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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.

Yes, Gold Is Being Manipulated. But to What Extent?
May 20, 2019

Gold is being suppressed but to what extent

Another day, another banking scandal.

Last week the European Commission announced that it’s fining five big banks for rigging the international foreign exchange (forex) market. As many as 11 world currencies—including the euro, British pound, Japanese yen and U.S. dollar—were allegedly manipulated by traders working at Barclays, the Royal Bank of Scotland (RBS), Citigroup, JPMorgan and Japan’s MUFG Bank.

Altogether, the fines come out to a whopping 1.07 billion euros ($1.2 billion).

According to the press release dated May 16, the infringements took place between December 2007 and January 2013. Traders working on behalf of the offending banks secretly shared sensitive trading information. This enabled the traders—who were direct competitors—to “make informed market decisions on whether to sell or buy the currencies they had in their portfolios and when.”

Financial services is already the least trusted sector among seven others worldwide, according to the 2019 Edelman Trust Barometer. News of the coordinated forex rigging—which follows other high-profile scandals such as the Libor scandal, Wells Fargo fake account scandal, gold fixing scandal (which I’ll get to later), among many more—is unlikely to improve public sentiment.

As I’ve said before, I believe that strong distrust in traditional financial services, especially among millennials, greatly contributed to early bitcoin adoption. With bitcoin, there’s no third-party risk. Transactions are peer-to-peer. Users of the digital coin find this sort of freedom very attractive, and because it’s built on top of blockchain technology, price manipulation is much more difficult to pull off.

That’s not to say that bitcoin hasn’t been, or isn’t still being, manipulated. There are those who argue that the cryptocurrency’s meteoric rise to nearly $20,000 in late 2017 was at least in part due to coordinated price manipulation. And early Friday morning, its price dramatically lost as much as $1,702, its worst intraday drop since January 2018, after breaching $8,300 on Thursday.

Bitcoin price sharply plunged friday morning
click to enlarge

Bitcoin Seen as a Threat to Global Fiat Currencies

None of this should come as a surprise to anyone who’s been paying attention, of course. I’ve seen and heard the aggressive stance bankers have taken against bitcoin and other cryptocurrencies, as I’m sure you have.

Quite simply, banks don’t want the competition. If you recall, JPMorgan CEO Jamie Dimon called people who buy bitcoin “stupid” and said he’d fire any trader caught trading it. (And then in an amazing about-face, his bank announced in February the rollout of its own digital coin, the “JPM Coin.”)

Also consider the comments made by Agustín Carstens, general manager of the Bank of International Settlements (BIS). The BIS, in case you’re unfamiliar, is often called the “central bank of central banks.” That’s because it provides banking services to as many as 60 financial institutions from all over the world, including heavyweights such as the Federal Reserve, Bank of England (BoE), European Central Bank (ECB) and Bank of Japan (BoJ). Its influence on global monetary and financial policy, in other words, is monolithic.

Ever since bitcoin hit $4,000 or so, General Manager Carstens has been on a global PR campaign to stop its momentum—because, again, it’s seen as a threat to sovereign currencies. As recently as November of last year, he laid out 10 reasons why central banks should discourage the use of digital coins.

Among them: “Cryptocurrencies are highly conducive to illegal activities.”

Anyone else see the irony? Fiat currencies are still very much used to conduct illegal activities, despite the enactment of anti-money laundering (AML) and know your customer (KYC) laws. In November 2017, Jennifer Fowler, deputy assistant secretary for the Office of Terrorist Financing and Financial Crimes (TFFC), testified before the Senate Judiciary Committee that the U.S. dollar “continues to be a popular and persistent method of illicit commerce and money laundering,” and that, although virtual currencies are also used, “the volume is small compared to the volume of illicit activity through traditional financial services.”

The BIS doesn’t stop at bitcoin, though. It’s also put gold in its crosshairs.

