S&P 500 Investment Grade Corporate Bond Index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of U.S. corporate debt issued by constituents in the S&P 500 with an investment-grade rating. The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The S&P 500 Index is a float-adjusted market-cap weighted index. It's calculated by taking the sum of the adjusted market capitalization of all S&P 500 stocks and then dividing it with an index divisor, which is a proprietary figure developed by Standard & Poor's.

Share “The Hunger for Muni Bonds (And Gold!) Is Real”

Net Asset Value
as of 05/24/2019

Global Resources Fund PSPFX $4.31 0.05 Gold and Precious Metals Fund USERX $6.53 0.04 World Precious Minerals Fund UNWPX $2.51 0.01 China Region Fund USCOX $7.91 0.05 Emerging Europe Fund EUROX $6.53 0.05 All American Equity Fund GBTFX $23.95 -0.02 Holmes Macro Trends Fund MEGAX $16.43 0.14 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change