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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.

Take the Long-Term View in a Late-Cycle Market
June 18, 2018

rebalance, stick to a plan and remember: get invested and stay invested. J.P. Morgan's Samantha Azzarello

The U.S. inflation story made further inroads this month, with year-over-year price growth for consumers and producers alike hitting multiyear highs. U.S. consumer prices expanded at their strongest pace in more than six years, climbing to an annual change of 2.8 percent in May. Prices for final demand goods, meanwhile, grew 3.1 percent, their strongest annual surge since December 2011.

annual consumer prices advance the most in six years
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As you might expect, energy was the greatest contributor to higher prices in May, with fuel oil jumping more than 25 percent from the same month a year ago. The current average price for a gallon of regular gas nationwide was just under $3.00, compared to only $2.33 in June 2017, according to the American Automobile Association (AAA).

Inflation is set to get an even bigger jolt now that President Donald Trump has formally approved 25 percent tariffs on as much as $50 billion of Chinese goods. China has already announced retaliatory action. While I agree some targeted tariffs are welcome to address intellectual property theft, tariffs at the wholesale level are essentially regulations that threaten to undermine all the work Trump has done to supercharge the U.S. economy. They act as headwinds to further growth, which in turn makes gold look attractive as a safe haven investment.

Blaming OPEC

Let’s return to energy for a moment. Hot off the success of his historic summit with North Korea leader Kim Jong-un, Trump took a stab at foreign oil producers last week, tweeting: “Oil prices are too high, OPEC is at it again. Not good!”

The president isn’t wrong, but I believe he may be overselling the Organization of Petroleum Exporting Countries’ influence here. In May, the 14-member cartel added an extra 35,000 barrels per day (bpd) in output compared to the previous month, to reach a total of 31.8 million bpd. This is down from the average 32.6 million and 32.4 million bpd OPEC collectively produced in 2016 and 2017.

Venezuela’s output deteriorated once again, falling more than 42 percent in May to 1.4 million bpd, which is less than half of what it produced 20 years ago.

The beleaguered South American country didn’t have the biggest monthly decline among OPEC members, however—that title belonged to Nigeria, which saw its April-to-May production tumble 53.5 percent to 1.7 million bpd. Analysts predict output could fall further to 1.4 million bpd by July—a level not seen since 1988—as the country’s Nembe Creek Trunk Line (NCTL) has had to be closed recently to address product theft along its route.

OPEC will meet later this month and is widely expected to loosen production curbs as global demand strengthens. In the meantime, the U.S. continues to pump even more oil on a monthly basis, and by 2019 it could be producing more than 11 million bpd for the first time ever. This would make it the world’s top oil producer, above Russia.

Want to learn more? Watch this brief video featuring Samuel Pelaez, who outlines the six factors we use to select best-in-class oil and gas exploration and production companies!  

Gold Glitters on Inflation Fears and U.S. Budget Imbalance

gold surged to a four-week high after the fed raised rates a second time this year and signaled two more hikes in 2018

The inflation news helped support the price of gold, which traded as high as $1,309 an ounce last Thursday, its best intraday showing in four weeks.

The price jump came a day after the Federal Reserve lifted interest rates another 0.25 percent, the second time it has done so this year. Although rising rates have historically made the precious metal look less competitive, since it doesn’t offer a yield, gold markets could be forecasting slower economic growth as a result of higher borrowing costs, not to mention costlier servicing of corporate and government debt.

On that note, the Treasury Department announced last week that in the first eight months of the current fiscal year—October through May—the U.S. government deficit widened to a whopping $532 billion, or 23 percent more than the same eight-year period a year ago. That’s already more than the total deficits in fiscal years 2014 and 2015. Because of higher spending and lower revenues, it’s estimated that the deficit by the end of the fiscal year will balloon to $833 billion, which would be the greatest amount since 2012.

I believe this makes the investment case for gold and gold equities even more appealing as a store of value. In the chart below, notice how the price of gold has responded to government spending. I inverted the bars, representing surplus and deficit, to make the relationship more clear. In the years following the Clinton surplus of the late 90s, the difference between expenditure and revenue surged to new record amounts on the back of military spending in the Middle East and the multibillion-dollar bailouts of financial firms during the subprime mortgage crisis. Consequentially, the price of gold exploded.     

relationship between price of gold and u.s. government deficit spending
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Learn more about what’s driving the price of gold right now by clicking here!

