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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.

Surprise! Gold Prices Have Beaten the Market So Far this Century
August 3, 2017

Spot gold finished July up more than 2 percent, its best month since February, when it returned 3.7 percent. The yellow metal responded to a struggling U.S. dollar, which has lost more than 10 percent so far this year relative to other currencies and is currently at a 15-month low. The dollar could very well continue to slide on additional political uncertainty surrounding President Donald Trump and his administration. This would mean further upside for gold and gold stocks.

Trade weighted u.s. dollar index continues to plummet
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Also contributing to gold’s price appreciation was lackluster economic data that, I believe, lowers the likelihood of another interest rate hike in 2017.

The yellow metal is now trading above its 50-day and 200-day moving averages, ordinarily seen as a bullish sign.

gold price is trading above its 50-day and 200-day moving averages
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More impressively, the price of gold has outperformed the S&P 500 Index so far this century, returning 86 percent more than the market if we index both asset classes at 100 on December 31, 1999. Over the past 17 years, the S&P 500 has undergone two major contractions, both of them resulting in a loss of around 40 percent. Gold, meanwhile, has held its value well, boosting its appeal as a portfolio diversifier.

gold price has beaten the market so far this century
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Our two gold funds have similarly outperformed the market so far this century, as you can see above. The Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX) are co-managed by myself and precious metals expert Ralph Aldis. Not only do Ralph and I rely on fundamentals to make stock selection and weighting decisions, but we also maintain close, productive relationships with mining company management teams across the globe.

Gold Could Be the Solution for a Vulnerable Stock Market

In a telephone interview with Reuters this week, DoubleLine Capital CEO Jeffrey Gundlach, known on Wall Street as the “bond king,” said that he still has exposure to gold, which he predicts will see continued upward price momentum in the short term.

“Gold looks cheap compared to markets that have rallied a lot, including bitcoin and including Amazon,” said Gundlach, whose firm oversees $110 billion in assets.

Indeed, information technology stocks such as Amazon, Facebook, Apple, Microsoft, Google (Alphabet) and others—the imprecisely named FANG or FAAMG stocks—have been on a tear so far this year, propelling the market higher. This has been a detractor for gold, as many investors have moved out of “safe haven” assets and into risk assets.

I should point out, though, that the stocks I just mentioned disproportionately account for up to a third of the market’s gains in 2017, according to CNBC. As of August 1, the S&P 500 is up around 10.5 percent. But if we remove tech stocks, it’s up only 7.5 percent. The market is moving higher nearly every day, but on the backs of only five or so tech stocks. This makes the market particularly vulnerable, should those stocks see a correction, and adds to gold’s investment case as a potential store of value.

What’s more, we’re only weeks away from India’s two most prolific gold-buying sprees, Diwali in October and the wedding season late in the year. Historically, now has been a good time for investors to enter the gold and precious metals market to capture the potential price appreciation that has often occurred during these important festivals.

Explore investment opportunities in gold and precious metals!

 

 

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.

Past performance does not guarantee future results.

Total Annualized Returns as of 6/30/2017
Fund One-Year Five-Year Ten-Year Gross Expense Ratio
Gold and Precious Metals Fund -20.33% -7.46% -2.30% 1.86%
World Precious Minerals Fund -19.09% -8.55% -5.98% 2.10%
S&P 500 Index 17.90% 14.63% 7.18% n/a

Expense ratios as stated in the most recent prospectus. The Adviser of the World Precious Minerals Fund has voluntarily limited total fund operating expenses (exclusive of acquired fund fees and expenses of 0.11%, extraordinary expenses, taxes, brokerage commissions and interest, and advisory fee performance adjustments) to not exceed 1.90%. With the voluntary expense waiver amount of 0.04%, total annual expenses after reimbursement were 1.95%. U.S. Global Investors, Inc. can modify or terminate the voluntary limit at any time, which may lower a fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

You cannot invest directly in an index.

Diversification does not protect an investor from market risks and does not assure a profit.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 6/30/2017: Amazon.com Inc. 0.00%, Facebook Inc. 0.00%, Apple Inc. 0.00%, Microsoft Corp. 0.00%, Alphabet Inc. 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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Venezuela on the Brink—An Opportunity for Oil Investors?
July 31, 2017

Venezuela on the Brink - An Opportunity for Oil Investors?

