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Gold Glimmers as Global Market Fear Grips Investors
August 24, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Gold last week broke above its 50-day moving average as a fresh round of negative news from around the globe rekindled investors’ interest in the yellow metal as a safe haven. The Fear Trade, it seems, is in full force.

Gold Breaks Above Its 50 Day Moving Average
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Below are just a few of the recent news items that have made some investors skittish, which has supported gold prices:

  • China, the world’s second-largest economy, continues to slow. Its preliminary purchasing managers’ index (PMI) reading, released on Friday, came in at 47.8, a 77-month low. This follows China’s decision to devalue its currency, the renminbi, close to 2 percent. For the first time in a year, the Shanghai Composite Index fell below its 200-day moving average.
  • Crude oil is on an eight-week losing streak, the longest in 29 years. West Texas Intermediate (WTI) slipped below $40 per barrel in intraday trading Friday, the first time it’s done so since 2009.
  • U.S. stocks are undergoing an ugly selloff. They just had their worst week since September 2011 and are on track to post their worst month since May 2012. The Dow Jones Industrial Average, down 10 percent since its all-time high, is nearing correction territory. All 10 S&P 500 Index sectors were off last week.

We can also add to this list the high levels of margin lending on the New York Stock Exchange (NYSE) right now. At the end of every month, the exchange discloses margin amounts, and it appears that everyone is leveraged. Real margin debt growth since 1995 is twice as much as real S&P 500 growth.

New-York-Stock-Exchange-Margin-Debt-at-All-Time-High
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Cartson Ringler is a market analyst and founder of Ringler Consulting and Research in Germany. Speaking with the Gold Report this week, he highlighted the precariousness of high margin debt in domestic equities:

We saw a huge bull market from 2009 to 2015 on the S&P 500 when it went to around 2,080 from 666. That market is really mature. One number that scares me is the high margin debt on NYSE. When the big market crash happened in 1987, we saw $38 billion in margin debt, but as of June 2015, NYSE margin debt was more than $504 billion. Everyone is dancing until the music stops. So I’m shorting the S&P 500, while building my basket of different precious metals producers.

Should the $504 billion—an all-time high, by the way—worry us, as Ringler suggests? Maybe, maybe not. It’s worth remembering, though, that high margin lending in China greatly contributed to the Shanghai Stock Exchange’s 30-percent correction just a month ago.

Margin-Lending-in-Trillions-of-Chinese-Yuan
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In its Friday newsletter, Kitco made note of many of these market-moving events and said that “optimism in gold should spill over next week. A strong majority among retail investors and market professionals expect to see higher prices the last full week of August.”

The Contrarian Case for Gold Is Scorching Hot

Earlier this month I shared with you that hedge funds are net short gold for the first time since U.S. Commodity Futures Trading Commission data began in 2006. Being short has become a very crowded trade, and many contrarian investors have seized upon this bearishness to add to their gold exposure. American Eagle gold coin sales rose an impressive 124 percent in July month-over-month.

Contrarian-Tool-Gold-Net-Position-for-Leveraged-Futures
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Last week, famed hedge fund manager Stanley Druckenmiller plunked down more than $323 million of his own money into a gold ETF, according to second-quarter regulatory filings.

Druckenmiller is the guy who consistently delivered 30 percent on an average annual basis between 1986 and 2010, the year he closed his fund to investors. He’s also responsible for making the call to short the British pound in 1992, which “broke the bank of England” because it forced the British government to devalue and withdraw the currency from the European Exchange Rate Mechanism (ERM).

And now he’s made a huge bet on gold. The $323-million investment, in fact, is the largest position in his family fund.

Demand among global central banks and retail buyers has also heated up. As I told Daniela Cambone in last week’s Gold Game Film, the Chinese government is now reporting monthly on its gold consumption to offer greater transparency and convince the International Monetary Fund (IMF) that the renminbi should be included as part of the special drawing rights. Last month, the Asian country purchased 54 million ounces. And in the first half of the year, demand in Germany, the third-largest gold market behind China and India, increased 50 percent over the same period in 2014.

Gold in Russian Ruble Terms Shows The Value of Hard Assets

The Russian ruble, meanwhile, has lost nearly 50 percent of its purchasing power from 12 months ago, following its invasion of Ukraine and the drop in oil prices. Over the same period, gold has risen about 54 percent.

