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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.

Will the Gold Bull Market Resume After the Summer Correction?
July 25, 2016

Donald Trump accepting the Republican nomination for president this week

Looking more Las Vegas casino than Oval Office, the stage Donald Trump delivered his nomination acceptance speech from Thursday was all gold, from the stairs to the podium, completely befitting of his showman-like style. Whether you support or oppose Trump, it’s time to face reality. This is really happening, and we should all brace ourselves for what will surely be one of America’s messiest, ugliest general election seasons.

Only time will tell which candidate will be triumphant in November, but in the meantime, one of the winners might very well be gold, which has traditionally attracted investors in times of political and economic uncertainty. In the United Kingdom, which voted one month ago to leave the European Union, gold dealers are seeing “unprecedented” demand, especially from first-time buyers. Some investors are reportedly even converting 40 to 50 percent of their net worth into bullion, though that’s not advisable. (I always suggest a 10 percent weighting, diversified in physical gold and gold mining stocks.) In Japan, where government bond yields have fallen below zero and faith in Abenomics is flagging, gold sales are soaring.

It’s not unreasonable to expect the same here in the U.S. between now and November (and beyond).

Strong U.S. Dollar and Treasury Yields Weighing on Gold

More so than the upcoming election, gold prices are being driven by U.S. dollar action, interest rates and low-to-negative bond yields around the world. (Between $11 trillion and $13 trillion worth of global sovereign debt currently carries a negative yield.) Right now the yellow metal is in correction mode on a strengthening dollar and rising two-year and 10-year Treasury yields, both of which share an inverse relationship with gold.

Gold Corrects on Rise of 10-Year Treasury Yield
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It’s also worth mentioning that the summer months have historically been among the weakest. By contrast, some of the highest gold returns of the year have occurred in September, when the Love Trade heats up in India in anticipation of Diwali and the wedding season.

Gold's Average Monthly Gains and Losses, 1975 - 2013
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For the past several trading days, gold demand had also been overshadowed by a hot equities market, with many stocks hitting 52-week highs. Both the S&P 500 Index and Dow Jones Industrial Average closed at all-time highs, twice in the latter’s case. The CNN Fear & Greed Index, which measures investor sentiment, is currently in “Extreme Greed” mode, at more than a two-year high.

Markets in Extreme Greed Mode

With gold taking a breather, now might be a good buying opportunity. Since 1970 there have been only four major gold bull markets, and the consensus among analysts right now is that we’re in the early stages of a new one, with end-of-year forecasts in the $1,400 an ounce range.

Learn more about what’s driving gold.

Rumors of Brexit’s Negative Impact Have Been Greatly Exaggerated

Despite gold’s correction, the metal got a boost last Thursday courtesy of Mario Draghi. The European Central Bank (ECB) president, as expected, announced that euro area interest rates and asset purchases would remain unchanged as economic ramifications of the Brexit referendum continue to be assessed.

Speaking of Brexit, Draghi noted that markets have met the volatility and uncertainty in the month following the U.K. referendum with “encouraging resilience.” Like many others, he had predicted that Brexit would dramatically stunt euro growth, but as we’ve already seen, such claims are overdone. In a note released last week, securities trading firm KCG wrote that June 24, the day following the British referendum, “was no repeat of August 24,” a reference to the “flash crash” that struck equities last summer and led to ETF mispricing.

Last week, the International Monetary Fund (IMF) trimmed 0.1 percent from its global economic growth forecast for the year, singling out Brexit fallout as the culprit. Curiously, though, the organization sees the U.K. growing faster than both Germany and France this year and next. This disconnect prompted U.K. Independence Party MP Douglas Carswell to label the IMF as “clowns” with “serious credibility problems.”

IMF Sees the U.K. Growing Faster Than Germany and France, Despite Brexit
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Following Draghi’s statement, gold prices immediately popped in Thursday morning trading, effectively hitting the pause button on the correction. On Friday, though, prices continued to slide, contributing to gold’s second straight week of losses.