Gold Suppression: It’s Not a Question of IF but to WHAT EXTENT

First of all, let me say that gold price suppression (“fixing,” “rigging,” “manipulating” or however else you want to think about it) is not just a conspiracy theory. It’s a well-documented phenomenon, with real actors and real ramifications. In 2014, Barclays was fined nearly $44 million for failing to prevent traders from manipulating the London gold “fix.” Late last year, a former JPMorgan trader pleaded guilty to manipulating the U.S. metals markets. Remember the gold futures “flash crash” of 2014?

The best people to speak to about this subject are the folks at the Gold Anti-Trust Action Committee, or GATA. For 20 years now, Chris Powell and others at GATA have made it their mission to expose collusion by international financial institutions to control the price and supply of gold.

Last week I had the chance to sit down with Chris, GATA’s secretary/treasurer. I asked him how institutions manage to manipulate the price of gold on such a global scale.

“It’s done largely in the futures markets,” Chris told me. “It’s also done in the London over-the-counter (OTC) market. The mechanisms are gold swaps and leases between central banks and bullion banks, and through the sale of futures contracts.”

GATA’s Robert Lambourne reported on this in March of this year. As you can see in the chart below, gold rallied between November 2018 and February, when it peaked at around $1,343 an ounce. Ordinarily, you could expect inventory in the bullion-backed SPDR Gold Shares ETF (GLD) to continue to climb at least until then. But that’s not at all what happened. Three weeks before the price of gold peaked, the holdings in the GLD curiously began to fall, and by March 4, the ETF had lost approximately 57.8 metric tonnes. And because the GLD is the largest gold ETF in the world—its value stands at $30.2 billion, as of this week—such selling will naturally impact the price of gold. Sure enough, the yellow metal soon fell below $1,300. What gives?

Is the Bank for International Settlemenst BIS suppressing teh price of gold?
click to enlarge

The answer to that question may lie in the BIS’ monthly statement of account for February. According to Robert’s reporting, the BIS was still actively trading gold swaps, which it uses to gain access to the metal held by commercial banks. Specifically, the bank placed as much as 56 metric tonnes of gold swaps into the market in February.

If you ask me, that amount is remarkably close to the 57.8 tonnes that fled the GLD in the first quarter of this year.

Hard to believe? This is only scratching the surface. I’ll let Chris Powell be the one to elaborate, but it will have to wait until a Frank Talk later this week. Trust me when I say this is an interview you don’t want to miss! Make sure you’re subscribed to Frank Talk so you can be one of the first to read it.

 

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

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

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3 Mining Stocks for Investors Seeking Gold Exposure
May 14, 2019

3 Mining Stocks for Investors Seeking Gold Exposure

As the U.S.-China trade spat drags on, so too could the stock market volatility that has accompanied it so far this month. The S&P 500 and Dow Jones Industrial Average both fell 2.4 percent on May 13 – their worst days since January. The longer trade negotiations remain ongoing, the longer the geopolitical and economic risks remain.

One potential hedge against volatility and market risk is having an allocation to gold, which has historically moved in the opposite direction of equities. I often recommend having a 10 percent portfolio weighting in the yellow metal – with 5 percent in physical gold and the other 5 percent in gold mining equities, mutual funds and ETFs.

Gold mining stocks have been down so far this year, but I believe this represents a buying opportunity. The NYSE Arca Gold Miners Index, which tracks a diversified blend of small-, mid- and large-cap miners, is down 9.22 percent for the 12 months ended May 13.

To get additional insight on miners, I spoke with our portfolio manager and gold expert Ralph Aldis. Ralph has over 30 years’ experience in the gold space, and together we manage two mutual funds focused on the yellow metal. Some of Ralph’s top gold mining stocks as of late are Wheaton Precious Metals, Wesdome Gold Mines and K92 Mining – all three of which we own in our junior and intermediate miner mutual fund, the World Precious Minerals Fund (UNWPX).

Wesdome Gold Mines Ltd.

One miner that we really like is Canadian-based Wesdome Gold Mines. Ralph describes the company as having “delivered both operating and drilling results very consistently” and being disciplined when it comes to raising money.

The company just reported strong first quarter results, including revenue of CA$32.5 million – a 24 percent increase from a year earlier. Plus, its gold production increased 6 percent from a year earlier to 19,010 ounces. Wesdome operates two gold mining operations in Ontario and Quebec and trades on the Toronto Stock Exchange under the ticker symbol WDO.

