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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.

China: Still the World’s Number One Heavy Metal Rock Star
April 26, 2016

I want to begin with a quote from a recent Cornerstone Macro report that succinctly summarizes the research firm’s view on growth prospects in emerging markets and China specifically. Emphasis is my own:

Our most out-of-consensus call this year is the belief that China, and by extension many emerging markets, will see a cyclical recovery in 2016. We understand the bearish case for emerging markets on a multiyear basis quite well, but we also recognize that in a given year, any stock, sector or region can have a cyclical rebound if the conditions are right. In fact, we’ve already seen leading indicators of economic activity and earnings perk up in 2016 as PMIs have rebounded in many areas of the world. That is all it takes for markets, from equities to CDS, to respond more favorably as overly pessimistic views get rerated. And like in most cyclical recoveries that take place in a regime of structural headwinds, we don’t expect it to last beyond a few quarters.

There’s a lot to unpack here, but I’ll say upfront that Cornerstone’s analysis is directly in line with our own, especially where the purchasing managers’ index (PMI) is concerned. China’s March PMI reading, at 49.7, was not only at its highest since February 2015 but it also crossed above its three-month moving average—a clear bullish signal, as I explained in-depth in January.

I spend a lot of time talking about the PMI as a forward-looking indicator of commodity prices and economic activity. As money managers, we find it to be far superior to GDP in forecasting market conditions three and six months out. In the past I’ve likened it to the high beams on your car.

GDP and PMI

We were one of the earliest shops to make the connection between PMIs and future conditions, and we continue to be validated. Just last week, J.P.Morgan admitted in its morning note that “stocks are taking their cues from the monthly PMIs,” the manufacturing surveys in particular, as opposed to GDP.

We eagerly await China’s April PMI reading and are optimistic that this cyclical recovery has legs.

Cornerstone’s outlook is supported by a recent study conducted by CLSA, which found that 73 percent of “Mr. and Mrs. China” expect to be better off three years from now, while only 3 percent expect to be worse off:

Optimism is strongest among those in higher-tier cities, reflecting the disparity in economic vibrancy across tiers: as many as 80 percent of families in first-tier cities have optimistic outlook. The figure is lower, albeit still strong, at 68 percent among families in the third tier.

More than half of those surveyed said they expected to be driving a nicer car and living in a bigger home in the next few years, which is a boon for materials and metals such as platinum and palladium, used in catalytic converters.

As a reflection of growing demand for new homes, house prices in China are climbing right now in first-tier and, to a lesser extent, lower-tier cities, a sign that more and more citizens are seeking the “Chinese dream.”

Housing Prices Rising in China, Year-over-Year Growth
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China’s Insatiable Appetite for Metals

China’s appetite for metals—gold, silver, copper, iron ore and more—is growing, another sign that the Asian giant is in turnaround mode.

China is the world’s largest importer, consumer and producer of gold. Last year, physical delivery from the Shanghai Gold Exchange (SGE) reached a record number of tonnes, more than 90 percent of total global output for 2015. Meanwhile, the People’s Bank of China continues to add to its reserves nearly every month and is now the sixth largest holder of gold—the fifth largest if we don’t include the International Monetary Fund (IMF). As of this month, the bank holds 1,788 tonnes (63 million ounces) of the yellow metal, which amounts to only 2.2 percent of its total foreign reserves, according to calculations by the World Gold Council.

Now, in a move that’s sure to boost China’s financial clout in global financial markets even more, the country just introduced a new fix price for gold, one that is denominated in Chinese renminbi (also known as the yuan).

Gold is currently priced in U.S. dollars. That’s been the case for a century. But since gold demand has been shifting from West to East, China has desired a larger role in pricing the metal. The Shanghai fix price is designed with that goal in mind.

It’s unlikely that Shanghai will usurp New York and London prices any time soon, but over time it will allow China to exert greater control over the price of the commodity it consumes in vaster quantities than any other country.

China’s gold consumption isn’t the only thing turning heads. I shared with you earlier last week that the country imported 39 percent more copper in March than in the same month last year. (Shipments also rose 18.7 percent in renminbi terms in March year-over-year.)

The heightened copper demand has fueled renewed optimism in the red metal. Prices are up 6 percent month-to-date.

Housing Prices Rising in China, Year-over-Year Growth
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Caixin reports that China’s iron ore imports are surging on lower prices. In the first two months of 2016, the country purchased 86 percent more iron than it needs. What’s more, total imports were up 84 percent from the same time last year.

