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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.

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
click to enlarge

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
click to enlarge

 

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.

 

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 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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Commodities Halftime Report: Separating the Wheat from the Chaff
July 10, 2017

amber waves of grain wheat is the best performing commodity of 2017

Of the 14 commodities we track closely at U.S. Global Investors, wheat rose to take the top spot for the first half of 2017, returning more than 25 percent. The grain was followed closely by palladium—used primarily in the production of catalytic converters—which gained 24 percent.

seperating the wheat from the chaff
click to enlarge

To view our ever-popular, interactive Periodic Table of Commodity Returns, click here.

Between the start of the year and June 30, the Bloomberg Commodity Index contracted 4.03 percent, with energy weighing down on the mostly strong performances of precious and industrial metals and agriculturals.

Contributing to metals’ gains was U.S. dollar weakness. During the first six months, the greenback lost 7.54 percent, responding partially to President Donald Trump’s comment in April that the dollar was “getting too strong.”

More recently, the president tweeted his thoughts on gas prices, which he pointed out were “the lowest in the U.S. in over ten years” for the July Fourth holiday. “I would like to see them go even lower,” he added.

Trump Goes to Warsaw

Speaking of Trump, I feel as if he has represented the U.S. and its values admirably during his visit to Europe last week. His speech in Warsaw sought to strengthen ties between America and Poland, which the New York Times just named the “next economic powerhouse.”

ahead of the g20 meeting this week, Presidend Trump and First Lady Melania arrived in Poland, greeted by Polish President Adrezej Duda and wife Agata.

Trump drew attention to a danger that’s “invisible” yet every bit as dangerous as terrorism and extremism—namely, “the steady creep of government bureaucracy that drains the vitality and wealth of the people.”

The U.S. and Poland “became great not because of paperwork and regulations,” the president said, “but because people were allowed to chase their dreams and pursue their destinies.”

This is the Trump I believe voters elected last November. If he were only able to stay on message and give his Twitter account a rest, he might more easily help engender and inspire an environment that better reflects the vision he described to his Polish audience.

I’m also encouraged by his first one-on-one meeting with Russian President Vladimir Putin. From what I’ve read, it sounds as if the two leaders managed to make some progress on Syria, with both sides agreeing to cooperate in maintaining “safe zones.”

Oil Embroiled

Regarding lower gas prices, Trump just might get his wish. Having fallen 14.30 percent in the first six months, oil is currently underperforming its price action of the past four years.

2017 oil underperforming the past four years
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Much of the thanks for oil’s slump goes to U.S. shale producers, which were quick to reactivate dormant rigs following the Organization of Petroleum Exporting Countries’ (OPEC) December announcement that it would be cutting production. As a result, the market is awash in black gold. In May, the Energy Information Administration (EIA) estimated that domestic output should average 9.3 million barrels a day this year and nearly 10 million in 2018, a level unseen in the U.S. since 1970.

West Texas Intermediate (WTI) popped above $47 a barrel last week, however, on news that oil and gas inventories in the U.S. dropped sharply the previous week. What’s more, the number of active North American oil rigs fell by two in the week ended June 30, from 758 to 756 rigs, the first such contraction since January, according to the Baker Hughes Rig Count.

Although constructive, there’s still quite a bit of terrain to cover before oil reaches the low- to mid-$50s we saw at the start of the year.

Where’s the Wheat?

As I told you back in May, the U.S. reclaimed its longstanding title as the world’s number one wheat exporter this year, displacing Russia, whose weak currency gave the Eastern European country a competitive advantage.

We might soon slip to second place yet again, for two primary reasons: 1) low U.S. wheat plantings and 2) severe droughts and unexpectedly hot weather conditions in the Northern Plains.

According to a March report from the U.S. Department of Agriculture (USDA), American farmers just aren’t planting wheat like they used to. Not only are we seeing shrinkage in the acreage devoted to the amber grain—more and more farmers are switching to soybeans—but wheat seedings are down for a second straight year. The USDA, in fact, estimates them to be at their lowest level ever since records began nearly 100 years ago in 1919.

