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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.

Talking Tech With Pulitzer Prize Nominee Michael Robinson
November 28, 2018

Michael Robinson, chief technology strategist of Money Map Press, is a lot of things: devoted son and father, technologist, avid skier and gun enthusiast, accomplished blues guitarist, Pulitzer Prize nominee.

Readers of his popular newsletters know him for his mantra, "The road to wealth is paved with tech.” As editor of Strategic Tech Investor, Nova-X Report and Radical Technology Profits, Michael has helped curious investors get in early on small-cap and micro-cap names involved in biotech, defense, cannabis research and more.

I got to see Michael’s presentation at the Black Diamond Investment Conference in October and was impressed by his energy, interesting life story and deep knowledge of niche markets.

Below are snippets from our recent discussion, which touches on topics ranging from trap shooting to cannabis legalization to blockchain technology.

Tell us about your start in military tech and biotech.

I grew up in a military household. My dad was a Marine Corps officer, and later he became the senior military editor at Aviation Week & Space Technology. He was among the earliest to write about the Strategic Defense Initiative (SDI), popularly known as Star Wars. So as a high schooler, I was exposed to all of these exotic defense technologies—materials, sensors, warheads and the like—which really gave me a leg up.

My dad and I ran a high-tech military newsletter in the 1980s. This put me in a position to visit Silicon Valley pretty regularly and talk with scientists and CEOs about cutting edge tech—materials that made battleships and submarines quieter, for example.

As a young auto analyst and reporter, I managed to break some big tech stories because I was willing to look away from the mainstream. The biggest story I did actually led to the firing of two executive vice presidents, which cost the bank close to $80 million. The New York Times and Wall Street Journal ended up having to cover the story, so that helped put me on the map.

I got involved in biotechnology later through my work at what was then the Oakland Tribune. The biotech sector was brand new in the mid-80s, and I was in California where it was all happening. While there, I did a five-part series on Betaseron, the first FDA-approved biotech drug to treat multiple sclerosis (MS).

How did you make the leap to the financial world?

That just felt like the natural next step. Every time I left a Silicon Valley presentation on some new tech, I would think: "That's really cool, but how can you make money off of it?" So even though I consider myself a technologist, I'm always looking at the financial angle.

What’s more, I served on the advisory board of a venture capital company. The experience gave me a different way of evaluating startups than a standard financial analyst, who might be trained only to do ratio analysis and things like that. There's nothing wrong with ratio analysis, but it's not going to give you the kinds of insights and instinct you need to figure out which companies really have it together and which don’t.

You’re known to have a strong interest in guns and shooting. Did that come out of your dad’s military background?

I never really thought of it that way. I just love shooting guns. Mostly these days I shoot trap and skeet. I joined the National Rifle Association (NRA) because I wanted to qualify as a Triple Distinguished Expert in pistols, rifles and shotguns. Shotgun was the most difficult, I thought.

The amount of concentration that's required to shoot at a high level really appeals to me. You have to block out all distractions. In that respect, shooting is a lot like investing. One of the things I remind readers and clients is to separate the signal from the noise. You can't become a good shot if you can't block out all the external distractions and things. Similarly, investors must learn to block out short-term market noise before they pull the trigger, so to speak.

Who would you say are your biggest influences?

Besides my dad, I would have to say the renowned economist Milton Friedman. I had the great pleasure to interview him once for the American Enterprise Institute (AEI). I remember he had a portrait of himself done, but his wife wouldn’t let him hang it up on the wall in their Nob Hill condo. It’s funny—here’s one of the world’s greatest economic thinkers, a Nobel Prize winner, and he had his portrait just sort of propped up in a corner somewhere.

In any case, Friedman was a huge influence on the way that I think about economics. In my freshman year when I was signing on to be an economics major, I remember reading about how iconoclastic he was, how out of step he was with the rest of the economics community, which was very Keynesian at the time. I learned the true value of contrarianism from studying him and looking at things like freedom to choose. Ayn Rand was another huge influence in that respect.

Michigan just voted to legalize recreational cannabis, making it the first Midwest state to do so. Is this a tipping point?