Venezuela is sliding closer and closer toward the brink, and things look as if they’ll get worse, unfortunately, before they improve.

A country that boasts the largest proven oilfield in the world should not be facing such dire food and medicine shortages, not to mention rampant protests and violence in the streets. But that’s what happens when far-left, authoritarian socialist regimes threaten to dissolve economic freedom, the rule of law and democracy itself.

As you might have heard, a vote passed in Venezuela on Sunday that could permanently amend the country’s constitution for the worse. President Nicolas Maduro is now poised to become the world’s next absolute dictator.

draghi ending ecb stimulus not there yet

Last Wednesday, the U.S. Treasury Department issued economic sanctions on 13 current and former Venezuela government officials in an effort to encourage Maduro to drop the election, which—let’s be honest—was likely rigged in his favor. According to Transparency International, Venezuela is among the most corrupt countries on the planet, ranking 166 out of 176 in 2016.

“We will continue to take strong and swift actions against the architects of authoritarianism in Venezuela, including those who participate in the National Constituent Assembly as a result of today’s flawed election,” the U.S. State Department said in a statement issued Sunday.

So why am I telling you this? Again, Venezuela sits atop the world’s largest proven oil patch. Crude accounts for roughly 95 percent of its export earnings. If Maduro does not relent, the U.S. could very possibly target the country’s oil industry next.

As Evercore ISI put it last week, the Treasury Department’s decision is “the first step toward comprehensive sectoral sanctions, including crude oil imports into the U.S.”

This would be phenomenally disruptive to Venezuela’s already fragile economy. Right now, the U.S. is the country’s top cash-generating market. Unlike most other markets, the U.S. pays its oil import invoices in full and on time. Venezuela could always boost exports to other existing clients, but the cash would dry up.

To be fair, such a move wouldn’t be exactly painless for the U.S. either. Venezuela is currently its third-largest supplier of crude, following Canada and Saudi Arabia. Several large American producers, including Chevron, Halliburton and Schlumberger, have joint-venture contracts with Petroleos de Venezuela (PDVSA), the South American country’s state-run oil company. And a number of oil refineries in the U.S. are equipped specifically to handle Venezuela’s notoriously extra-heavy crude.       

top 5 crude suppliers to the U.S.
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Speaking to MarketWatch last week, Oil Price Information Service energy analyst Tom Kloza said the “possibility of chaos” in Venezuela could adequately spur an oil rally that the most recent global production cuts have failed to achieve. Despite the Organization of Petroleum Exporting Countries’ (OPEC) December agreement to trim output in an effort lift prices, crude fell more than 14 percent in the first six months of 2017 and is currently underperforming its price action of the past four years. 

Venezuela’s vote this past weekend, followed closely by fresh U.S. Treasury Department sanctions, could be the “only true element that would change the dynamic for crude,” Kloza says.

Crude Gains on Inventory Draw

West Texas Intermediate (WTI) crude climbed to a nearly two-month high last week—but not entirely in response to the upcoming Venezuela vote. The U.S. Energy Information Administration (EIA) reported that crude oil inventories, not including those in the Strategic Petroleum Reserve (SPR), sharply fell 7.2 million barrels in the week ended July 21. Stocks now stand at slightly more than 483 million barrels. Although still historically high, inventories have now decreased for four straight weeks.

U.S. Crude stocks see big draw, sending oil prices higher
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Last Tuesday, oil jumped 3.34 percent, its biggest one-day gain since November 2016. The commodity is on track to have its first positive month since February.

Also supporting oil right now is speculation that domestic producers could soon start slashing capital budgets after months of depressed prices. Anadarko Petroleum made headlines last week after becoming the first major U.S. producer to announce cuts. The Texas-based company plans to trim $300 million from its 2017 budget.

But don’t expect domestic output to slacken anytime soon. In its Short-Term Energy Outlook, released last week, the EIA forecasts crude production to reach a record high of 9.9 million barrels a day on average in 2018. That would push it over the previous record of 9.6 million barrels a day, set way back in 1970.

