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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.

What We’re Paying Attention to Following the Paris Attacks
November 23, 2015

Ten days ago, 129 lives were brutally cut short when assailants affiliated with the terrorist group ISIS, also known as the Islamic State, stormed Paris in a series of coordinated attacks. Along with the rest of the world, we were shocked and saddened as the tragic news unfolded, worsening as the night progressed. Our thoughts are with the victims’ families and friends.

For us, the atrocity struck especially close to home, as one of our portfolio managers, Xian Liang, was in the city at the time of the attacks. We’re extremely grateful he and his wife returned home safe and sound. I wish the same could be said for the victims in Paris that day, the 224 on the Russian jet brought down by an ISIS-built bomb, the hostages in Mali Friday, and many others whose lives have been affected by the global scourge of terrorism.

We Take Our Role as Fiduciaries Seriously

As money managers, it’s our duty and responsibility to be cognizant of such geopolitical events—large and small, good and bad—and to consider all of the possible ramifications. The consequences often reach far and wide, and can be felt in the short-term (changes in investor confidence) as well as the long-term (changes in government policy).

Early last year, for instance, we were quick to adjust asset allocations when Russia invaded and annexed Crimea. We anticipated that sanctions would be imposed on the country, and indeed they were, by the U.S., European Union, Australia and other international organizations. These sanctions, coupled with falling oil prices, contributed to the Russian ruble’s dramatic breakdown.

Diesel, the seven-year-old belgian shepherd who was killed recently during a French SWAT raid

Against these challenges, I’m impressed by how strongly Russian stocks have performed lately. Last Tuesday, the Micex Index jumped to an eight-month high in ruble terms. This is especially interesting since both Brent oil and the ruble are way down. It suggests that investors are showing approval of President Vladimir Putin’s involvement in Syria.

Putin is also benefiting from a strong public relations push. The Daily Mail writes: “Russia has shown its solidarity with the people of France in an unusual way—by donating a new puppy to carry on the memory of Diesel, the police dog killed by a suicide bomber.”

It should come as a surprise to no one that, following the tragedy in Paris, defense spending will likely increase. French President François Hollande has already told Parliament that France is at war and will “be merciless” in its pursuit of justice. The country wasted no time in striking back against ISIS and has begun bombing raids in Syria.

As early as last Monday, stocks of companies that manufacture weapons and fighter jets traded up.

War Stocks Rally Following Attacks in Paris
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We own Lockheed Martin, manufacturer of the F-35, F-22 and F-16 fighters; Boeing, manufacturer of the Tomahawk cruise missile, F-18 fighter and more; and Northrop Grumman, which was recently awarded the contract to build America’s next generation of long-range strike bombers. Raytheon develops and manufactures guided missiles.

The U.S. Navy plans to buy more Boeing F/A-18E/F Super Hornets in the coming years.

International Travel to Be Hit

Understandably so, the terrorist attacks will have an impact on international travel, immigration and border security. France immediately tightened its borders, and other European countries quickly followed suit. Meanwhile, Poland’s newly-elected government rejected the European Union’s quotas for accepting refugees from Syria, an attitude that’s echoed by more than 30 U.S. states. The House of Representatives just passed legislation to suspend the admittance of 10,000 Syrian refugees, though it’s likely to be vetoed.

This is the climate we find ourselves in right now. It has a huge effect, at least in the near-term, on perceptions of international travel.

“Most people are risk-averse,” Xian says. “When my wife and I left for the airport by taxi the morning after the Paris attacks, we agreed not to travel to Europe again any time soon.”

Others share Xian’s attitude. Paris has for years been the world’s top tourist destination, but the City of Lights has already seen a huge drop-off in tourists as people have delayed or cancelled travel plans. Hotel stocks were up 10 percent in October but will likely face headwinds as a result of Paris and Mali.

Gold, Diamond and Oil Declines Good for Manufacturers

Xian stresses the importance of having gold exposure as diversification. A good diversifier is any investment that’s expected to have a low correlation with the rest of your portfolio, and gold historically has little to no correlation with equities.

The yellow metal has traditionally been seen as a safe haven in times of war, but so far we’ve seen little movement. Year-to-date, gold is down nearly 9 percent, and it could possibly end 2015 in negative territory for the third straight year.

Even so, the yellow metal has performed better than other select world currencies for the year, including the Russian ruble (-10 percent), Australian dollar (-11 percent), euro (-12 percent) and Canadian dollar (-13 percent).