Gold-in-US-dollar-vs-Russian-Rubles
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It shows that when a currency loses value and falls out of favor, gold has tended to benefit as investors seek real assets. Gold prices have then been able to soar, just as we saw in the months following the financial crisis, eventually reaching an all-time high of $1,921 per ounce in September 2011.

Remember, Druckenmiller just invested heavily into gold. Prudent investors such as him understand the dynamic between fiat currencies and gold, and they adjust their funds accordingly. Does he predict something happening to the U.S. dollar that might benefit gold?

Druckenmiller might have 20 percent allocated to gold, but it’s advisable to have closer to 10 percent—5 percent in gold stocks, 5 percent in bullion, then rebalance every year.  This should be strongly considered whether the economy is soaring or struggling.

I invite you to head over to Kitco and compare for yourself the price of gold in U.S. dollars to other world currencies.

Looking for Other “Safe Haven” Options in the Volatile Market?

Gold is indeed glimmering with safe haven appeal, but I encourage investors seeking an investment that has a history of less drama to check out municipal bonds. Our Near-Term Tax Free Fund (NEARX) invests heavily in high-quality munis that are on the short-end of the curve, ideal for when there’s interest rate uncertainty.  

Having provided investors with over 20 straight years of positive returns, NEARX holds five stars overall from Morningstar, among 185 Municipal National Short-Term funds as of 6/30/2015, based on risk-adjusted return.

Air Traffic Demand Continues Its Upward Ascent

On a final note, Jeffries released its latest air traffic demand growth numbers yesterday, and the results were very positive. According to the group:

The July Jefferies Air Traffic survey registered a 6.4-percent year-over-year growth rate for our sample. The IATA (International Aviation Transport Association) report for July could show traffic growth of about 8.5 percent, strong vs. 5.9 percent year-to-date. Financial market turmoil and weak commodity prices don’t appear to be hurting demand.

July demand is up from 4.8 percent in June, Jefferies also notes. The strong traffic results serve as further justification for the group’s year-end demand growth estimate of 6 percent.

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

Total Annualized Returns as of 6/30/2015:
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fund 1.88% 2.48% 3.04% 1.08% 0.45%

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through April 30, 2016, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest).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 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 www.usfunds.com or 1-800-US-FUNDS.

Morningstar Rating

Overall/184
3-Year/184
5-Year/160
10-Year/110

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 6/30/2015

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

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

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

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.

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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These Billionaire Investors Just Made Massive Bets on Gold and Airlines
August 20, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

I always advise investors to follow the smart money, and two people high on the list are Stanley Druckenmiller and Warren Buffett.

Second-quarter regulatory filings show that Stanley Druckenmiller, the famed hedge fund manager, just placed more than $323 million of his own money into a gold ETF, at a time when sentiment toward the yellow metal is in the basement. Meanwhile, Buffett announced this week that Berkshire Hathaway is purchasing aircraft parts supplier Precision Castparts for $32 billion.

Investors should take note!

Stan-Druckenmiller-Buys-Gold-Warren-Buffett-Buys-Aerospace

Druckenmiller Sees Gold as a “Home Run”

Druckenmiller has commented in the past that if he sees something that really excites him, he’ll bet the ranch on it.

“The way to build long-term returns is through preservation of capital and home runs,” he said. “Grind it out until you’re up 30 to 40 percent, and then if you have the convictions, go for a 100-percent year.”

While I have always advocated for a diversified approach, this all-in approach has served him well. Between 1986 and 2010, the year he closed his fund to investors, Druckenmiller consistently delivered 30 percent on an average annual basis. Thirty percent a year! That’s a superhuman, Michael Jordan-caliber performance—or Ted Williams, if we want to stick to baseball imagery. The point is that words such as “legendary” and “titan” were invented with people like Druckenmiller in mind.

During his career, the man has made some now-mythic calls, the most storied and studied being his decision to short the British pound in 1992. This bet against the currency forced the British government to devalue the pound and withdraw it from the European Exchange Rate Mechanism (ERM), which is why many people say the trade “broke the Bank of England.” It also made Quantum, George Soros’s hedge fund, $1 billion.

And now he’s making a call on gold. The $323-million investment is currently the single largest position in Druckenmiller’s family fund. It’s twice as large, in fact, as its second-largest position, Facebook, and amounts to 20 percent of total fund holdings.