The next hurdle to be cleared is a U.S. interest rate hike. Expectations that rates will go up in September have wobbled back and forth since Brexit, but in recent days, it’s been reported that Federal Reserve officials feel confident enough to raise them at least once before the end of the year. Gold will face additional pressure if rates are allowed to rise, but if the Fed chooses to stand pat, it could serve as another catalyst for a price surge.

 

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 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 CNN Fear & Greed Index monitors seven market factors, including stock price momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility and safe haven demand, by calculating how far they have veered from their averages relative to how far they normally veer, on a scale of 0 to 100, with 0 indicating fear and 100 greed. Then, the seven scores are equally combined into one.

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Gold Is Just Getting Warmed Up: UBS Analyst
July 12, 2016

It’s been a stellar six months for gold investors. The yellow metal has surged 28 percent year-to-date, its best first half of the year since 1974. And now there are signs that the rally is just getting started.

That’s the assessment of analysts from UBS and Credit Suisse, who see gold entering a new bull run. According to UBS analyst Joni Teves, gold could climb to $1,400 an ounce in the short term on macroeconomic uncertainty, dovish monetary policy and lower yields.

“These factors,” Teves writes, “justify strategic gold allocations across different types of investors” and should encourage hesitant investors to participate.

Already-low bond yields around the globe have fallen even further in Brexit’s wake, many of them hitting fresh all-time lows, including yields in the U.S., U.K., Germany, France, Australia, Japan and elsewhere. For the first time ever, Switzerland’s entire stock of bond yields has fallen below zero, with the 50-year yield plunging to negative 0.03 percent on July 5.

Switzerland 50-Year Bond Yield
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Canada’s 30-year bond yield also plunged to a record low, as did yields on the 10-year and 30-year Treasuries.

Canada 30-Year Bond Yield
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U.S. 30-Year Treasury Yield
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U.S. 10-Year Treasury Yield
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About $10 trillion worth of global government debt now carry historically low or negative yields, which are “creating negative growth” in the world economy, according to billionaire “bond king” Bill Gross in his recent Investment Outlook.

Anemic yields are also contributing to gold’s attractiveness right now. Since Britain’s June 23 referendum, the precious metal has rallied more than 8 percent, helping it achieve its best first half of the year in more than a generation.

Negative Real Rates Fuel Prices

Joining UBS in forecasting further gains is Credit Suisse, which sees gold reaching $1,500 by as early as the start of next year. As Kitco reports, Credit Suisse analyst Michael Slifirski writes that “the surprise Brexit vote has solidified and intensified macro and political uncertainty and extended the time frame for a negative real rate environment in the U.S. and potentially abroad.”

This is precisely what I told BNN’s Paul Bagnell this week, using Canada as an example. The Canadian 10-year yield is sitting just below 1 percent, while inflation in May came in at 1.5 percent. When we subtract the latter from the former, we get a real rate of negative 0.5 percent—meaning inflation is eating your lunch. Like negative bond yields, negative real rates have in the past accelerated momentum in gold’s Fear Trade.

We need only look at the end of the last upcycle in gold to see this to be the case. When gold hit its all-time high of $1,900 in August 2011, real interest rates were around -3 percent. A five-year Treasury bond yielded only 0.9 percent, and that’s before inflation took 3.8 percent. But as real rates rose, gold prices fell. Now the reverse is happening.

Gold Rebound Linked to Fall in Interest Rates
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Gold Miners Rally

The appreciation in bullion is helping to push up gold mining stocks. The FTSE Gold Mines Index, which tracks seniors such as Barrick Gold, Newmont Mining and Goldcorp, is up a phenomenal 125 percent year-to-date.

Our own Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX) are both performing exceptionally well, with USERX returning close to 80 percent for the one-year period and UNWPX surging nearly 100 percent during the same period.

U.S. Global Investors Gold Funds
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Managed by Ralph Aldis, named a Metals and Mining “TopGun” by Brendan Wood International last year, the Gold and Precious Metals Fund holds four stars overall from Morningstar out of 71 Equity Precious Metals funds, based on risk-adjusted returns, as of June 30, 2016.  