EIA forecasts record U.S. oil production in 2018
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Not everyone agrees with this assessment. In a report last week, Capital Economics writes that “after more than a year of steady gains, the number of active drilling rigs will decline in the second half of the year. Accordingly, while mining structures investment probably posted another rise in the second quarter, these gains won’t be repeated in the second half of the year.”

Active Rigs and Mining Structures Investment Set to Fall
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It’s important to remember, though, that a common theme among American frackers is that operations have become exceedingly more efficient than ever before. When oil prices collapsed more than two years ago and rigs were mothballed, output remained strong. So it’s possible that even with fewer rigs actively pumping crude, and less capital going into mining structures, we could still see domestic production reach 10 million barrels a day by next year.

OPEC Compliance at Six-Month Low

Obstructing price appreciation right now is news that a number of OPEC countries are not complying with production guidance laid out earlier in the year. The compliance rate fell from 95 percent in May to a six-month low of 78 percent in June, with monthly output from Algeria, Ecuador, Gabon, Iraq, the United Arab Emirates and Venezuela totaling more than what should be allowed.

Meanwhile, Libya and Nigeria—which are exempt from the OPEC agreement because recent political instability in those countries knocked out months’ worth of production—dramatically increased output that reportedly has Saudi Arabia worried.

Peak Oil Demand in 10 Years?

Looking ahead on the demand side, we could see global oil consumption peak as soon as the late 2020s or early 2030s.

draghi ending ecb stimulus not there yet

That’s according to Ben van Beurden, CEO of Royal Dutch Shell. Speaking to CNBC last Thursday, van Beurden cited growth in electric vehicle sales as well as countries switching from fossil fuels to renewables as major catalysts that would trigger peak demand much sooner than previous estimates. Back in November, the International Energy Agency (IEA) said it didn’t expect demand to peak before 2040.

But things are changing more rapidly every day. In June, Volkswagen—the world’s number one manufacturer by sales—announced it would cease selling fossil fuel-burning automobiles by 2020. Both France and the United Kingdom recently said gas and diesel cars would be banned by 2040. India, the fastest growing automobile market, set a similar target for 2030.

Even when oil demand peaks—whether in 2030 or 2040—it won’t “go out of fashion overnight,” van Beurden said. Planes, ships and heavy trucks will continue using fossil fuels all around the globe, and smaller emerging markets will not be able to make the transition to renewables so easily as larger economies such as Western Europe, China and India.

“Supply will shrink faster than demand can shrink,” he explained, “and therefore, working on oil and gas projects will remain relevant for many decades to come.”

Shell reported knockout second-quarter earnings as cash generation rose sharply. The Anglo-Dutch producer’s earnings attributable to shareholders rose to $1.9 billion in the June quarter, a whopping 703 percent increase over the same period last year. Free cash flow stood at an incredible $12.1 billion, up from negative $3.1 billion during the same quarter in 2016.

With the price of oil having averaged $45 a barrel for the past two years, Shell will remain “very disciplined” going forward, van Beurden said.

 

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 6/30/2017: Chevron Corp., Dutch Royal Shell PLC,  

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“Mother of All Bubbles” Keeps Gold in Focus
July 24, 2017

global debt bubble

Today I want to discuss reports that global debt levels are at all-time highs, and what this means for your investment decisions going forward.

But first, a few comments about last week. I recently returned from the Oxford Club’s Private Wealth Seminar, held at the historic Grand Hotel on Michigan’s Mackinac Island. The hotel, which some of you might remember as the setting for the 1980 film “Somewhere in Time,” starring Christopher Reeve and Jane Seymour, took a mere 93 days to build in the 1880s—impossible by today’s standards, especially when you consider that it boasts the world’s largest front porch at 660 feet.

While there, I had the privilege of catching up with some old friends and contacts, including Alex Green, the Oxford Club’s chief investment strategist. You might have read some of his wonderful work for Investment U, the group’s educational arm.

Alex reminded me over lunch that the difference between Democrats and Republicans, in his view, is that Democrats are for personal freedom and some economic restrictions, while Republicans are for economic freedom and some personal restrictions.