His conviction in gold can be traced to his criticism of the Federal Reserve’s policy of massive money-printing and near-zero interest rates. Such ongoing low rates push investors and central banks alike into other types of assets, including physical gold.

Concerns over government policy is why prudent investors hope for the best but prepare for the worst. I’ve always advocated a 10-percent weighting in gold: 5 percent in gold stocks, 5 percent in bullion, then rebalance every year. This is the case in good times and in bad.

Trump on Gold

Love him or hate him as a presidential candidate, Donald Trump has the same attitude toward owning gold in today’s easy-money economy. After leasing a floor of the Trump Building to Apmex, a precious metals exchange, he agreed back in 2011 to accept three 32-ounce bars of gold as the security deposit, according to TheStreet.

The U.S. dollar, Trump says, is “not being sustained by proper policy and proper thinking.” Accepting the gold “was an opportunity… to show people what’s happening with the dollar so we can do something about it.”

Trump and Druckenmiller aren’t the only ones adding to their gold positions right now. As I told Daniela Cambone on this week’s Gold Game Film, the Chinese government is now reporting its gold consumption on a monthly basis. In July it purchased 54 million ounces. This is significant in the country’s march to become a world-class currency that’s supported by the International Monetary Fund (IMF) for special drawing rights.

Both of our precious metals funds, Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), aim to offer protection against the sort of monetary instability Druckenmiller and Trump have warned us about.

Buffett Makes the Biggest Deal of His Career in Airlines

Many investors know that Warren Buffett has been hard on the airline industry in the past, even going so far as to say, in his 2008 letter to Berkshire Hathaway investors, that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville [Wright] down.”

But since then it appears as if he’s come around—in a huge way. At more than $32 billion, his purchase of Precision Castparts is the largest-ever takeover in the aerospace sector, not to mention the largest deal Buffett’s ever been involved in.

More than that, though, the deal implies that Buffett, 85, sees great opportunity in the sector where previously he didn’t.

Indeed, the Wall Street Journal writes that the acquisition comes “as airlines’ seemingly insatiable appetite for new fuel-efficient jets in the past several years has left Airbus Group SE and Boeing Co. with combined orders on the books for over 10,000 jets.”

A couple of months ago, I shared with you Boeing’s estimate that $5.6 trillion in new aircraft orders will be placed over the course of the next 20 years. In the infographic below, courtesy of World Property Journal, you can see that Boeing’s world fleet is set to double in size during this period, from 21,500 units to 43,560. Click the image to make it larger.

Precision-Castparts-Stock-Surges-19-After-Berkshire-Hathaway-Takeover-Announcement
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Precision Castparts, based in Portland, Oregon, manufactures parts used in gas turbines and aircraft engines. Its stock flew up 19 percent on the announcement.

Precision-Castparts-Stock-Surges-19-After-Berkshire-Hathaway-Takeover-Announcement
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“We’re going to be in this business for the next 100 years,” Buffett told CNBC’s Squawk Box.
Follow the money!

 

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

Past performance does not guarantee future results.

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 Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 6/30/2015: Facebook Inc. 0.00%, Apmex Inc. 0.00%, TheStreet Inc. 0.00%, Airbus Group SE 0.00%, Boeing Co. 0.00%, Precision Castparts Corp. 0.00%.

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

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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China Not Immune to Contagious Quantitative Easing and Massive Printing of Cheap Money
August 17, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Renninbi

First it was the U.S. Federal Reserve. Then, in 2013, Japan launched what became known as Abenomics. The European Central Bank (ECB) followed suit in 2014. And now the People’s Bank of China has joined the parade.

All of them in some way stimulated economic growth by initiating monetary quantitative easing (QE) programs.

The media and politicians applauded them for their QE plans. All of them, that is, except for China. Instead, we’ve only seen a flurry of negative headlines.

I often tell investors to follow the money, which currently is cheap to borrow. Cheap money is good for stock prices, but not for retired folks who have most of their savings in term deposits with low interest yields.

Most important for commodity investors is the powerful correlation between China’s money supply and commodity prices. The money supply peaked in 2011 and has been falling along with commodity prices.

On Monday, China unexpectedly trimmed the value of its currency, the renminbi, 2 percent, the most in two decades. In the days since, many analysts and “experts” have irrationally turned sour on the Asian country, similar to the extreme bearishness toward gold in the last month.