Gold and Diamonds Follow the Same Downtrend
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Diamonds have likewise struggled over the past four years, but with the recent news that Canadian miner Lucara discovered the largest diamond in 100 years, investors might show renewed interest. The massive 1,111-carat diamond was unearthed in Lucara’s Botswana project. Although the stone has yet to be assessed, it’s worth noting for comparison that a 100-carat diamond sold at Sotheby’s in April for $22 million.   

Gold and Diamonds Follow the Same Downward Trend
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These declines over the past three and four years have been good for jewelry companies such as Tiffany, which I wrote about last December. Gold and diamond supply is now less expensive, so the company has margin expansion.

The same can be said of oil. Low prices have hurt South Texas, the Middle East, Russia and Colombia, not to mention drillers and explorers, but they’ve been a windfall for the end consumer, including manufacturers and airlines. Falling energy prices are finding their way into the global engine of growth.

$500 Billion Peace Dividend for Global Consumers and Businesses
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Many analysts expect to see crude oil prices tick up on mounting tension in the Middle East. During past military engagements, oil has typically performed well since a lot is required to fight a war. We haven’t seen prices move just yet—oil still sits at $40 per barrel—but it’s something we’ll monitor closely. As I said earlier this month, the global purchasing managers’ index (PMI) turned up in October after bottoming in September, and in the past this has been followed by a jump in oil prices.

Oil Trends Typically Drive by Global Economic Activity
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Inflation Rousing from Sleep

We learned this week that the consumer price index (CPI) rose 0.2 percent in October, suggesting that inflation is finally picking up steam in the U.S. and giving the Federal Reserve further excuses to raise rates next month.

Based on the 2-year Treasury yield (0.89 percent) and the headline CPI (0.20 percent), real rates now stand at 0.69 percent. (Real interest rates are what you get when you subtract the CPI from the Federal funds rate.) I’ve often explained that gold responds positively when real rates turn negative, as you can clearly see in the chart below, so we’re eagerly awaiting stronger inflation.

Real Interest Rates and Gold Share an Inverse Relationship
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In a note this week, Drew Matus, an economist at UBS, wrote that inflation in the U.S. is poised to jump in the next couple of months. The CPI measures the price of a basket of goods to the price of the same goods a year ago, so inflation fell dramatically between November 2014 and January 2015 as energy prices plunged.

But “absent a similar move this year, those sharp price declines will drop out of the year-over-year data, resulting in a rapid, technical acceleration in overall inflation measure,” Matus says.

If such inflation occurs—possibly as soon as January or February, Matus points out—real rates could have a better chance of dipping into negative territory, which would be constructive for gold prices.

Thanksgiving is this week, and in light of recent events, I think we all have ample reason to express gratitude to friends and loved ones. Everyone have a blessed week!  

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.

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 9/30/2015: Lockheed Martin Corp., The Boeing Co., Northrop Grumman Corp., Lucara Diamond Corp.

The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

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

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The Bullish Case for Aussie Gold
November 16, 2015

A Qantas A380 in flight

On Thursday of last week, I arrived back in the States after spending two weeks globetrotting and attending international investing conferences, first in New Orleans, then in Lima, Peru.

Most recently I was in Melbourne, Australia, for the International Mining and Resources Conference, one of the largest and most distinguished in the world, attended by not only top economists, geologists and CEOs of mining companies but also mining ministers from all corners of the globe.  

I was encouraged to see that sentiment for gold was very positive. There’s a gold bear market here in North America, where the yellow metal has plunged to a six-year low of $1,083 per ounce on the strong U.S. dollar. But when priced in the weaker Aussie dollar, the precious metal is sitting at $1,520. As recently as last month, it touched $1,642.

This, combined with lower fuel costs, has been a huge boon to many gold companies in the world’s second-largest gold-producing nation after China. The country has excellent sponsorship by both the Australian and state government of Victoria, where Melbourne was built like San Francisco in a Gold Rush.

Strong Gross Margins and Cash Flow Returns

For the one-year period, the Australian dollar has fallen about 20 percent against the U.S. greenback, so gold looks very attractive—especially compared to iron ore and copper—and has lots of upside potential.

Iron Ore vs Gold vs Copper in Australian Dollar
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As a result, if you look at the top Aussie gold producers by gross margin, they all beat the median for world gold producers, currently at 15.9 percent. We own the names with a star next to them. Also note the total returns for the one-year period, shown in Aussie dollars.

