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3 Reasons Why Gold Isn’t Behaving Like Gold Right Now
July 27, 2015

Green-GoldAs many of you know, I was in San Francisco the week before last where I had been invited to speak at the MoneyShow, one of the biggest, most preeminent investor conferences in the world. Over the past couple of decades, I’ve spoken at many MoneyShows all around the country and have covered many different topics. Gold investing is one that often draws a big crowd. Not this year. Guess which natural resource stole the show?

The commodity that attracted attendees’ attention is one that until pretty recently could only be grown and harvested under the shroud of secrecy. Marijuana. Currently legal in 23 states and the District of Columbia, medical marijuana generated $2.7 billion in 2014 and is expected to bring in $3.4 billion this year. Investors are taking notice. The cash crop is even starting to change intranational migration. Whereas many retired seniors flock to warmer climates in which to live out their golden years, others now factor in whether a state will permit them to self-medicate in order to treat their arthritis, according to a recent Time article.

Investors themselves who might have suffered from arthritis attended the pot presentation at their own risk, as it was standing room only. They couldn’t have been pulled away even to sit comfortably in the scarcely occupied room next door. Sentiment toward gold was indeed very bearish at the MoneyShow, as it is around the world right now.

Gold Hits the Reset Button

Gold is universally recognized as a safe-haven investment, a go-to asset class when others look uncertain. Following the 2008 financial crisis, for instance, the metal’s price surged, eventually topping out at $1,900 per ounce in August 2011.

But last week proved to be a particularly rocky one for the metal, even with Greece and Puerto Rico’s debt dilemmas, not to mention the recent Shanghai stock market decline, fresh in investors’ minds. Gold traded down for 10 straight sessions to end the week at $1,099 per ounce, its lowest point in more than five years. Commodities in general dropped to a 13-year low.

Commodities-Drop-to-a-13-Year-Low
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Gold stocks, as expressed by the XAU, also tumbled.

gold-stocks-slide-to-a-multi-year-low
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The selloff was given a huge push when China, for the first time in six years, revealed the amount of gold its central bank holds. Although the number jumped nearly 60 percent since 2009 to 1,658 tonnes, markets were underwhelmed, as they had expected to see double the amount.

Then in the early hours last Monday, gold experienced a “mini flash-crash” after five tonnes appeared on the Asian market. Initially this might not sound like a lot, but five tonnes equates to 176,370 ounces, or about $2.7 billion. It also represents about a fifth of a normal day’s trading volume. Suffice it to say, price discovery was effectively disrupted. In a matter of seconds, gold fell 4 percent before bouncing back somewhat.

Reflecting on the trading session, widely-respected market analyst Keith Fitz-Gerald noted: “Far from being a one-day crash, this could represent one of the best gold-buying opportunities of the year.”

The last time the metal descended this quickly was 18 months ago, on January 6, 2014, when someone brought a massive gold sell order on the market before retracting it in a high-frequency trading tactic called “quote stuffing.” Last month I shared with you that we now know who might have been responsible for the action—and many others that preceded it—and pointed out that the accused party’s penalty of $200,000 was grossly inadequate. Last Monday I told Daniela Cambone during the Gold Game Film that such downward price manipulation seems to result in little more than a slap on the wrist. But if manipulation is done on the upside, traders could get into serious trouble.

Besides apparent price manipulation, other factors are affecting gold’s behavior right now, three in particular.

1. Strong U.S. Dollar

Like crude oil, gold around the world is priced in U.S. dollars. This means that when the greenback gains in strength, the yellow metal becomes more expensive for overseas buyers. With the U.S. economy on the mend after the recession, the dollar index remains steady at a 12-year high.

It’s important to recognize, though, that gold is still strong in other world currencies, including the Canadian dollar. As such, our precious metals funds have hedged Canadian dollar exposure for Canadian gold stocks, which has benefited our overall performance.

2. Interest Rates on the Rise?

Federal Reserve Chair Janet Yellen continues to hint that interest rates might be hiked sometime this year, perhaps even as early as September. When rates move higher, non-yielding assets such as gold often take a hit.

As you can see, the 10-year Treasury bond yield and gold have an inverse relationship. When the yield starts to rise, investors might find bonds a more attractive asset class.