But investors last week came home to the yellow metal after China announced it had increased its gold reserves by an additional 19 tonnes in July, boosting its total holdings to 1,677 tonnes (nearly 54 million ounces). This helped prices rally 1.4 percent on Wednesday to reach $1,124.46, a three-week high.

Investors should likewise return to China when they realize that the global reaction to the renminbi devaluation has been hugely overblown. I agree entirely with my friend Addison Wiggins, who writes in his Daily Reckoning newsletter:

The market is up in arms about this currency move. And frankly most things that I read from the market have it all wrong…

They make China out to be the big, bad villain—calling this move manipulation or a “currency war.” And while EVERYTHING that central banks do is indeed manipulation or a “currency war”—why don’t we hear those terms thrown around the ECB or the U.S. Fed?

To help cut through the noise and get a more balanced picture of devaluation's causes, effects and possible ramifications, I chatted with our resident Asia expert Xian Liang, portfolio manager of our China Region Fund (USCOX). Below are some of the highlights.

As you know, we follow currencies very closely in our investment team meetings because we’re aware that government policy is a precursor to change. Having said that, why did China decide to devalue the renminbi?

There are several possible reasons, the first one being economics—specifically, to stimulate economic growth and ease liquidity in the financial sector. A weaker renminbi can help make Chinese exports cheaper for foreigners and imports dearer for locals, creating the incentive for a “net inflow” of money. July data shows that economic activity remains worse than expected. China’s purchasing managers’ index (PMI) reading for the month is one example, but fixed-asset investments, power generation and exports were all down.

chinas-manufacturing-pmi-falls-to-two-year-low-in-july
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Deflationary pressure also intensified in July, and the renminbi in trade-weighted terms—that is, against a whole basket of major trading partners’ currencies, not just the dollar—has soared to record highs. This is because of a de facto peg to the dollar, making Chinese goods and services uncompetitively priced to world customers.

Another reason is domestic politics. Chinese policymakers want to resurrect their reformist image among domestic intellectuals and the middle class by yielding more power to market forces to determine its currency exchange rate, which offers some compensation for July’s aggressive, command-and-control intervention in the A-Share market.

And then there’s international politics. It’s well known that China wishes its currency to be included in the International Monetary Fund’s special drawing rights basket, along with the U.S. dollar, euro, British pound and Japanese yen. Chinese policymakers are actively demonstrating to the IMF their commitment to “a more market-determined exchange rate,” a critical step toward eventual renminbi internationalization.

Many countries have devalued their currencies lately—Japan, Germany, France and others. Business Insider, in fact, just shared a Goldman Sachs chart showing how miniscule the renminbi’s depreciation really is compared to other emerging countries’ currencies. And yet China gets singled out in the media! Why is everyone so hard on China?

Renminbi-depreciation-not-nearly-significant-as-other-emerging-markets-currencies
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What’s usually not mentioned in all the news and editorials we’ve seen is that China hasn’t resorted to currency devaluation in 20 years. For the last decade, the renminbi was largely moving in a single direction—up—because China was tired of being dubbed a currency manipulator and it would like to foster consumerism.

As the second-largest economy in the world, China is interested in transforming its growth model from investment-driven to consumer-driven, and some investors might wonder how the devaluation will affect consumption. Today, the richer Chinese middle class is made up of big spenders, both home and abroad, and a weaker renminbi translates to weaker purchasing power for them. It might also have larger implications for global tourism, global consumer goods and global property. So the difference between China and, say, France is pretty significant.

Chinas-Central-Bank-Trims-the-Renminbi-2-After-10-years-of-Gains
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A lot of people think the Federal Reserve will hike interest rates this year—maybe even as early as September—though I’ve expressed doubts about that. Will the devaluation have any effect on the Fed’s decision?

To the extent that it weakens its own currency, China exports deflation to the U.S. and can help the dollar’s strength. Lower inflation and a stronger dollar reduce the incentive or rationale for any imminent Fed rate hike. So yes, you can almost say this is China’s silent protest against the widely anticipated September hike. China seems to be reminding Janet Yellen that in today’s interconnected world, unilateral monetary policy action by the U.S. without first considering global dynamics might not be the smartest thing to do. In effect, it’s saying: “Here’s a preview of what could happen if you insist on hiking rates this year.”

