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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.

How Gold Came to South Korea’s Rescue
September 27, 2016

A busy street in Seoul, filled with shoppers.

Nineteen years ago, South Korea came precipitously close to bankruptcy.

The Asian financial crisis had spread like a virus. Thailand, Malaysia, Singapore and other Southeast Asian countries were all affected, inciting fears of a global economic meltdown if the crisis couldn’t be contained.

Before 1997, South Korea had been held up as a textbook example of economic reversal and resilience.

Once a poor colony, the country underwent an unbelievably rapid transformation in the second half of the 20th century, propelled by smart policy reforms and heavy investment in education. Many called it the “Miracle on the Han River.” By the end of the century, Korea had grown to become the world’s 11th largest economy. Residents had the incomes to enjoy comfortable, “Western” lifestyles.

But in the summer of ‘97, the bug arrived in Seoul. Businesses began to fail. Left with nonperforming loans, banks collapsed, while others discontinued fresh lending. The won was in freefall. Liquidity dried up. Foreign investors yanked nearly $18 billion out of the country. Hundreds of thousands lost their jobs.

Korea’s only recourse was to seek help from the International Monetary Fund (IMF), and in December, the lender approved a gargantuan $58 billion bailout package, the largest in history. The deal required Korea to liberalize trade and its capital accounts, reform its labor market, restructure corporate governance and more.

A new crisis emerged, then, which native Koreans still refer to as the “IMF Crisis.”

The government wasted no time in raising the funds to pay back the loan, and on January 5, 1998, a national campaign was launched that today stands as one of the most moving shows of patriotism and self-sacrifice the world has ever known.

In Times of Economic Crisis, People Have Turned to Gold
click to enlarge

The Drive for Gold

At the time, it was estimated that South Korean households held roughly $20 billion in gold, in the form of necklaces, coins, bars, trinkets, statuettes, medals, pendants, military insignias and more. Most of it carried strong personal and familial significance, far beyond its monetary value.

Gold, after all, has typically played an auspicious role in Koreans’ personal milestones. Many families celebrate an infant’s first birthday in a tradition known as doljanchi, during which gifts of 24-karat gold rings are customary. Gold jewelry and watches are routinely given to newlyweds, as we also see in India, Turkey and elsewhere. Companies often award retirees with gold keychains.

This is the Love Trade I speak so frequently about, responsible for driving a huge percentage of the demand and price of gold. In many parts of the world, gold jewelry is more than just beautiful ornamentation—it’s also prized as an important form of financial security.

In Times of Economic Crisis, People Have Turned to GoldKoreans know this all too well. Ninety years earlier, in 1907, the Korean Empire owed Japan 13 million won, equivalent to an entire year’s budget. To help pay it off, men quit smoking while women sold their cherished wedding jewelry.

Gold again came to Korea’s aid in 1998.

Nearly 3.5 million people, almost a quarter of the entire country’s population, voluntarily participated in the campaign. Queues of people—young and old, rich and poor—stretched for blocks outside special donation points, all of them answering the call to help their country. Yellow ribbons proclaiming “Let’s overcome the foreign currency crisis by collecting gold” could be found pinned to people’s shirts.

Big-name Korean corporations, from Samsung to Hyundai to Daewoo, lent their marketing strength to help spread the word, as did celebrities. Lee Jong-beom, a hot young baseball star, drew national attention when he brought in 31.5 ounces of gold, valued at over $9,000, all in the form of trophies and medals he had acquired over his five-year career.

On average, each person donated 65 grams of the yellow metal, or a little over $640 based on prices at the time.

In the Associated Press video below, you can see the various types of items Koreans donated. Please note that the video is Korean, so I can’t attest to what’s being said.

In as little as two months, 226 metric tons, valued at $2.2 billion, were collected, every last scrap of which was melted into ingots and promptly delivered to the IMF.

Although this amount was just a drop in the bucket, the gold collecting campaign served as an important rallying point early on in South Korea’s effort to tackle its debt, not to mention the fact that it demonstrated the deep patriotism and unity of its people. The Love Trade helped the country pay back the $58 billion loan in full by August 2001—nearly three years ahead of schedule.