With gold having possibly entered the early stages of a new bull run, it might be time to consider gold stocks. I invite you to visit our gold funds page to learn more about what’s driving gold right now.

I WANT TO LEARN MORE

 

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. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Past performance does not guarantee future results.

Total Annualized Returns as of 6/30/2016
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Gold and Precious Metals Fund 67.827% -8.04% -0.36% 2.20% 1.90%
World Precious Minerals Fund 87.51% -11.85% -2.90% 2.01% 1.90%

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.

Morningstar Rating

Overall/71
3-Year/71
5-Year/69
10-Year/50

Gold and Precious Metals Fund
Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 6/30/2016

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.)

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 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.

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 3/31/2016: Barrick Gold Corp. 1.60% in Gold and Precious Metals Fund, 0.00% in World Precious Minerals Fund; Newmont Mining Corp. 0.00% in Gold and Precious Metals Fund and World Precious Minerals Fund; Goldcorp Inc. 5.13% in Gold and Precious Metals Fund, 1.27% in World Precious Minerals Fund.

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. This article may include certain “forward-looking statements” including statements relating to revenues, expenses, and expectations regarding market conditions. These statements involve certain risks and uncertainties. There can be no assurance that such statements will prove accurate and actual results and future events could differ materially from those anticipated in such statements.

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Silver Takes the Gold: Commodities Halftime Report 2016
July 11, 2016

Silver Takes the Gold: Commodities Halftime Report 2016

Here we are at the halfway point of the year, less than two months away from the Rio 2016 Olympic Games. As a group, commodities are the top performing asset class, beating domestic equities, the U.S. dollar and Treasuries.

Commodities, the Top Performer in First Half of 2016

Below is our ever-popular Periodic Table of Commodities Returns, updated to reflect the first half of 2016. Click to see an enlarged version.

The Periodic Table of Commodity Returns
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Commodities’ performance is quite a reversal from the weakness we’ve seen lately, particularly last year, but we shouldn’t expect another 2004 or 2005, when global trade was humming. Conditions are still not ripe for a real takeoff, with manufacturing activity in China and the eurozone struggling to gain momentum.

But there’s hope. Many of the challenges standing in the way of growth were exposed when Britain voted last month to leave the European Union (EU), which I’ve been writing about for the past few weeks. Most recently, I highlighted some of the winners to emerge from Brexit, among them gold investors, U.S. homeowners and British luxury goods makers.

Hopefully we can add global trade to the list. Brexit has brought to light some of the corruption and economic strangulation by regulation that chokes the flow of capital. Last week I had the opportunity to speak with some EU citizens. Their frustration was palpable. The cronyism among the EU’s unelected officials is nothing new, but it’s only worsened over the past decade and a half, they said. The British referendum has encouraged a balanced, intercontinental discussion on the direction Brussels must take now that the corruption and depth of discontent have been exposed for the world to see.    

Precious Metals Shine Brightly on Macroeconomic and Geopolitical Concerns

Silver demand had a phenomenal 2015, with retail investment and jewelry fabrication both reaching all-time highs. Led by consumers in the U.S. and India, coin and bar investment soared 24 percent from the previous year, while jewelers gobbled up a record 226.5 million ounces. According to the Silver Institute’s World Silver Survey 2016, metal demand for photovoltaic installation climbed 23 percent in 2015, offsetting some of the losses we continue to see in photographic applications.

Global Demand for Silver Bars Surged 24% in 2015
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Caused by worries of a summer interest rate hike and uptick in the U.S. dollar, gold and silver both stalled in May but have since rallied on the back of Brexit and with government bond yields in freefall. For the first time ever, Switzerland’s entire stock of bonds has fallen below zero, with the 50-year yield plummeting to negative 0.03 percent on July 5.

Switzerland 50-Year Bond Yield
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All-time low yields can also be found in the U.S.—where the 10-year Treasury yield fell nearly 38 percent in the first half—U.K., Canada, Germany, France, Australia, Japan and elsewhere. Roughly $10 trillion worth of global government debt, in fact, now carry low to subzero yields.