Top Australian Gold Producers by Gross Margin
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A similar story emerges when you look at the top Aussie gold producers by cash flow return on invested capital (CFROIC).

Top 10 Australian Gold Producers by Cash Flow Return on Invested Capital (CFROIC)
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We like to focus on stocks that offer high reserves per share, growth in sales, low debt to equity and high returns on invested capital. Australia has many outstanding companies whose financial fortunes have improved with a decline in the Aussie dollar. There’s little hope for iron ore to outperform due to China’s slowdown in mega-infrastructure projects, which means fewer imports.

St. Barbara, one of our holdings, is up 1,120 percent for the 12-month period. The company operates in Western Australia and has a project in the New Zealand province of Papua New Guinea.

St. Barbara Is up 1,1120% for the 12-Month Period
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But gold companies aren’t the only ones reaping the benefits of a weak Aussie dollar and low fuel prices. Qantas Airways, Australia’s flagship airline, was up nearly 150 percent for the 12-month period.

Qantas vs Crude Oil vs Australian Stock Market
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Sights and Sounds of the International Mining and Resources Conference

During the conference, I had the pleasure to meet Bernard Salt, a columnist for The Australian and a popular social commentator who has written widely on changes in demographics and social behaviors. His presentation focused on how shifting demographic trends are shaping the demand for commodities.

Top 10 Australian Gold Producers by Gross Margin

In a fascinating article published last month in The Australian, Bernard shows that there’s a “tectonic shift in corporate power” happening right now, from New York City to Beijing. The number of head offices of Fortune 500 companies in New York has dropped from 36 to 25 between 2005 and 2015, while the number has risen in Beijing during the same time period, from just 12 to 51.

What’s going on? It’s not that the U.S. economy is struggling, Bernard argues. It’s that China grew more rapidly over these 10 years—especially its middle class, a topic I’ve written and spoken about numerous times.

In any case, it appears as if Greater Beijing is now the world’s most powerful corporate city.

Capital Flows from New York City to Beijing
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S2 Resources CEO Mark Bennett

I also had the chance to hear Mark Bennett, managing director and CEO of S2 Resources, on the ingredients of a successful mining entrepreneur. The two-time recipient of the AMEC Prospector of the Year Award, he once served as chief geologist for LionOre Mining, which we used to own.

He’s also just as capable in a New York boardroom as he is in the Australian Outback. In 2009, Mark seeded gold and nickel miner Sirius Resources with $5 million, and soon before it merged with Independence Group this year, it was valued at $1.5 billion. You expect to see this kind of growth with a tech startup, not a mining company! This is just further proof of how exceptional Mark is.

S2 Resources CEO Mark Bennett

Also presenting was Jim Askew, Chairman of the Board of Directors of OceanaGold. Jim is a mining engineer with over 40 years of international experience as a director and CEO. He also serves on the Board of Evolution Mining, one of Australia’s leading mining companies.

Another notable speaker was Dr. Mehdi Karbasian, Iran’s deputy minister for industry, mining and trade, whose presentation on investment opportunities in the country’s mining sector drew a packed house. (Iran is seeking $29 billion of investment, following the lifting of sanctions.) To me, what really stood out was how inexpensive labor and energy in Iran were. According to Karbasian, skilled labor costs about $300 per month, whereas in Australia it’s closer to $300 per day. And as for energy, a kilowatt hour (kWh) will set you back only a penny and a half. (In the U.S., it’s between 5 and 15 cents on average.) Meanwhile, Iran sits atop the second-largest natural gas reserves in the world, following Russia.

My question, then, is this: If energy is already so cheap and abundant, what does Iran possibly want with a nuclear power plant? It makes you wonder.

Central Banks and Retail Consumers Gobble Gold at Near-Record Pace

I want to end by sharing with you some good news. Judging from a new report from the World Gold Council (WGC), global central banks’ appetite for gold remains insatiable. In the third quarter, net purchases rose to 175 tonnes. This is the second-highest level ever recorded, nearly equaling the all-time high of 179.5 tonnes in the same period last year.

Third-Quarter Gold Purchases by Central Banks Was Second-Highest on Record
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Russia and China were the top buyers, but we also saw some central banks return to the list of those that hold gold. The United Arab Emirates (UAE), for instance, reports that it now has 5 tonnes of the yellow metal, after holding none since 2003. The only net-seller for the quarter was Colombia.