Steel production, which requires iron ore, is likewise ramping up.  Output is currently at 70.65 million tonnes, an increase of nearly 3 percent year-over-year.

Chinese Steel Production is on the rise
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For reasons unknown, China has also been growing its silver inventories pretty substantially for the past six months, according to an article shared on Zero Hedge. This month, as of April 19, the Shanghai Futures Exchange added a massive 1,706 tonnes, which is a 452 percent increase from the amount it added in April 2015. Shanghai silver inventories are now at their highest level ever.

Silver Mountain
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Though unconfirmed, it’s possible this silver will eventually be used in the production of solar panels, every one of which uses between 15 and 20 grams of the white metal. China is already the world’s largest market for solar energy—it surpassed Germany at the end of last year—with 43.2 gigawatts (GW) of capacity. (By comparison, the U.S. currently has 27.8 GW.) But get this: It plans on adding an additional 143 GW by 2020, which will require a biblical amount of silver.

Not to be outdone, India also plans significant expansion to its solar capacity, with a goal of 100 GW by 2022, according to the Indian government.

Metals Still Have Room to Rock

We know that money supply growth can lead to a rise in commodity prices. Note that Chinese money supply peaked in 2010 and has since fallen, along with commodity prices.

New Loans and M2 Money Supply in China
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New bank loans in China have spiked dramatically this year while money supply has grown more than 13 percent year-over-year, which is good for metals and manufacturing.

The increase in metals demand, not to mention the weakening of the U.S. dollar, has allowed silver to become the top performing commodity of 2016 after overtaking gold.

Metals Make Huge Gains
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Despite the rally, gold doesn’t appear to be overbought at this point, based on an oscillator of the last 10 years. We use the 20-day oscillator to gauge an asset’s short-term sentiment. When the reading crosses above two standard deviations, it’s usually considered time to sell. Conversely, when it crosses below negative two standard deviations, it might be a good idea to buy.

Silver is currently sitting at 1.2 standard deviations, suggesting a minor correction at this point would be normal.

Gold Still Has Plenty of Upside Potential, Silver Long in the Tooth?
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Time to Take Profits in Oil?

The same could be said about Brent oil, which has returned 61 percent since hitting a recent low of $27.88 per barrel in January. This has driven up the Russian ruble and energy stocks. (We’ve recently shown the correlation between world currencies and commodities.)

The rally has been so strong over the past three months that it’s signaling an opportunity to take profits or wait for a correction. Based on the 20-day oscillator, Brent’s up 1.3 standard deviations, which suggests a correction over the next three months.

Brent Crude Oil 20-Day Percent Change Oscillator
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Oil has historically bottomed in January/February. The rally this year has not disappointed. Further, it has helped many domestic banks that have been big lenders to the energy sector. High(er) oil prices translate into stronger cash flows for loans.

 

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 GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts.

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.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. 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.

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.

The 100 Cities Index tracks pricing data for 100 Tier 1, Tier 2, and Tier 3 cities in China.

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Why One Analyst Believes Gold Could Hit $3,000 an Ounce
April 18, 2016

An analysis of previous bull-bear cycles suggests we may be entering a new bull market for gold. World Gold Council (WGC)

After finishing its best quarter in 30 years, gold extended its gains, rising more than 17.2 percent year-to-date to become the best performing asset class among other commodities, U.S. Treasury bonds and major world currencies and equity indices.

We are likely entering a new gold bull market, writes the World Gold Council (WGC). If so, it would be the first time since the previous one concluded in September 2011, when the metal reached its all-time high of $1,900 per ounce. Since 1970, we’ve seen five gold bull markets, each one lasting an average 63 months and returning an average 385 percent, according to the WGC.

Now, as reported on Mining.com, one precious metals analyst predicts gold could rise to $3,000 within the next three years. Speaking at the Dubai Precious Metals Conference this week, Dr. Diego Parrilla, coauthor of the book “The Energy World Is Flat,” stated that “a perfect storm for gold is brewing” as uncertainty over global central bank policies is deepening. We might have reached the limit of what quantitative easing (QE) programs and negative interest rate policies (NIRP) can accomplish.

Three thousand dollars might be an overstatement, but several prominent financial institutions, including HSBC, RBC Capital Markets and Credit Suisse, are currently bullish on the metal.

For the 12-month period as of April 13, our Gold and Precious Metals Fund (USERX) was up 31.96 percent, while the World Precious Minerals Fund (UNWPX) returned 36.34 percent. This puts us ahead of the funds’ two benchmarks, the FTSE Gold Mines Index and NYSE Gold Miners Index.