How Close Are We to the End of the Business Cycle?

But back to the Fed. Besides lifting rates, the central bank has also signaled that we can expect two more hikes in 2018, suggesting it sees less and less need to accommodate a booming U.S. economy. Since the start of this particular rate hike cycle two and a half years ago, we haven’t yet seen four increases in a single calendar year.

This raises the question of how close we are to the end of the business cycle.

Rising rates, among other indicators, have often preceded the end of economic expansions and equity bull markets. Among other telltale signs: a flattening yield curve, record corporate and household debt, an overheated jobs market and increased mergers and acquisition (M&A) activity. So far this year, the value of global M&As has already reached $2 trillion, a new all-time high. The last two periods when M&As reached similar levels were in 2007 ($1.8 trillion) and in 2000 ($1.5 trillion), according to Reuters. Careful readers will note that those two years came immediately before the financial crisis and tech bubble.

Now, the world’s largest hedge fund, Bridgewater Associates, has reportedly turned bearish on “almost all financial assets,” according to one of its most recent notes to investors.

In the firm’s Daily Observations, co-CIO Greg Jensen writes that “2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed’s tightening will be peaking.”

Don’t Miss the Opportunities

Be that as it may, calling the end of the cycle would be a fool’s errand and could result in missed opportunities, as J.P. Morgan’s Samantha Azzarello points out in a recent note to investors. Late-cycle returns can still be quite substantial, she says. Take a look at the chart below, which highlights returns 24 months, 12 months, six months and three months leading up to the past eight market peaks. Obviously returns were higher in the longer-term periods, but even the three-month periods delivered some attractive returns—returns that would be left on the table if skittish investors exited now. According to Azzarello, it’s important to “rebalance, stick to a plan and remember: get invested and stay invested.”

S&P 500 Index Returns Leading up to Market Peaks
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As further proof that many investors still see plenty of fuel in the tank, the June survey of fund managers conducted by Bank of America Merrill Lynch (BAML) found that equity investors are overweight U.S. stocks for the first time in 15 months. Commodity allocations are at their highest in eight years. And two-thirds of managers say the U.S. is the best region in the world right now for corporate profits, which is at a 17-year high.

That’s not to say there aren’t risks, however. Forty-two percent of survey participants said they believed corporations were overleveraged. That’s well above the peak of 32 percent from soon before the start of the financial crisis. Fund managers cited “trade war” as the biggest “tail risk” for markets at present.

This is largely why we find domestic-focused small to mid-cap stocks so attractive right now. These firms are well positioned to take advantage of Trump’s high-growth “America first” policies, yet because they don’t have as much exposure to foreign markets, they bypass many of the trade war pitfalls large multinationals must face. Since Election Day 2016, the small-cap Russell 2000 Index has outperformed the large-cap S&P 500 Index by more than 8.5 percent.

Get the scoop on small to mid-cap stocks by clicking here!

Rethinking Market Cap-Weighting

On a final note, I want to draw attention to a change we’ve observed in S&P 500 returns—specifically, the difference in performance between an equal-weighted basket of stocks and one that’s market cap-weighted. For the longer-term period, equal-weighting outperformed. But more recently, market cap-weighting has pulled ahead. This is the case for the one-year, three-year and five-year periods.

market cap-weighted has beaten equal-weighted more recently
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So why is this? Simply put, the phenomenally large FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have made the S&P 500 top heavy. Today, these five stocks represent a highly concentrated 12 percent of the S&P 500, nearly double from their share just five years ago. Apple alone represents 4 percent of the large-cap index.

Ten years ago, the FAANG stocks—excluding Facebook, which wasn’t public yet—had a combined market cap of $390 billion, according to FactSet data. In 2018, they’re valued at more than eight and half times that, or right around $3.32 trillion—a mind-boggling sum.

Market cap-weighted also means more money is disproportionately being reallocated to top winners such as Apple and Amazon, and so it becomes a self-fulling prophecy. This leaves you with too much exposure to companies that would be hardest hit in the event of a market downturn, and too little exposure to names and sectors that might rotate to the top in the next cycle.