Gold Recycling up 10 Percent

Korea’s is arguably the best known example of gold recycling, which the World Gold Council defines as gold that is “sold for cash by consumers or other supply-chain players,” including countries.

Of course, it’s not the only example.

Although central banks as a whole have been net buyers of the precious metal since 2010, Venezuela is in liquidation mode, having sold off most of its gold reserves since March 2015 in an effort to offset low oil prices and to pay down debts. Good thing the socialist country had gold to fall back on, as bolivar notes are now so worthless, some Venezuelans have found that it’s cheaper to use the bills as napkins than to buy actual napkins.

Because the precious metal is virtually indestructible, all gold ever mined is still available in some form or another, making recycling an important part of  supply. The rate of recycling has tended to ramp up during times of economic crises, or when gold prices in a country’s currency accelerate. Look at how recycling in the U.S. has correlated to prices.  

Infrastructure Spending Evolves Regions Economic Growth
click to enlarge

With gold having posted its best first half of the year since 1974 and on track for its best full year since 2010, more people are taking their old coins and rings to the pawn shop. In the first six months, the rate of recycling was up 10 percent compared to the same period in 2015, as Bloomberg reports.

 

LEARN WHAT ELSE IS DRIVING GOLD

 

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 was held by any accounts managed by U.S. Global Investors as of 6/30/2016.

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The Case for Natural Resource Equities
September 26, 2016

The Case for Natural Resource Equities

Last week I attended the Denver Gold Forum along with three other U.S. Global Investors representatives, including our resident precious metals expert Ralph Aldis. I was happy to see sentiment for gold way up compared to last year’s convention, as was turnout. I was also pleased to see Franco-Nevada, Silver Wheaton and Royal Gold in attendance, all of which I’ve written extensively about.

One of the most interesting presentations was held by Northern Star Resources—the third biggest listed gold producer in Australia, a dividend payer and a longtime holding of USGI. I’ve always appreciated Northern Star’s insistence on being a business first, a mining company second. This shareholder-friendly mantra is reflected in its stellar performance.

Compared to other companies in the NYSE ARCA Gold Miners Index (GDM), Northern Star is a sector leader in a number of factors, including five-year cash flow return on invested capital. Whereas the sector average is negative 1.6 percent over this period, Northern Star’s is a whopping 27 percent, the most of any other mining company in the GDM.

This has helped it return an amazing 800 percent over the last five years as of September 23. Compare that to the GDM, which returned negative 56 percent over the same period.

Australian gold miners as a whole trade at an impressive discount to North American producers, 5.7 times earnings versus 8.3 times earnings, according to Perth-based Doray Minerals.

Top Performing Australian Gold Producers Based Relative Valuations
click to enlarge

Screening for high cash flow returns on invested capital, as you can see, helps give us a competitive advantage and uncovers hidden gems such as Northern Star and others.

Resource Equities Offer Attractive Diversification Benefits

A recent whitepaper published by investment strategist firm GMO makes a very convincing case for natural resource equities. I urge you to check out the entire piece when you have the time, but there are a few salient points I want to share with you here.

In the opinion of Lucas White and Jeremy Grantham, the paper’s authors, “prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources,” presenting an attractive investment opportunity. Over the long-term, resource stocks have traded at a discount and outperformed their underlining metals and energy by a wide margin.

According to White and Grantham, a portfolio composed of 50 percent energy and metals, 50 percent all other equities, had a standard deviation that’s 35 percent lower than the S&P 500 Index. What’s more, the returns of such a portfolio outperformed those of the S&P 500, resulting in a risk-adjusted return that’s 50 percent higher than that of the broader market.

Long Term Diversification Benefits Resource Stocks
click to enlarge

Resource equities have also historically shown a low to negative correlation to the broader market, which might appeal to bears. The reason? When metals and energy have risen in price, it’s been a drag on the economy. The reverse has also been true: Low prices have been a boon to the economy.

The thing is, general equities currently do not give investors enough exposure to natural resources. The weight of energy and metals in the S&P 500 has been halved in the last few years as oil and other materials have declined. Considering the diversification benefits, investors should consider a greater allocation to the sector.