U.S. Global Investors Gold Funds Beating their Benchmarks
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I’m also pleased to say that as of March 31, USERX continues to hold its overall four-star rating from Morningstar among 71 Equity Precious Metals funds, based on risk-adjusted returns.

Drivers of Gold: The U.S. Dollar and Real Interest Rates

The U.S. dollar has been weakening relative to other major currencies, recently hitting an 11-month low of 94.06, down 4.8 percent year-to-date. Gold is priced in dollars, so when the greenback drops, the yellow metal becomes less expensive, and therefore more attractive, for buyers in other countries.

More meaningful to price movements, however, are negative real interest rates. When inflation picks up, making short-term government bond yields drop below zero percent, savvy investors turn to other so-called “haven” assets, gold among them. This is what I call the Fear Trade. In September 2011, when gold hit $1,900, the real fed funds rate was sitting close to negative 4 percent.

Zero Hedge found that since 2008, the correlation between gold prices and real negative rates has been particularly high, adding:

Based on a regression analysis holding gold as the independent variable, a negative 0.5 percent real rate level would suggest a gold price of $1,380 an ounce and a negative 1.0 real rate level would suggest a gold price of $1,546 an ounce… The potential for inflation rates to move upwards and match U.S. Treasury yields, which continue to be held down in the short-term, could create a 1970s-esque phase in real rates.

There were two gold bull markets in the 1970s, according to the WGC. The first, which lasted from January 1970 to January 1975, returned a cumulative 451 percent. The second, lasting from October 1976 to February 1980, gained a whopping 721 percent. 

As of April 11, the 2-year Treasury yield has contracted 93 percent in 2016, the 5-year yield more than 32 percent. This doesn’t take inflation into account, which takes a further 2.2 percent from these yields, based on the most recent consumer price index (CPI) reading.

Gold Rises as Treasury Yields Fall
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Interested in taking a deeper dive into gold? On May 10, I’ll be speaking at the 35th annual MoneyShow conference, which will be held this year at Caesars Palace in Las Vegas. Registration is absolutely free. I hope to see you there!

Join Me at The Money Show Las Vegas and Learn How to Position Your Portfolio for Success! Frank Holmes

 

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 3/31/2016
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Gold and Precious Metals Fund 24.07% -16.32% -3.02% 1.97% 1.90%
World Precious Minerals Fund 26.49% -21.56% -6.62% 1.99% 1.90%
FTSE Gold Mines Index 20.65% 17.69% -4.42% n/a n/a
NYSE Arca Gold Miners Index 11.02% -18.60% -5.21% n/a n/a

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

Morningstar Rating

Overall/71
3-Year/71
5-Year/70
10-Year/50

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 3/31/2016

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.

Note that gold stocks, gold bullion and Treasury bonds differ in investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features. Treasury bonds are backed by the full faith and credit of the U.S. government.

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. The NYSE Arca Gold Miners Index (GDM) is a modified market capitalization weighted index comprised of publicly traded companies primarily involved in the mining of gold and silver in locations around the world.

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.

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 Had Its Best Quarter in a Generation. So Where Are the Investors?
April 4, 2016

Best Quarter in 30 Years - Gold Has Risen 16.5% Year-to-Date

The last time gold had a quarter this strong, Ronald Reagan was a year into his second term as president, the Soviet Union was taking its final gasp and the U.S. was still reeling from the Challenger explosion. In the first quarter, the yellow metal rose 16.5 percent, its best three-month performance since 1986, mostly on fears of negative interest rates and other global central bank policies.

Gold Just Had Its Best Quarter in 30 Years
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Bloomberg writes that the current gold rally has “cemented its status as a store of value.” Before now, a  gold bear market persisted not because the metal had lost its status necessarily, but because of the strong U.S. dollar and, more significantly, positive real interest rates. According to Pierre Lassonde, cofounder of Franco-Nevada, gold is the fourth most liquid asset in the world.

As I’ve mentioned many times before—during interviews and in the Investor Alert and my CEO blog Frank Talk—gold has historically performed best when real rates turned negative. We were one of the earliest to discuss this important relationship on a regular basis, and now I’m starting to see it covered frequently in the mainstream media.

To get the real rate, you subtract the current consumer price index (CPI) reading, or inflation, from the government bond yield. When yields are low—or negative, as they are now—it encourages smart investors to seek other stores of value, including gold.