I prefer to focus on policies instead of partisan politics, but Alex has a point. I’m convinced that Donald Trump, a Republican, won the presidential election because his pledge to reform the tax code and deregulate resonated with both white-collar and blue-collar Americans who felt as if the U.S. economy was no longer working for them. U.S. corporate taxes are among the highest in the Organization for Economic Cooperation and Development (OECD), spurring large multinationals to move operations overseas, and out-of-control regulations threaten to strangle business growth.

But just as Green insinuated, the Trump administration has enacted, or has hinted at enacting, policies that rankle Americans of all political stripes, precisely because they could be used to encroach upon personal liberties.

Take Attorney General Jeff Sessions’ recent decision to strengthen the government’s ability to seize private property from suspected criminals. (The operative word here is “suspected.”) Many now are arguing this directive could be abused by police and other officials. It could, in fact, violate the Fourth Amendment, which of course protects Americans against “unreasonable searches and seizures.”

This is just one among numerous policy-making decisions that have members of both political parties, as well as independents, scratching their heads. Trump was elected to reform taxes, slash regulations and generally make business and capital formation run more smoothly. It’s unclear how private-asset seizures fit into that picture.

If this administration resolved to stay on message and on course, and worked to bring fiscal relief to everyday Americans, it might receive greater support from those who voted for Trump—and perhaps even from those who didn’t.

U.S. Dollar in Bear Market, a Boon for Gold

Since the start of the year, the five-year Treasury yield, adjusted for inflation, has risen about 150 percent. Normally this would put remarkable pressure on the price of gold—higher yields raise the opportunity cost of buying gold—but over the same period, the U.S. dollar has steadily weakened and is now officially in a bear market. Because gold is priced in dollars, this has been supportive for prices. Year-to-date, the yellow metal is up more than 8 percent.

crosscurents impacting gold treasury yeild up dollar down
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As I said, the greenback’s been on the decline for most of the year so far, but it slumped to a 13-month low against the euro last week following European Central Bank (ECB) president Mario Draghi’s remark that “monetary accommodation” would continue in the European Union (EU) until at least the end of the year.

draghi ending ecb stimulus not there yet

“We need to be persistent and patient and prudent, because we’re not there yet,” Draghi said, referring to the fact that EU inflation and wage growth have been disappointingly slow, despite the bloc’s economic recovery since the financial crisis. (Indeed, the June purchasing manager’s indexes for emerging European markets were all above the key 50 mark for the first time in recent memory.)

UBS: We’re Still Constructive on Gold

That gold is still holding at its current level—despite rising rates, despite a stock market that continues to rally—is “encouraging.”

That’s one of the key takeaways from a UBS note last week, in which the Swiss financial services firm maintains its constructive view of the yellow metal. Investor demand this year has been slower than expected, but UBS analyst Joni Teves makes the case that expectations of a good monsoon season in India this summer could help push consumption in the world’s second-largest importer of gold to a new record high by the end of the year. With India having imported a phenomenal 525 metric tons in the first half of 2017 alone, Teves writes that “we expect gold demand in India this year to be around historic averages,” which would be very supportive for prices.

ETPs Attracted a Record $245 Billion in the First Half of 2017

Like gold in India, exchange-traded products (ETPs) also had a knockout first half. As Deutsche Bank reports, ETPs attracted a record $245 billion in the first six months of 2017, in what has historically been the weaker half of the year. To put into perspective just how impressive this figure is, $245 billion would be the second-largest full-year record amount following 2016’s $283 billion. We could see ETP inflows climb as high as $500 billion by the end of this year, Deutsche estimates.

exchange traded porducts etps see record 245 billion in inflows in first half of year
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Of course, runaway demand for ETPs and other risk assets has contributed to muted interest in gold.

Having said that, though, BullionVault—the world’s number one online precious metals market—reported recently that private gold holdings among its users leaped to a record 38 metric tons, as of the beginning of July. That’s enough gold to make more than 10 million 18-carat wedding rings, BullionVault says, or to supply the microchips for 1.5 billion iPhones. The site points out that investor demand has lately been driven by lower prices, following three months of “light liquidation.”