As you can see in the chart below, the company has seen massive growth in the last 12 months with a total return nearly exceeding 100 percent. We believe it’s a good candidate for a takeover by a larger miner due to its strong drilling results, competent management team and safe jurisdiction in Canada.

In fact, Wesdome was the top holding in UNWPX as of the most recent quarter end. View all fund holdings here.

Wesdome gold mines up significantly in the last 12 months
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K92 Mining Inc.

Perhaps a less well-known name, K92 Mining is based in Vancouver and operates solely in Papua New Guinea. Ralph sums up why he likes the company: “I think K92 is another one that has a great deposit, high grade. The CEO spends time at the mine site. It's off on the other side of the world, but he goes and spends a week there every month working, so it's very much a hands-on management style.”

Strong management is an important factor for us when looking at companies. It’s one of our “5 Ms” for picking gold mining stocks: market capitalization, management, money, minerals and mine life cycle.

K92 has broken out so far in 2019 and could have further to go after reporting strong first quarter results. The company reported 19,125 gold ounces produced from its Kainantu mine in Papua New Guinea.

K92 Mining has broken out so far in 2019
click to enlarge

Wheaton Precious Metals Corp.

Although not technically mining stocks, royalty and streaming companies are a way to gain exposure to miners. These companies own streams on the production of precious metals, in exchange for helping finance the projects and providing upfront capital. One of our favorites is Wheaton Precious Metals Corp.

Wheaton Precious Metals CEO Randy Smallwood with USGI porfolio manager Ralph ALdis

In 2018 Wheaton faced a tax dispute with the Canada Revenue Agency (CRA) over income generated by foreign owned subsidiaries. The CRA claimed that the company owed back taxes and fines that could have been as high as $1 billion. Fortunately, an agreement was reached, and although Wheaton will face higher taxes, the company can now focus attention on operations and put the issue behind it.

Ralph is in close contact with much of senior management: “In fact, Chief Financial Officer Gary Brown was at our office in San Antonio a few weeks ago and explained to our team that the tax issue has been resolved, but that investors still haven’t woken up to the good news. That’s why we believe right now could be a good time to pick up this name before word spreads.”

Wheaton trades in both New York and Toronto, making it easier for investors to buy. The company focuses on silver – in addition to gold, copper and other metals – and currently has streaming agreements for 19 operating mines and nine development stage projects. We like to look at the price-to-book ratio, and based on that, Wheaton looks undervalued relative to some of its royalty and streaming peers, including Franco-Nevada Corp. and Royal Gold Inc.

Wheaton Precious Metals looks undervalued compared to peers
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A consolidation bug hit senior miners late last year and early this year. When Barrick Gold bought Randgold Resources, then Newmont merged with Goldcorp, many analysts suspected there would be a selloff of assets and a flood of acquisitions and deals in the small- and mid-cap producer space.  

As Ralph puts it: “I do think a wave of consolidation is going to come because we know a lot of the seniors are going to try to spin assets off.  That could create a lot of interesting opportunities for smaller mining companies.”

Interested in adding to your gold exposure through an actively-managed mutual fund? Learn more about the World Precious Minerals Fund (UNWPX) by clicking here.

 

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.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the World Precious Minerals Fund as a percentage of net assets as of 3/31/2019: Wesdome Gold Mines Ltd. 5.65%, K92 Mining Inc. 1.89%, Wheaton Precious Metals Corp. 0.30%, Franco-Nevada Corp. 0.54%, Royal Gold Inc. 0.00%, Barrick Gold Corp. 0.13%, Randgold Resources 0.00%, Newmont Mining Corp. 0.03%, Goldcorp 0.00%.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.

The price to book ratio, also called the P/B or market to book ratio, is a financial valuation tool used to evaluate whether the stock a company is over or undervalued by comparing the price of all outstanding shares with the net assets of the company.