Learn more about the domestic market 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 S&P 500 Index is a market capitalization weighted index of the 500 largest U.S. publicly traded companies by market value. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.

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 3/31/2018.

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Texas Gold Investors Just Got Their Own Fort Knox
June 11, 2018

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017

If you live in Texas and have any extra gold bars, coins and/or jewelry lying around that need safekeeping, you’re in luck. The Texas Bullion Depository, the first of its kind in the U.S., officially opened to the public in Austin last week, putting a cap on three years of planning and construction. The private firm managing the facility, Lone Star Tangible Assets, calls it the “world’s most advanced depository.”

This is wonderful news. Because Texas is such a trend-setting state, it might encourage other states to look into creating their own depositories. It also has the potential to attract even more investors to precious metals, which I believe are crucial components of any well diversified portfolio. As I’ve shown before, gold has little to no correlation with other assets such as equities, cash and Treasuries.

That makes the yellow metal especially favorable—now more than at any time since the financial crisis. We’re in the second longest economic expansion since World War II, and some experts see another recession as soon as 2020. A new survey by the National Association for Business Economics (NABE) finds that half a panel of 45 “professional forecasters” believe the next recession could occur between the fourth quarter of 2019 and the second quarter of 2020.

Although I don’t necessarily agree with this assessment, it’s important to recognize the risks and headwinds and prepare accordingly.

“Troubled” Deutsche Has $1.7 Trillion in Assets

Among the most headline-worthy risks is the uncertain survival of Deutsche Bank. Shares of Germany’s biggest lender have plummeted following a first quarter report showing net income fell some 80 percent from a year ago, as well as news that the Federal Reserve downgraded the bank’s U.S. operations to “troubled.”

could deutsche bank be another lehman
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Many analysts are already making the dubious comparison between Deutsche and Lehman Brothers, the storied American financial services firm whose bankruptcy nearly 10 years ago set off the global financial crisis. At the time of its filing, Lehman had approximately $639 billion in assets. As of the end of last year, Deutsche controlled more than double that amount — $1.7 trillion — meaning its failure could be catastrophic to global financial markets.

Ideas are currently being floated to save the distressed bank, including a German government bailout and a merger with rival Commerzbank, but nothing is guaranteed.

Record Student Debt

Starbucks CEO Schultz debt is the greatest economic threat to the United States

Something else I’m keeping my eye on is the ever-growing mountain of government and household debt. Howard Schultz, the outgoing billionaire executive chairman of Starbucks, told CNBC last week that he considered national debt to be the greatest threat to the U.S.

“I think the greatest threat domestically to the country is this $21 trillion debt hanging over the cloud of America and future generations,” Schultz said, adding to speculation that the former Starbucks chief is considering a presidential run in 2020.

I couldn’t agree more with Schultz on this point. I should add that higher interest rates are making servicing this debt even more costly than it already is. No one is off the hook.

Household debt is also ballooning out of control, and today, student loan debt stands at more than $1.5 trillion. Student debt is now the largest form of debt in the U.S. after mortgages. It’s bigger than auto loan debt and credit card debt. Even more alarming is that an estimated 20 percent of borrowers right now are behind on their payments.

US outstanding student loan debt now stands at 1.5 trillion dollars
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Negative Interest Rates in America?

Between Deutsche and student debt, the implications are enormous. They also highlight my recommendation that investors have approximately 10 percent in gold, with half of that in physical bullion and the other half in high-quality gold mining stocks, mutual funds and ETFs.

As I said earlier, the investment case for gold is highly appealing right now. Should another recession happen anytime soon, the Federal Reserve at present would be hamstrung to offer monetary accommodation.

That’s according to a recent post by my colleague James Rickards, who writes that it’s historically taken between 3 percent and 5 percent in interest rate cuts to pull the U.S. out of a recession.

The problem with this is that the federal funds rate currently sits at 1.75 percent. You do the math.

Were a recession to strike tomorrow, the Fed would have very little wiggle room to ease monetary policy. It could cut rates exactly 1.75 percent, but then it would hit zero and “be out of bullets,” as Rickards says.