Relatively low prices no doubt factored into the buying spree, but more than that, central banks recognize gold’s ability to hedge against inflation and monetary instability. It’s probably not appropriate to have 72 percent of your portfolio in gold, as the Federal Reserve does, but investors should nonetheless take note of what the banks are doing.

In fact, this might be what was on U.S. investors’ minds in the third quarter. Sales of American gold eagle coins shot up a whopping 200 percent year-over-year to 32.7 tonnes, a five-year record. I always recommend having around 10 percent: 5 percent in gold stocks, the other 5 percent in bullion or gold jewelry.

This never changes, whether we’re in a bear market or, in the case of Australia, a bull market.

Finally, just a reminder that on November 23, I’ll be giving the keynote address at the Silver Summit and Resource Expo in San Francisco. I invited you once before to attend the conference as my guest, and the response was very positive. But there’s still room for more! If you’d like a complimentary registration, send me an email.  

Past performance does not guarantee future results.

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 9/30/3015: Doray Minerals Ltd., St. Barbara Ltd., Northern Star Resources Ltd.    

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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Follow the Leaders: Learning from ETFs, BCA and the New PM
October 26, 2015

Reggie Browne, the Goldfather of ETFs, gave the opening remarks at the ETF conference in Austin.Last Thursday I had the pleasure of attending an intensive daylong ETF conference in Austin, just up the road from our office in San Antonio. Hosted by Cantor Fitzgerald, the conference was designed for institutional investors.

Welcoming the group was Reginald “Reggie” Browne, the “Godfather of ETFs,” who now serves as the senior managing director at Cantor Fitzgerald. His celebrity and prominence are nearly as big as his six-foot-five frame—and with good reason. Reggie has been instrumental in building the ETF landscape over the last decade and convincing investors of the power of the exchange-traded fund.

One of the panels featured chief investment officers from the Texas Teacher Retirement System (TRS). Jase Auby, Lee Partridge and Tom Tull discussed potential shifts in asset allocation under a rising interest rate environment, among other topics.

The TRS, one of the largest pension funds in the U.S., makes significant use of gold in its investment strategy, holding the yellow metal in many forms over the years. The same is true for the $20 billion University of Texas endowment fund.

Bruce Zimmerman, chief investment officer for UTIMCO, told CNBC in 2011 that the $20 billion endowment holds gold as a diversifier and hedge against currencies. This is precisely what we tell investors, and it’s validating to see such huge funds put it in practice.

During the ETF panel, I asked Jase, Lee, Tom and moderator Ronnie Jung about their thoughts on real interest rates and their relationship with gold. Everyone’s speculating on when the Federal Reserve will hike interest rates, but real interest rates, as I shared with you this week, appear to have already risen. (As a reminder, real interest rates are what you get when you deduct the monthly rate of inflation from the 10-year Treasury yield.) A 10 percent upswing in the U.S. dollar is equivalent to the federal funds rate being hiked 100 basis points.

This has had a huge effect on the yellow metal. When real rates are negative, gold has tended to do well. Conversely, when they’re positive—and rising, as they are now—it’s been a headwind for gold. This relationship was confirmed by the research of Barry Bannister, chief equity strategist for Stifel, who visited our office last week.

I also appreciated the TRS group’s bullishness on China. Their position is that, because everyone is negative on China right now, all sorts of investment opportunities open up from a contrarian point of view.

The World’s Second-Largest Economy in Flux

I’ve commented before that China has been moving away from a manufacturing-based economy and instead focusing more on services—financials, real estate, insurance, ecommerce and the like.

China's Services Industry Surpasses 50 Pecent GDP
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While the country’s purchasing managers’ index (PMI) reading has been in contraction mode since March of this year, these service industries are ever-expanding. The problem is that the transformation has not been fast enough to offset the massive size of the manufacturing sector.

But investment opportunities in this sector still exist. Anyone who’s traveled more than 100 miles inland knows that China is under-urbanized. Ever since Deng Xiaoping created special tax-free zones along the eastern Chinese coastline in 1978, most of the country’s growth has been concentrated in these few regions and municipalities. The interior provinces, on the other hand, have remained largely rural.

You can see this for yourself in the chart below, provided by Marko Papic, chief geopolitical strategist for BCA Research, who briefed our investments team this week. BCA is an influential, independent investment strategy firm with more than 65 years of experience conducting excellent macroeconomic research.