I think the tipping point probably occurred in 2016, when as many as nine states had cannabis legalization on their ballots. That year is also when we launched our investment report, the Roadmap to Marijuana Millions. All 30 of the stocks we recommended made money. The reason I say that is not to brag about our track record, but to point out that we saw large numbers of new investors coming in, willing to take the risk, wanting to be early and understand the industry.

Michigan, for me, was an affirmation of this critical mass. It’s also a reminder of what we need more of to attract institutional investors: initial public offerings (IPOs), mergers and acquisitions (M&As), up-listings to major exchanges.

Obviously the biggest catalyst would be something out of Washington—an effort to reclassify marijuana off of Schedule I, for instance. I would love to see that happen, as would my dad, the Marine Corps officer, but I don’t believe the support is there right now.

You recently argued that blockchain technology should not be used for voting, for reasons involving secrecy and anonymity. In what industries do you see its application making the most sense?

Literally everything. Supply chain management is a huge area that could benefit from blockchain. Look at the oil industry, which still uses this old paper-based system. Companies that have already shown interest in blockchain are British Petroleum (BP) and Royal Dutch Shell, among others.

Counterfeit goods is a problem that runs in the hundreds of billions of dollar every year. Blockchain can help with that. You can use it to tag and identify goods early on, and then they can be tracked with some kind of a distributed ledger.

Or look at financial services. Frank, you’ve pointed out a number of times before that JPMorgan Chase CEO Jamie Dimon has criticized cryptocurrencies, and yet the bank was quietly investing millions upon millions.

Speaking of cryptocurrencies, they’re down significantly this year. Do you think now is a good time to buy, or is more pain ahead?

I fear about jumping in right now. Are we at the bottom of bitcoin? I don't know. One thing I do know is that this crypto selloff may be healthy in the long-term. There’s been an insane number of initial coin offerings (ICOs), which have really hurt bitcoin and Ethereum. We need to sweep out some of the smaller coins because 2,000 cryptos is more than the world can possibly absorb. There has to be a shakeout.

Total currency market capitalization
click to enlarge

You work on several newsletters. Can you describe them for our readers and explain what value they bring?

The main value they bring is making our readers a lot of money. For starters, we have Strategic Tech Investor, which is our free service. The idea is to give investors the rules they need to succeed and not be so emotionally-driven. Because it's free and it's open format, we want to educate investors, and hopefully they'll develop an interest in my investing style and decide to subscribe to one of our paid services.

That brings us to the Nova-X Report and Radical Technology Profits.

Nova-X focuses on mid-cap stocks and the lower end of large-caps. We feel that's a good comfort zone for entry-level investors who are looking for big trends and ways to make money that aren't necessarily household names. We try to get to market early.

Radical Tech is our premium service. It’s designed for much more savvy, much more aggressive people. We swing for the fences more than we do with Nova-X. The focus is on any kind of cutting-edge technology—small-caps and even some micro-caps.

As long as my readers make money, I know I'll do well. I take breaks from time to time, but for the most part I'm up well before dawn screening charts and looking at articles—anything to make our readers as much money as I can.

I want to thank Michael for his time and enthusiasm. Be sure to check out his newsletters!

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 9/30/2018: BP PLC, Royal Dutch Shell PLC.

 

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Freezing Temperatures Could Heat Up Natural Gas Prices
November 19, 2018

Midterm Elections Gridlock Was the Best Possible Outcome

Here in San Antonio, the temperature hit a bone-chilling low of 27 degrees last Wednesday, breaking a 102-year-old record for mid-November. An out-of-state visitor, Cornerstone Macro’s Head of Portfolio Insights Stephen Gregory, speculated that the Central Texas temperature, ordinarily mild this time of year, was down more than three standard deviations. I didn’t make the calculation, but my guess would be about the same.

With temperatures so low, it’s perhaps no surprise that natural gas had one of its best days in years. Its price popped almost 18 percent last Wednesday—before falling nearly as much on Thursday. The Energy Information Administration (EIA) reported that natural gas storage in the lower 48 states was below the five-year average as of October 31. This, combined with a stronger-than-expected start to winter, prompted traders to push prices to a four-year high of $4.84 per million British thermal units (MBtu). Meanwhile, natural gas futures trading hit an all-time daily volume record of 1.2 million contracts, according to CME Group.