Of course, the Fed could dip rates into negative territory, which—in theory—should spur consumer spending. Better to spend your cash on that new boat, the thinking goes, than be punished for letting it sit in the bank. But there’s evidence negative rates haven’t worked as expected to prop up the economies that have experimented with them—notably Japan, Switzerland, Sweden and the eurozone.

And because there’s really no easier way to destroy wealth than with negative interest rates, I would expect gold investment demand to get a massive jolt.

This is precisely why German investors have quietly become the world’s biggest buyers of gold. Until recently, Germany wasn’t known as a nation of gold bugs. But following the financial crisis, the European Central Bank (ECB) slashed rates, and banks began charging customers to hold their cash. Yields on German bonds went subzero. Today, the five-year bond will cost you more than 20 basis points.

For many Germans, the only reliable store of value was gold. Investors ploughed as much as $8 billion into gold coins, bars and exchange-traded commodities in 2016, the most recent year of available data. Demand for safety deposit boxes surged.

I’m curious to see if the same will happen at the Texas Bullion Depository.

Gold ETFs Have Attracted $1 Billion a Month So Far in 2018

The latest report from the World Gold Council (WGC) shows that inflows into global gold ETFs in May were mostly solid. European gold funds grew by 26 metric tons, or $1.2 billion, as geopolitical uncertainty weakened the euro against the dollar. And in Asia, gold ETFs rose by 21 metric tons, or $862 million, a phenomenal 20 percent increase from the previous month. These gains were offset somewhat by net outflows from North American funds as a strong U.S. dollar pushed the price of gold below $1,300 an ounce.

So far this year, gold ETFs have attracted nearly $5 billion, or approximately $1 billion per month.

gold ETF flows were strong in may despite subdued metal prices
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This pace can be maintained for the rest of year, I believe, especially now that it looks as if the U.S. dollar has peaked. Since its 2018 high on May 29, the greenback has already lost close to 1.5 percent. This affords gold more upside potential as we head closer to Diwali and the Indian wedding season, when gifts of gold jewelry are considered auspicious.

Ready to learn more? Download my award-winning whitepaper, “Gold’s Love Trade!”

 

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.

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 3/31/2018.

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GO GOLD! Inflationary Tariffs Could Supercharge the Yellow Metal
June 4, 2018

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017

Ready for inflation?

Just days after Treasury Secretary Steven Mnuchin reassured markets that a trade war between the U.S. and China was “on hold,” the Trump administration announced that it would be moving forward with plans to impose 25 percent tariffs on as much as $50 billion worth of Chinese exports to the U.S. Beijing has already suggested that it will retaliate in kind.

The White House also reinstated tariffs on imports of steel and aluminum from Canada, Mexico and the European Union (EU) after allowing earlier exemptions to expire. Again, there’s a big chance the U.S. will see some sort of tit-for-tat response.

Steel prices are already up 45 percent from a year ago. The annual change in the price of a new vehicle in the U.S. has been dropping steadily since last summer, according to Bureau of Labor Statistics data, but with the cost of materials set to rise dramatically, we could see a price reversal sooner rather than later.

US midwest hot rolled steel price up 45 percent from last year
click to enlarge

Next up, the U.S. government could slap steep tariffs on imported automobiles—and possibly even ban German luxury vehicles outright, according to a report by German business news magazine WirtschaftsWoche.

These decisions, if fully implemented, will have a multitude of implications on the U.S. and world economies. What I can say with full confidence, though, is that prices will rise—for producers and consumers alike—which is good for gold but a headwind for continued economic growth.

You Can’t Suck and Blow at the Same Time

US midwest hot rolled steel price up 45 percent from last year

Let me explain. I’ve often said that middle class taxpayers elected Trump president by and large to take on entrenched bureaucrats, cut the red tape and streamline regulations. People are fed up. A study last year by the Congressional Budget Office (CBO) found that government workers not only earn more on average than private-sector workers with similar educational backgrounds, they’re also guaranteed health, retirement and other benefits. Trump responded to these concerns by signing an executive order that eased the firing of federal workers.

He’s kept his word in other ways. Since being in office, he’s already eliminated five federal rules on average for every new rule created, according to the Competitive Enterprise Institute (CEI). He’s weakened Obamacare and Dodd-Frank, not to mention slashed corporate taxes.