Chinese Interior Provinces Still Need Investment-Led Growth
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We just learned that the People’s Bank of China cut both lending and saving rates 0.25 percent, to 4.35 percent and 1.50 percent respectively. This will cause negative real rates in China to fall even lower, which is good for gold demand.

It will also likely add to the Fed’s list of doubts about raising its own rates. In a world where every other major country is stimulating its economy by cutting rates and devaluing its currency, it makes less and less sense for the U.S. to hike rates.

BCA’s Marko Papic stressed the need to see further stimulus in China. Without it, commodities and global growth in general are at risk. Some economists believe we might be headed for a global recession.

Difference of Opinion When It Comes to Defining Global Recession

Depending on who you ask, there are different ideas of what global recession looks like. The generally accepted one in the U.S. is two consecutive quarterly declines in real GDP. The International Monetary Fund (IMF), however, uses a different measure. Among other economic conditions, annual GDP must fall below 3 percent, a high benchmark and one that requires much stimulus.

Global growth for 2015 is at 3.3 percent, the IMF calculates, precariously close to the 3 percent threshold. 

BCA Research: The Trans-Pacific Partnership Is Needed to Fast-Track Global Growth

This is where the Trans-Pacific Partnership (TPP) comes into play, which is the stance BCA also takes. The landmark trade agreement, involving 12 nations, was signed earlier this month. Although it still requires ratification, the TPP could boost the world economy by an incredible $223 billion by 2025, according to the Peterson Institute for International Economics.

The 12 Apostles of the Historic Trans-Pacific Partnership
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Like Father, Like Son: Canada Elects a New Leader

I feel blessed to have had the chance to meet Prime Minister Pierre Trudeau in 1978. I'm second from the right.

One of the TPP’s biggest supporters was outgoing Canadian Prime Minister Stephen Harper. But the newly elected Justin Trudeau, member of the Liberal party, has also come out in support of free trade agreements. The hope is that he will continue to take this position where the TPP is concerned.

Although Trudeau earned his degree in education from the University of British Columbia and taught as a school teacher for many years, he is by no means a stranger to politics. He’s served as a Member of Parliament since 2008, and his father, Pierre Trudeau, served as Canada’s prime minister for 15 years.

Back in the 1970s, in fact, I campaigned for Pierre Trudeau alongside Dr. John Evans, a Rhodes Scholar. This was during Trudeau’s first stint in office, before being voted out in 1979 and then returning to serve again in 1984.

His son, only 43, ran on a campaign of hope and change—sound familiar?—and promised that, if elected, he would help the economy by increasing infrastructure spending. Unlike some other world leaders, he wants to put people to work instead of establishing a welfare state. Trudeau plans to raise revenue by taxing recreational marijuana—if he succeeds at legalizing it, that is.

Justin Trudeau boxes his way to center stage

One of the main criticisms of Trudeau the Younger is that he’s inexperienced politically. But here in the U.S., take a look at who’s currently topping the polls in the Republican field: business magnate Donald Trump, neurosurgeon Dr. Ben Carson and former Hewlett-Packard CEO Carly Fiorina. Accomplished though they are, none of them has been elected to office. This goes to show that voters have grown fed up with career politicians who lack accountability.


Next Stop, the Big Easy

Former Federal Reserve Chair Alan Greenspan one of the many distinguished speakers at the New Orleans Investment ConferenceThis week will kick off my short conference road trip, beginning with the 2015 New Orleans Investment Conference, happening October 28 – 31. For 41 years, this event has attracted some of the world’s most distinguished speakers—from Margaret Thatcher to Steve Forbes to Norman Schwarzkopf—and this year’s no exception. I look forward to speaking again this year alongside some of the brightest minds in the industry at what some call the “World’s Greatest Investment Event.”

After that, I’ll head to Peru for the Mining & Investment Latin America Summit, November 4 – 5, and wrap things up in Melbourne, Australia, at the International Mining and Resources Conference.

I hope you’ll join me!

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

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 9/30/2015: Hewlett-Packard Co. 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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 “Oprah Effect” and Gold
October 22, 2015

Oprah bought 10 percent of weight watchersMany short sellers of Weight Watchers no doubt felt too down to look in the mirror this week after company stock unexpectedly ballooned nearly 170 percent.

You can thank (or blame) Oprah. The influential former talk show hostess bought a 10 percent stake in the weight management company, sending its shares up from $6.79 to $18.25 in as few as two trading sessions.