Natural gas prices exploded
click to enlarge

Freezing temperatures increase demand for heating, much of which is provided by natural gas. In January of this year, when temperatures fell below the average in many parts of the U.S., demand reached a single-day record of 150.7 billion cubic feet, according to the EIA. I can’t say we’ll beat this record again in the coming months, but forecasts for more freezing weather this Thanksgiving week and beyond should support additional moves to the upside.

What kind of moves? Says Jacob Meisel, chief weather analyst at Bespoke Weather Services, the price could get to $7 or $8 per MBtus, levels we haven’t seen since 2008. “This looks like a capitulation move today, but if cold weather really takes off, the sky is the limit,” Meisel told CNBC.

Oil Selloff Steepest in Three Years, “Overdone”

Natural gas wasn’t the only commodity that broke records last week. On Tuesday, West Texas Intermediate (WTI) crude oil ended an extraordinary 12 straight days of losses, settling at a 2018 low of $55.69 per barrel, down more than 27 percent from its 2018 high in early October. Triggered by concerns of a global demand slowdown, the plunge is oil’s steepest in three years, and a stunning reversal from last month’s calls for $100-per-barrel crude.

The bears appear to have overreacted, though. “Crude-oil-position liquidations have never been this extreme, indicating the purge in WTI futures is overdone,” writes Business Intelligence strategist Mike McGlone, adding that petroleum markets have “never experienced a comparable decline over a similar period.” 

World Needs the Equivalent of Another Russia’s Worth of Crude

Again, the oil selloff halted last Tuesday, the same day the International Energy Agency (IEA) announced its estimate that U.S. shale will need to add the equivalent of Russia’s entire oil production by 2025 to prevent a global shortage. In its flagship “World Energy Outlook 2018,” the Paris-based group says that world oil consumption will increase significantly in the coming decades due to “rising petrochemicals, trucking and aviation demand.”

“U.S. shale production, which has already been expanding at record pace, would have to add more than 10 million barrels a day from today to 2025, the equivalent of adding another Russia to global supply in seven years—which would be an historically unprecedented feat,” according to the IEA.

Jets fyling high

The U.S. produced 11.7 million barrels of crude per day in the week ended November 9. That means shale producers would need to ramp up output to at least 21 million barrels in seven years, if the IEA’s estimates are accurate.

I think this would be a challenge, but a real possibility. The reason I think this is because the U.S. fracking industry continues to prove it can produce more with less. According to a recent report by the EIA, U.S. crude oil and natural gas production increased in 2017, despite there being fewer wells. This is thanks in large part to horizontal wells, which “contact more reservoir rock and therefore produce greater volumes” of oil and gas. Although more expensive to drill, horizontal wells are growing faster than traditional vertical wells. In 2017 they accounted for 13 percent of total well drills, up from only 10 percent three years earlier.

Also in the IEA’s outlook: By 2040, emerging markets, led by China and India, will account for 40 percent of global energy demand, up from 20 percent in 2000. Below, note how the European Union is expected to be displaced by India and Africa in terms of energy demand within the next couple of decades.

Emerging markets will account for 40 percent of global energy demand by 2040
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I believe only the U.S. fracking industry would be able to meet this demand. Russia and Saudi Arabia are pumping at record levels right now, but production cuts of as much as 1.4 million barrels per day are being discussed among members of the Organization of Petroleum Exporting Countries (OPEC) to firm up prices. If cuts do go into effect, U.S. producers can be expected to fill in the supply gap.

“It can happen but would be a small miracle,” said Fatih Birol, the IEA’s executive director.

U.S. Shale “More Profitable Than Ever”

Normally, ever greater supply would weigh on prices and weaken profitability. Based on new data, it looks as if the U.S. fracking industry has changed the game.