Below, you can see that when gold prices peaked at $1,900 per ounce in August 2011, real interest rates were close to negative 4 percent. A five-year Treasury bond yielded only 0.9 percent—and that’s before inflation took 3.8 percent. (Decades ago, when I was a young analyst in Canada, we would compare everything to the five-year government bond yield.) 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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Double the Gold Returns under Negative Real Rates?

Most investors look only at nominal interest rates. This is only the tip of the iceberg. The British author and playwright Oscar Wilde wrote: “Nowadays people know the price of everything and the value of nothing.” Along those lines, smart investors know that money flows to the highest real interest rate.

I call this the Fear Trade.

“When real rates are negative, gold returns tend to be twice as high as the long term average,” the World Gold Council (WGC) writes its latest report. “Even if real rates are positive and as long as they are not significantly high (4 percent in our study), average gold returns remain positive.”

Negative rates erode confidence in fiat currencies, which typically has benefited gold. A currency itself, gold is “the only one that is not targeted directly by, and doesn’t respond negatively to, expansionary monetary policies,” the WGC writes.

The chart below shows the difference in the nominal and real yield curves for government bonds in a number of advanced economies. When you factor in inflation, investors of shorter-term government debt are actually paying the government to hold their money, a proposition that’s hard to swallow.

Low and Negative Government Bond Yields Convince Investors to Look Elsewhere
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The WGC points out that about 30 percent of global sovereign debt is now trading with subzero yields. That’s $8 trillion! A further 40 percent has yields below 1 percent.

United States of America gold eagle coin

This is just the latest reason why investors have been losing faith in central banks. In its most recent quarterly report, the Bank for International Settlements (BIS) notes that investors’ “confidence in central banks’ healing powers has—probably for the first time—been faltering,” as it becomes more and more clear that room for additional policymaking is narrowing. If asset-buying programs, helicopter drops of money and negative interest rate policies fail to reverse the economic slowdown, what more is there?

These conditions have led to a surge in gold coin and bullion sales around the world. American Eagle consumers bought 83,500 ounces of the coin in February, a 351 percent increase from the 18,500 ounces sold in the previous February. The Perth Mint in Australia is also reporting huge sales volumes.

Retail Investors Missing out on the Gold Rush

Interest in gold bullion, however, hasn’t seemed to translate fully into renewed interest in gold miners. So far this year, inflows into the SPDR Gold Trust (GLD), which invests in physical bullion, have accelerated as investors chase the rally.

where are the gold investors?

At the other end is the Market Vectors Junior Gold Miners ETF (GDXJ), which holds junior gold equities such as Northern Star, OceanaGold and Evolution Mining. Despite an increase in share price, we’ve seen a net decrease in shares outstanding. Year-to-date, outflows have totaled $84 million. Flows out of the Market Vectors Gold Miners ETF (GDX), which holds senior gold stocks, have been even more dramatic, at $94 million.   

Retail Investors Bullish on Bullion, Bearish on Gold Stocks
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This could be explained by investors taking profits off the table, unease with the volatile swings in the gold market lately or mistrust in mining stocks. In any case, many investors could be missing out on one of the most impressive gold rallies in a generation. Since the start of the year, Goldcorp has gained 38 percent, Randgold 45 percent, Barrick Gold 84 percent, Harmony Gold 300 percent.

Good News! Global Manufacturing Turns Up

Another concern investors have right now is over the health of the global economy. Since February 2014, we’ve seen the J.P.Morgan Global Manfacturing Purchasing Managers’ Index (PMI) trend steadily downward.

For March, however, the PMI came in at 50.3, a slight improvement from the neutral February reading of 50. The monthly reading also rose above the three-month moving average, a bullish signal.

March Global Manufacturing PMI Reading above Three-Month Moving Average
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We use PMI data as a gauge for commodity price movements three and six months out, and I write about PMI often.

The U.S. Manufacturing ISM—the American version of PMI—showed improvement, rising from 49.5 in February to 51.8 in March, the first time it expanded in seven months. New Orders strengthened in particular, gaining 6.8 percentage points to register 58.3 last month. Meanwhile, the Markit Eurozone Manufacturing PMI edged up slightly to 51.6, from 51.2 in February.

China, on the other hand, continues to exhibit deterioration. Although the Caixin China General Manufacturing PMI rose to 49.7 in March from 48 in February, the reading is still below the key 50 benchmark that separates contraction and expansion.