Is this a sign of further reforms? What else can we expect?

The devaluation does indeed herald back to the days of major Chinese reform. In fact, it occurred one day after China approved a comprehensive plan to reform its state-owned enterprises to make them more market-driven, similar to those in Singapore. So at least the government welcomes the perception that the devaluation has more to do with long-term structural reform and less to do with short-term expediency.

Investors are being bombarded with bad news about China right now. There have been some very negative headlines. Where’s the good news in all this?

Here’s the simple answer: A weaker currency not only helps Chinese exporters but also U.S. consumers. Whether you buy things made in China or are planning your next vacation there, you’ve got money to save now. Opportunities have also been expanded for U.S. retailers and manufacturers that source from China, not to mention U.S. airlines. And if you’re in the camp that believes this devaluation is the start of a new “currency war,” then it might be time for gold to shine.

Gold’s Safe Haven Status Never Disappeared

Countries with largest gold holdings

Indeed, gold tends to benefit the most when there are global currency fluctuations. Last week was no exception, as the metal had its best week since June. Many analysts, it seems, prematurely declared that gold has lost its safe haven status because it fell to five-year lows during the height of Greece’s and Puerto Rico’s debt crises.

But as I explained last month, gold is behaving this way not because it’s lost anything. Instead, there are external forces at work here, including the strong U.S. dollar, fears of rising interest rates and a slowing global economy, not to mention possible price manipulation. Despite these powerful headwinds, gold managed to hold strong the week before last as media giants’ stock plummeted, erasing $60 billion in stock value.

Speaking of gold and mining, I’ll be in Lima, Peru during the first week in November to attend the Mining & Investment Latin America Summit, where I’m scheduled to deliver the opening keynote address. I’ll be speaking on mining around the world, macro trends and opportunities and challenges in the upcoming year. For those of you interested in attending, you can register here. I’d love to see you there!

Airports Get 400,000 Views!

As you might imagine, I spend a lot of time in jets and airports. Last year I took over 100 flights, and this year it looks as though I’ll take just as many, if not more. I’m not the only one, as Airlines for America, an industry trade group, estimates that 222 million passengers will have flown on U.S. carriers this summer. It’s for this reason we created a colorful slideshow that celebrates the eight busiest airports in the world. As of this writing, it’s been viewed on Business Insider nearly 400,000 times! Check out the slideshow for yourself and then share with us your favorite airport story.

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

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 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.

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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Gold Holds Its Own Against These Media Darlings
August 10, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

There’s no other way to put it: Commodities took it on the chin last month.

July was the seventh worst performing month for the S&P Goldman Sachs Commodities Index, going back to January 1970. Crude oil saw its steepest monthly loss since October 2008. Both copper and aluminum touched their lowest levels in six years. And on July 19, possibly as a result of deliberate price manipulation, gold experienced a mini flash crash, sending it down to five-year lows.

Have Commoditeis Hit a Bottom?
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Regardless, several commodities are beating the exchange-traded funds that track them for the one-year period, according to the Wall Street Journal. Our Gold and Precious Metals Fund (USERX) is over 1,900 basis points ahead of the Market Vectors Gold Miners ETF (GDX) year-to-date.

But that hasn’t stopped many gold bears from using this as an opportunity to disparage the yellow metal. A recent Bloomberg article points out that the gold rout has cost China and Russia $5.4 billion, an amount that would sound colossal were it not for the fact that U.S. media companies such as Disney and Viacom collectively lost over $60 billion for shareholders in as little as two days last week.

Below are the weekly losses for just a handful of those companies. Compared to many other asset classes, gold has held up well, even after factoring in its price decline.

Media Stocks Collapse, Gold Holds Its Own
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And isn’t it funny that the Federal Reserve doesn’t keep other countries’ currencies, but it continues to hold gold—and in larger amounts than any other central bank? China and Russia have two of the biggest gold reserves in the world—and have added to them recently—but they don’t come close to the Fed’s holdings, even when combined. What’s more, the U.S. Treasury’s Office of the Comptroller of the Currency just classified gold as money by placing gold futures in the foreign exchange derivatives classification.