According to Reuters, “U.S. shale firms are more profitable than ever after a strong third quarter,” according to the agency’s analysis of 32 independent producers. “These companies are producing more efficiently, generating more cash flow and consolidating in a wave of mergers.”

Nearly a third of these 32 companies “generates more cash from operations than they spent on drilling and shareholder payouts, a group including Devon Energy, EOG Resources and Continental Resources. A year ago, there were just three companies on that list,” Reuters writes.

Thanksgiving Travel to Hit 13-Year High

On a final but related note, this week is Thanksgiving, the busiest travel season of the year in the U.S. The American Automobile Association (AAA) predicts that the number of travelers on Thanksgiving Day, by auto and air, will top 54.3 million people, an increase of almost 5 percent from last year, and the highest volume since 2005.

Similarly, Airlines for America (A4A) believes U.S. Thanksgiving air travel demand between last Friday and November 27 will climb to an all-time high of 30.6 million passengers. “It is thanks to incredibly accessible and affordable flight options that more travelers than ever before are visiting loved ones, wrapping up year-end business or enjoying a vacation this Thanksgiving,” commented A4A Vice President and Chief Economist John Heimlich.

Thanksgiving 2018 US air travel demand estimated to rise 5 percent from last year
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While I’m on the topic of aviation, A4A also reported that U.S. airport revenues have grown faster than the consumer price index (CPI) as well as the number of air passengers and aircraft departures. From 2000 to 2017, airport revenues rose 87 percent, double the pace of U.S. inflation. Increased growth came thanks to a number of resources, from taxes and fees to the Passenger Facility Charge (PFC) and Airport & Airway Trust Fund (AATF).

US airport revenues have grown faster than flights passengers and inflation
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According to Fitch Ratings, “strong overall performance for U.S. airports should continue undeterred for the foreseeable future.” Over 90 percent of the airports Fitch currently rates have a “Stable Rating Outlook,” signifying continued stability deep into 2019.

Curious to learn more? Explore our latest slideshow, “How Do Airports Make Money?”

 

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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.

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 9/30/2018.

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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The Best Time to Prepare Is While the Bull Runs
September 24, 2018

how to manage your risk

In case you couldn’t tell from the ubiquitous political ads and yard signs, midterm elections are right around the corner. Historically, volatility has increased and markets have dipped leading up to midterms on uncertainty, but afterward they’ve outperformed.

Of especially good news is that we’re entering the three most bullish quarters in the four-year presidential cycle, according to LPL Financial Research. The fourth quarter of the president’s second year in office, which begins next month, and the first and second quarters of the third year have collectively been the best nine months for returns, based on 120 years of data.

the next three quarters have historically been bullish for stocks
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It makes sense why this has been the case. Following midterms, the president has been motivated to “boost the economy with pro-growth policies ahead of the election in year four,” writes LPL Financial.

Government Policy Is a Precursor to Change

Should Republicans manage to hold on to both the House and Senate—which Wells Fargo analysts Craig Holke and Paul Christopher estimate has a 30 percent probability—it’s likely they’ll try to pass “Tax Reform 2.0,” with an emphasis on the individual tax side. We can also probably expect to see additional financial deregulation.

Cornerstone Macro is in agreement, writing that “the better Republicans do in the election, the more confidence investors will have that [President Donald] Trump could be reelected and the business-friendly regulatory practices will remain in place.” A GOP Congress, the research firm adds, would be supportive of banks and energy, specifically oil, gas and coal. Since Trump’s inauguration, the Dow Jones U.S. Coal Index has climbed nearly 60 percent, double the S&P 500’s performance.

Back from the dead: coal stocks have risen since inauguration day
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The more likely outcome, according to Holke and Christopher, is a divided Congress, with Democrats taking control of the House. In such a scenario, financial deregulation would slow, but Trump, who’s pushed hard for aggressive infrastructure spending, might find the support he needs for a bill from Democrats. This would help increase demand for commodities and raw materials, but “additional stimulus in an economy already near capacity may result in higher inflation, negatively affecting fixed income,” Holke and Christopher write.

On the other hand, higher inflation has historically meant higher gold prices. After climbing for 12 months, year-over-year change in consumer prices cooled in August to 2.7 percent, from July’s 2.9 percent.

