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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.

5 Charts That Show Why Gold Belongs in Your Portfolio Now
October 9, 2018

5 charts that show why gold belongs in your profile in gold we trust report 2018

The annual “In Gold We Trust” report by Liechtenstein-based investment firm Incrementum is a must-read account of the gold market, and its just-released chartbook for the 2018 edition is no exception.

The strengthening U.S. dollar has lately dented the price of gold, and rising interest rates are making some yield-bearing financial assets more attractive as a safe haven. But as Incrementum shows, there are many risks right now that favor owning gold in your portfolio.

Below I’ve selected five of the most compelling charts that highlight why I think you need gold in your portfolio now.

1. The End of Easy Money

To offset the effects of the global financial crisis a decade ago, central banks increased liquidity by slashing interest rates and buying trillions of dollars’ worth of government securities. Now, however, it looks as though banks are ready to start tightening, and no one is really quite sure what the consequences will be. The Federal Reserve was the first, in late 2015, to begin hiking rates, and it’s been steadily shrinking its balance sheet for about a year now. Other banks are set to follow suit. According to Incrementum, the tide will turn sometime next year, with global liquidity finally set to turn negative. In the past, recessions and bear markets were preceded by central bank tightening cycles, so it might be a good idea to consider adding gold and gold stocks, which have historically done well in times of economic and financial turmoil.    

central banks to withdraw liquidity from financial markets for the first time since crisis
click to enlarge

2. Banks on a Gold-Buying Spree

While I’m on this subject, central banks have been net purchasers of gold since 2010, with China, Russia, Turkey and India responsible for much of the activity. Just this week, I shared with you the news that Poland added as much as nine metric tons to its reserves this past summer. If gold is such a “barbarous relic,” why are they doing this? As Incrementum writes, “The increase in gold reserves should be seen as strong evidence of growing distrust in the dominance of the U.S. dollar and the global monetary system associated with it.” Having a 10 percent weighting in gold and gold stocks could likewise help you diversify away from fiat currencies and monetary policy.

change in gold reserves held by emerging countries from 2007 to 2017
click to enlarge

3. Too Much Debt

Everywhere you look, debt is rising to historic highs, whether it’s emerging market debt, student loan debt or U.S. government debt. Meanwhile, higher rates are making it more expensive to service all this debt. As you can see below, interest payments will hit a record $500 billion this year. It’s forecast that the federal deficit will not only reach but exceed $1 trillion in 2019. How will this end? Earlier this year, I called this risk the “global ticking debt bomb,” and I still believe it’s one of the most compelling reasons to maintain some exposure to gold.   

US government debt outstanding continues to rise rapidly
click to enlarge

4. An Exceptional Store of Value

In U.S. dollar-denominated terms, the price of gold is down right now. But in Turkey, Venezuela, Argentina and other countries whose currencies have weakened substantially in recent months, the precious metal is soaring. This alone should be reason enough to have part of your wealth stored in gold. Need further proof? According to a recent Bloomberg article, the cost of a black-market passport in Venezuela right now is around $2,000. That’s more than 125,000 bolivars, or 68 times the monthly minimum wage. A Venezuelan family that had the prudence to own gold would be in a much better position today to survive or escape President Nicolas Maduro’s corrupt regime. In extraordinary circumstances such as this, the yellow metal can literally help save your life.

gold does exactly what it is supposed to do protect purchasing power gold price increases in turkish lira and venezuelan bolivar
click to enlarge

5. A Sterling Time to Buy Gold?

Finally, a word about timing. According to Incrementum, some of the best gold buying opportunities have been when the gold/silver ratio crossed above 80—that is, when it took 80 or more ounces of silver to buy one ounce of gold. If you look at the chart below, you’ll see that such instances occurred in 2003, 2009 and late 2015/early 2016—all ideal times to accumulate. We see a similar buying opportunity today, with the gold/silver ratio at a high of 83 as of October 8. What’s more, gold stocks are the cheapest they’ve been in more than 20 years relative to the S&P 500 Index.

highs in the gold silver ratio were great buying opportunities for gold
click to enlarge

Curious to learn more? Download my popular whitepaper on gold’s love trade 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 widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Diversification does not protect an investor from market risks and does not assure a profit.