Countries with largest gold holdings

Indeed, central banks all over the world continue to add to their gold reserves. If the metal were as valueless as a pet rock, as one Wall Street Journal op-ed recently claimed, why would they bother to do this? A few weeks ago, China disclosed the amount of gold its central bank holds for the first time in six years. Global markets reacted negatively that the country increased its reserves “only” 57 percent. But the World Gold Council (WGC) saw this as positive news:

We believe the People’s Bank of China’s confirmation of its revised gold holdings is supportive for the gold market. It reiterates how China, along with other central banks, views gold as a key resource asset as it continues to seek diversification away from the U.S. dollar.

As I’ve said before, China is the 800-pound commodities gorilla. This has largely been the case since 2000.

Half a Trillion Dollars a Year in Commodities

Between 2002 and 2012, China was growing fast at an average annual pace of around 10 percent. The country was responsible for nearly all of the net increase in global metals consumption between 2000 and 2014, according to the World Bank. Over the same time period, its share of metals consumption tripled, eventually reaching an astounding 47 percent.

China's Share of Metal Consumption Reached 47 Percent in 2014
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The year 2014 was a standout for Chinese commodity imports. Compelled by low prices, the country, which accounted for 12 percent of worldwide imports, brought in record volumes of crude oil, iron ore, copper and other raw materials.

Because China is a trading partner with practically every other country, and because it imports over $500 billion a year in commodities, its importance in global trade cannot be stressed enough. BBVA Research writes that “any reduction in its level of [purchasing] activity places significant downward pressure on the prices of [commodities], such as oil or copper.”

And yet we’re seeing that reduction now. For the past five months, China’s purchasing managers’ index (PMI) has remained below the neutral 50 mark, indicating that its manufacturing sector has been in contraction mode for the better part of this year so far.

China's Manufacturing PMI Falls to a Two-Year Low in July
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It’s important to keep in mind that China is still the number one importer of many key materials, including coal, iron ore and crude oil. The country’s import growth of these commodities continues to rise, but at a slower pace than in years past.

This isn’t necessarily the case with gold, however.

Demand Still Higher Than the Five-Year Average

According to the WGC, the decline in Chinese gold demand has been overstated.

Although China’s jewelry demand in the first quarter of 2015 was down from the record level the previous year, it was 27 percent higher than its five-year average. And consumer demand—jewelry plus bar and coins—in the first quarter was the fourth best on record, surpassed only by the surge in demand triggered by the price fall in 2013.

The WGC also points out that gold has a low correlation with and different demand drivers than commodities. Whereas commodities, as expressed by the Bloomberg Commodities Index, have returned to 2001 levels, gold is still up significantly for the period shown in the chart below.

Gold has Outperformed the Commodities Complex
click to enlarge

As many of you know, I call gold’s drivers the Fear Trade and the Love Trade. I recently had the pleasure to describe these drivers to Mike Gleason of Money Metals Exchange.

The Fear Trade, dominant in the psyche of North America, involves money supply growth and real interest rates. Whenever the U.S. has negative real interest rates, gold starts to rise in dollar terms, and whenever we have positive real rates of return, it starts to decline. If you go back to 2011, we had negative real interest rates off 3 percent on a 10-year government bond, and the average gold price that year was around $1,500 per ounce. But now that rates are positive 2 percent, the metal’s been depressed.

The Love Trade includes the purchase of the precious metal due to cultural affinity and rising GDP per capita in Asia and the Middle East. This includes gift giving of bullion and gold jewelry in anticipation of upcoming festivals such as Diwali, Christmas and the Chinese New Year. Historically, the Love Trade has begun to pick up around this time of the year.

Gold is a long-term investment with long-standing tradition. This remains true even now that prices have declined. As always, I recommend a 10 percent weighting: 5 percent in gold stocks, 5 percent in bullion or jewelry, then rebalance every year.

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

Total Annualized Returns as of 6/30/2015:
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap (or) Expense Ratio After Waivers
Gold and Precious Metals Fund -28.42% -15.80% 1.62% 1.97% 1.90%
Market Vectors Gold Miners ETF -32.35% -18.76% n/a 0.53% 0.53%

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 www.usfunds.com or 1-800-US-FUNDS.

For information regarding the investment objectives, strategies, liquidity, risks, expenses and fees of the Market Vectors Gold Miners ETF, please refer to that fund's prospectus.

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.

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.

The S&P GSCI Spot index tracks the price of the nearby futures contracts for a basket of commodities.