Government policy is a precursor to change, as I often say. It’s not the party that matters but the policies, and there are ways for investors to make money however the midterms unfold.

Money Managers and Banks Are Adding Safe Havens at a Faster Pace

With the bull run now the longest in U.S. stock market history, there’s a lot of talk and speculation about when the next major pullback will happen. I’ve discussed a number of possible catalysts with you already, from record levels of global debt to the flattening yield curve. Recently I shared with you that Goldman’s bull/bear indicator hit its highest level in nearly 50 years.

Even as markets closed at fresh all-time highs, essentially ignoring the intensifying U.S.-China trade war, Bank of America Merrill Lynch (BofAML) called the bull run “dead” last week, due to slowing global economic growth and the end of monetary stimulus. “The Fed is now in the midst of a tightening cycle, ignoring structural deflation, focusing on cyclical inflation,” writes BofAML chief strategist Michal Hartnett.

Against this backdrop, a growing number of money managers hold a dim view of continued economic growth. September’s Bank of America Merrill Lynch Fund Manager Survey found that a net 24 percent of fund managers believe global growth will slow over the next 12 months. That’s the highest percentage of managers with such a view since December 2011, the height of the European debt crisis. Reasons given for this bearishness are the U.S.-China trade tensions and, again, the end of central bank accommodation.

Fund managers are raising their cash levels, Hartnett says, as well as their exposure to fixed income, which has traditionally been used as a safe haven in times of uncertainty. In July, the most recent month of Morningstar data, bond funds attracted the greatest amount of any asset class in the U.S., with taxable and municipal bonds seeing a collective $28.5 billion in inflows. U.S. equity funds, meanwhile, collected a little under $3 billion, and in fact have seen $11 billion in outflows in the 12 months through July 31.

Getting even more specific, U.S. actively-managed ultrashort bond funds were the biggest winner, attracting over $6 billion in July, according to Morningstar.

You can read more about short-term bond funds by clicking here.

Central banks added gold in first half at fastest pace since 2015
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Gold demand among central banks has also accelerated this year. According to the World Gold Council (WGC), banks added a net 193.3 metric tons of gold to their reserves in the first half of the year, an 8 percent increase from 2017. This was the most purchased in the first six months since 2015.

Watch my interview with Kitco News to learn why now might be a good time to follow the “Golden Rule.”

The Next Crisis Could Be Triggered by Passive Indexing

One of the biggest risks right now, I believe, is the explosion in passive, “dumb beta” indexing. Trillions of dollars have poured into products that track indices built not on fundamental factors like revenue, cash flow and return on invested capital (ROIC), but on simple market capitalization. A piling on effect has occurred, whereby multibillion-dollar funds are buying more and more of the most expensive stocks. This has resulted in overinflated valuations.

The big risk is when these funds rebalance, which could happen as early as the beginning of next year. Last year, junior mining stocks got crushed after the VanEck Vectors Junior Gold Miners ETF (GDXJ) restructured its portfolio. Imagine what could happen if all passive index funds did the same simultaneously.

Last week I wrote more in depth about the risks passive indexing poses. If you didn’t get a chance to read it, I invite you to do so 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 Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. The Dow Jones U.S. Coal index is a subindex of the Dow Jones U.S. Indices and seeks to track all stocks classified in the coal subsector (1771) of the Dow Jones Sector Classification Standard traded on major U.S. stock exchanges.

Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity. Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

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 6/30/2018.

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5 World Currencies That Are Closely Tied to Commodities
September 5, 2018

This year, commodity prices have been under pressure from a strong U.S. dollar and trade war fears. This has made a huge dent in the balance sheet of many net exporters of resources, in turn weakening their currencies. However, commodities could be on the rebound and are flashing a massive buy signal.

This should come as a shock to no one, but what most people don’t realize is just how closely some currencies track certain commodities. I have shared several charts that show this correlation over the years at numerous industry conferences. Attendees were always astounded when I got to these slides – and we’re talking professional economists, money managers and CEOs here.