In 2017, the number of pages in the Federal Register, the official list of administrative regulations, dropped to 61,950 from 97,069 the previous year. This is especially good news for productivity. Research firm Cornerstone Macro found that Americans were more productive when there were fewer rules, less productive when there were more rules. 

productivity decreased as the number of federal rules and regulations grew
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These are all positive developments that should help boost the economy. The problem is that they could be undermined by tariffs, which are essentially regulations. We believe government policy is a precursor to change, and history suggests that rising tariffs and regulations hurt the economy.

Consider automobiles. U.S. automakers are the second largest consumer of steel following construction. In March, the Wall Street Journal estimated that the tariffs could add at least $300 to each new vehicle sold in the U.S. And speaking to Bloomberg last week, a spokeswoman for the Alliance of Automobile Manufacturers said the tariffs on steel and aluminum imports will make cars more expensive. “These tariffs will result in an increase in the price of domestically produced steel—threatening the industry’s global competitiveness and raising vehicle costs for our customers,” Gloria Bergquist said.

Do tariffs on imported vehicles threaten united states auto sales
click to enlarge

Higher Inflation Has Historically Meant Higher Gold Prices

The good news in all this is that higher inflation has historically been supportive of the price of gold. In the years when inflation was 3 percent or higher, annual gold returns were 15 percent on average, according to the World Gold Council (WGC).

gold has historically rallied in periods of high inflation
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When gold hit its all-time high of $1,900 an ounce in August 2011, consumer prices were up nearly 4 percent from the same time the previous year. The two-year Treasury yield, meanwhile, averaged only 0.21 percent, meaning the T-note was delivering a negative real yield and investors were paying the U.S. government to hang on to their money. This created a favorable climate for gold, as investors sought a safe haven asset that would at least beat inflation.

CIBC: Major Gold Firms to Generate Strong Free Cash Flow and ROIC

gold has historically rallied in periods of high inflation

Finally, I want to draw attention to an exciting research report released last week by the Canadian Imperial Bank of Commerce (CIBC). I’m a huge admirer of the work CIBC does, especially that of Cosmos Chiu, director of precious metals equity research. Chiu and his team write that the “future looks brighter” for gold equities on improved free cash flow and return on invested capital (ROIC). Both factors are among our favorites. I recently shared with you a chart that shows that, over the past 30 years, ROIC outperformed other factors by as much as one and half times.

With gold trading near $1,300 an ounce, producers are currently posting positive margins, according to CIBC. As a result, every stock in the bank’s large-cap universe, with the exception of Kinross, is expected to generate positive free cash flow through 2019.

Go Gold! Royalty/Streaming Companies Deliver the Profits

The bank has even better news for royalty and streaming companies, particularly Franco-Nevada, Royal Gold and Wheaton Precious Metals. For one, the three big royalty names delivered combined shareholder returns of 6.2 percent between 2013 and 2017, outperforming both senior producers and physical gold.

Three largest royalty and streaming companies forecast to deliver strong return on invested capital
click to enlarge

Now, CIBC forecasts the royalty group will generate strong ROICs, “steadily inching higher over the next decade… to average between the 5 percent and 8 percent mark from 2018 – 2023.” ROIC measures how well a company can turn its invested capital into profits.  

Loyal readers already know we’ve long been fans of Franco-Nevada, Wheaton Precious Metals and other royalty/streaming names. To find out why we believe they’re the “smart money” of the gold mining space, I invite you to watch this brief five-minute video.

 

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

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 (03/31/2018): Franco-Nevada Corp., Royal Gold Inc., Wheaton Precious Metals Corp.

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow or FCF is the cash left over after a company pays for its operating expenses and capital expenditures or CAPEX.

Return on invested capital (ROIC) is a profitability ratio. It measures the return that an investment generates for those who have provided capital, i.e. bondholders and stockholders. ROIC tells us how good a company is at turning capital into profits.

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Building a Better U.S. Economy
May 29, 2018

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017

This shouldn’t surprise anyone, but public trust in the federal government is eroding. Sixty years ago, 75 percent of Americans expressed faith in the government to do the right thing “most of the time” or “just about always.” Seventy-five percent! You can’t get 75 percent of people to agree on anything now, as the recent “Laurel or Yanny” video proved.