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These 3 Charts Will Convince Investors That Time May Be Running Out
May 13, 2019

These 3 Charts Will Convince Investors That Time May Be Running Out

Before we get to looking at those three charts, I want to talk about trade for a moment. On Friday the Trump administration made good on its threat to raise tariffs on as much as $200 billion worth of Chinese imports to 25 percent from the previous 10 percent. The president also said that a decision could be made soon on whether to impose the same 25 percent rate on an additional $325 billion of Chinese goods, which, all told, would cover approximately the total amount of goods the U.S. imported from China in 2018.

So what does this mean? As I’ve made clear here, here and elsewhere, a tariff—beside being a strain on international relations—is essentially a tax that must be paid to the U.S. government before a shipment can clear customs. But here’s the kicker: Tariffs are typically paid not by the exporting company but by the importer. In other words, it’s U.S.-based companies that are picking up the tab—then passing the extra expense on to American consumers.

With the exception of the U.S. Treasury, which collects the tariff payments, few stand to benefit here. A February study by Washington, D.C.-based Trade Partnership Worldwide (TPW) estimated that 25 percent tariffs on Chinese goods cost families of four close to $2,300 extra on average per year. They also have the potential to impact upwards of 2.2 million American jobs as well as risk diverting trade to other markets.

“By any measure, the imposition of tariffs by the United States and U.S. imports of steel, aluminum, motor vehicles and parts… is a net loss for the U.S. economy and U.S. workers,” the report reads. Workers “experience greater losses than gains,” and in many cases, according to TPW, “the tariff actions erase all of the anticipated gains from tax reform.”  

Market Sentiment at Its Lowest in 10 Months

Stocks sold off last week on the tariff news and plunged even further Monday after China announced that it would retaliate.

Equities are now officially in oversold territory. Our own U.S. Global Sentiment Indicator, which tracks as many as 126 commodities, indices, sectors, currencies and international markets, calculates the percentage of positions whose five-day moving averages are above or below their 20-day moving averages. Then we compare the data to the S&P 500 Index. Last week the sentiment indicator fell to 20 percent, showing that the market is at its most oversold since July 2018. Statistically, we should expect to see a bounce.

U.S. Global Sentiment Indicator Is Showing That the Market is Oversold
click to enlarge

Stocks may still have further to slide before a resolution to the trade dispute is reached. But for now this could be a good opportunity for investors to pick up some distressed stocks as we await mean reversion. In a Frank Talk post last week, I recommended that investors who seek to get access to the robust U.S. economy but limit their exposure to international trade would do well to look at high-quality small and mid-cap equities. Smaller firms, those with market caps between $1 billion and $10 billion, have the potential to outperform right now because they rely much less on trade than their larger multinational peers. They’re also supported by a stronger U.S. dollar.

I would also recommend considering government and investment-grade municipal bonds, which historically have helped investors improve their risk-adjusted returns in times of economic uncertainty. And of course there’s always exposure to gold and other metals that are expected to be in greater demand in the coming years, copper chief among them.

This leads us to the main event. Below are three charts that I think will convince investors that time is running out to prepare for the next major downturn. All charts and data were brought to my attention by Michael Kantrowitz, head of portfolio strategy at market research firm Cornerstone Macro, who visited our office last week.

1. Is U.S. Manufacturing Growth Projected to Stall?

I recently reported that the ISM Manufacturing Index for the U.S. fell sharply in April to 52.8, down from 55.3 in March. This means that although the manufacturing sector is still expanding, it’s doing so at a much slower pace. What’s more, the manufacturing index could soon fall below 50.0, indicating a slowdown. For this we’d largely have the Federal Reserve to thank.

Every Fed Tightening Cycle Has Preceded a Slowdown in U.S. Manufacturing
click to enlarge

That’s according to Michael, who pointed out to us that every Fed tightening cycle going back to the 1950s has preceded a pullback in the ISM Manufacturing Index. And each of these pullbacks coincided with an economic recession and/or market selloff. (One notable exception was 1995, when the market continued to rally despite manufacturing weakness.)

So will this time be different?

I’ll let my friend Bob Moriarty—whose excellent book Basic Investing in Resource StocksI reviewed earlier this month—tackles this one: “The most dangerous words in investing are ‘This time it’s different.’ It’s never different.”