This is hardly the first time one of Oprah’s endorsements, whether verbal or monetary, has lifted a struggling business or product. There’s even a name for it: the Oprah Effect.

No matter your opinion of Oprah—her politics, her tastes—you have to admit that she’s a phenomenally savvy businesswoman, whose rags-to-riches success has helped make her one of the most powerful women in not just the U.S. but the world. As such, it’s important for investors to pay attention to her and other such “smart money” influencers. Their decisions often have the power to move markets.

So what’s moving gold right now?

Quite a lot, actually, from widespread doubts of a 2015 interest rate hike, to strong seasonal demand in India and China, to Russia’s military action in Syria. Gold also received a huge endorsement recently from billionaire Paul Singer, CEO of Elliott Management Corp., who said that the precious metal “should be a part of every investment portfolio, maybe five to 10 percent.”

(I always recommend 10 percent: 5 percent in gold stocks, 5 percent in bullion, then rebalance every year.)

But as I discuss in a previous Frank Talk, perhaps the most significant mover of gold right now is the weakening of the strong U.S. dollar against other world currencies. Gold and the dollar share an inverse relationship, and for the past year, the greenback has been putting pressure on the yellow metal, not to mention other commodities and natural resources.

Now that the dollar is showing signs that it’s starting to turn, however, gold is starting to turn heads.

Watch my video below for further insight into what’s moving gold.

None of U.S. Global Investors Funds held any of the securities mentioned in this article as of 9/30/2015. 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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Will Gold Finish 2015 with a Gain?
October 19, 2015


After its stellar performance last week, gold might do something it hasn’t done since 2012—that is, end the year in positive territory. You can see past returns for yourself in our perennially popular Periodic Table of Commodities Return.

Responding to a weaker U.S. dollar, continued contraction in global growth and wide speculation that interest rates will stay near-zero for the remainder of the year, the yellow metal broke above its 200-day moving average and is close to erasing its 2015 losses.

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This could be the price reversal many gold bulls have been expecting.

Back in August I shared with you that legendary hedge fund manager Stanley Druckenmiller, who’s made some mythic calls over his long career, invested $323 million of his own money in gold, now the largest position in his family funds. Although such a large weighting isn’t appropriate for all investors—I’ve always recommended 10 percent in gold: 5 percent in gold stocks, 5 percent in bullion—it looks as if Druckenmiller made another good call.

The big news last week was that Walmart took a massive hit after the retail giant said it expected a profit slump in 2016. Walmart investors lost a whopping $24 billion—$21 billion on Wednesday alone. While this news dominated the headlines, it’s important to recognize that the total amount of net assets in the SPDR Gold Trust, the world’s largest gold-backed ETF, is just slightly more than Walmart’s one-week loss.


“Death” of the Dollar?

It’s no mere coincidence that gold’s breakout coincides with the weakening of the U.S. dollar last week. The greenback signaled what’s known as a “death cross,” just in time for Halloween. Widely recognized as the start of a bearish trend, a death cross occurs when the 50-day moving average crosses below the 200-day.

This hasn’t happened since September 2013.

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As ominous as this sounds, it’s good news for gold and other metals and commodities, not to mention emerging markets and American exports. For the past year, the strong dollar has crushed these assets, something I write and speak about frequently. If the death cross does indeed indicate the start of a downward trend, gold might have the breathing room it needs to reach the important $1,200 resistance level.

Our China Region Fund (USCOX) and Emerging Europe Fund (EUROX) have responded well to the dollar’s drop, both of them crossing above their 50-day moving averages.

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When we factor in the Love Trade, gold has even further upside potential. In India, the world’s largest consumer of the precious metal, the annual wedding and fall festival season has officially begun, which has historically triggered a spike in demand. This period is followed by Christmas and the Chinese New Year in February, when gold prices have surged, based on the shorter-term, five-year pattern.

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Russian Air Strikes Ignite the Fear Trade

Gold has also likely benefited in the short term by the Fear Trade, specifically global geopolitical events such as Russia’s involvement in Syria. We should never welcome war, but the truth is that political turmoil very often has had a positive effect on commodity prices and currencies. Both the Russian ruble and Brent oil are currently above their 50-day moving averages.

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In a recent piece titled “The New Cold War Battlefield… and How It Will Affect Oil Prices,” Dr. Kent Moors, global energy strategist for “Oil & Energy Investor,” writes that what happens in the Middle East has “always had a rather direct impact on energy prices and the prospects for investing in the sector.”