Timing Is Key

There’s mounting evidence that now might be an opportune time to get back into resource stocks. Following the sharpest decline in crude oil prices in at least a century, as well as a six-year bear market in metals, the global environment could be ripe for a commodity rebound. From its January trough, the Bloomberg Commodity Index has rallied 17 percent, suggesting commodities might be seeking a path to a bull market.

During the down-cycle, many companies managed to bring costs lower, upgrade their asset portfolios and repair their balance sheets. As a result, many of them are now free cash flow positive and are in a much better positon to deliver on the bottom line when commodity prices increase.

I’ve often written about the imbalance between monetary and fiscal policies. My expectation is that unprecedented, expansionary global monetary policy will be followed by fiscal expansion. Consider this: Total assets of major central banks—including those in the U.S., European Union, Japan and China—have skyrocketed to $17.6 trillion dollars as of August 2016, up from $6.3 trillion in 2008.

Total Assets Major Central Banks
click to enlarge

This expansion is expected to result in significant inflation gains over the next decade, an environment in which natural resource stocks have historically outperformed the broader market.

Infrastructure Spending About to Increase?

China largely drove the global infrastructure build out over the past decade as rapid economic growth and rising incomes increased the demand for “advanced” and “quality of life” infrastructure. This resulted in a breathtaking commodities bull market.

Infrastructure Spending Evolves Regions Economic Growth
click to enlarge

Now, other advanced countries, the U.S. especially, are readying to sustain the next cycle to repair its aging and uncompetitive infrastructure.

As you can see, most major economies dramatically cut infrastructure spending after the financial crisis, indicating it might be time to put some of that $17.6 trillion to good use.

Time Major Economies Boost Public Infrastructure Spending
click to enlarge

According to the Center on Budget and Policy Priorities (CBPP), the U.S. is presently facing a funding gap of $1.7 trillion on roads, bridges and transit alone—to say nothing of electricity, schools, airports and other needs. Meanwhile, state and local infrastructure spending is at a 30-year low.

If this financing can’t be raised, says the American Society of Civil Engineers (ASCE), each American household could lose an estimated $3,400 per year. Inefficient roadways and congested airports lead to longer travel times, and goods become more expensive to produce and transport.

Let’s look just at national bridges. After an assessment of bridges last year, the American Road & Transportation Builders Association (ARTBA) found that 58,495, or 10 percent of all bridges in the U.S., are “structurally deficient.” To bring all bridges up to satisfactory levels, the U.S. would currently need to spend more than $106 billion, which is six times what was spent nationwide on such projects in 2010.

Infrastructure backbone US economy

Fortunately, both U.S. presidential candidates have pledged to boost infrastructure spending—one of the few things they share with one another. Hillary Clinton says she will spend $275 billion over a five-year period, while Donald Trump says he’ll spend “double” that.

Trump’s central campaign promise, as you know, is to build a “big, beautiful, powerful wall” along the U.S.-Mexico border, which analysts at investment firm Bernstein estimate could cost anywhere between $15 billion and $25 billion, requiring 7 million cubic metres of concrete and 2.4 million tonnes of cement, among other materials.

As I like to say, government policy is a precursor to change. I’ll be listening closely for further details on Trump and Clinton’s infrastructure plans this coming Monday during the candidates’ first debate. I hope you’ll watch it too! Media experts are already predicting Super Bowl-sized audiences.

Don’t Count China Out

In the past year, a lot of ink has been devoted to China’s slowdown after its phenomenal spending boom over the last decade, but there are signs that spending is perking up—a tailwind for resources. According to the Wall Street Journal, Chinese economic activity rebounded in August, driven by government spending on infrastructure and rising property taxes.

“In the first seven months of 2016,” the WSJ writes, “China invested 962.8 billion yuan ($144.1 billion) in roads and waterways, an 8.2 percent increase from the previous year.”

The Asian giant still accounts for a large percentage of global trade in important resources such as iron ore, aluminum, copper and coal. This is why we closely monitor the country’s purchasing manager’s index (PMI), which, according to our own research, has been a reliable indicator of commodity price performance three and six months out.

 

EXPLORE INVESTING OPPORTUNITIES IN NATURAL RESOURCES

 

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.

Cash Flow Return on Invested Capital (CFROIC) is defined as consolidated cash flow from operating activities minus capital expenditures, the difference of which is divided by the difference between total assets and non-interest bearing current liabilities. 