This has been highly constructive for gold and silver, as yields and precious metals tend to be inversely related.

What’s more, the rally doesn’t appear to be done, with UBS analysts making the case last week that we’re in the early stages of a new bull run. Credit Suisse sees gold testing the $1,500 an ounce mark as early as the beginning of 2017. As for silver, some forecasters place it at between $25 and $32 an ounce by year’s end.

The risk now is that higher prices are pushing away some potential investors. Today Bloomberg reported that gold imports in India plunged a sizable 52 percent in the first half of 2016, compared to the same period in 2015.

Supply and Demand Rebalancing?

Much of the price appreciation has been driven by a global rebalance in supply and demand. Dismal prices over the last couple of years compelled explorers and producers to cut activity and other capital expenditures, while demand continues to rise.

This dynamic certainly helped  zinc, the best performing industrial metal of 2016 so far. During the first four months of the year, mine production fell 8.1 percent from the same time a year earlier due to declines in Australia, India, Peru and Ireland, according to the International Lead and Zinc Study Group. In January, London-based Verdanta Resources made its last zinc shipment from its Lisheen Mine in Ireland, which for the last 17 years had produced an average 300,000 tonnes of zinc and 38,000 tonnes of lead concentrate per year.

Meanwhile, the demand for refined zinc, used primarily to galvanize steel, is expected to increase 3.5 percent this year. What might surprise you is that a large percentage of this growth can be attributed to China, which is still investing heavily in infrastructure, even as money supply growth has slowed.

This rebalancing has also bolstered crude oil prices, up 73 percent since its 2016 low in February. Unplanned production outages in Canada, Nigeria, Iraq and elsewhere removed a collective 3.6 million barrels per day off the market in May alone. Coupled with ongoing declines in the North American rig count—U.S. crude production is now at a two-year low—this helped nudge prices up to levels not seen since July 2015.

Month-over-month change in global oil supply disruptions
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At the same time, global consumption is expected to increase by 1.5 million barrels a day both this year and next, according to the U.S. Energy Information Administration (EIA), with North America and Asia, particularly China and India, responsible for much of the growth.

Record Automobile Sales Support Commodities

Crude consumption is also being supported by robust automobile sales, which set a six-month record in the U.S. following six straight years of growth. Between January and June, sales reached an all-time high of 8.65 million units, up 1.5 percent from the same period last year. In China, the world’s number one auto market, 10.7 million vehicles were sold in the first five months, an impressive year-over-year increase of 7 percent. Sales of light vehicles, especially motorcycles, have been strong in India.

As you might expect, this has likewise benefited demand for platinum and palladium, both used in the production of autocatalysts. The CPM Group anticipates palladium demand to reach an all-time high this year, up 3 percent from last year, on tightened emissions standards and the purchase of larger cars and trucks in the U.S. on lower fuel costs. (The larger the engine, the more palladium or platinum is needed to reduce emissions.)

Autocatalyst Production Driving Palladium Demand
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Since January, the platinum group metals (PGMs) have increased over a third in price, marking the end of an 18-month bear cycle, according to Metals Focus’ Platinum & Palladium Focus 2016. Fundamentals have improved since last year, when EU growth concerns and Volkswagen’s emissions scandal weighed heavily on investment prospects.

Like zinc, crude and other commodities, the PGMs were supported the last six months by lower output levels, as labor disputes in South Africa—the world’s largest platinum producer and number two largest palladium producing country—disrupted operations.

EXPLORE INVESTMENT OPPORTUNITIES IN PRECIOUS METALS

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 03/31/2016.

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4 Winners to Emerge from Brexit
July 5, 2016

30 Year Mortgage Rates at Record Lows?

Last week my friend John Mauldin, chairman of Mauldin Economics, released a special Brexit edition of his popular investments newsletter Outside the Box. In it he shared a post written by geopolitical strategist George Friedman that describes a recent meeting among six foreign ministers representing the European Union’s founding member states: Belgium, France, Germany, Italy, Luxembourg and the Netherlands. The topic of discussion was the possible causes and implications of the U.K.’s decision to leave the EU.