Today, only one in five Americans, or 20 percent—a near-record low—believes our leaders make decisions in the country’s best interest. If you’re reading this, you might very well be in the camp that has some serious doubts.

United States public trust in federal government near historic lows
click to enlarge

The polling data, provided by the Pew Research Center, was shared by Pulitzer Prize-winning biographer Jon Meacham, who spoke last week at an Investment Company Institute (ICI) meeting in Washington, D.C. Although no fan of the president, Meacham believes, as I do, that fed up, disillusioned voters turned to Donald Trump to take on the beltway party and career bureaucrats and roll back out-of-control regulations.

Government Policy Is a Precursor to Change

This anti-establishment discussion isn’t just happening here in the U.S., of course. Brexit in the U.K. was a populist backlash against excessive rules from unelected bureaucrats in Brussels. Last year, France nearly elected the far-right Marine Le Pen to the president’s mansion. And in Italy this week, tax-paying middle class, euroskeptic voices are getting louder following President Sergio Mattarella’s veto of their pick for economy minister.

Love him or hate him, Trump has so far stuck to his word, and he doesn’t seem to have any reservations about whose applecart he upsets. He’s an equal-opportunity disruptor, and for that he has opponents on all sides of the political spectrum, including the beltway.

It's little wonder, then, that “Trump” is likely the most spoken word in the English language right now, according to Meacham. Just don’t tell Trump that.

Presidential biographer and historian Jon Meacham

The presidential historian—who last month delivered the eulogy for former first lady Barbara Bush—also reminded the audience that, as bad as many people believe things are right now, they used to be much worse. Remember slavery? Remember Jim Crow?

Some people believe Trump is determined to weaken First Amendment protections, but he’s not the biggest threat to free speech this country has ever seen, Meacham said.

A little over 100 years ago, in preparation for America’s entry into World War I, Congress passed and President Woodrow Wilson signed the Espionage Act, which gave the U.S. government sweeping new authority to control and censor the press. Overnight, it became illegal to “convey information with intent to interfere with the operation or success of the armed forces of the United States or to promote the success of its enemies.” Hundreds of communist and pro-German newspapers and magazines were banned or otherwise forced to shut down.

It’s important to put things in perspective. Trump might regularly criticize what he perceives as “fake news,” but at least those outlets—the New York Times, Washington Post, CNN and others—are allowed to continue operating.

 

 

Trump Maintains a One-In, Five-Out Pace for Regulations

Many attendees of the ICI meeting, all representing investment and wealth management firms,  weren’t so optimistic about their ability to communicate effectively with shareholders and potential clients. Some of them shared with me their observation that regulators are increasingly getting bolder about what financial firms can and cannot say, and the interpretation of rules keep piling up.

Within the past year, we were asked to add disclosure under a picture of Elvis Presley in many of our gold presentations, if you can believe it. And during the conference, a fund manager said he found it ridiculous that, in a company slideshow, he was asked to add disclosure beneath a picture of Aristotle to inform clients that the ancient Greek philosopher was not, in fact, affiliated with the fund in any way.

It raises the question: What reader would assume that Elvis and Aristotle—the former having been dead 40 years, the latter 2,000 years—are affiliated with an investment firm?

It’s common knowledge in the business that the number of investment advisors and brokers is shrinking day-by-day. You would think that the number of rules and regulations would likewise shrink, but that doesn’t appear to be the case. In such a climate, the only ones who manage to stay ahead are the Vanguards and BlackRocks of the investment world. (Similarly, the number of seats in Congress has not changed in over 100 years, and yet we’ve seen a growth in the power of unelected bureaucrats.)

This has created an unlevel playing field that favors the Vanguards and BlackRocks of the investment world.

I believed that this is one of the key reasons why many people voted for Trump—to cut the red tape and rein in rampant bureaucracy. Here again, he’s kept his word, having so far eliminated, on average, five federal rules for every new rule created, according to the libertarian think tank Competitive Enterprise Institute (CEI).

Bye Bye, Dodd-Frank. Hello, Economic Growth?

Case in point: The week before last, he signed legislation that severely weakened the Dodd-Frank Wall Street Reform and Consumer Protection Act. The behemoth 2010 law, intended to prevent another financial crisis, is believed to be directly responsible for the failure of a number of small and regional banks, which small businesses and rural families depend on for loans and other financial services.