With that said, I think it’s important that you see this correlation as well. Below are five world currencies that have been impacted by lower commodity prices.

1. Australian Dollar

Australia is the world’s top iron ore producer and exporter, with usable iron ore output of 880 metric tons in 2017. This means that its income is very sensitive to price changes. As demand from China, the world’s largest consumer of iron ore and top steel producer, has softened, so too has the Australian dollar.

Australian Dollar Tracks Iron Ore Prices
click to enlarge

2. Canadian Dollar

The fifth-largest oil producer in the world is Canada, with an average production of 4.59 million barrels per day in 2016. Oil accounts for almost 11 percent of the nation’s exports – almost all of which is sent straight to the U.S. The strong correlation between the Canadian dollar and oil prices is largely due to crude oil being the largest single contributor of foreign exchange to the nation. Should oil prices continue to rise, so too should the Canadian dollar.

Canadian Dollar Tracks Oil Prices
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3. Russian Ruble

Compared to Canada and Australia, Russia’s export mix isn’t nearly as diversified: about half of its exports in terms of value are a combination of oil and natural gas. (Russia sits atop the third-largest oil reserves in the world and the number one natural gas reserves.) It should come as no surprise, then, that its currency is highly influenced by the price of crude. When oil fell in July 2014, so did the ruble. However, the ruble and crude decoupled in early 2018 when the U.S. imposed sanctions against the Eastern European country for its alleged meddling in the 2016 presidential election.

Russian Ruble Tracks Oil Prices
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4. Colombian Peso

The same story can be found in Colombia, where oil exports are responsible for about 20 percent of government revenue and 25 percent of total exports. Although oil exports fell from $12.7 billion in 2015 to $8.26 billion in 2016, production exceeded targets in 2017 with an average 854,121 barrels per day. As Venezuela’s economy falls further into disarray, Colombia has taken its place as the number five exporter of oil to the U.S. – one of the world’s biggest markets.

Colombian peso tracks oil prices
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5. Peruvian Sol

Copper is Peru’s most important mineral export by value, amounting to 24 percent of exports in 2016 worth $8.77 billion. With around 81 million metric tons of copper reserves, it’s the second-largest producer after Chile. As such, the Peruvian sol has declined in tandem with the red metal.

Peruvian Sol Tracks Copper Prices
click to enlarge

How familiar are you with the world’s currencies? Test your knowledge in this interactive quiz!

 

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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Oil Takes Center Stage: Commodities Halftime Report 2018
July 16, 2018

meet the top ranking commodities for the first half of 2018

Near the beginning of the year, Goldman Sachs analyst Jeffrey Currie made the case that the macro backdrop right now favored commodities in 2018. With inflation pushing prices up and world economies borrowing record amounts of capital, it was the best time “in decades,” he said, for investors to have exposure to base metals, energy and other materials.

“Commodities had a miserable year” in 2017, Currie told CNBC. “History says commodities will outperform equities this year.”

Currie’s forecast has been mostly accurate so far. Except for a rocky June, commodities have been one of the best performing asset classes in the first half of the year. From January to the end of May, the group, as measured by the Bloomberg Commodities Index, rallied close to 3 percent—170 basis points ahead of the S&P 500 Index. Advances were largely driven by crude oil, which currently seeks to close above $80 a barrel for the first time since November 2014.

Of the 14 major commodities we track at U.S. Global Investors, oil was the standout performer, gaining roughly 23 percent, followed by nickel (up 16.76 percent) and wheat (16.51 percent). You can view our always-popular, interactive Periodic Table of Commodity Returns by clicking here.

commodity returns in the first half of 2018
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There are a number of factors supporting oil right now, not least of which is President Donald Trump’s decision to withdraw the U.S. from the Iran nuclear deal. The move has the potential to significantly curb exports out of the Middle Eastern country, responsible for about 4 percent of the world’s supply. Markets were further disrupted two weeks ago when the U.S. government warned importers to stop buying Iranian oil or face sanctions.

In addition, supply is being squeezed by worsening economic conditions in Venezuela, which sits atop the world’s largest known oilfield, and conflict in Libya, home to Africa’s largest oil reserves. On Wednesday of last week, though, Libya indicated it would resume exports from its eastern ports, which sent Brent crude down more than 2 percent.