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 NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.  The index benchmark value was 500.0 at the close of trading on December 20, 2002. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

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.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2016: Franco-Nevada Corp., Silver Wheaton Corp., Royal Gold Inc., Northern Star Resources Ltd., Doray Minerals Ltd., Saracen Minerals Holdings Ltd., Evolution Mining Ltd., St. Barbara Ltd.

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The War on Cash Is Still Good for Gold
September 19, 2016

Negative Real Rates Real Positive Influence Gold

The consumer price index (CPI), a measure of inflation, came in hotter than expected Friday, registering 2.3 percent year-over-year in August on expectations of 2.0 percent. With the five-year Treasury yielding 1.19 percent, government bond investors are now receiving a negative real rate of return (because 1.19 minus 2.3 comes out to negative 1.11 percent).

This is highly constructive for the price of gold. As I’ve discussed many times before, the yellow metal has benefited when real rates have fallen below zero. This was the case in September 2011 when gold hit its all-time high of $1,900 per ounce. And last year around this time, the opposite was true—positive real rates were a drag on gold.

Although gold sunk to a two-week low on a strong U.S. dollar and fears over this week’s Federal Reserve meeting, the drivers are firmly in place to push prices higher.

LEARN MORE ABOUT WHAT’S DRIVING GOLD

   

Rogoffs new book calls end paper moneyMaybe you’ve heard that a new book out right now is planting propaganda in the war on cash. In “The Curse of Cash,” Harvard economics professor Kenneth Rogoff makes the case that nixing paper money—at the very least, larger-denominated bills—“could help more than you might think” in combating criminal activities such as drug trafficking, corruption, extortion and money laundering. It could even prevent the spread of terrorism and discourage illegal immigration, Rogoff argues.

It gets even worse. Central banks, he adds, should have the latitude to drop interest rates below zero during recessions to spur spending. If the Federal Reserve tried this now, of course, many people would likely convert their savings into paper—which at least yields 0 percent—and hoard it in bedroom safes. This is precisely what many Germans have reportedly done, prompting safe manufacturers to scramble to meet demand

But in a world where nothing larger than a $10 bill exists, hoarding cash would be highly impractical. Better to buy that new boat you don’t need!

While we all agree that corruption and terrorism are things that should be stopped, killing cash is the absolute wrong way to go about it.

Instead, perhaps Rogoff should consider “The Curse of No Cash.” Does he not recall what happened in Cyprus just three years ago? The government ransacked citizens’ bank accounts to “fix” its own mistakes and mismanagement. In example after example, people’s rights to save and freely hold cash have been disrupted, with tragic results.

I’ve written about this topic before. In a cashless society, your economic liberty is forever at risk. Every transaction could be monitored, taxed and charged a fee. Capital controls would be crippling, assets could be seized. Just ask the Colombians and Venezuelans

I’m not the only one who disagrees with the ideas in Rogoff’s polemic against money. As of this writing, nearly three quarters of Amazon customers have given the book a rating of two or fewer stars. And in a scathing Wall Street Journal op-ed, respected financial writer James Grant strips away the book’s “technical pretense” to uncover its true motive. Rogoff, he writes, “wants the government to control your money,” which is the extreme form of Keynesian economics.

Gold Has Shined Brightly During Currency Crises

There’s one area where Rogoff and I both agree, though. “As paper currency is phased out,” he writes, “gold prices will rise.” Were cash eliminated and interest rates plunged underwater, gold’s role as a store of value would become even more apparent and demand for the yellow metal would turn red hot, despite its price appreciation.

This has been the case in countless past examples. Rogoff himself cites Indians’ longstanding love of and cultural affinity to gold jewelry as protection against currency uncertainty. For centuries, inhabitants of the Indian subcontinent saw continuous regime change, not to mention imperialist rule by various European forces. During all this time, the one stable and widely accepted currency was gold.

Indian Households Own More Gold Than Top Six Central BanksThe tradition carries on today. A third of Indian gold jewelry demand comes from rural farmers, who annually convert a portion of their crop revenues into the yellow metal. Whether this gold is stored or given to a female family member, perhaps a daughter, before her wedding day, its purpose is twofold: one, as a beautiful heirloom to be worn and passed down to the next generation, and two, as a form of financial security.