In Memoriam: Ian McAvity

Ian McAvity speaking with Kitco's Daniela Cambone in 2012. Ian passed away March 16.

It’s with a heavy heart that I share with you the passing of one of my friends and mentors, Ian McAvity. Ian spent his career in minerals and mining, most recently in the role of president and CEO of Toronto-based exploration company Duncan Park.

In past years, I quoted often from Ian’s insightful and widely-read newsletter, “Deliberations on World Markets,” which he began writing in 1972 and for which he was known as a “chartist extraordinaire.” He was an occasional contributor to some of our publications and in 2010 he joined me on a webcast following the midterm elections.

Most people remember Ian as a witty writer and speaker—he coached me on my public speaking—and as a regular contributor to Barron’s Roundtable, the Contrary Opinion Forum, “Louis Rukeyser’s Wall Street” and other well-regarded investment publications and associations, along with industry giants such as Gary Shilling, Ned Davis and Ray Dalio.

What many might not know about him is that he was a gifted athlete, a World Doubles Champion in squash during the 1970s. The first time I went skiing was with Ian, in fact. I fell down so many times, but he would always pause and wait for me to catch up.

Not only did Ian guide me in my public speaking but he also stressed to me the importance of technical analysis on a macro level, from moving averages to relative strengths of countries. He also cultivated my interest in gold. I read Roy Jastram’s “The Golden Constant,” a seminal work on the economics of the precious metal, just so I could keep up with Ian—like skiing. He was just one of those great influencers who taught me much of what I know today, and I only have gratitude for his wisdom and guidance. 

 

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

Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2015: Northern Star Resources Ltd., OceanaGold Corp., Randgold Resources Ltd.

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.

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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states. The Caixin China Manufacturing PMI, released by Markit Economics, is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.

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Is Economic Growth in Its Final Innings?
March 30, 2016

Is economic growth in its final innings?

The start of baseball season is still several days away, but a recent survey conducted by Bank of America Merrill Lynch found that 59 percent of U.S. fund managers believe the current stretch of economic growth is in its “final innings.” This is the highest reading since the financial crisis in 2008.

As if to support this outlook, the Commerce Department released economic data last Friday that shows fourth-quarter 2015 corporate profits fell at their fastest rate since—you guessed it—the same period in 2008.

Even though year-over-year GDP growth in the fourth quarter was revised to 1.4 percent, up from 1 percent, profits tanked a substantial 11.5 percent. For the entire year, pretax earnings declined 3.1 percent.

This could end up being a speedbump for the U.S. economy. In the past, significant drops in corporate profits have acted like gravitational tugs on jobs growth, with companies cutting positions and putting a freeze on new hiring. We have yet to see this play out—jobs growth has been steady for 72 straight months, jobless claims have been falling and confidence in the labor market is at a nine-year high—but the divergence between profits and employment is something to keep an eye on.    

Jobs and Corporate Profits are Beginning to Diverge
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This is no reason for investors to panic, however. When I look at the chart above, I see fairly regular cycles of economic activity, like the EKG readings of a reasonably healthy person. It’s possible we’re facing the final stage of this particular economic cycle, as a majority of fund managers suspect, but mean reversion could eventually bring conditions back to “normal.” Speaking to the Economic Club of New York on Tuesday, Federal Reserve Chair Janet Yellen called the U.S. economy “remarkably resilient,” and I agree with her.

Jobs and Corporate Profits are Beginning to DivergeIt’s also important to remember that this is the eighth year of a two-term presidency. Historically, stocks have performed above average during election years, but second-term election years have been the weakest going back to 1928, falling an average 4 percent. As I explained earlier this month, this might stem from the uncertainty of who will succeed the incumbent president, and what his or her policies will be.

Two Ways to Prepare: Gold and Munis

During her speech, Yellen stated that the Fed will proceed with a “cautious approach,” and investors should do the same. Gold has been used during times of inflation, currency weakness and other economic disruptions. This includes negative real interest rates, which drop the yield on a government bond below zero. The yellow metal rallied more than 1 percent following Yellen’s statements on Tuesday, after contracting last week.

I’ve also discussed in detail how municipal bonds have done well even when equity markets turn especially volatile, and now might be a good time to consider them with recessionary fears rising. Muni bond funds have seen 24 consecutive weeks of net inflows, according to financial services firm Baird, with $901.5 million moving into them in the week ended March 23.

Plus, the Fed has indicated it still plans to raise interest rates at least twice this year. Bond prices fall when rates rise, but short-term munis are less sensitive to rate fluctuations than longer-term bonds.