What George finds extraordinary is that, in their follow-up statement, the ministers appear to capitulate, admitting they “recognize different levels of ambition amongst Member States when it comes to the project of European integration.”

As George puts it, this is their way of acknowledging—finally?—the impossible task of enforcing uniformity across the European continent, home to many different peoples and cultures, all with different goals and aspirations.

If nothing else, this alone should be seen as a positive consequence of Brexit. It’s too early to tell what direction the EU will take post-Brexit, or whether any material policy changes will be made, but it seems as if the cries of resentment and frustration that have risen up from England and Wales (and, to a lesser extent, Scotland and Northern Ireland) have not fallen on deaf ears.

This is precisely what I’ve been writing about the last few weeks. If you’ve been following the mainstream media’s coverage of Brexit, you might think it’s little more than a reactionary, anti-immigrant groundswell. Don’t get me wrong—immigration is certainly part of it. Trying to integrate 333,000 people a year into the country’s national health care and school system has pushed the bandwidth of the British economy.

But the U.K.’s grievances—some of which I discussed in previous commentaries—are much more varied than that. And following the historic referendum, EU bureaucrats seem to be taking the gripes seriously, which we can count as a win not just for the U.K. but other member states as well.

Below are four more winners to have emerged from Brexit.

1. Gold Investors

The day after the referendum, gold jumped nearly 5 percent and since then has held above $1,300 an ounce, helping to achieve its best first half of the year since 1974. The yellow metal, which has historically been sought by investors during times of political and economic uncertainty, is also strengthening now that a U.S. interest rate hike seems less and less likely post-Brexit.

Markets, in fact, seem to have completely shed any belief that the Federal Reserve will raise rates this year. Bets that rates will be cut by September spiked before retreating, while bets that they would be left untouched surged 48.6 percent.

Bets on Fed Rate Cuts Surge Post-Brexit
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This bodes well for gold, which has traditionally shared an inverse relationship with interest rates. When savings account rates and yields on government bonds are low, gold suddenly becomes much more attractive to hold as a store of value.

This is especially true in countries where rates are negative. The yield on the German 10-year Bund recently fell below zero, and the Swiss 30-year government bond yield turned negative, in effect charging investors for the privilege of holding their cash.

But American investors aren’t immune. Last Friday, the yield on the 10-year Treasury fell to as low as 1.385 percent, an all-time record.

Learn where the opportunities are in today’s gold market.

Across the pond, British rates are likely to be slashed this summer, according to Bank of England Governor Mark Carney. In response, Britain’s FTSE 100 Index roared up to a 10-month high, erasing all Brexit-inflicted losses.

British Stocks Quickly Rebound to Pre-Brexit Levels
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2. U.S. Homeowners

The promise of continued low rates in Brexit’s wake could be good news for U.S. homeowners, both current and potential. For the week ended June 24, the mortgage rate on a 30-year home loan fell to 3.75 percent, its lowest level since May 2013, according to the Mortgage Bankers Association. Some analysts are even forecasting mortgage rates—which tend to track 10-year Treasury yields—to sink to record lows in the coming weeks. This move is expected to spur a wave of new loan applications and refinancing as borrowers rush to lock in historically low rates.

U.S. Home Prices Soar as Mortgage Rates Fall
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Home prices in the U.S., meanwhile, continue to improve after the financial crisis. Prices advanced 5 percent year-over-year in April, according to new data from the S&P/Case-Shiller Home Prices Indices. The 20-City Composite Index, in fact, is back up to its winter 2007 level.

3. British Luxury Goods Makers

In the immediate aftermath of the U.K. referendum, Donald Trump suggested the pound’s dramatic decline could encourage more foreign tourists to visit Turnberry, Scotland, where he owns a luxury golf resort. Many in the media criticized him for the comment, arguing he seems to care only about how he might profit from Brexit. But the thing is, he’s right.