It’s estimated that Indian households currently hold more than 20,000 tonnes of gold. To put that in perspective, 20,000 tonnes is more than the official gold holdings of the U.S., Germany, Italy, France, China and Russia combined.

With speculation strong that a rupee devaluation is imminent, it makes just as much sense now as ever for Indians to have at least some of their wealth in gold. When the rupee unexpectedly dipped to record lows in August 2013, the wealth that prudent Indians had stored in the precious metal was, for the time being, safe.

Indians Gold Jewelry Protect Wealth Against Currency Devaluation
click to enlarge

Although there’s little fear right now that the U.S. dollar is in trouble, I still recommend that investors maintain a 10 percent weighting in gold—5 percent in gold stocks, 5 percent in gold coins and jewelry.

Is Chicago Next to Declare Bankruptcy?

Is Chicago the next DetroitIt’s not just Indian investors who should be aware of currency fluctuations and imbalances in monetary and fiscal policy. These can happen right here in our own backyards, and investors who aren’t paying attention—specifically municipal bond investors—could pay a steep price.

In the past few years, we’ve seen how financial mismanagement can bring calamity to state and local economies, the most notable example being Detroit’s $18 billion bankruptcy in July 2013, the largest in U.S. history. Right now, the U.S. territory of Puerto Rico is in dire financial straits, owing some $70 billion, more than any state government except California and New York.

And then there’s Chicago, which is looking at $170 billion in unfunded pensions and other costs.

This came to my attention earlier this month when I visited Chicago to attend the Morningstar ETF Conference. While there, I had the opportunity to speak to several locals, who shared with me their frustration of high local tax rates—some of the highest in the country.

Taxes are high, they said, mainly because of outrageous pensions for public and union workers. Entitlement spending has exploded. Now, Chicago, which has the lowest credit rating of any major U.S. city, is edging scarily close to bankruptcy.

Unfortunately, it isn’t hard to see why. For starters, the state has one of the most highly unionized workforces in the country, compared to the national average.

Illinois Has Among Largest Unionized Workforces
click to enlarge

And instead of reining in costs, state and city officials continue to add to the pile of debt. The Land of Lincoln already has the least funded retirement system in the country, according to Bloomberg, and is on track to end the year $7.8 billion in the hole.

Lawmakers and other government workers are among the highest paid in the nation and enjoy “Cadillac” health care benefits and pensions. It’s not uncommon for them to retire in their 50s. The Illinois Policy Institute estimates that the total annual operating cost for each state lawmaker—including salary, insurance and the like—stands at more than $100,000, with private taxpayers footing most of the bill.

“It’s like we work for the government,” one Chicagoan told me. “Everything we make goes to their pensions.”

Conveniently, the state constitution includes a clause that forbids any reduction of public pensions.

For these reasons, Illinois is saddled with some of the highest income and corporate taxes in the United States. Chicago’s sales tax is the highest of any major U.S. city. Despite the revenue this generates, it doesn’t come close to touching what’s been promised.

Look at the chart below. Between 2000 and 2015, Illinois tax revenue increased 57 percent. That’s a significant jump. But over the same period, state-employee insurance and pension benefits skyrocketed—166 and 586 percent respectively—while essential services such as higher education suffered.

Unfunded Promises Illinoiss Runaway Spending Government Workers
click to enlarge

What this means is very little of taxpayers’ money is going toward anything tangible—new schools, new hospitals, new wastewater treatment plants. Nothing that provides jobs or has a multiple effect is being produced.

We’re already seeing serious consequences as a result of the state and city’s fiscal woes. In a recent study of jobs market competitiveness, CareerBuilder found that Chicago is the least competitive metropolitan area in the U.S. in terms of jobs growth. Between 2014 and 2015, the Windy City’s rate of adding jobs was far short of the national average.

Because of this—among other reasons, including crime, unemployment and political infighting—Chicago had the largest population loss of any metro in the U.S last year (6,263). Meanwhile, Illinois was one of only seven states to see a net decline (22,194).

And where are these people going? Where the jobs are, of course. I always say that money flows where it’s most respected. People behave the same way.