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Gold's Bottom Could Be Investors' Lost Treasure
October 1, 2018

how to manage your risk

Get ready, gold bulls: The precious metal could be close to finding a bottom.

The price of gold fell back below $1,200 an ounce again last week as the U.S. dollar advanced following another federal funds rate hike. The precious metal logged its sixth straight month of declines, its longest losing streak since 1989.

That gold’s not trading below $1,150 is, I believe, remarkable. There’s a lot motivating the bears right now. Besides a stronger dollar and higher interest rate, stocks are still going strong, buoyed by record buybacks and massive inflows into passive investment products. In the week ended September 20, investors poured as much as $34.3 billion into ETFs, taking year-to-date inflows to nearly $215 billion, according to FactSet data.

This makes gold mining stocks look especially attractive by comparison. Relative to U.S. blue chips, the FTSE Gold Mines Index is now at its most discounted level in over 20 years.

gold stocks at their most discounted level in over 20 years, relative to the market
click to enlarge

Gold Industry Ready for Consolidation?

There are other signs that a bottom is near.

For one, Vanguard just restructured its precious metals mutual fund, slashing its exposure to the industry from 80 percent to only 25 percent. This means the world’s largest fund company will no longer offer its investors a way to participate in a potential rally in metals and mining stocks.

The last time Vanguard made a change like this, it coincided with a huge run-up in metal prices. In 2001, gold was just as unloved as it is now, prompting Vanguard to drop the word “Gold” from what was then the Gold and Precious Metals Fund.

Bad move—the precious metal went from under $300 an ounce to as high as $1,900 in September 2011.

Last week, mining giants Barrick Gold and Randgold Resources announced an $18 billion merger that, once complete, will create the world’s largest gold producer. An “industry champion for long-term value creation,” according to BMO Capital Markets, the resultant company will “operate five of the 10 ‘tier one’ gold mines on a total cash cost basis and possess numerous projects with potential to” deliver sustainable profitability.

the barrick-randgold merger will create the world's largest gold miner, valued at $18 billion

Historically, a telltale sign that an industry has found a bottom is consolidation. Just look at the wave of mergers and takeovers in the then-struggling airline industry following the financial crisis.

Other financial firms and analysts also find the Barrick-Randgold news positive, for the two senior producers as well as metals and mining as a whole. Scotiabank believes the merger “improves [Barrick’s] overall asset quality, balance sheet, free cash flow profile, technical expertise and management team, with no takeout premium paid.” The deal, says the Royal Bank of Canada (RBC), “could spur a pick-up in M&As, which in our view could result in a turnaround in mining equity performance.”

Good news indeed as inflation continues to ramp up. The price of Brent oil, the international benchmark, closed above $80 a barrel last week for the first time since November 2014. That’s an incredible threefold increase from its recent low of $27 a barrel, set in January 2016.

The Incredible Shrinking Stock Market Is Shrinking Even Faster

As you already know, one of the key reasons why gold has been so highly valued for centuries—as a commodity and currency—is its scarcity. It makes up roughly 0.003 parts per million of the earth’s crust. According to the World Gold Council (WGC), an estimated 190,040 metric tons of the stuff have been mined since the beginning of time, leaving only 54,000 metric tons in the ground for producers to dig up, at greater and greater expense.

“Peak gold,” as some experts call it, is a real concern, one that could rocket the price of the yellow metal into the stratosphere on a supply-demand imbalance.

Scarcity, after all, is what’s helping to drive the equity bull market even higher right now. Over the past 20 years, the number of listed companies has steadily been shrinking, mostly as a result of tougher securities regulations.

And now, those companies—flush with cash thanks to last year’s corporate tax reform—are buying back their own stock at record and near-record levels.

stock buybacks have soared faster than capital spending
click to enlarge

Just how much? I shared with you recently that in the June quarter alone, S&P 500 companies spent a record $190.6 billion on stock repurchases, an increase of almost 60 percent from the same quarter a year ago. Apple led the pack, taking $21.9 billion worth of stock out of circulation. That’s down slightly from the record $22.8 billion in the first quarter.

In general, Wall Street likes buybacks, which lower the number of shares outstanding. As a result, earnings per share (EPS) and dividends available per share increase even when there isn’t any profit growth.