Global Debt on Alert

All of what I’ve said so far pertains to the near-term. Gold’s medium- to long-term investment case, I believe, looks even brighter. Many unsettling risks loom on the horizon—not least of which is a record amount of global debt—that could potentially spell trouble for the investor who hasn’t adequately prepared with some allocation in a “safe haven.”

According to the highly-respected Institute of International Finance (IIF), global debt levels reached an astronomical $217 trillion in the first quarter of 2017—that’s 327 percent of world gross domestic product (GDP). Notice that before the financial crisis, global debt was “only” around $150 trillion, meaning we’ve added close to $120 trillion in as little as a decade. Much of the leveraging occurred in emerging markets, specifically China, which is spending big on international infrastructure projects.

total global debt stands at all time high
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It goes without saying that this is a huge risk. Some are calling this mountain of debt “the mother of all bubbles,” and we all remember how the last two bubbles ended, in 2000 (the tech or dotcom bubble) and 2007 (the housing bubble).

Paying down this debt will not be easy. As Scotiabank mentioned in a note last week: “Higher interest rates are going to make the burden of refinancing the debt considerably heavier, and as more money goes into servicing the debt, it means less money is available to spend on other things, which could lead to less infrastructure spending and increased austerity.”

Add to this the fact that global pension levels are also sharply on the rise, with people living longer and population growth—and therefore workforce growth—slowing in many advanced economies. In May, the World Economic Forum (WEF) estimated that by 2050, the size of the retirement savings gap—unfunded pensions, in other words—could be as much as $400 trillion, an unimaginably large number.

The U.S. alone adds about $3 trillion every year to the pension deficit. I shared with you earlier in the month that the State of Illinois’s unfunded pensions could be as high as $250 billion, putting each Illinoisan on the hook for $56,000.

Central banks’ efforts to promote economic growth through monetary easing haven’t exactly been a raging success, nor can they continue forever. Plus, near-zero interest rates are precisely what encouraged such inflated levels of borrowing in the first place.

You can probably tell where I’m headed with all of this. Another crisis could be in the works. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction.

Gold is one such asset that’s been a good store of value in such times, and gold stocks have tended to outperform the yellow metal as production costs have fallen, according to Seabridge Gold. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in gold stocks, mutual funds or ETFs.

 

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

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the commentary were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: Seabridge Gold.

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How to Get a Better Bargain on Your Investment with Emerging Europe
July 20, 2017

Prague Czech Republic

American equities have been a good place to invest during the current bull market, now in its eighth year. Since the November election, the S&P 500 Index has surged close to 16 percent. But this means that valuations continue to creep up, and political risk threatens to derail further gains as President Donald Trump’s high-growth agenda stumbles on even more roadblocks.

Investors might therefore be looking for an alternative. I believe one of the most attractive destinations for your investment dollars right now is emerging European countries. Below you can see a valuation comparison between U.S. and emerging European equities. Trading at 9.2 times earnings, the latter are offering quite a bargain for investors seeking a “better bang for the buck.”

Emerging Europe Offers investors attractive bargains
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More than that, though, “core” Central and Eastern Europe (CEE) countries—including Poland, the Czech Republic, Romania and Hungary—are currently among the fastest growing in the world. In a recent series on the region, the Financial Times put it succinctly: “The former communist countries that have joined the European Union (EU) since 2004 offer superior growth to western Europe and many other emerging markets, combined with the benefits and protections of EU membership.”

Expectations for economic growth in CEE countries have changed rapidly and positively. The consensus forecast is now 2.5 percent growth this year, 0.3 percent points higher than expectations near the beginning of the year.

Next year could be even brighter, with analysts expecting 2.6 percent growth, 0.1 percentage point higher than earlier forecasts. Stronger-than-expected external demand in Western Europe, a tighter labor market, an attractive environment for foreign investment, government stimulus measures, easy financing conditions and the revival of EU structural funds are all supporting stronger growth in the region.

Manufacturing Continues to Strengthen

Loyal readers of Frank Talk know that we closely follow the purchasing manager’s index (PMI), which measures the strength of a country’s manufacturing industry. We’ve found it to be not only a handy gauge of future commodities demand but also a country’s or region’s economic growth potential.  