That’s why I named Dodd-Frank one of the five costliest financial regulations of the past 20 years. Barney Frank himself, the former chairman of the House Financial Services Committee and one of Dodd-Frank’s chief architects, acknowledged he “sees areas where the law could be eased.”

With the most restrictive parts of Dodd-Frank gone or amended, annual economic growth in the U.S. might finally be able to break above 3 percent, a rate we haven’t seen since 2005.

In the meantime, asset management firm AllianceBernstein shows that, over the past 30 years, the best performing factor has been return on invested capital (ROIC). According to the firm, ROIC outperformed return on equity (ROE) by one and a half times, and gross profitability by nearly three times.

Trading return on invested capital has been most successful over much of the cycle
click to enlarge

Seeing this chart was particularly vindicating for us, as ROIC is among the most important factors we pay attention to when making our investment decisions.

Government Policy Right Now Favors Small-Cap Stocks

The Dodd-Frank rollback is just the latest move by the Trump administration that should benefit smaller businesses. Quarter-to-date, the small-cap Russell 2000 Index is up more than 6 percent, compared to the S&P 500 Index, which is up 2.8 percent. Meanwhile, small business optimism , as measured by the National Federation of Independent Business (NFIB), remains near a historic high, posting 104.8 in April, up a hair from the previous month.

Small cap stocks continue to climb as business optimism strengthens
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I often say it’s not about which party is in power but rather the policies that matter. Whether the Republicans or the Democrats control Washington isn’t the point. There are ways for investors to make money in either case, and right now, government policy favors domestic small-cap stocks that have limited exposure to overseas markets. The trend is your friend, as they say, and with respect to small-caps, that certainly seems to be the case.

Learn more about small and mid-cap stocks 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 Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

Return on invested capital (ROIC) is a performance and profitability ratio indicating how much investors in a business are earning on the capital.

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. 

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Blockchain Will Completely Revolutionize How We Mine Gold and Precious Metals
May 21, 2018

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017

Last week I had the pleasure to attend Consensus 2018 in New York, the premiere gathering for the who’s who in blockchain, bitcoin and cryptocurrencies. Attendance doubled from last year to an estimated 8,500 people, all of them packed in a Hilton built for only 3,000. Ticket sales alone pulled in a whopping $17 million, while event booths—the largest of which belonged to Microsoft and IBM—generated untold millions more.

The entire three-day conference, hosted by crypto news outlet CoinDesk, had the energy and flair of the world’s greatest carnival. Sleek lambos sat outside the hotel, attracting all sorts of gawkers. Passersby also stopped and stared at the “bankers against bitcoin” protest, conceived and funded by Genesis Mining, one of the largest bitcoin mining companies. (You can read my interview with Genesis cofounder and CEO Marco Streng here.)

Bankers agaisnt Bitcoin protest

The same money went to finance bitcoin awareness billboards outside the Omaha office of Warren Buffett, who recently bashed the cryptocurrency, calling it “rat poison squared.”

“Warren,” the billboards read, “you said you were wrong about Google and Amazon. Maybe you’re wrong about Bitcoin?”

Warren Buffet billboard Bitcoin Genesis Mining

Bringing #BitcoinAwareness to the Masses

That Buffett has a negative opinion of bitcoin shouldn’t surprise anyone. The “Oracle of Omaha” has famously been averse to emerging technology and tech stocks he doesn’t fully understand, including Google, Amazon, Microsoft and others. But he’s changed his mind in the past after he’s seen the value these companies provide.

I’m old enough to remember when Buffett was vehemently against airline stocks. The industry was a “death trap” for investors, he once said. Today, his company Berkshire Hathaway is one of the top holders of stock in the big four carriers—United Continental, Delta Air Lines, Southwest Airlines and American Airlines. He even told CNBC he “wouldn’t rule out owning an entire airline.”

Obviously there’s a world of difference between airline stocks and bitcoin—although blockchain, the technology that bitcoin is built on top of, is already being used in aviation to increase transparency in aircraft manufacturing and maintenance. All I’m saying is I wouldn’t rule out bitcoin, or cryptocurrencies in general, just because Buffett isn’t a fan. He doesn’t like gold as an investment either, and that hasn’t stopped it from being one of the most liquid assets on the planet.