As to the second point, severe to extreme hot and dry weather conditions in the Northern Plains—specifically in areas of Montana and the Dakotas—are putting wheat (and corn) on the defensive. According to the U.S. Drought Monitor, parts of Montana just experienced their driest May and June in 99 years and the driest January through June since 1983. Last week alone, temperatures in the region surged into the 90s and 100s, about 15 to 20 degrees above the norm. These conditions are expected to persist for several more weeks.

drought in the northern plains has impacted spring wheat conditions
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Supply constraints have pushed the grain up 25 percent so far this year to a nearly two-year high. A bushel now costs a little over $5, but some analysts see it rising above $6 and $7.

Precious Metals Continue to Shine

Also benefiting from limited supply is silver, which climbed nearly 4.5 percent as of June 30. The Silver Institute reported in May that global silver mine production in 2016 declined for the first time in 14 years on lower-than-expected output from lead, zinc and gold projects. World supply decreased 0.6 percent year-over-year, or about 32.6 million ounces.

Meanwhile, silver’s use in solar photovoltaic (PV) cells hit a new record high last year, further boosting demand. As I shared with you in May, solar ranked as the number one source of new electric generating capacity in the U.S. in 2016, followed by natural gas and wind.

In the first half of 2017, palladium, the silvery-white metal used in the production of catalytic converters, has surged to a 16-year high on speculative demand.

palladium price closing in on 16 year high
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At first blush, this trade might seem counterintuitive. After all, gas-powered vehicles, which use catalytic converters to control emissions, are expected to be surpassed in sales by electric vehicles, which do not require palladium, as early as 2040. Volvo just announced that it would completely phase out gas-only vehicles by 2019. Meanwhile, Tesla’s first mass-market battery electric vehicle (BEV) finally hit production last week.

Driving palladium’s rally this year, though, are bets that European car buyers will soon be switching from diesel-burning to gas-burning cars because of emissions concerns.

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

Palladium—one of the rarest elements on earth and mined almost exclusively in Russia and South Africa—is the smallest precious metals market, making its prices particularly vulnerable to such speculative trading. It’s achieved near-price parity with its sister metal, platinum, for the first time in two decades.  

On the other end of the spectrum is gold, whose market is larger than many major global stock and bond markets. Those include U.K. gilts, German bunds, the FTSE 100 Index, the Hang Seng Index and others.

Up 7.75 percent in the first six months, gold was supported largely by strong demand in India as consumers made their purchases ahead of the government’s Goods and Services Tax (GST), in effect since July 1, which levies a 3 percent tax on gold.

The impact of the country’s demonetization in December is also still being felt, with Indians’ confidence in fiat currencies tested. I believe Prime Minister Narendra Modi’s scheme to combat black money and public corruption, while admirable, has only reinforced Indians’ faith in the yellow metal as a store of value.

With consumer prices in the U.S. possibly set to begin rising on President Trump’s more protectionist policies—once he can get them enacted—gold priced in dollars could also be headed higher.

The Road Ahead

There’s a lot we’ll be keeping our eyes on in the second half of the year. For one, look to India’s upcoming Diwali holiday and fourth-quarter wedding season, during which gold gift-giving is considered auspicious.

Earlier in the year, I was excited about Trump’s ambitious infrastructure agenda, which would have greatly boosted domestic demand for base metals and energy. But with the Senate still locked in negotiations over what to do about Obamacare, an infrastructure deal looks as if it’s months if not years away.

Finally, I think with Tesla firing up its Nevada-based Gigafactory, investors would be prudent to keep their eyes on aluminum, cobalt, nickel and especially copper, as electric vehicles use around three times as much of the red metal as conventional vehicles. Lithium, which I featured back in March, is also expected to be a beneficiary of the move to BEVs.

 

 

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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
The FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong.

The Baker Hughes North American rig count is released weekly at noon central time on the last day of the work week. 

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 3/31/2017.