Inverse-Relationship-Between-Gold-and-the-10-Year-Treasury-Bond-Yield
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3. Slowing Manufacturing Activity

Earlier this month I wrote about the downtrend in manufacturing activity across the globe. As many loyal readers are well aware, we closely monitor the global purchasing manager’s index (PMI) because, as our research has shown, when the one-month reading has fallen below the three-month moving average, select commodity prices have receded six months later.

Global-Manufacturing-PMI-Continues-Its-Downtrend
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China is the 800-pound commodity gorilla, and its own PMI has remained below the important 50 threshold for the last three months, indicating contraction. The preliminary flash PMI, released last Friday, shows that manufacturing has dipped to 48.2, a 15-month low. For gold and other commodities to recover, it’s crucial that China jumpstart its economy.

In the meantime, we’re encouraged by news that the slump in prices has accelerated retail demand in both China and India, which, when combined, account for half of the world’s gold consumption.

Battening Down the Hatches

They say that a smooth sea never made a skillful sailor. No one embodies this more than Ralph Aldis, portfolio manager of our precious metals funds. He and our talented team of analysts are doing a commendable job weathering this storm. We’re invested in strong, reliable companies, and when commodities eventually turn around, we should be in a good position to catch the wind.

We look forward to the second half of the year, when gold prices have historically seen a bump in anticipation of Diwali, which falls on November 11 this year, and the Chinese New Year. As you can see, average monthly gold performance has ramped up starting in September.

Average-Monthly-Gold-Performance
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 “Gold is down 15 to 25 percent below production levels,” Ralph says. “That might cause some companies to halt production.”

And, in so doing, help prices find firmer footing.

After my trip to San Francisco, an important rallying point for the 1960s counterculture movement, it only seems fitting that I traveled to Colorado, one of the first states to legalize cannabis for recreational use. It was only a coincidence that Julia Guth chose to retreat to the state’s beautiful mountains for the Oxford Club’s educational seminar. It was a privilege to present to two assemblies of curious investors like yourself.  I enjoy meeting many of you when I’m on the road.

The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones-UBS Commodity Index (DJ-UBSCI) in 2009, when UBS acquired the index from AIG. The Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.

The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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

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There’s a Huge Disparity Between How Regulators Deal with Gold and Stock Market Manipulation
June 26, 2015

Gold futures were going bonkers in the fall of 2013 and early 2014.

On a weekly and sometimes daily basis, unbelievably massive gold contracts were coming on the market at non-peak trading hours, only to be withdrawn almost instantaneously. In one particularly alarming instance in January 2014, the yellow metal plummeted $30, from $1,245 an ounce to below $1,215, in as little as 100 milliseconds.

The GOld Futures "Flash Crash" of January 6, 2014
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Whatever the cause of this behavior—“fat finger” errors, as some people suggested, or “quote stuffing,” as others suspected—markets were effectively shaken.

From the very beginning, we reported on these anomalies in a series of commentaries that read now like notes from a foxhole. In the September 13, 2013 edition of our Investor Alert, the USGI investments team wrote:

The bullion plunge this week sent the yellow metal breaking below the 100- and 50-day moving averages. Strange dealing patterns are adversely affecting the gold price. These dealings revolve around the “flashing” of massive gold contracts for sale to traders, at a time of day that there is normally little or no activity in the markets, and no news story being released.

Then, on October 25:

You can see massive trading volumes every day of over 5,000 contracts, all around the same time. On the first of October, as well as on October 10, there were massive trades of over 20,000 contracts. This amount represents well over two million ounces, or around $2.6 billion. It’s safe to say nobody has that amount of physical gold, apart from the big central banks, so these trades are being done by entities trading gold they do not have in a manner designed primarily to trigger stop loss orders.

Unusual Gold Trades Triggering Sharp Swings in Gold Price
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And again, on December 20, 2013:

In recent weeks, there have been concerns among market participants and regulators that the process for establishing the price of gold may lend itself to insider trading and other forms of unfair dealing. The spot price of gold tends to drop sharply around the London evening fixing, or 10:00 a.m. Eastern. A similar, if less pronounced, drop in price occurs around the London morning fixing. For both commodities, there were, on average, no comparable price changes at any other time of the day. These patterns appear to be consistent with manipulation in both markets.

Although these “strange dealing patterns” eventually tapered off, it remained a mystery who or what was behind them.

Until now.