The Bloomberg Commodity Index is a broadly diversified commodity price index that tracks the prices of futures contracts on physical commodity on the commodity market. It currently has 22 commodity futures in seven sectors.

M1 Money Supply includes funds that are readily accessible for spending.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund as a percentage of net assets as of 6/30/2015: Market Vectors Gold Miners ETF 0.00%, The Walt Disney Co. 0.00%, Viacom Inc. 0.00%, 21st Century Fox 0.00%, Time Warner Inc. 0.00%, CBS Corporation 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 “Gold Holds Its Own Against These Media Darlings”

Gold on Sale, Says the Rational Investor
August 3, 2015

Gold doesn't tarnishThe leveraged gold futures derivatives market is knocking down the precious metal, yet in massive contrast, this drop has ignited a shopping frenzy according to gold coin dealers. I spoke with several friends and industry experts last week who confirmed the record sales numbers for the month. In fact, American Gold Eagle sales reached 161,500 ounces in July, the highest monthly figure since April 2013. What gives?

Gold often attracts conspiracy theories when it falls so abruptly, especially on Mondays. Interestingly, in a recent article on Zero Hedge, ABC Bullion out of Sydney, Australia, details some of the speculation behind the precious metal’s beatdown, which I’ve also discussed in my blog.

Price manipulation, or a “bear raid,” could be a factor. Last week, gold prices experienced a mini “flash crash”—the first one in 18 months—after five tonnes of the metal appeared on the Shanghai market. Whether front-running or fat fingers are to blame, the sell order for what many are calling a bear raid was initially thought to have originated in China, but we now believe it came from New York City.

Did investors anticipate China’s negative flash purchasing managers’ index (PMI) last week? China is the largest consumer of gold, and the PMI is a useful leading indicator of commodities demand as well as job growth.

What about the Greek crisis? This type of debt fear crisis often has the effect of boosting the price of gold, but we didn’t see that happen. Did European central banks sell gold down to dampen the psychological impact of the event? Understating the seriousness of the debt crisis may have prevented investors from seeking gold as protection.

Conspiracy theories or not, I believe none of this tarnishes gold’s sustainable allure. It’s important to look at the two key demand drivers for gold: the Fear Trade and the Love Trade. The Fear Trade is related to money supply and negative real interest rates. The Love Trade comes from the purchase of gold due to cultural affinity and the rising GDP per capita in Asia and the Middle East.

I’ve always advocated, and continue to advocate, a 10 percent weighting: 5 percent in gold stocks and 5 percent in bullion, then rebalance every year.

From Crisis to Opportunity

Take a look at the chart, which shows that the bearish trend is obvious.

Contrarian Tool: Gold Net-Position for Leveraged Futures
click to enlarge

And yet many investors are still buying. In an interview this week with Money Metals Exchange and in talking to Bart Kitner, founder of Kitco, both conversations confirmed that smart investors are enthusiastically buying gold during this downdraft in prices.

Rational Investors Know a Deal When They See One, and Feel One

With so much gloom and doom in the media surrounding gold right now, you might wonder why coin sales are soaring at multiyear highs. The reason is pretty simple: Gold is on sale.

Ray Dalio manages the largest hedge fund in the world

High net worth individuals and other savvy investors realize that even now, as herds of people are rushing for the exit, owning gold is one of the best ways to manage systemic risk. They follow that Greeks had their cash in banks frozen like in Cyprus only a few years ago.

Ray Dalio, founder of Bridgewater Associates, said it best: “If you don’t own gold, you know neither history nor economics.”

Indeed, some investors fail to take a long-term perspective on gold. Their sentiment toward the metal extends only as far back as the most recent selloff, induced by the strong U.S. dollar, weak global manufacturing activity and fears that interest rates will soon rise.

Many investors have that “sinking feeling” with a deterioration in global PMI, leading economic indicators, falling commodity prices and the threat of rising U.S. interest rates. Many have raised their cash levels due to decelerating global growth prospects. I’ve written that bad news is good news because when governments accelerate monetary policy, this can be a good opportunity for investors to add to their gold exposure.