Because of the drop in the pound, which sent it to levels not seen in more than 30 years, U.S. and Chinese interest in travel to Britain has already seen a huge spike. This could be a potential windfall for Britain’s luxury goods industry, which posted sales averaging nearly $1 billion in 2014, according to advisory firm Deloitte. Clothing designer Burberry, Britain’s largest luxury company, could end up being a beneficiary, along with many other major European brands found in the U.K.

Weak Pound Seen Benefiting British Luxury Goods Companies
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I’ve mentioned before how Chinese tourists spend more than any other country’s. Now, a March report by the World Travel & Tourism Council (WTTC) found that in 2015, outbound Chinese travelers shelled out a massive $215 billion overseas, representing an increase of 53 percent from the previous year. A weakened pound should only intensify demand even more.

4. British Taxpayers

According to the Daily Express, about 10,000 Brussels-based bureaucrats earn more than—and in many cases, more than twice as much as—U.K. Prime Minister David Cameron, who has a gross annual salary of 142,500 pounds. What’s more, they pay the euro equivalent of 50,000 pounds less per year than Cameron does. And before the 2015 Christmas break, these Eurocrats, who all enjoy a final salary pension, just gave themselves a 2.4 percent raise.

The British referendum was in large part a rejection of this brand of elitism. Similar to what many Americans feel today, taxpayers in the U.K. are fed up with seeing their money leave the British shores only to line the pockets of unelected officials, with little to show for it in return.

The two-year transition period that follows will likely present many challenges, but in the long run, an independent Britain will be able to set its own immigration policies, impose its own rules and regulations, negotiate the terms of its own trade agreements and much more.

Note: A correction was made July 7 regarding immigration figures.

 

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 FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The S&P/Case-Shiller 20-City Composite Home Price Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan areas: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa and Washington, D.C.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article was held by any accounts managed by U.S. Global Investors as of 3/31/2016.

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Why Gold, Why Now?
June 21, 2016

During my most recent webcast a couple of weeks ago, I had the pleasure of being joined by the CEO of the World Gold Council (WGC), Aram Shishmanian. As expected of someone of his stature, Aram brought another level of insight and expertise to our discussion of gold’s Love Trade and Fear Trade.

You might wonder what the WGC does exactly. In Aram’s words, it focuses on “innovation and integration to create the gold market” around the world. Among other important endeavors, the group “lobbies governments to make their countries appropriately pro-gold” and is the only agency in the world to “train central bankers in the use of gold.” 

Below, I’ve selected a few key moments from the webcast to share with you. You can hear the full replay and follow along with the slide deck at usfunds.com.

A Stellar First Quarter

Aram: It’s an understatement to say that gold had a good quarter. It increased over 16 percent in the first quarter, the fastest it’s done so in 30 years, overtaken only by the Iranian oil crisis in the 80s.

The story is not just about the gold price. The gold ETF industry has increased by over 50 percent worldwide.  In addition to that, we’ve seen the market capitalization of members of the World Gold Council—which represents the majority of the gold mining companies in the world—increase 70 to 80 percent in the past four months alone.


click to enlarge

Rise of the Global Middle Class

Frank: The growth of gold’s Love Trade depends on rising global GDP per capita, and last year there was a tipping point in China. For the first time, the size of China’s middle class reached 109 million people, overtaking the U.S. middle class. This group gets lost in the sea of 1.4 billion people, but these 109 million people—a third the size of America—want to travel and buy higher quantities of gold for gift giving.

The same goes for India, where 600 million people are under the age of 25. That’s two times the size of the population in the U.S. They’re all wired. They’re all connected. They’re driven for education. Their affinity for gold is not going away.

If you look at China, the U.S. and India, there’s a significant portion of GDP growth, which is so important for the gold market.

China to Become a Gold Price-Maker

Aram: Today, China and India represent over 70 percent of world demand, driven by hundreds of millions of people and supported by pro-gold government policy. The U.S., by comparison, is 6 percent of world demand, yet price discovery on the COMEX (Commodity Exchange) in London is somewhat overweight because it is U.S. or Western economy-centric.