Last week, the CME Group officially accused Mirus Futures, a now-defunct brokerage firm, of failing to “adequately monitor the operation of its trading platform,” which resulted in “unusually large and atypical trading activity by several of the Firm’s customers.” This is what allegedly led to the disruption in price discovery in the gold futures market.

The Partyallegedly behind the gold "flash crashes" in 2013 and 2014 has been identified.

What’s unclear is how culpable Mirus Futures really was in all of this. At the very least, it acted carelessly. Did its trading platform have a glitch, and if so, when did Mirus become aware of it? Was it deliberately trying to manipulate the gold markets? There’s no way we can know the answers to these questions. That Mirus has since been acquired by another brokerage firm would make any investigation into its intentions—if there were any to begin with—even more challenging for authorities.

What I find especially notable, though, is that the firm settled with the CME by paying a fine of only $200,000.

This is already a pretty paltry amount, considering how far-reaching its actions (or inactions) were. But when you compare the $200,000 penalty to what Navinder Sing Sarao faces, a huge disparity in the enforcement of such white collar crimes emerges.

Flashing the Stock Market

You might not be familiar with the name Navinder “Nav” Sarao, but it’s likely you’ve heard of the event he’s accused of orchestrating, thanks largely to Michael Lewis’s bestselling book Flash Boys. On May 6, 2010, Sarao, a 36-year-old British day trader, allegedly spoofed American markets using a familiar technique: mammoth-size orders were placed, only to be withdrawn right before execution. Price discovery broke down. In the brief timespan of five minutes, the Dow Jones Industrial Average was taken on a wild 1,000-point ride. Shares of Procter & Gamble fell to as little as a penny. Altogether, nearly $1 trillion in value vanished from U.S. stocks.

Down Jones Industrial Average on May 6, 2010
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Two months after being arrested by Scotland Yard, Sarao now sits in a British prison on bail set at $7.5 million, his assets completely frozen. He awaits extradition to the U.S., where he will face multiple charges, including several counts of market manipulation, commodity fraud, wire fraud and more. According to the Department of Justice, “Sarao’s alleged manipulation earned him significant profits and contributed to a major drop in the U.S. stock market.”

The maximum sentence for all charges is 380 years in jail. Next to that, a $200,000 fine seems more reward than punishment.

You could argue that the upheaval that Sarao contributed to, if not singlehandedly caused, is more significant than the series of gold flashes that occurred in 2013 and 2014. Or that Sarao demonstrated nefarious intentions more unambiguously than Mirus Futures did. Still, the discrepancy is colossal and hard to ignore.

“Apparently regulators care much more about manipulation of the stock market than gold,” commented Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

This could be a problem. As long as rogue traders are convinced that their actions will go unchecked, the gold market could continue to be a target and the metal’s fair value remain under pressure. As I wrote last year in my whitepaper Managing Expectations: “We welcome the regulators to explore ways to manage these issues better and create both a fairer playing field and more transparent trading arena.”

But until gold is allowed to find its true, fundamental value, now might be a good time to accumulate. As always, I recommend that investors allocate 10 percent of their portfolios to gold—5 percent in bullion, 5 percent in gold stocks, then rebalance every year.

Tell us what you think!

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

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 Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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 3/31/2015: CME Group Inc. 0.00%, Procter & Gamble Co. 0.00%.

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

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Gold and Health Care Stocks Get a Clean Bill of Health
June 22, 2015
June 2006: Shakira's hips didn't lie and rates rose for the last time

Even though the Federal Reserve announced last week that it would wait a little longer to raise rates, spooked investors fled to gold bullion, helping to drive prices above $1,200 an ounce. It was the greatest single-session surge by percentage in nearly a month and a half for the yellow metal, widely seen as a safe-haven investment. As I told MarketWatch, $1,200 is an important threshold for gold miners because it helps increase profitability and spur production.

The market move can be attributed not only to the Fear Trade—interest rate jitters and the Greek financial crisis—but also to the Love Trade. Heading into late June, the yellow metal has historically hit a trough and then rebounded on account of the approaching Indian festival and wedding seasons, a traditional time for gold gift-giving. I mentioned in a recent Frank Talk that in all but two of the past 27 years, gold and gold equities enjoyed a late summer rally, and that between 2001 and 2014, the metal posted an average 14.9-percent gain between midsummer and mid-autumn.

At the same time, it’s important for investors to keep in mind that gold has its own DNA of volatility. For the 12-month period over the last 10 years, gold’s volatility has been plus or minus 19 percent.