For the first time in recent memory, most emerging European economies’ PMIs are above the key 50 mark that separates growth from contraction. Greece rose from 49.6 in May to 50.5 in June, the first time its manufacturing sector was in expansion mode in nearly a year.

Emerging Europe economies PMIs all above 50 in June
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Russia grew at a much slower pace in June, however, with its PMI falling to 50.3, just above the threshold. But as I shared with you this week, Capital Economics analysts believe Russian growth in the coming quarters “will be stronger than most anticipate,” with the Central Bank of Russia loosening monetary policy even further.

The fact that all CEE countries are above 50 points to synchronized growth. It also suggests that the worst of the region’s economic woes following the global recession might finally be in the rearview mirror.

Poland the Next “Economic Powerhouse”?

Writing recently for the New York Times’ opinions section, Ruchier Sharma, Morgan Stanley Investment Management’s chief global strategist, singled out Poland as the world’s likeliest next advanced economy, following South Korea’s entry into the high-income club 20 years ago.

I have to agree. As Sharma points out, Poland has seen average annual growth of 4 percent since 1991, the year it transitioned from communism to democracy. During that period, it hasn’t had a single down year, amazingly enough.

The Polish economy continued to grow at an annual rate of nearly 4 percent in the second quarter, as suggested by the May retail sales and industrial output data. According to mBank analysts, fiscal-year growth will slightly exceed 4 percent, driven by public investments recovery and persistently strong consumption. The real retail sales growth in the second quarter held close to the prior-quarter level, which means that consumption growth should remain at around 5 percent, mBank estimates.

Poland’s impressive ascent should only help strengthen other CEE countries, both economically and politically. Its president, Andrzej Duda, seems fully aware of this and has taken several important strides to improve not just Poland’s economy but the region’s as well. The Three Seas Initiative, spearheaded last year by Duda and Croatian president Kolinda Grabar-Kitarovi?, seeks to connect the economies and infrastructure of 12 CEE countries between the Adriatic, Baltic and Black Seas. A number of EU officials see the Initiative as a threat to the EU bloc’s unity, which might be partially why President Trump agreed to meet with Initiative members when he visited Poland last month.

nations that signed the three seas initiative

Stocks on the Rise

Also contributing to CEE growth right now is the steadily weakening U.S. dollar, as Reuters reports. Prague stocks rose to a seven-week high this week, while Hungary’s Budapest Stock Exchange Index (BUX) continues to hit new all-time highs.

Budapest stock exchange index (BUX) continues to hit new highs
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Speaking of Hungary, its government is considering whether to lower personal income taxes to 10 percent from the current 15 percent. This would be a major boost to Hungarians’ disposable income, which is already rising at a breathtaking pace. Wage growth in April was an amazing 14.6 percent.

Again, the CEE region looks more and more like a good place to invest, not least of which because of its attractive discount to American equities.

 

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.

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

The MSCI Emerging Markets Europe Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the emerging markets countries of Europe (Czech Republic, Hungary, Poland, Russia, and Turkey).

The Budapest Stock Exchange Index is a capitalization-weightedindex adjusted for free float. The index tracks the daily price only performance of large, actively traded shares on the Budapest Stock Exchange.

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Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?
July 17, 2017

Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?

Gold got a boost Friday on weaker-than-expected inflation and retail sales figures, casting doubt on the Federal Reserve’s ability to continue normalizing interest rates this year.

Consumer prices rose slightly in June, at their slowest pace so far this year. The consumer price index (CPI), released on Friday, showed the cost of living in America rising only 1.6 percent compared to the same month last year, significantly down from the most recent high of 2.8 percent in February and below the Fed’s target of 2 percent. Much of the decline was due to energy prices, which fell 1.6 percent from May.

consumer prices continued to expand in june yet at a slower pace
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As I’ve explained elsewhere, CPI is an important economic indicator for gold investors to track. The yellow metal has historically responded positively when inflation rises—and especially when it pushes the yield on a government bond into negative territory. Why lock your money up in a 2-year or 5-year Treasury that’s guaranteed to give you a negative yield?