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Investor Beware! What Does the Illinois Budget Crisis Mean for Your Bond Fund?
July 6, 2017

L-Train Tracks, Pilsen Neighborhood Chicago Illinois

A recent Capital Economics (CE) report shines an unforgiving light on Illinois’ ongoing budget woes—and what it finds isn’t pretty. The crisis, which has affected every level of government in the state, is a cautionary tale for not only public spending run amok but also independent investors taking too large of a risk by seeking high yields.

The Land of Lincoln’s credit is already the lowest-rated in the union and, until recently, its debt came precariously close to being downgraded to “junk.” Were this to happen, it would become the first state ever to receive such an ignoble rating.

The state’s 10-year bond yield has soared in recent months, which might attract certain unwary speculators. It’s our belief, however, that such debt should generally be avoided, as the risks are especially high.

Illinois 10-Year Bond Yield Soared as State Flirted with "Junk" Status
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As I write this, a state budget could possibly be successfully negotiated, making it the first time in over two years that Illinois has operated with a budget. Republican Gov. Bruce Rauner already vetoed the first bill that reached his desk, which includes tax hikes, but the veto was immediately overridden by the State Senate and is now headed for the House.

No matter the outcome, the point here is that political dysfunction is unfavorable—to put it lightly—and muni investors should remain cautious.

Illinois isn’t the only state facing problems. Connecticut, Delaware, Maine, Massachusetts, New Jersey, Oregon, Rhode Island and Wisconsin are all (or were) mired in similar budgetary impasses. New Jersey public beaches reopened just in time for July 4 celebrations after a high-profile government shutdown closed them down.

For many muni investors, navigating around these numerous pitfalls might seem overwhelming. That’s why I believe an actively-managed municipal bond fund such as our Near-Term Tax Free Fund (NEARX) could be the solution.

More than 95 percent of NEARX is invested in munis that hold between an A and AAA investment-grade rating as of March 31. What this means is we’ve historically avoided exposure to debt issued by poorly-managed municipalities.

We also like to stay on the short end of the yield curve, especially now that the Federal Reserve has begun a new interest rate cycle. When rates rise, bond prices fall, and short- and intermediate-term munis are less sensitive to rate increases than longer-term munis whose maturities are further out.

To learn more about how rates affect municipal bonds, read our whitepaper.

On the Brink of Bankruptcy

Illinois’ total debt currently stands at about $60 billion, according to Capital Economics, which is above Detroit’s $20 billion bankruptcy in 2013 and just below Puerto Rico’s $70 billion debt. The state’s unfunded pensions—for teachers, professors, state employees, judges, emergency personnel and more—could be as high as $250 billion. That puts each Illinoisan on the hook for an estimated $56,000.

Political dysfunction and mismanagement are bad enough, but the state’s adverse demographics make matters even worse.

Illinois is one of only four states whose populations shrank over the past five years, the others being Connecticut, Vermont and West Virginia. CE estimates that over the next decade, the state’s population could grow only 2.2 percent, far below the national average. The number of retirees, meanwhile, could surge 34 percent.

Bottom 10 State Percent Changes in U.S. Population, 2010-2016
click to enlarge

That means fewer working-age Illinoisans are expected to be counted on to support retirees in the coming years, driving up the amount of unfunded pensions even higher.

So even if the Illinois government can resolve its budget soon, we see this as only a short-term fix. The state has even larger obstacles emerging on the horizon.

Our Solution

Again, this is why I think an actively-managed muni fund like NEARX is an attractive solution. Whereas other muni funds might accumulate Illinois debt based on its high yield, regardless of risk, we generally have stuck to investment-grade munis.

It must be said that if you look at NEARX’s holdings today, you’ll see that Illinois is one of its top issuers. The bonds were purchased at an earlier time, before the state’s budgetary problems really began to worsen. We haven’t accumulated any more since it became clear to us that the risks were too great.

We continue to hold the debt because we’re confident the state’s government can successfully unravel the political gridlock and arrive at a short-term resolution. It’s the state’s long-term demographic risks that investors should especially worry about. Our longest Illinois bonds mature in 2021, and as long as the state doesn’t default in the next four years—which, in our opinion, is highly unlikely—we should get a good return on the bonds based on their yield when they were purchased.