2. Trying to Predict Future Earnings Per Share Growth? Monitor Lumber Prices

One of the most eye-opening charts Michael shared illustrates the close relationship between lumber prices and future earnings per share (EPS) growth. “Believe it or not,” he told us, “lumber prices are among the most reliable leading indicators available.”

I believe it. Housing is a massive part of the U.S. economy, contributing between 15 percent and 18 percent to gross domestic product (GDP), according to the National Association of Home Builders (NAHB). Housing also has an extremely high multiplier effect. Every 100 homes in the U.S. can support up to 70 jobs on average and generate as much as $4.1 million in local income on an ongoing annual basis.

So it stands to reason that lumber prices can give us an incredibly accurate forecast of where the market is headed. In the chart below, lumber prices have been advanced forward six months to illustrate the lag time between changes in price and EPS estimates. When lumber tanked over the 12-month period, EPS followed around six months later. And when lumber soared, EPS estimates shot up.

Timber! A Sign of Earnings Weakness Ahead? Lumber Price Change
click to enlarge

You may have already detected the warning signal that lumber’s flashing right now. From its high in May of last year, the lumber price has plunged almost 50 percent. That’s the commodity’s sharpest 12-month decline on record. Going forward, then, keep your eyes on earnings, which are a central driver of stock prices.

3. New York Fed on Recession Watch

Every month, the New York Fed updates its probability of an economic recession in the next 12 months. Probabilities are calculated using the spread between the 10-year and three-month Treasury yield—which inverted again last week for the first time since March.

According to the Fed’s most recent report, the probability that a recession will make landfall between now and April 2020 rose to 27.49 percent, its highest reading since January 2007 (as it was ascending, not falling), and before that, September 1999.

Probability of a U.S. recession in the next 12 months has surged to pre crisis levels
click to enlarge

Past performance does not guarantee future results, of course, but the point I’m trying to make by sharing these charts is that it might be time to consider making some adjustments to your portfolio. That doesn’t mean rotating entirely into safe havens, especially since the market is so oversold right now.

When Picking Gold Stocks, Be Sure to Focus on Quality

But if you’re concerned about what the data suggests, it might be prudent to ensure you have exposure to fixed income, specifically tax-free muni bonds, as well as gold and gold stocks. One of our favorite gold names, Franco-Nevada, just reported record net revenue of $179.8 million and record net income of $65.2 million in the March quarter. But when selecting gold stocks, it’s important to stick with quality companies that have competent management, little to no debt and a portfolio of high-grade mines. Go gold!

Is the eurozone slowdown over? In case you missed last week’s commentary from European research analyst Joanna Sawicka, watch it now 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. 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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

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

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.

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 3/31/2019: Franco-Nevada Corp.

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How to Limit Your Exposure to the U.S.-China Trade War
May 9, 2019

How to Limit Your Exposure to the U.S.-China Trade War

The U.S. economy is growing at one of the fastest rates in the developed world right now, and unemployment hit a nearly 50-year low of 3.6 percent in April. Under normal circumstances, this should boost demand for domestic equities. Some investors, however, are hesitant to participate due to escalating trade tensions between the U.S. and China, among other factors. The latest fund flows report from Morningstar shows that investor appetite for equities has declined so far this year in favor of asset classes that are perceived to have less risk, including government and municipal bonds.

What’s more, economic data points to a slowdown in parts of Europe and Asia. The Eurozone Manufacturing PMI registered a six-year low of 47.5 in March, while China’s manufacturing sector is expanding only marginally.

This is expected to impact large U.S.-based multinationals that do a significant percentage of their business overseas. (In 2017, Intel topped the list with foreign sales accounting for 80 percent of total sales, followed by food and beverage maker Mondelez (76 percent) and Coca-Cola (70 percent).)

Many investors may wonder, then, how they can get access to the robust U.S. economy and strengthening dollar while limiting their exposure to shrinking global trade and a potentially slowing economy outside of the U.S.

world trade volume shrank in January 2019
click to enlarge

Time to Rotate Into Small-Cap and Mid-Cap Stocks?