But there are a couple of issues. First, buybacks require capital that could have otherwise been spent on investing, upgrading equipment, giving workers raises and the like. For the first time in 10 years, according to Goldman Sachs, buybacks have outstripped capital spending so far in 2018. The S&P 500 is already trading at overinflated prices, meaning companies like Apple are buying high.

Second, buybacks take shares off the market. Over the past decade, companies have bought back $4.4 trillion as historically low interest rates created, for some, a more favorable environment to float debt instead of equity. Below, I chose to highlight the consumer staples sector because the decline in shares since 2006 has been so dramatic, falling from around 32.5 billion shares to 27.5 billion shares—a decrease of more than 15 percent.

total shares outstanding of S&P 500 consumer staples companies are plunging
click to enlarge

Today, “not enough shares are being issued to offset those being withdrawn from circulation,” according to Reuters. Net equity supply turned negative for the first time ever in 2016, and it could end in negative territory again by the end of this year.

Coupled with the ticking passive index bomb I wrote about earlier in the month, fundamental investing is changing. It’s hard to say where this will end—when there’s only one share of Apple left? Prices would explode, and investing would become even more out-of-reach for many than it already is today.

Click here to get my thoughts on why I think the market could correct between 10 percent and 20 percent early next year, and what investors can do now to prepare!

 

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

The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The FTSE Gold Mines Index Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold.

Free cash flow represents the cash a company can generate after required investment to maintain or expand its asset base. Total cash cost refers to the cost per payable unit of metal sold during the life of the commercial operations of a mine. There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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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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
click to enlarge

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
click to enlarge

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
click to enlarge

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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It's Time for Contrarians to Get Bullish on Gold
August 14, 2018

It’s Time for Contrarians to Get Bullish on Gold

Gold can’t seem to catch a break. The yellow metal normally acts as a safe haven in times of political and economic strife, but in the face of Turkey’s lira meltdown, investors have taken cover instead in the U.S. dollar. On Monday, the stronger greenback pushed gold to end below $1,200 an ounce for the first time since January 2017.

The lira fell to its lowest level ever recorded against the dollar Monday, mainly in response to President Donald Trump’s call to sanction and double steel and aluminum tariffs on Turkey. This sent gold priced in Turkey’s currency to all-time highs. If you recall, we saw the same thing happen recently in Venezuela, where inflation is expected to hit 1 million percent by the end of the year.

Turkish lira down more than 45% for the year
click to enlarge

Turkey’s faith in gold was on full display this week as President Recep Erdogan urged his fellow Turks to convert their gold and hard currencies into lira in an effort to prop up the country’s hammered currency. The same strategy was used in December 2016, a month after Trump’s election sent the lira tumbling against the dollar.

The Love Trade Is Strong in Turkey

As I’ve discussed before, Turkey has a long and rich history with gold. Home to the world’s very first gold coins more than 2,500 years ago, Turkey still stands as one of the largest buyers of the yellow metal. In the June quarter, the Eurasian country was the fourth largest consumer of gold jewelry, following India, China and the U.S. Twelve and a half metric tons were purchased in the three-month period, up 13 percent from the same time a year ago.

Along with Russia and Kazakhstan, Turkey also continues to add to its official gold holdings. Its central bank’s net purchases in the first half of the year totaled 38.1 metric tons, up 82 percent from the same six-month period in 2017, according to the World Gold Council (WGC). This made it the second highest buyer, after Russia.

Time to Get Contrarian

Gold investors might be discouraged by its performance this year, compounded by news that hedge funds are shorting the metal in record numbers. A lot of this has to do with the fact that, so far this year, gold has had a very high negative correlation to the U.S. dollar—more precisely, a negative 0.95 correlation coefficient, according to gold research firm Murenbeeld & Co. What this means is that gold prices have been moving in nearly the exact opposite direction as the greenback.

I think it’s important to point out that, despite a stronger dollar, gold is still up for the 36-month period—and climbing even higher over the long term. The dollar has only recently broken even, whereas gold has continued to hit higher lows since its phenomenal breakout in December 2015.

despite a stronger u.s. dollar, gold is still up for 36-month period
click to enlarge

The dollar could be ready to peak, with the potential for even higher gold prices. The metal is currently down two standard deviations over the past 60 trading days, so the math is currently in our favor for gold to rally.