It’s no wonder, then, that the state that attracts the most Illinois expats is Texas, according to the Chicago Tribune. This falls in line with what I wrote just a couple of weeks ago. Between 2014 and 2015, Texas added more residents than any other state because of its strong economy, abundance of jobs and low taxes. CareerBuilder’s jobs study, I should point out, rated Dallas as the most competitive city. And within the next eight to 10 years, Houston is expected to surpass Chicago to become the nation’s third largest city by population.

I’m not saying this to beat up on Chicago, but to emphasize my earlier point about being aware and prepared—especially, in this case, when it comes to municipal bond investing. Many passive muni funds might hold Chicago debt because it’s high-yielding. But those yields could come at a huge cost. Three years ago, bondholders of Detroit’s bad debt learned the hard way that, in the event of a default, pensioners get paid first, investors last—or worse, not at all.

As active managers we’re well aware of this. We sincerely hope Chicago can straighten out its balance sheet, but in the meantime, we feel it’s not a space to be a buyer right now. Instead, we seek to invest primarily in high-quality, short-term munis.

LEARN MORE ABOUT SHORT-TERM MUNIS

 

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.

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 6/30/2016.

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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5 Reasons Why Active Management Works
September 13, 2016

As we all know, exchange-traded funds (ETFs) have increasingly become the hot menu item, attracting a lot of money away from actively-managed funds such as mutual funds. But don’t discount active management just yet! There’s still plenty of room in your portfolio for this type of investment.

Consider the following:

1. First-Mover Advantage

Active management gives us the ability to act swiftly and strategically, with the surgical skill of a highly-trained team of Special Forces. It allows us to push out of the starting blocks much faster.

As active managers, we closely monitor key indicators and macroeconomic themes such as PMI (the Purchasing Manager’s Index), which we’ve written about many times, and negative real interest rates. These indicators, among other factors, often serve as the signals we’re looking for.

2. Explicit and Tacit Knowledge

Some people have book smarts (explicit knowledge), while others have street smarts (tacit knowledge). Active management requires that you have both.

Not only are we experts in geology and mineral resources, we’re also world travelers with “boots on the ground” experience visiting mines, spending time with mining crews and meeting with management teams.

Frank Holmes Gold Mining

3. Technical Models

We are practitioners of quantitative analysis on a per-share basis. We use a matrix of top-down macro models and bottom-up micro stock selection models to determine weightings in individual securities. When looking at mining stocks, for instance, we screen for the following factors:

Our Factors For Selecting Mining Stocks

4. Hidden Gems

Using technical stock screens and tacit knowledge of management teams can help us uncover hidden gems with attractive growth prospects.

One such company is Nevada-based Klondex Mines, which reported incredible second-quarter growth of 82 percent in net income and 25 percent in the amount of gold produced compared to the same time last year. Klondex is up more than 156 percent year-to-date, as of August 30.

Granted, this type of performance is out-of-the-ordinary, and there’s no guarantee it will be repeated in the future. But when it happens, active management can help us capture the upswing.

gold mine

5. Portfolio Manager Tenure

Active management is only as good as the people running it, and at U.S. Global Investors, we’re fortunate to have one of the best in the business—Ralph Aldis.
Ralph has over 20 years’ worth of experience at USGI alone and was even named a metals and mining “TopGun” fund manager by Brendan Wood International last year. The capital markets performance measurement firm recognized a group of investors as “optimal leaders of thought in the industry” during the year. The honor was given based on a vote from 269 sell-side professionals, and this was Ralph’s second time to receive such recognition from his peers.

Ralph Aldis Portfolio Tenure

 

Explore opportunities in precious metals and mining investment!

 

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.

Cash Flow Return on Invested Capital (CFROIC) is defined as consolidated cash flow from operating activities minus capital expenditures, the difference of which is divided by the difference between total assets and non-interest bearing current liabilities. 

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2016: Klondex Mines Ltd., Silver Wheaton Corp.

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

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Look to Chindia for Gold’s Love Trade
September 12, 2016

Diwali trigers gold's love trade in India. The five-day festival of lights kicks off on October 30

A few weeks ago, I shared with you what I brought home from my trip to Toronto, Vancouver and New York City, where I had met with gold fund analysts. The current gold bull run began in January, but as I told you, the general retail investors weren’t buying then. The only people buying that early were quants and huge hedge funds. The question, then, was: What factors or models were the quants using to uncover gold’s meteoric rise this year?