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

But right now the gold Fear Trade is being supported by what some are calling turmoil in the Trump administration. Last week the Russia collusion story took a new twist, with emails surfacing showing that Donald Trump Jr.; Jared Kushner, the president’s son-in-law and now-senior advisor; and former Trump campaign manager Paul Manafort all agreed to meet with a Russian lawyer last summer under the pretext that she had dirt on Hillary Clinton.

Whether or not this meeting is “collusion” is not for me to say, but the optics of it certainly look bad, and it threatens to undermine the president’s agenda even more. For the first time last week, an article of impeachment was formally introduced on the House floor that accuses Trump of obstructing justice. The article is unlikely to go very far in the Republican-controlled House, but it adds further uncertainty to Trump’s ability to achieve some of his goals, including tax reform and infrastructure spending. I’ll have more to say on this later

A Contrarian View of China

A new report from CLSA shows that Asian markets and Europe were the top performers during the first six months of the year. Korea took the top spot, surging more than 25 percent, followed closely by China.

asia and europe are the top market drivers so far this year
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Despite persistent negative “news” about China in the mainstream media, conditions in the world’s second-largest economy are improving. Consumption is up and household income remains strong. The number of high net worth individuals (HNWIs) in China—those with at least 10 million renminbi ($1.5 million) in investable income—rose to 1.6 million last year, about nine times the number only 10 years ago. It’s estimated we could see as many as 1.87 million Chinese HNWIs by the end of 2017.

According to CLSA, global trade is robust, with emerging markets, and particularly China, driving most of the acceleration this year. In the first three months of 2017, global trade grew 4 percent compared to the same period last year, its fastest pace since 2011.

“Indeed the early months of 2017 have seen China become easily the biggest single country driver of Asian trade growth,” writes Eric Fishwick, head of economic research at CLSA.

A lot of this growth can be attributed to Beijing’s monumental One Belt, One Road infrastructure project, which I’ve highlighted many times before. But according to Alexious Lee, CLSA’s head of China industrial research, a “more nationalist America” in the first six months of the year has likely given China more leverage to assume “a larger global, and especially regional, leadership role.”

This comports with what I said back in January, in a Frank Talk titled “China Sets the Stage to Replace the U.S. as Global Trade Leader.” With President Donald Trump having already withdrawn the U.S. from the Trans-Pacific Partnership (TPP) and promising to renegotiate or tear up other trade agreements—he recently tweeted that the U.S. has “made some of the worst Trade Deals in world history”—China has emerged, amazingly, as a champion of free trade, a position of power it will likely continue to capitalize on.

The country’s overseas construction orders have continued to expand, with agreements signed since 2013 valued at more than $600 billion.

business is booming for china
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Emerging Europe Expected to Remain Strong

Another recent report, this one from Capital Economics, shows that the investment case for emerging Europe remains strong in 2017. Russia is expected to strengthen over the next 12 months, while Poland, Hungary, the Czech Republic and Slovakia are likely to remain attractive.

“Russia’s economy has pulled out of recession and growth in the coming quarters will be stronger than most anticipate,” the research firm writes, adding that its central bank’s loosening of monetary policy should support the recovery even further.

To be sure, the region faces strong headwinds, including a rapidly aging population and the loss of an estimated 20 million skilled workers to foreign markets over the past 25 years, according to a July 11 presentation from the International Monetary Fund (IMF).

But I believe that as conditions in central emerging Europe countries continue to improve, many of those workers will be returning home. Life in the region is not the same as it was 10 or 20 years ago, when good jobs might have been scarce. Firms are now growing at a healthy rate and hiring more workers. As you can see below, unemployment rates in Poland, Hungary and the Czech Republic have been falling steadily since at least 2012 and are now lower than the broader European Union.    

emerging europe countries hard at work
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This strength is reflected in emerging Europe’s capital markets. For the 12-month period as of July 12, Hungary’s Budapest Stock Exchange is up 38 percent. Poland’s WIG20 is up more than 43 percent. Meanwhile, the STOXX Europe 600 Index—which includes some of the largest Western European companies—has made gains of only 17 percent over the same period.