 

 

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.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

A bond’s credit quality is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C).

The Near-Term Tax Free Fund invests at least 80 percent of its net assets in investment-grade municipal securities. At the time of purchase for the fund's portfolio, the ratings on the bonds must be one of the four highest ratings by Moody's Investors Services (Aaa, Aa, A, Baa) or Standard & Poor's Corporation (AAA, AA, A, BBB). Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C). In the event a bond is rated by more than one of the ratings organizations, the highest rating is shown.

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San Francisco Named a Global Leader in Disruptive Innovation
June 29, 2017

Bay Area Leads the U.S. in Patents

When people think of San Francisco, they might think of the Golden Gate Bridge, cable cars, Chinatown, the 49ers or Giants. I’m a fan of all of those things, but what usually comes to mind when I think of San Francisco is Silicon Valley, the world’s premiere hub for innovation and entrepreneurialism. That makes it, I believe, one of the most attractive places in the world to invest.

Others clearly share this belief.  One consulting firm, in fact, just named San Francisco as having the best long-term outlook in terms of innovation and business.

Since 2008, A.T. Kearney has annually ranked the world’s most innovative cities, and for the second straight year, the City by the Bay topped the group’s list of cities with the greatest outlook “to attract and retain global capital, people and ideas.” Decisive factors included not just innovation but also personal well-being, economics and governance.

Rounding out the top five cities were New York, Paris, London and Boston. But for my money, San Francisco, and indeed the broader Bay Area and Silicon Valley, offers the most attractive investment opportunities, for numerous reasons.

Patents and Venture Capital Galore

San Francisco—and its fellow Bay cities San Jose, Oakland, Mountain View and others—is ground zero for American innovation. Taken as a whole, the Bay Area has far and away the most patents than any other American city, after surpassing New York City in 1995. It grew from contributing only 4 percent of U.S. patents in 1976 to 16 percent by 2008.

Bay Area Leads the U.S. in Patents
click to enlarge

A.T. Kearney’s report cites San Francisco’s strong start-up ecosystem, emphasis on technology and willingness to take risks as contributing factors to the city’s rapid increases in the number of U.S. patents.

The Bay Area also leads the nation in the amount of venture capital that pours in every year. A study conducted in 2012 by the Bay Area Council Economic Institute and Booz & Company found that the region, where most Silicon Valley companies are headquartered, attracted between 35 and 40 percent of all U.S. venture capital investment. Much of the investment focused on information technology, biotechnology, internet, digital entertainment and “cleantech” firms.

Bay Area Captured between 35% and 40% of U.S. Venture Capital Investment
click to enlarge

In 2016, San Francisco ranked 10th in the nation in terms of the number of Fortune 500 companies, or those with the highest gross revenue. With 11 such companies calling San Francisco home, the city is the only one in California, interestingly, that appears in the top 10.

Disruption HQ

Perhaps more so than any other region in the world, the Bay Area produces new companies that disrupt and redefine entire industries. Think Google (Alphabet), Intuit, Netflix, eBay, Tesla Motors, Cisco Systems and others—many of which we’ve owned at one point or another in our two domestic equity funds, the All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX).

John Bardeen, William Shockley and Walter Brattain, inventors of the transitorWe can thank Stanford University for a lot of this innovative spirit. Founded in 1885 by railroad magnate and former California governor Leland Stanford, the school’s mission from the start was to teach not just traditional liberal arts but also technology and engineering.

Whole books have been devoted to what Stanford—which Reuters named as the world’s most innovative university in 2016—has contributed to our world, from antibody therapies to data analytics to DSL. In 1991, the first websites in North America went online at the school’s National Accelerator Laboratory, paving the way for the Internet Age we live in today.

One of Stanford’s most influential professors, Frederick Terman, was not only renowned for his research in electronics and radio engineering, but he also pushed his students to form their own companies. Known today as the “Father of Silicon Valley,” Terman personally invested in many of these companies, one of which was Hewlett-Packard, founded in Palo Alto in 1939.