Last Chance to Register!

To learn more about muni bonds, I invite you to join us later today as fixed-income investment analyst Juan Leon and I discuss the power of tax-free, stress-free income. I hope you’ll be there!  

Tax-Free, stress-free income: the power of Muni Bonds - A Webcast Event

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.

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Mixed Economic Data Supports Gold and Short-Term Munis
March 22, 2016

A batch of mixed economic data was released this week and last that underlines continued strength among U.S. businesses and manufacturers. But consumer confidence still seems to be held back by the global slowdown, central bank policy concerns and other factors. This suggests investors should remain cautious and might want to consider assets that have demonstrated an ability to preserve capital in times of uncertainty—gold and short-term municipal bonds among them.

For the third straight month, consumer confidence slipped on fears that the days of cheap gasoline might be coming to an end. The University of Michigan’s Index of Consumer Sentiment fell to 90 in March, down from 91.7 in February. Although it’s still above recession levels, the index has been trending down for the past 12 months.

University of Michigan Consumer Sentiment Index
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Conditions improved for manufacturers in New York State, according to the monthly Empire State Manufacturing Survey. Many investors pay attention to this metric as an indicator of industry health in the very influential New York region of the U.S. The headline reading climbed 17 points to its first positive score since July of last year, with significant improvements in new orders and shipments. Manufacturers also said they were more optimistic about business conditions six months out.

Manufacturing in New York Improves for the First time since July 2015
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But overall industrial production told a slightly different story. Activity fell 0.5 percent in February month-over-month, and as I explained earlier in the week, industrial production is a subset of GDP, which indicates where the markets have been.

Housing data was also mixed. On the one hand, we saw a higher-than-expected rate of new housing starts in February. Single-family homes led the way, rising from 767,000 in January to 822,000, the highest print since the end of the recession. This helped push the total number of homes to 1.18 million, a 5.2 percent increase from January and an impressive 30.9 percent jump from the previous February.

At the same time, existing-home sales dropped a substantial 7.1 percent in February, according to the National Association of Realtors. Low supply levels and price growth were the leading culprits.

The most welcome news was that the core consumer price index (CPI)—which excludes food and energy—rose 2.3 percent year-over-year in February, representing the fourth straight month of inflation and the highest rate since October 2008.

Good for Gold: Core Inflamation Heats Up
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As I’ve pointed out many times before, gold has tended to respond well when inflationary pressure pushes real interest rates below zero. To get the real rate, you subtract the headline CPI from the U.S. Treasury yield. When it’s negative, as it is now, gold becomes more attractive to investors seeking preservation of their capital. The yellow metal has risen more than 17 percent so far this year, making it one of the best performers in 2016.

Muni Bonds Could Be Poised for Another Strong Year

Uncertainty over the direction the Federal Reserve might take on interest rates is also influencing investors to add to their short-term municipal bond exposure. Munis were the top-performing fixed-income asset of 2015, and they appear poised for another strong year. The Fed revealed last week that it expects to raise rates twice this year, possibly as soon as April, which makes short-term munis more attractive since they’re less sensitive to rate adjustments than longer-term debt. And because they’re tax-free at the federal level, they appeal to wealthy investors who seek to protect their capital against possibly-rising income taxes, depending on which presidential candidate wins the election in November.

Muni bond mutual funds just saw their 24th straight week of positive inflows, Bloomberg reports.

We’ll be hosting a webcast on this very topic, titled “Tax-Free, Stress-Free Income: The Power of Muni Bonds,” on March 30 at 3:30 Central Time. Along with Juan Leon, our fixed-income investment analyst, I’ll be discussing the secrets behind an investment that has delivered more than 20 straight years of tax-free income. I hope you’ll join us!

 

 

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The Empire State Manufacturing Index is an index based on the monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. The index summarizes general business conditions in New York State.

The University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan.  The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spend money.

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.

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Net Asset Value
as of 04/29/2016

Global Resources Fund PSPFX $5.28 0.04 Gold and Precious Metals Fund USERX $8.49 0.45 World Precious Minerals Fund UNWPX $6.70 0.29 China Region Fund USCOX $7.05 -0.06 Emerging Europe Fund EUROX $5.86 0.01 All American Equity Fund GBTFX $23.73 -0.11 Holmes Macro Trends Fund MEGAX $17.67 -0.01 Near-Term Tax Free Fund NEARX $2.25 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change