Other factors that could be influencing gold markets right now are China and, believe it or not, the State of Texas. The Asian giant is buying massive amounts of the metal to back the renminbi, which it purportedly wants to elevate to a world-class reserve currency. Similarly, Texas will be bringing home between $650 million and $1 billion worth of bullion from the Federal Reserve, as it’s in the early stages of creating the first state-run gold depository.

Global Pharmaceutical Spending Could Reach $1.3 Trillion by 2018

Besides gold, we’re also finding strength in health care, the best-performing S&P 500 Index sector for not only the week but also the one-, three-, five- and 10-year periods.

It’s easy to see why. According to health care information and technology company IMS Health, total pharmaceutical spending around the globe is expected to reach $1.3 trillion in just three years’ time. Although the U.S. remains the largest market in the world, China is set to experience the largest spending growth as its population continues to swell and incomes rise.

Pharmaceutica-spending-per-capita-is-expected-to-grow
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Indeed, in many parts of the world, the fastest-growing demographic is those aged 65 and older, a cohort that is much more likely to be prescribed medicines and require other health care treatments and services. Because of rising life expectancy, the number of centenarians—those over 100—is projected to grow 10-fold between 2010 and 2050, according to the National Institute on Aging.

Percent-Change-in-the-Worlds-Population-by-Age-2010-2050
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As a result, the number of people over 65 will, for the first time ever, make up a larger percentage of the world’s population than those under five. This bifurcation should continue to widen as even more people live longer and reach advanced ages.

Young-Children-and-Older-People-as-a-Percentage-of-Global-Population
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2015 Health Care M&As Expected to Top 2014’s Record $114 Billion

Last year, health care companies benefited from a series of business deals, all of which totalled a record $114 billion. We’re only halfway through the year, and already we’ve seen close to $100 billion worth of mergers, acquisitions and other deals, one of the biggest being CVS’s takeover of Target’s pharmaceutical business for $2 billion.

Below, you can see how some of the growthier health care companies we hold in our Holmes Macro Trends Fund (MEGAX)—Canadian drug-maker Valeant,  insurance company Cigna and hospital-operator HCA Holdings—have outperformed the S&P 500 Health Care Index year-to-date. All three companies recently hit all-time highs.

Health-Care-Stocks-on-the-Upswing
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Valeant, maker of a wide range of best-selling drugs, has managed to expand over the years through a host of strategic acquisitions, including eyecare company Bausch + Lomb and specialty pharma company Salix Pharmaceuticals. It’s reported that a Valeant insider has recently purchased $1.8 million in company stock, usually a good sign of future growth. Meanwhile, Cigna shares had a boost when the market learned that rival insurers Anthem and Aetna expressed interest in buying the Connecticut-based company.

Because of a growing (and aging) population and the emergence of a truly global middle class, we see health care as a strong performer for the long-term. Along with information technology and consumer discretionary, we are overweight health care right now, which has helped MEGAX beat its benchmark, the S&P Composite 1500 Index, year-to-date. 

USGIs-Holmes-MAcro-Trends-Fund-MEGAX-Is-Ahead-of-Its-Benchmark-Year-to-Date
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This Asset Class Could Earn You More Income Than Treasuries, and It's Tax-Advantaged

In a recent Barron’s article, investors are reassured that even though the municipal bond market has contracted for the last three months largely because of interest rate concerns, now might be a great time to get into shorter-term munis. In fact, according to Bloomberg, households are increasingly moving away from individual muni bonds and into actively-managed muni mutual funds.

Seekers of fixed income, Barron’s says, can earn more “from a triple-A rated muni maturing in 15 years than they can from a Treasury—roughly 2.8 percent versus 2.6 percent.”

The muni, moreover, is tax-free at the federal level and, in many cases, the state level.

Our Near-Term Tax Free Fund (NEARX) invests mostly in quality, short-term municipal bonds. Having provided investors with over 20 straight years of positive returns, NEARX holds five stars overall from Morningstar, among 185 Municipal National Short-Term funds as of 5/31/2015, based on risk-adjusted return.

Explore NEARX today!

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

Past performance does not guarantee future results.