The title “Father of Silicon Valley” is also sometimes shared by William Shockley, who came to Stanford in 1963 to teach electrical engineering. Earlier in his career, in 1947, he and his Bell Telephone Laboratories colleagues John Bardeen and Walter Brattain invented the transistor, an achievement that’s absolutely fundamental to modern electronics. The transistor can be found in nearly everything we use and enjoy today, from cars to jets to computers. For this creation, Shockley and his co-inventors were awarded the Nobel Prize in 1956.

Sign of First Silicon DeviceThat same year, Shockley and seven other scientists founded Shockley Semiconductor Laboratory, the “first silicon device and research manufacturing company in Silicon Valley,” as a plaque marking the spot in Mountain View reads today. The work conducted at the laboratory, which closed in 1968, is literally the reason why Silicon Valley is so named. (The building was later used as a furniture store, then a produce market. It was eventually torn down.)

It’s impossible to overemphasize the importance of Stanford’s economic contributions. A 2012 study estimated that the approximately 40,000 companies founded by Stanford alumni since the 1930s generate world revenues in the neighborhood of $2.7 trillion—every year. If they were their own independent nation, they would be the world’s 10th largest economy.

Manifest Destiny

As pleased as I am to see that San Francisco ranked first in the world for its “disruptive innovation,” as A.T. Kearney puts it, I’m not surprised. The city has long been an agent of change and a prime destination for those seeking fortune and glory.

When gold was discovered in California in 1848, San Francisco became an overnight mecca for miners from all corners of the world. Its population swelled from 1,000 in 1848 to 20,000 just two years later. The city grew so rapidly in size and importance, it was eventually selected as the westernmost stop along the first transcontinental railroad.

Today, innovative ideas are sought just as fervently as 49ers sought gold, and it’s precisely those ideas that we invest in. Both the All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX) have a 16 percent to 17 percent exposure to Silicon Valley-type tech firms—firms like Apple, NetApp, Qualcomm, eBay, Interdigital and others. I believe they’re well positioned to continue attracting and retaining capital and talent for many years to come.

 

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund and Holmes Macro Trends Fund as a percentage of net assets as of 3/31/2017: Alphabet Inc. 0.00%; Intuit Inc. 0.00%; Netflix Inc. 0.00%; eBay Inc. 0.00%; Tesla Inc. 0.00%; Cisco Systems Inc. 0.00%; Apple Inc. 0.00%; Qualcomm Inc. 2.72% in All American Equity Fund, 0.00% in Holmes Macro Trends Fund; InterDigital Inc. 0.00%; Hewlett Packard Enterprise Co. 0.00%; NetApp Inc. 3.05% in All American Equity Fund, 0.00% in Holmes Macro Trends Fund.  

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.

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One Easy Way to Invest in the “Asian Century”
June 15, 2017

One Easy Way to Invest in the “Asian Century”

The 19th century belonged to the United Kingdom, the 20th century to the United States. Many market experts and analysts now speculate that the 21st century will be remembered as the “Asian Century,” dominated by rising superpowers such as Indonesia, India and China.

It’s those last two countries, India and China—home to nearly 40 percent of the world’s population—that I want to focus on. Both emerging markets offer attractive investment opportunities, especially for growth investors who seek to derisk from American equities.

Look at how dramatically the two have expanded in the last half century. As recently as 1970, neither country controlled a significant share of world gross domestic product (GDP). As of June of this year, however, China represents more than 15 percent of world GDP, India more than 3 percent. This has displaced Russia and Spain, itself the world’s wealthiest economy in the 16th century.

China and India Cracked the Top 10 List of World Economies
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And the expansion is expected to continue. Back in February, I shared with you research from PricewaterhouseCoopers (PwC), which predicts that by 2050, China and India will become the world’s number one and number two largest economies based on purchasing power parity (PPP). (PPP, if you’re unfamiliar, is a theory that states that exchange rates between two nations are equal when price levels of a fixed basket of goods and services are the same.)

top 10 economies expected to be dominated by 7 largest markets in 2050
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Also note Indonesia, which is expected to replace Japan as the fourth-largest economy by midcentury.