The Future of Gold Mining (And Investing)  

But back to Consensus. It wasn’t all fun and games, and there were some serious discussions on how governments might one day use cryptocurrencies; the future of bitcoin mining; and blockchain applications in finance, health care, insurance, energy and more. As I explain in last week’s Frank Talk Live, charitable giving is down because donors are increasingly concerned about fraud. Blockchain can help validate where your money is going.

I would include the mining industry to that list. Blockchain has the potential to revolutionize how gold and precious metals are manufactured and delivered. Consider the journey a gold nugget must take along its supply chain, from mine to end consumer—it cuts through several other industries and practices, including legal, regulatory, financial, manufacturing and retail, each of which might have its own ledger system.

These ledgers are vulnerable to hacking, fraud, errors and misinterpretations. They can be forged, for example, to conceal how the metal or mineral was sourced.

With blockchain technology, there’s no hiding anything. Decentralization guarantees complete transparency, meaning anyone along the supply chain can see how, when and where the metal was produced, and who was involved every step of the way.

This will give the industry a huge shot of trust, not to mention dramatically increase efficiency.

Many producers, tech firms and entire jurisdictions have already adopted, or plan to adopt, blockchain technology for these very reasons. IAMGOLD, a Toronto-based producer, announced last month that it partnered with Tradewind Markets, a fintech firm that uses blockchain technology to facilitate digital gold trading. IBM just helped launch a diamond and jewelry blockchain consortium, TrustChain, that will track and authenticate diamonds, metals and jewelry from all over the world. And sometime this year, the Democratic Republic of Congo will begin tracking cobalt supply from mines to ensure children were not involved.

With precious metals being used more widely in industrial applications, from smartphones to electric cars to Internet of Things (IoT) appliances, tracking metals across the supply chain has become increasingly more important to businesses and consumers. According to the Semiconductor Industry Association (SIA), global sales of semiconductors—which contain various metals, including gold—crossed above $400 billion for the first time in 2017. Total sales were $412.2 billion, an increase of nearly 22 percent from the previous year.

That’s a lot of metal and other materials that blockchain tech can help authenticate.

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017
click to enlarge

Before I get off this topic, I want to mention that blockchain is also bringing change to gold investment. Consider Royal Mint Gold (RMG), which aims to provide the “performance of the London Gold Market with the transparency of an exchange-traded security.” There’s also the Perth Mint’s InfiniGold, which issues digital certificates guaranteeing ownership of gold and silver in the mint’s vault. A number of other platforms exist to help facilitate gold trading.

Should even one of these become hugely popular, it “could be as big a change to the gold markets as the development of ETFs, but with the added advantage of appealing to younger generations,” according to the World Gold Council’s (WGC) chief strategist, John Reade.

Who Says Size Matters?

The small-cap Russell 2000 Index closed at its third straight record high on Friday after putting up bigger gains than the larger-cap S&P 500 Index and Dow Jones Industrial Average.   

the russel 2000 index hit a new all-time high
click to enlarge

As I’ve explained before, President Donald Trump’s protectionist policies and low corporate tax and regulatory environment strongly favor small-cap stocks. Investors hate uncertainty, which is precisely what the market is feeling with regard to tariffs and global trade. Because small-cap companies don’t rely as heavily on overseas markets as huge multinationals do, it’s little wonder why we’re seeing money flow into the Angie’s Lists and Yelps of the world right now.

 

The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group. 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.

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 (03/31/2018): IAMGOLD Corp., United Continental Holdings Inc., Delta Air Lines Inc., Southwest Airlines Co., American Airlines Group Inc.

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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Net Asset Value
as of 06/18/2018

Global Resources Fund PSPFX $5.82 -0.01 Gold and Precious Metals Fund USERX $7.59 -0.02 World Precious Minerals Fund UNWPX $3.86 -0.03 China Region Fund USCOX $11.75 -0.05 Emerging Europe Fund EUROX $6.64 -0.08 All American Equity Fund GBTFX $25.97 No Change Holmes Macro Trends Fund MEGAX $20.15 -0.07 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change