Total Annualized Returns as of 3/31/2015:
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Holmes Mega Trends Fund -2.45% 9.16% 5.10% 1.94% N/A
Near-Term Tax Free Fund 2.38% 2.59% 3.10% 1.08% 0.45%
S&P 1500 Composite Index 12.54% 14.64% 8.26% N/A N/A

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through April 30, 2016, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Morningstar Rating

Overall/185
3-Year/185
5-Year/161
10-Year/111

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-term funds
Through: 5/31/2015

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

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

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600. The index was developed with a base value of 100 as of December 30, 1994. The S&P 500 Healthcare Index is a capitalization-weighted index.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund and Near-Term Tax Free Fund as a percentage of net assets as of 3/31/2015: IMS Health Holdings Inc. 0.00%, CVS Health Corp. 0.00%, Target Corp. 0.00%, Cigna Corp. 0.00%, Valeant Pharmaceuticals International Inc. 0.00%, HCA Holdings Inc. 0.00%, Bausch & Lomb Inc. 0.00%, Salix Pharmaceuticals Inc. 0.00%, Athem Inc. 0.00%, Aetna Inc. 1.14%.

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 in the Age of Soaring Debt
June 18, 2015

Ever wonder how much gold has ever been exhumed in the history of the world? The GFMS Gold Survey estimates that the total amount is approximately 183,600 tonnes, or 5.9 billion ounces. If we take that figure and multiply it by the closing price on June 16, $1,181 per ounce, we find that the value of all gold comes within a nugget’s throw of $7 trillion.

This is an unfathomably large amount, to be sure, yet it pales in comparison to total global debt.

According to management consulting firm McKinsey & Company, the world now sits beneath a mountain of debt worth an astonishing $200 trillion. That’s greater than twice the global GDP, which is currently $75 trillion. If we were to distribute this amount equally to every man, woman and child on the face of the earth, we would each owe around $28,000.

More surprising is that if gold backed total global debt 100 percent, it would be valued at $33,900 per ounce.

Try convincing your gold dealer of this next time you want to sell a coin.

5.9 Billion Ounces. Estimated amount of gold ever mined. $200 Trillion. Amount of global debt. $33,900. Value per ounce if gold backed debt 100%.

Besides imagining being able to buy a new BMW with a single American Gold Eagle coin, why is it important to think of the yellow metal in this way?

The Case of the Runaway Debt

To answer that, let’s back up a bit. For thousands of years, in countless cultures around the world, gold has been recognized as an exceptional store of value and, as such, accepted in all forms of transactions. A new archeological discovery, in fact, shows that the metal was being traded in the British Isles as far back as 2500 B.C., an entire millennium before the world’s first gold coins were minted in what is now present-day Turkey.

Up until the twentieth century, most nations were still using the gold standard. Just as most music is composed in a particular key signature to control tonality, the gold standard has historically provided long-term stability and inflationary controls. Even so, several financiers and central bankers throughout history tried experimenting with a fiat currency system, a decision which often led to major imbalances between monetary and fiscal policies, and eventually economic depressions. Last week I shared two such examples, including Scottish gambler John Law’s four-year experiment with paper money in the early eighteenth century, which ruined France’s economy and laid the groundwork for the French Revolution.

More to the point, the gold standard limits the amount of debt that can be issued. Forty-four years ago, when the U.S. made the switch to a fiat currency system, the federal government owed $399 billion. Since then, outstanding debt has ballooned 4,411 percent to $18 trillion—more than twice the amount of all the gold in the world. Such massive debt levels can be reached only in a fiat currency system, where money is easy, virtually limitless and unsecured by anything tangible.

Below, you can see how dramatically all debt in the U.S., both public and private, has been allowed to soar past economic growth since the end of the gold standard.

Runaway Debt in the U.S Beats GDP Growth
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The $200 Trillion Question

So how would any of this debt ever be settled were it called in tomorrow? The U.S. currently holds “only” 8,133.5 tonnes of gold in its reserves, a significant decline from the all-time high of over 20,000 tonnes in the 1950s. This amount calculates to about $340 billion—nothing to sneeze at, but a far cry from the current U.S. debt level.

Countries with the largest gold holdings

This is the case in other nations as well. As you can see, Japan is one of the top holders of gold, but at 400 percent, its debt-to-GDP ratio is higher than any other country’s in the world.

Lately we’ve seen several central banks repatriate more of their gold reserves from foreign vaults, most notably Germany, Austria, France, Switzerland and others. Texas is even in the early stages of creating its own gold depository, the first to be run by a state. The fact that central banks still hold the metal has less to do with “tradition”—as former Federal Reserve Chair Ben Bernanke put it during a Congressional hearing in 2011—and more to do with confidence in gold’s enduring power.