The difference today, Moors says, is that Syria “is a rising power vacuum right smack in the middle of the largest concentration of global crude production.”

This is a theme that’s explored in even further detail in my friend Marin Katusa’s bestselling book, “The Colder War: How the Global Energy Trade Slipped from America’s Gasp.”

Speaking of Marin, his Katusa Research and Cambridge House International will be co-producing the Silver Summit and Resource Expo in San Francisco November 23 and 24. I’ll be giving the opening keynote address. If you’d like to attend the conference as my guest, send me an email for a complimentary registration.

Real Interest Rates, Real Impact on Gold

The Fear Trade also includes monetary and fiscal policies such as money supply and real interest rates. As opposed to geopolitical events, which might have an immediate effect on gold, these drivers can have a long-term influence.

As a reminder, real interest rates are what you get when you deduct the rate of inflation from the 10-year Treasury yield. For example, if Treasury yields were at 2 percent and inflation was also at 2 percent, you wouldn’t really be earning anything. But if inflation was at 3 percent, you’d be experiencing a negative real rate.

When gold hit its all-time high of $1,900 per ounce in August 2011, real interest rates were sitting at -3 percent. In other words, if you bought the 10-year, you essentially lost 3 percent a year on your “safe” Treasury investment. Since gold doesn’t cost anything to hold, it became more attractive and the metal’s price soared.

Today, the U.S. has virtually no inflation, so real interest rates are at 2 percent, a swing of 500 basis points since August 2011. This has lately had a negative effect on gold, which means it’s even more remarkable that the precious metal has broken above its 200-day moving average.

Our office was visited last week by Barry Bannister, CFA, the chief equity strategist for investment firm Stifel, who gave us buckets of useful macroeconomic research, much of which validated what we’ve been saying for a long time regarding the relationship between the price of gold and real interest rates.

Barry made the case that real interest rates are even higher than we realize. He argued that the reason the Federal Reserve hasn’t allowed rates to lift off yet is because—you might want to sit down for this—it already has, in an “invisible” interest rate hike of 4 percent. Quantitative easing (QE), Barry said, was “negative” interest rates, and that “economic recovery and time ‘raised’ rates to 0 percent, a de facto rate hike.”

Gold’s rally last week occurred in spite of this “invisible” rate hike.

Active Management on Top

Even with gold prices off around 38 percent since the August 2011 high, our Gold and Precious Metals Fund (USERX) has done well, outperforming the Market Vectors Gold Miners ETF (GDX) and PowerShares Global Gold & Precious Metals ETF (PSAU).

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Speaking to Investor’s Business Daily, portfolio manager Ralph Aldis pointed out that one of the reasons why our fund has outperformed is because we’re able to apply our tacit knowledge of company executives and management teams, as well as anticipate and act on political risks in countries we invest in. This is a skill (and benefit) that only active management can provide.

Both the GDX and the PSAU are strictly market capitalization-weighted, so they might miss out on unexpected “success stories.”

“They end up owning the biggest companies, which because of their size have difficulty growing,” Ralph told IBD.

Klondex Mines is one such success story. It’s the fund’s top weighting, at 17 percent—and yet because of its market-cap, it isn’t included at all in the two ETFs.

As Ralph told The Gold Report last week, “I want to own companies where management can increase the value proposition,” regardless of gold prices.

To end, I’d like to congratulate the U.S. Global communications team for receiving five STAR awards from the Mutual Fund Education Alliance Thursday night for excellence in investor education. Please help me applaud the team’s efforts and your commitment to being a curious and informed investor by sharing our award-winning communications with your friends, family and colleagues.

Thanks you for being a subscriber to our award-winning communications!

P.S. It’s with sadness to inform you of the passing of Raymond Edward “Ed” Flood. Ed spent his whole life and career in the mining industry, serving most recently as the CEO of Concordia Resource Corp. Back in the mid-1990s, he was the founding president of Ivanhoe Mines, today a massive producer of copper, gold and other metals that operates mostly in southern Africa.  We were early investors in Ivanhoe.

My path crossed with Ed’s many times over the years, and I came to know him as not only a talented money manager but also an exceptional human being. I join everyone else who knew him, both personally and professionally, when I say that he’ll be sorely missed.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.



Past performance does not guarantee future results.