One of the factors they were looking at, I learned, was low SG&A-to-revenue. “SG&A” stands for “selling, general and administrative expenses” and refers to the daily operational costs of running a company that are not related to making a product. It includes everything from shipping fees to salaries to utilities. SG&A-to-revenue is an unusual factor, not typically used among analysts and fund managers, so we were curious to apply it.

Using this information, we looked just at the first quarter to find the mining companies that spent the least amount of money on these daily operations relative to revenue. Mining companies, after all, have had trouble with expense discipline.

What we discovered was nothing short of astonishing. All combined, the top 10 gold companies for the quarter—led by South Africa-based Harmony Gold—returned a spectacular 88 percent. That’s almost double what the Market Vectors Gold Miners ETF (GDX) returned over the same period (45.5 percent). 

Top 10 Gold Names Based on SG&A-to-Revenue
click to enlarge

As early as January, the drivers were in place to fuel gold’s best first half of the year since 1974. The yellow metal is now in position to have its best year overall since 2010, when it rose 29.5 percent.

 

DISCOVER INVESTMENT OPPORTUNITIES IN THE GOLD SPACE

 

Upcoming Festivals Could Activate Love Trade

I talk a lot about the differences between gold’s Fear Trade and Love Trade. Loyal readers know that the Fear Trade is associated with negative real interest rates and excessive money supply, which triggers an imbalance of monetary and fiscal policies and macroeconomic uncertainty. Historically, investors in the U.S., Japan, Germany and the U.K. have been the main drivers of the global Fear Trade.

The Love Trade, on the other hand, is all about gold’s powerful allure and its timeless role as a gift without peer. It has two significant benefits: one, as beautiful gold jewelry to be worn, and two, as financial security. Although gold jewelry is often given as a special gift in Western countries, it pales in comparison to what takes place in China and India, or “Chindia”—home to about 40 percent of the world’s population, and the two largest gold importers.

The following image, courtesy of Visual Capitalist, shows emphatically just how enormous this region’s population is. More people live inside the green circle—which covers not just India and China but also Japan and some South China Sea countries—than outside it.

More than Half of the World's Population LIves Inside This Circle

As I shared with you last month, the two Asian countries together accounted for more than half of total global gold jewelry demand in 2015. The U.S., by comparison, represented about 5 percent of demand. All of Europe, even less.

Significant to boosting the metal’s price are important cultural events, from India’s upcoming Diwali festival and fourth-quarter wedding season to the Chinese New Year in January. Going back decades, the yellow metal has tended to perform best in September, when jewelry, coin and bullion dealers restock their inventories in preparation for these celebrations.

Also known as the Festival of Lights, Diwali begins October 30 this year, followed by the wedding season. To give you a sense of scale, as many as 150 million Indian weddings will be held between 2011 and 2021, according to the Government of India. For each wedding, between 0.7 and 70 ounces of gold are typically purchased, which is equivalent to 35 percent to 40 percent of total wedding expenses.

Of course, you can’t convert cash into gold if you don’t have the cash. What’s more, gold priced in Indian rupees and Chinese renminbi has really taken off, making it more expensive to Indian and Chinese consumers than America buyers.

Gold Priced in U.S. Dollars, Indian Rupees and Chinese Renminbi
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Gold consumption, then, really depends on household income. Fortunately, income growth in Chindia is booming with the rise of the middle class.

Rising Incomes = Golden Opportunity

And just how much income growth are we talking about? According to Boston Consulting Group (BCG) data, consumer spending in both China and India will soon overtake spending in Germany and France, and is on a trajectory to match Japan’s level of consumption.

India and China's affluent class will consume as much as some major countries by 2020
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By 2020, the number of “affluent” households in China—those with annual incomes of at least $20,000—will grow to 280 million, equal to 30 percent of the country’s urban population. That’s quite a leap up from today’s 120 million households labeled as “affluent.” It’s also good news for the Love Trade.