Vanguard Just Gave Precious Metal Investors the Short Shrift

There’s another sign that gold has found a bottom.

Last week, I spoke with Kitco’s Daniela Cambone about Vanguard’s decision to change its Precious Metals and Mining Fund. Starting next month, the fund’s exposure to metals and mining will be dropped from 80 percent today to only 25 percent—meaning the world’s largest fund company will no longer offer investors a way to participate, should gold and precious metals rally.

does vanguard's latest fund name change mean gold has found a bottom?
click to enlarge

This isn’t the first time Vanguard has done this to investors. Back in 2001, it removed the word “gold” from what was then the Gold and Precious Metals Fund. The change coincided with a decade-long precious metals bull run that saw gold rally from an average price of $271 an ounce in 2001 to an all-time high of more than $1,900 in September 2001. That’s more than a sevenfold increase.

And now it’s dropping the fund altogether—at a time when gold might be ready to break out.

So could this mean another bull run is in the works? No one can say for sure, of course, but the timing of Vanguard’s announcement is certainly interesting.

What I can say with certainty is that there are likely many investors in the Vanguard ecosystem who are in for a rude awakening when they find out their exposure to the metals and mining sector has inexplicably shrunk.

 

 

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 U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.

Standard deviation is a quantity calculated to indicate the extent of deviation for a group 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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Overbought or Oversold? Let These Mathematical Signals Be Your Guide
July 23, 2018

overbought or oversold? let these mathematical signals be your guide

just the facts, ma'am dragnet TV series sgt. joe friday

Anticipate before you participate in the market. This is a classic piece of advice I like to give investors and have written about extensively in my CEO blog, Frank Talk. Financial markets are influenced by relatively predictable cycles and trading patterns, and by better understanding these we are able to react thoughtfully to headline noise or unexpected market developments.

How many of you remember the old police procedural Dragnet? In it, Sgt. Joe Friday famously uses the line “Just the facts, ma’am.” I’ve always felt this nuts-and-bolts attitude relates perfectly to how our investments team makes its decisions on where to allocate capital. Follow the models, look at the math—and leave emotions at the door.

A Sentiment Indicator for Contrarian Investing

At U.S. Global Investors, one tool that we find particularly useful to track the different market cycles is our U.S. Global Sentiment Indicator. This indicator tracks 126 commodities, indices, sectors, currencies and international markets to help monitor volatility and cash flow levels.

Using this indicator, we note the percentage of positions that have five-day moving averages above or below the 20-day moving averages. Then we compare it to the S&P 500 Index. As you can see in the chart below, as of Wednesday, the sentiment indicator rebounded to 54 percent, rallying from a low of around 20 percent at the end of June.

The U.S. global sentiment indicator reaches 54 percent mid-week
click to enlarge

While a drop below 20 percent means the market is extremely oversold, we do not view the market as overbought until around the 80 percent mark. Having a keen awareness of these movements allows our investments team to be more proactive rather than reactive. It helps us manage our emotions and not be swept away by negative media or overly optimistic headlines.

Explore this topic further in the Managing Expectations whitepaper!

Is the Gold Market Being Suppressed?

Gold continued its trek lower last week, the price steadying around $1,220 an ounce on Tuesday following Federal Reserve Chair Jerome Powell’s congressional testimony.  Powell commented that he thought the U.S. was on course for continued steady growth, supporting his expectation of a rate hike every three months. These comments sent the dollar up and gold down.

Despite this movement, I’m amazed that gold is holding up so well, particularly when you compare real interest rates in the U.S., Japan and the European Union.

Japan leads the world in government debt that trades negative yield
click to enlarge

In addition to these price moves, we’ve seen suppression and manipulation in the gold market in recent years. This is a topic I discussed last week in our webcast, cohosted by Randy Smallwood, CEO of Wheaton Precious Metals.