A possible option could be small to mid-cap stocks, which are generally tied more closely to the domestic market than their blue-chip peers.

Not only are small and mid-caps more insulated from protectionist policies such as tariffs and stricter trade barriers, but they’re also supported by a stronger U.S. dollar. This week, the dollar tested its 52-week high, set in late April, and is currently trading above its 50-day and 200-day moving averages.

a strengthening U.S. dollar favors smaller, more domestic-focused companies
click to enlarge

A strong greenback acts as a headwind to multinationals that do a lot of exporting, the reason being that American goods and services become more expensive to international markets.

Conversely, a stronger dollar supports smaller but high-quality, dividend-paying firms whose revenues are more likely to come from inside the U.S. than overseas. Think companies like Pool Corporation, the Clorox Company, PetMed Express, Hawaiian Holdings and more—all of which were held in our Holmes Macro Trends Fund (MEGAX) as of March 31.

A recent Wall Street Journal article supports this strategy.

“A resurgence in the dollar potentially bodes well for one group that has struggled to reclaim record territory after last year’s rout: small-cap stocks,” the article reads. It also adds that smaller companies likely stand to benefit from the Federal Reserve’s freeze on additional interest rate hikes.

We Believe Smaller Domestic Companies Look Undervalued

Indeed, small-cap stocks have not fully recovered from the market selloff in the fourth quarter, unlike S&P 500 companies. As of May 8, the Russell 2000 Index was still around 9 percent lower than its all-time high in late August. The S&P, meanwhile, rocketed back up to record levels before hitting resistance from President Donald Trump’s recent announcement that he was considering raising tariffs even higher on China-made goods.  

small-cap stocks still haven't recovered after the selloff
click to enlarge

I think this creates an attractive buying opportunity for small and mid-caps. Dollar strength and trade friction could very well prompt investors to rotate out of large-cap multinationals in favor of their smaller peers, which have a performative advantage over blue-chips anyway.

They’ve also historically outperformed large-cap stocks in most rolling 20-year periods, according to legendary investor James O’Shaughnessy, author of the essential What Works on Wall Street and The New Rules for Investing Now.

In New Rules, O’Shaughnessy writes that “a company with $200 million in revenues is far more likely to be able to double those revenues than a company with $200 billion in revenues. With large companies, each increase in revenues becomes a smaller and smaller percentage of overall revenues. Small stocks, on the other hand, have a much easier time delivering great percentage growth in revenues and earnings.”

Looking for a way to invest in high-quality small and mid-cap stocks? Our Holmes Macro Trends Fund (MEGAX) is indexed to the S&P Composite 1500 Index, which covers about 90 percent of U.S. equity market capitalization, but we favor smaller firms for the reasons I explained. As of March 31, the fund had a 58.0 percent weighting in mid-cap stocks (those with market caps between $1 billion and $10 billion) and a 17.5 percent weighting in small-cap stocks (those under $1 billion in market capitalization).

To learn more and to request literature on MEGAX, click here!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus. Historically, investing in small-cap and mid-cap stocks has been more volatile than investing in large-cap stocks.

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.

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.

The U.S. dollar index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600.  The index was developed with a base value of 100 as of December 30, 1994.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund as a percentage of net assets as of 3/31/2019: Intel Corporation 0.00%, Mondelez International Inc. 0.00%, The Coca-Cola Co. 0.00%, Pool Corp. 4.80%, The Clorox Co. 3.17%, PetMed Express Inc. 2.16%, Hawaiian Holdings Inc. 1.06%.

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

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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
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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”

Net Asset Value
as of 05/20/2019

Global Resources Fund PSPFX $4.32 -0.01 Gold and Precious Metals Fund USERX $6.59 -0.02 World Precious Minerals Fund UNWPX $2.51 No Change China Region Fund USCOX $7.95 -0.12 Emerging Europe Fund EUROX $6.45 No Change All American Equity Fund GBTFX $24.23 -0.12 Holmes Macro Trends Fund MEGAX $16.51 -0.11 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change