As for India, the number of middle class consumers is expected to triple between now and 2025, eventually reaching 89 million people, according to McKinsey & Company.

What I find even more incredible is that by 2030, the economic output of India’s top five cities is expected to reach the size of five middle-income countries today, according to McKinsey. Mumbai’s massive $245 billion economy, for example, could soon exceed the entire country of Malaysia. Likewise, India’s capital city of New Delhi could one day be bigger than the Philippines.

This presents a huge opportunity for the Love Trade to expand even more, as rising incomes and economic momentum have been a tailwind for gold demand.

I’ve pointed out before the relationship between M2 money supply growth in China and the price of gold. Money supply isn’t the same as income growth, of course. But it serves as further evidence that the more money that’s available—and the more people who have access to that money—the more it can be converted into gold.

Gold Price Has Largely Followed Chinese Money Supply
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Negative real interest rates play an important role as well, as I’ve discussed many times before. The yellow metal shares an inverse relationship with real rates, which is what you get when you subtract inflation from nominal interest rates.

silver is the best performing commodity of the year having returned more than 38 percent as of September 9

Speaking of which, many investors are wondering if rates will rise this year or not. December is still on the table, but the likelihood of a hike this month seems to have been doused by the August jobs report, which came in below expectations. CNBC reports that Goldman Sachs economists walked back their call for a September rate hike when it was revealed the U.S. economy added only 151,000 jobs, 32 percent fewer than the same month a year ago and a whopping 69 percent decrease from July’s payroll additions.

Be that as it may, markets seem to be betting the end of easy money could arrive sooner rather than later. Stocks sold off today in their worst session since June 24, the day after Brexit.

The Friday before last, both gold and silver jumped on the underwhelming jobs numbers. As I told Daniela Cambone during last week’s Gold Game Film, which you can watch here, silver is an important metal to follow because as people develop more confidence in the precious metal area, silver could begin to take center stage.

India Now the Fastest Growing Large Economy

In June, I asked if India is the new China. I think the jury’s still out on that question, but what we do know is that India has pulled ahead of China to become the world’s fastest growing large economy. In its June update to its world economic outlook, the International Monetary Fund (IMF) sees India advancing 7.4 percent this year, compared to China’s 6.6 percent. On a relative basis, these are much stronger growth rates than what we find in advanced economies such as the U.S., European Union and Japan.  

Real GDP Growth Around the World
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India’s manufacturing sector appears to be growing at a faster clip than China’s, when we compare the two Asian giants’ purchasing manager’s indices (PMI). For the month of August, the India PMI rose to 52.6 from 51.8 in July, indicating healthy sector expansion.

China and India Manufacturing Headed in Right Direction
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Meanwhile, China logged a neutral 50, indicating neither expansion nor contraction. But as you can see above, the trend is headed in the right direction and making steady improvements from its recent low of 47.2 in September 2015.

For the one-year period, the First Trust ISE Chindia Index Fund (FNI) is up more than 23 percent, as of September 4, suggesting the bad news we’ve been seeing in the media might be over, and the markets in China and India may have reached a bottom. This is good for global growth and the Love Trade. 

Book Your Flights!

At the end of this month, I will be a speaker and panelist at Mines and Money in Toronto. The conference, one of the biggest and most attended in the world, brings together leading institutional investors, mining developers and sought-after industry experts. It will take place September 26 through 28, so don’t hesitate to book your flights. I hope to see you there!  

 

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 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.

The Nikkei India Manufacturing Purchasing Managers’ Index, reported by Markit Economics, measures the performance of the manufacturing sector and is derived from a survey of 500 manufacturing companies.

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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2016: Sibanye Gold Ltd., Northern Star Resources Ltd., Regis Resources Ltd.

Share “Look to Chindia for Gold’s Love Trade”

Net Asset Value
as of 09/29/2016

Global Resources Fund PSPFX $5.76 -0.02 Gold and Precious Metals Fund USERX $9.58 -0.01 World Precious Minerals Fund UNWPX $8.95 -0.02 China Region Fund USCOX $7.82 -0.01 Emerging Europe Fund EUROX $5.53 -0.02 All American Equity Fund GBTFX $23.06 -0.17 Holmes Macro Trends Fund MEGAX $18.78 -0.22 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change