What do I mean by “gold suppression”? Historically, the price of gold has tracked U.S. debt, but as you can see in the chart below, that seems no longer to be the case.

suppression of gold? gold price has traditionally tracked U.S. debt
click to enlarge

The question, then, is not whether gold is actively being suppressed, but to what extent and by whom. Traders working at some big banks—including UBS, Deutsche Bank and HSBC—have already been charged for manipulating the price of precious metals futures contracts and fined as much as $30 million by the Commodity Futures Trading Commission (CFTC).

However, I’m skeptical that this has resolved the issue. In the past several years, gold has traded down in the week prior to China’s Golden Week, when markets are closed. As much as $2.25 billion of the yellow metal was dumped in the futures market in October 2016, as someone clearly sought to take advantage of the fact that markets were closed for the week in the world’s largest buyer of gold.

gold and silver price manipulation headlines

During the webcast, Randy Smallwood thoughtfully pointed out that the deliberate suppression of prices can't go on forever. I agree, and believe that precious metals such as gold and silver are significantly undervalued right now.

So what should investors be paying attention to?

The Magic Behind the Math

Using an oscillator chart, let's compare the U.S. dollar to gold. I believe oscillators are vital to identifying the optimal time to buy or sell, and right now it appears that the greenback is overbought while gold is oversold.

Looking back over five years of data, we've discovered that, historically, when gold exceeded two standard deviations above the mean, the commodity fell 51 percent of the time in the following three months.

In contrast, when gold prices exceeded two standard deviations below the mean, it rose 77 percent of the time in the following three months. This is because gold is undervalued at this level.

Is gold due for a reversal?
click to enlarge

Buying the laggards when the time is right could enable you to participate in a potential rally—and right now, that rally could be in gold, currently down 2.24 standard deviations.

Understanding this kind of math is almost like being adept at counting cards. In the 2008 film 21, an MIT professor helps six students become experts at card counting. The story, based on true events, shows how these students end up taking Vegas casinos for millions in winnings by following their professor’s teachings. Of course, there’s no way I can promise such an extraordinary outcome in your investments, but I do think there’s something to be said for the magic behind the math.

King Copper Could Also Be Due for a Reversal

Gold isn’t the only commodity that might be due for a reversal. Take a look at this chart showing copper versus the U.S. dollar. The red metal looks even more oversold than gold, down close to four standard deviations as of July 18. As I mentioned in the 2018 Commodities Halftime Report, copper looks attractive on surging demand for electric vehicles (EVs), which require between three and four times as much copper as traditional gas-powered automobiles.

copper looks oversold relative to the U.S. dollar
click to enlarge

What’s more, based on these mathematical models, emerging markets have the potential to move higher as well. I encourage you to take a look at the chart featured in the Europe section of Friday’s Investor Alert to see what I mean.

Always Remember the Golden Rule

10 percent portfolio weighting in gold recommended by frank holmes

Gold continues to be a classic example that helps illustrate seasonal rotations and price fluctuations based on a number of different factors geopolitical noise, inflation, wedding season in China and India, and much more.

The DNA of volatility, as I like to call it, shows that it is a non-event for gold to move up or down 17 percent over a rolling 12-month period. Knowing this has helped me to develop the 10 percent Golden Rule.

I have always advocated investors have around 10 percent of their portfolios in gold—5 percent in gold bullion or beautiful gold jewelry, and 5 percent in well managed gold mutual funds or ETFs. And then rebalance.

While no investment rules or statistical tools are accurate 100 percent of the time, investors can take ownership in how they use certain tools to manage emotions of the market and position themselves for greater success.

Capturing opportunities and understanding the ins and outs of the markets are what make investing so exciting.

Know a fellow investor who could benefit from this type of weekly investment analysis? Share our Investor Alert sign up page  with them—subscribing is always FREE!

 

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.

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

The U.S. Dollar Index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

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 (06/30/2018): Wheaton Precious Metals Corp.

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Net Asset Value
as of 10/16/2018

Global Resources Fund PSPFX $5.18 0.07 Gold and Precious Metals Fund USERX $6.97 0.01 World Precious Minerals Fund UNWPX $3.60 0.01 China Region Fund USCOX $8.21 0.14 Emerging Europe Fund EUROX $6.50 0.12 All American Equity Fund GBTFX $25.72 0.39 Holmes Macro Trends Fund MEGAX $18.50 0.39 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change