The Shanghai Gold Exchange was established 13 years ago and today is the largest gold exchange in the world, not to mention the most sophisticated. In April this year, it launched the Shanghai gold benchmark, which parallels that of the London benchmark price of physical gold. Last year, trading volumes in Shanghai were over 10 trillion renminbi.

China launched its yuan-denominated fix price for gold on Tuesday, April 19, with a gram set at 256.92 yuan ($39.69) equivalent to $1,234.50 an ounce

I think for those who haven’t had the opportunity to visit China, you have to go to understand that China is the biggest producer and consumer of gold. It imports over 600 tonnes a year and is driven by highly diverse demands by hundreds of millions of people. Three hundred million Chinese households will become middle class in the next two years, and they have a higher savings ratio than anyone in the world.

Gold Jewelry and Financial Security

Frank: Jewelry ends up becoming money whenever there’s a crisis in a country’s currency. Right now, it’s not so much a crisis as gold is an important asset class, in a world where we have zero interest rates.

Aram: Jewelry demand is still 45 percent of the gold market, and in Asian societies—India, China, Southwest Asia—it’s about wealth preservation. In India, a marriage is not a marriage without gold. It’s crucial to their belief system. The husband owns the land and the farm and other assets, but the wife owns the gold. It’s her security blanket. It’s not just about adornment, it is about financial security. That’s quite often misunderstood in the West where we think of jewelry as discretionary adornment.

In India, a marriage is not a marriage without gold

Frank: You can buy the most incredible gold jewelry, but it is 24 carat.

Aram: Yes, Chinese gold demand is purely 24 carat gold, which is 100 percent. In North America, 18 carats is the norm, but in India it’s 22 carats. During Diwali, it is auspicious to buy gold, and at certain festivals in India throughout the year, it is an auspicious time to marry and then you see peaks that are highly predictable.

Strong Gold Positions in Global Pension Funds

Frank: It’s unprecedented that a third of all global government debt has negative yields.

Aram: Which drives gold demand. Effectively what we’re seeing is people’s pensions being decimated because the policymakers have had very few if any alternatives left. It is in this environment that gold will help satisfy need.
Take the Japanese economy. Today, over 200 pension funds allocated about 2 percent to gold. It’s not only about wealth creation like the model in the Western world, where we generated 7 percent returns on investment for pension funds. That is gone in Japan, and therefore it’s more about protection of wealth rather than creation. That’s where gold plays.

Frank: In the state of Texas, where we’re based, Shayne McGuire, portfolio manager of the Gold Fund for the Teacher Retirement System (TRS) of Texas, is doing a great job. They’ve taken up a real strong position.

Aram: They took a strong position quite a few years ago. The TRS has been one of the forerunners of U.S. pension funds holding gold. 

The Power of Scarcity

Aram: An important aspect of gold is its scarcity value. The total amount of gold produced in the history of mankind is about 170,000 tonnes. That’s the size of two Olympic-size swimming pools and it is still in use.

The amount of gold discoveries are very, very few now. Gold production at the moment is pretty constant. As you’ve seen with mining equities, huge capital investments were made in the last few years, but very little new supply came forward because the mining companies had to invest huge amounts of money to get licenses to operate and to find new discoveries and increasingly more complex mining conditions. In terms of supply, it is virtually constant. It goes up and down 1 or 2 percent per year, but it is constant.

Gold’s Timeless Allure

Aram: Producing gold iPhones has increased sales dramatically. It goes back to the idea that gold is integral to our belief system. It’s integral to our language. Not just in the DNA of far-flung countries but in our Western society.

Frank: And then talk about extravagant wealth in the Middle East, where some of these princes have their cars gold-plated. It’s extravagant, but I’m trying to highlight the allure of gold, which can be found everywhere, from the iPhone to buying 24 carat gold jewelry. I think this is important for investors to realize.

 

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