Countries with largest gold holdings

I’m not the only one who takes this position. Besides the investors gobbling up American Gold Eagles, central banks around the world continue to buy, hold and repatriate bullion. The U.S. Federal Reserve maintains its 8,133 tonnes, the most of any central bank. Germany, the Netherlands and other countries have brought home mounds of the yellow metal in the last 12 months. China has increased its reserves 60 percent in the last six years. And Texas is in the early stages of establishing its own gold depository, the first state to do so. If there were no faith left in the metal, why would banks even bother with it?

At the same time, massive amounts of paper money are still being printed. In fact, the International Monetary Fund has asked the Bank of Japan to be ready to increase its monetary stimulus further, according to Bloomberg. Let the paper printing roll! In the U.S., where quantitative easing was supposed to have ended back in October, the Fed’s balance sheet is still within 0.3 percent of its all-time high, according to Sovereign Man.

Based on Historical Volatility Models Gold Is Extremely Oversold

Before the bottom fell out, gold’s support seemed to have been around $1,150, whereas the resistance trend line was breaking down. The descending triangle pattern, seen below, indicates that demand was weakening and downside momentum was gathering force. 

Gold Price Falls Through Key Support Level
click to enlarge

A useful tool that traders and analysts use is Bloomberg’s relative strength indicator (RSI). Below is gold’s RSI over the same one-year period. It shows that gold has passed below the 30 mark into oversold territory. When this happens, many analysts see it as a buying opportunity. Between November 3—the last time gold fell this significantly below 30—and January 20, the yellow metal ended up rallying 13 percent.

Gold at Its Most Oversold Since November 2014
click to enlarge

A similar tool we use to identify buy and sell signals is the price oscillator, which I often explain while speaking at conferences. This tool measures how many standard deviations an asset’s value has moved from its mean (and in which direction). When the number crosses above two standard deviations, it’s often interpreted as an opportunity to take some profits, and when it crosses below negative two, it might be a good time to think about accumulating.

Gold 20-Day Percent Change Oscillator
click to enlarge

Love Trade and Fear Trade: Gold’s Tailwinds and Headwinds

I always look at two demand factors for gold, the Fear Trade and the Love Trade. The Love Trade is the purchase of gold for weddings, anniversaries and cultural celebrations while the Fear Trade is gold’s reaction to monetary and fiscal policies, particularly real interest rates.

10,000 Chinese consumers wait in line to buy gold.

Historically, the Love Trade has been on the upswing starting around this time—late July and early August—in anticipation of international festivals and holidays such as Diwali, Christmas and the Chinese New Year. But as you can see in the oscillator chart above, gold is down 1.4 standard deviations for the 10-year period. This suggests gold may be at an attractive level to accumulate, and gold stocks can offer greater beta when gold begins to revert to its mean.

The Fear Trade, on the other hand, involves the Fear Trade and real interest rates (inflation – CPI = real interest rates). Several times in the past I’ve explained how gold tends to benefit when real interest rates turn negative. When the rate of inflation exceeds the yield on a five-year Treasury note, it makes gold much more attractive to many investors.

At this time, the five-year Treasury yield sits at 1.58 percent while inflation is crawling along at 0.1 percent. This means that real rates are a positive 1.48 percent—a headwind for gold. As I told Daniela Cambone during last week’s Gold Game Film, the U.S. has some of the highest real rates of return in the world right now.

To see gold gain traction again, not only do we need to see negative real interest rates in the U.S. we need to see rising real GDP per capita in China and rising PMI in China.

On a final note, there appears to be a battle between the debt markets and equity markets. The debt market yields suggest rates will not be rising next month or quarter, while equity markets suggest they will. I think the bond market is more accurate. With a struggling global economy and commodity deflation odds favor rates will not rise soon in America, and gold will revert back to the mean.

Past performance does not guarantee future results. 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 links above, you will be directed to  third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

The Relative Strength Index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

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.

M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

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.

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

Share “Gold on Sale, Says the Rational Investor”

Net Asset Value
as of 08/28/2015

Global Resources Fund PSPFX $4.92 0.04 Gold and Precious Metals Fund USERX $4.84 0.13 World Precious Minerals Fund UNWPX $4.05 0.10 China Region Fund USCOX $7.33 -0.03 Emerging Europe Fund EUROX $5.52 0.05 All American Equity Fund GBTFX $26.55 -0.04 Holmes Macro Trends Fund MEGAX $19.91 -0.01 Near-Term Tax Free Fund NEARX $2.24 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change