 

Markets Still Believe in Trump

As we all know, the mainstream media’s criticism and ire aren’t reserved for China alone. Ninety-nine percent of the media right now is against President Trump, for a number of reasons—some of them deserved, some of them not.

Markets, however, seem not to care what the media or polls have to say. The Dow Jones Industrial Average continues to hit new all-time highs. Even though it’s stalled a few times, the “Trump rally” appears to be in full-speed-ahead mode, more than eight months after the election.

Back in November, I wrote about one of my favorite books, James Surowiecki’s The Wisdom of Crowds, which argues that large groups of people will nearly always be smarter and better at making predictions than an “elite” few. Surowiecki’s ideas were vindicated last year when investors accurately predicted Trump’s election, with markets turning negative between July 31 and October 31.

For the same reason, I think it’s important we pay close attention to what markets are forecasting today.

The White House is under siege on multiple fronts, which, as I said, has been positive for gold’s Fear Trade. But equity investors also seem to like the direction Trump is taking, whether it’s pushing for tax reform and deregulation or shaking up the “beltway party,” composed of deeply entrenched D.C. lobbyists and career bureaucrats. Just last week, the president made waves for firing a number of bureaucrats at the Department of Veteran Affairs (VA), long plagued by scandal and controversy. Since he took office in January, Trump has told more than 500 VA workers “You’re fired!”   

The Fundamentals of “Quantamental”

Of course, we look at so much more than government policy when making investment decisions. We take a blended approach of not only assessing fundamentals such as market share and returns on capital but also conducting quantitative analysis.

It’s this combination that some in the industry are calling “quantamental” investing. At first glance, “quantamental” might sound like nothing more than cute wordplay—not unlike “labsky,” “bullmation” and other clever names we give mixed-breed dogs—but it’s rapidly replacing traditional investment strategies at the institutional level.

Business Insider puts it in simple terms: “Quantamental managers combine the bottom-up stock-picking skills of fundamental investors with the use of computing power and big-data sets to test their hypotheses.”

See my Vancouver Investment Conference presentation, “What’s Driving Gold: The Invasion of the Quants,” to learn more about how we use quantitative analysis, machine learning and data mining.

Wall Street: The Birthplace of American Capitalism and Government

moments after closing bell june 29

The concept of quantamentals helps explain our entry into smart-factor ETFs. As most of you already know, members of my team and I visited the New York Stock Exchange (NYSE) three weeks ago to mark the launch of our latest ETF.

While there, Doug Yones, head of exchange-traded products at the NYSE, gave us a short history lesson about the exchange and surrounding area.

Most investors are aware that the NYSE, which is celebrating its 225th anniversary this year, is the epicenter of capitalism—not just in the U.S. but also globally.

moments after closing bell june 29

What many people might not realize is that on the site where the exchange now stands, Alexander Hamilton, the first U.S. treasury secretary, floated bonds to replace the debt the nascent country had incurred during the Revolutionary War.

Right next door to the NYSE is Federal Hall, where George Washington took his first oath of office in April 1789. The building today serves as a museum and memorial to the first U.S. president, whose statue now looks out over Wall Street and its passersby.

In this one single block of Wall Street, therefore, American capitalism and government were born. Here you can find the essential DNA of the American experiment, which, over the many years, has fostered our entrepreneurial spirit to form capital and to create new businesses and jobs. Growth, innovation and competition run through our veins, and that’s largely because of the events that unfolded centuries ago at the NYSE and Federal Hall.

For more insight and commentary like this, subscribe to my award-winning CEO blog, Frank Talk.

 

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

The Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price-only performance of large, actively traded shares on the Budapest Stock Exchange. The WIG20 Index is a modified capitalization-weighted index of 20 Polish stocks which are listed on the main market. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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Net Asset Value
as of 08/21/2017

Global Resources Fund PSPFX $5.44 -0.01 Gold and Precious Metals Fund USERX $7.42 0.03 World Precious Minerals Fund UNWPX $6.50 0.01 China Region Fund USCOX $10.22 0.10 Emerging Europe Fund EUROX $6.81 0.05 All American Equity Fund GBTFX $23.60 -0.03 Holmes Macro Trends Fund MEGAX $19.36 0.01 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change