Total Annualized Returns as of 9/30/2015:
Fund Year to Date One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Emerging Europe Fund (EUROX) 17.84% -26.10% -10.43% -4.65% 2.29% N/A
China Region Fund (USCOX) -11.46% -6.68% -4.78% 2.53% 2.97% 2.55%
Gold and Precious Metals Fund (USERX) -6.98% -21.82% -20.11% -1.79% 1.97% 1.90%
Market Vectors Gold Miners ETF (GDX) -25.39% -35.31% -23.97% N/A 0.53% N/A
SPDR Gold Shares ETF (GLD) -7.39% -8.79% -3.53% N/A 0.40% N/A
PowerShares Global Gold & Precious Metals Portfolio ETF (PSAU) -26.26% -34.84% -22.62% N/A 0.75% N/A

Expense ratios as stated in the most recent prospectus. The expense cap is a voluntary limit on total fund operating expenses (exclusive of any acquired fund fees and expenses, performance fees, extraordinary expenses, taxes, brokerage commissions and interest) that U.S. Global Investors, Inc. can modify or terminate at any time, which may lower a fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at or 1-800-US-FUNDS.

For information regarding the investment objectives, strategies, liquidity, risks, expenses and fees of the Market Vectors Gold Miners ETF, SPDR Gold Shares ETF, or the Powershares Global Gold & Precious Metals Portfolio please refer to those funds’ prospectuses.

Investment Objective: The Gold and Precious Metals Fund is an actively managed mutual fund that focuses on gold and precious metals producing companies. The Market Vectors Gold Miners ETF is a passively managed fund that seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index. The investment objective of the SPDR Gold Trust is for the shares to reflect the performance of the price of gold bullion, less the expenses of the Trust’s operations. The PowerShares Global Gold & Precious Metals ETF is a passively managed fund that seeks to replicate as closely as possible, before fees and expense, the price and yield performance of the NASDAQ OMX Global Gold and Precious Metals Index.

Liquidity: The Gold and Precious Metals Fund can be purchased or sold at a net asset value (NAV) determined at the end of each trading day. The Market Vectors Gold Miners ETF, SPDR Gold Shares ETF and Powershares Global Gold & Precious Metals Portfolio can be purchased or sold intraday. These purchases and redemptions may generate brokerage commissions and other charges not reflected in the ETF’s published expense ratio.

Safety/Fluctuations of principal/return: Loss of money is a risk of investing in the Gold and Precious Metals Fund, the Market Vectors Gold Miners ETF, the SPDR Gold Shares ETF and the Powershares Global Gold & Precious Metals Portfolio. Shares of all of these securities are subject to sudden fluctuations in value.

Tax features: The Gold and Precious Metals Fund may make distributions that may be taxed as ordinary income or capital gains. Mutual funds are pass-through entities, so the shareholder is responsible for taxes due on distributions.

The Market Vectors Gold Miners ETF and the Powershares Global Gold & Precious Metals Portfolio may make distributions that are expected to be taxed as ordinary income or capital gains. However, ETFs are designed to minimize taxable distributions to shareholders. Shareholders of the SPDR Gold Trust will generally be treated as if they directly owned a pro rata share of the underlying assets held in the Trust. Shareholders also will be treated as if they directly received their respective pro rata shares of the Trust’s income and proceeds, and directly incurred their pro rata share of the Trust’s expenses.

The sale of shares of both mutual funds and ETFs may be subject to capital gains taxes by the shareholder.

Information provided here is neither tax nor legal advice and is general in nature. Federal and state laws and regulations are subject to change.

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 concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund, Emerging Europe Fund and Gold and Precious Metals Fund as a percentage of net assets as of 9/30/2015: Wal-Mart Stores Inc. 0.00%, SPDR Gold Shares ETF 0.00%, Market Vectors Gold Miners ETF 0.00%, PowerShares Global Gold & Precious Metals Portfolio ETF 0.00%, Klondex Mines Ltd. in Gold and Precious Metals Fund 16.91%, Concordia Resource Corp. 0.00%, Ivanhoe Mines Ltd. 0.00%.

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

Share “Will Gold Finish 2015 with a Gain?”

Net Asset Value
as of 11/24/2015

Global Resources Fund PSPFX $4.94 0.05 Gold and Precious Metals Fund USERX $4.76 0.05 World Precious Minerals Fund UNWPX $3.90 0.07 China Region Fund USCOX $7.77 0.01 Emerging Europe Fund EUROX $5.60 -0.11 All American Equity Fund GBTFX $27.22 0.06 Holmes Macro Trends Fund MEGAX $20.68 -0.03 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change