Global Oil Consumption Blasted to New Heights

Many investors might be inclined to believe the oil rally is over, but I think we could continue to see movement to the upside on further supply restrictions and rising demand. In its June Statistical Review of World Energy, British oil and gas giant BP reports that consumption grew for the eighth straight year in 2017, climbing to 98.2 million barrels per day (bpd) for the first time ever. We would need to see growth of only 2 percent by the end of this year for demand to reach and surpass 100 million bpd—a phenomenally large sum.

This could be achieved if Chinese demand growth remains as robust as it’s been for the past decade. Consumption stood at 12.8 million bpd in 2017, a new record for the country. This figure is up 64 percent from only 7.8 million bpd in 2007.

Although China is now the world’s number one auto market in terms of sheer size, vehicle and vehicle finance penetration are still relatively low compared to the U.S., Japan, Germany and other major economies. There were about 115 vehicles per 1,000 people in 2015, according to J.D. Power, compared to the U.S. with 800 vehicles per 1,000 people. That means there’s plenty of upside potential for energy as more Chinese households are able to afford automobiles.

Speaking of autos, the excitement over electric vehicles (EVs) is helping to drive up the cost of nickel, vital in the production of lithium-ion batteries. In the first six months of the year, the price of nickel rose close to 17 percent, to $14,823 per metric ton. As impressive as that is, it’s still three and a half times below its all-time high of $54,050, set in May 2007.

Commodities Now a Buy: Goldman Sachs

As I said earlier, commodities had a rough June, falling some 3.64 percent as trade tensions between the U.S. and China escalated. This was the group’s biggest monthly slump in nearly two years, led by copper and soybeans.

goldman sachs says commodities now a buy after biggest monthly decline since 2016
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Goldman analysts say this has created a well-timed buying opportunity, as the selloff was overdone. According to the bank, the U.S.-China trade war impact on commodities “will be very small, with the exception of soybeans where complete rerouting of supplies is not possible.”

Goldman now forecasts a 10 percent return on commodities over the next 12 months as the U.S. dollar corrects and trade fears subside.

If you recall, I made a similar bullish call on commodities back in April after showing that, relative to equities, commodities are as cheap now as they’ve possibly ever been. They’re even cheaper than they were in 2000, before the start of the last commodities super cycle. Had you invested in a fund tracking a commodities index in 2000, you would have seen your money grow at a compound annual growth rate (CAGR) of around 10 percent for the next 10 years, according to Bloomberg data.

history says now might be the time to rotate into commodities
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Copper Demand Should Accelerate With Electric Vehicle Sales

Among the most attractive opportunities I see is copper, which rose to an 11-month high of $3.29 per pound in early June before sinking 15 percent. Like nickel, copper has benefited from the forecast that EV adoption will accelerate. According to Bloomberg New Energy Finance, EV sales are expected to grow from a record 1.1 million units worldwide in 2017, to 11 million in 2025, then to 30 million in 2030.

This is good news for copper. As I’ve pointed out before, EVs require three to four times as much copper as traditional gas-powered vehicles.

copper price tumbled 15 percent on trade war fears
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“You’re going to need a telescope to see copper prices in 2021,” Robert Friedland, billionaire founder and executive chairman of Ivanhoe Mines, told us back in January when he visited our office.

Robert’s comment might be hyperbolic, but the thing to keep in mind is that demand for the red metal is about to turn red hot.

 

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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: BP, Ivanhoe Mines Ltd.

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.

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A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

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Net Asset Value
as of 12/10/2018

Global Resources Fund PSPFX $4.57 -0.05 Gold and Precious Metals Fund USERX $6.47 -0.05 World Precious Minerals Fund UNWPX $3.04 -0.06 China Region Fund USCOX $7.93 0.02 Emerging Europe Fund EUROX $6.23 -0.07 All American Equity Fund GBTFX $24.09 -0.10 Holmes Macro Trends Fund MEGAX $17.97 0.08 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change