A Surge in Middle Class Spenders

What should excite investors the most is the growing size of the middle class in China and India. More middle class consumers means more spending on goods and services and more investing.

Remember, China’s middle class is already larger than that found here in the U.S., according to Credit Suisse. In October 2015, the investment bank reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durables, luxury goods, vehicles, air travel, energy and more.

109 million for the first time, the size of china's middle class has overtaken the U.S. 109 million compared to 92 million

Living standards have risen dramatically in China. According to Dr. Ira Kalish, a specialist in global economic issues for Deloitte, hourly wages for manufacturing jobs in China are now higher than those found in Latin American countries except for Chile. They’re even nearing wages found in lower-income European countries such as Greece and Portugal.  

Looking ahead to 2030, China is expected to have a mind-boggling 1 billion people—more than three times the current U.S. population—enjoying a middle class lifestyle filled with middle class things, from cars to designer clothes to electronics and appliances.

Asia's Growing Middle Class
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India, meanwhile, will have an estimated 475 million people among its middle class ranks. The South Asian country is currently the fastest-growing G20 economy, with Morgan Stanley analysts estimating year-over-year growth to hit 7.9 percent in December. Driving this growth is a steady increase in wages and pensions, which will support consumption of goods and services.

Demographic trends in India make the country look especially favorable. As I’ve shared with you before, India has a young population, with an average age of 29. (The average age in China, by comparison, is around 37, while Japan’s is 48.) By 2020, more than 64 percent of Indians will be under the age of 35. For many years to come, therefore, India will have a much larger group of working-age individuals than any other country on earth.

In fact, India’s total population could now be larger than China’s, according to new estimates. Yi Fuxian, a researcher at the University of Wisconsin-Madison, believes China’s population is much smaller than official statistics, owing to years of slower population growth under the one-child policy. Yi insists that about 90 million fewer people reside in China than previously thought, meaning its 2017 population could be closer to 1.29 billion people. That would narrowly make India, home to 1.31 billion people, the world’s most populous country.

Investing in 40 Percent of Humanity

So how can investors take advantage of this rapid growth in spending power?

One of the best ways, I believe, is with our China Region Fund (USCOX), which invests in securities in the authorized China securities markets (Hong Kong, Shenzhen and Shanghai) as well as the surrounding countries, including India.

The fund, which seeks to achieve long-term capital appreciation, focuses on companies that we believe are poised to benefit the most from an increase in middle class consumption. That includes automotive firms (Geely Automotive, Great Wall Motor), pharmaceuticals (CSPC Pharmaceutical, Sinopharm), information technology (Tencent, NetEase), consumer discretionary (Anta Sports) and much more.

For the one-year period as of June 12, USCOX was up more than 35 percent, well ahead of its 50-day and 200-day moving averages.

U.S. Global Investors China Region Fund (USCOX)
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Click here to see the fund’s performance.

To learn more about investment opportunities in the “Asian Century,” visit the USCOX fund page!

 

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.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less conc entrated portfolio.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2017: Geely Automobile Holdings Ltd. 7.00%, Great Wall Motor Co. Ltd. 0.54%, CSPC Pharmaceutical Group Ltd. 3.48%, Sinopharm Group Co. Ltd. 1.84%, Tencent Holdings Ltd. 5.47%, NetEase Inc. 0.75%, ANTA Sports Products Ltd. 2.36%.

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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Net Asset Value
as of 07/21/2017

Global Resources Fund PSPFX $5.60 -0.01 Gold and Precious Metals Fund USERX $7.24 0.05 World Precious Minerals Fund UNWPX $6.42 0.04 China Region Fund USCOX $10.07 -0.14 Emerging Europe Fund EUROX $6.64 -0.05 All American Equity Fund GBTFX $24.60 -0.06 Holmes Macro Trends Fund MEGAX $20.11 -0.03 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change