It’s unlikely that gold will ever reach $33,900 per ounce—or even $12,000, as investing expert James Turk calculates—but the fact that supply has not kept up with debt levels suggests that prices might very well rise.

Gold’s Late Summer Rebound Trend

A new report by Bank of America Merrill Lynch shows that since 2001, bullion has reached a bottom between mid-June and mid-July and rebounded thereafter. In all but two of the last 27 years, or 93 percent of the time, gold and gold equities enjoyed a late summer rally, thanks in large part to the approaching Indian festival and wedding seasons.

This helps confirm what I often write and speak about, that gold prices have historically followed seasonality trends for the five-, 15- and 30-year periods. You can see how gold troughed between June and July and then rose in anticipation of Diwali and the wedding season.

Gold: 24 Hour Composite
click to enlarge

According to BofA Merrill Lynch, from 2001 to 2014, the yellow metal gained 14.9 percent on average between mid-summer and mid-autumn.

Gold's Summer Seasonal Rallies
Year Start Date Gold Price per Ounce End Date Gold Price per Ounce Percent Change in Gold Price
2001 July 30 $265 September 28 $293 10.6%
2002 July 29 $303 September 24 $326 7.8%
2003 July 16 $344 September 24 $389 13.2%
2004 August 12 $394 November 22 $499 14.0%
2005 July 14 $420 September 21 $472 12.6%
2006 July 14 $560 August 9 $650 16.1%
2007 June 12 $647 September 2 $734 13.4%
2008 August 15 $786 October 9 $913 16.3%
2009 July 8 $910 October 13 $1,064 17.0%
2010 July 27 $1,157 November 9 $1,393 20.4%
2011 July 1 $1,487 September 5 $1,900 27.8%
2012 July 12 $1,572 October 4 $1,790 13.9%
2013 June 27 $1,201 August 28 $1,418 18.1%
2014 June 2 $1,244 July 11 $1,339 7.6%
Average       $937.89 14.9%

Source: Bloomberg, BofA Merrill Lynch Global Research, U.S. Global Investors

Gold equities fared even better, posting an average gain of 23.6 percent during the same time periods. This could be a tailwind for both our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

Let us know what you think!

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

Past performance does not guarantee future results.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

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Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 3/31/2015: Bayerische Motoren Werke AG.

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Breaking from the Gold Standard Had Disastrous Consequences
June 11, 2015
a 1928 Federal Reserve Note

About 100 years ago, in his testimony before Congress, banking giant J.P. Morgan famously stated: “Gold is money, and nothing else.”

At the time, this was true in every sense of the word “money,” as the U.S. was still on the gold standard.

Of course, that’s no longer the case. Despite the fact that previous attempts in other countries to adopt fiat currency systems wreaked havoc on their economies, the U.S., under President Richard Nixon, cut all ties between the dollar and gold in 1971. Gold rose 2,330 percent during the decade, from $35 per ounce to $850.

Today, money supply continues to expand while federal gold reserves remain at the same levels.

M2 Money Supply Rises While Gold Supply Remains the Same, 1959 - 2010
click to enlarge

Many people still view the yellow metal as something more than just another asset. They also contend that it’s grossly undervalued. In a recent interview with Hard Assets Investor, author and veteran gold investing expert James Turk explained that the money we use now in transactions is not real money at all but a substitute for gold—real money—which he sees fundamentally valued at $12,000 per ounce.

That is to say, if the U.S. government decided tomorrow to return to the gold standard, one ounce of the metal could be valued as high as $12,000, according to Turk’s model.

The current fiat currency system in the U.S. is more than 40 years old. That’s much longer than many in the past lasted, including two of the earliest attempts by central bankers Johan Palmstruch and John Law, both of which I summarize below. Some readers might identify more than a few parallels between then and now.

Johan Palmstruch, the Dutchman Who Started a Paper Ponzi Scheme in 1661

a 1928 Federal Reserve Note

In the mid-1600s, a Dutch merchant named Johan Palmstruch founded the Stockholms Banco in Sweden, the first bank in Europe to print paper money. The Swedish currency at the time was the daler, essentially a copper plate. Palmstruch’s bank began holding these and issuing banknotes, which were exchangeable in any transaction and fully backed by the physical metal.

At least, that’s what customers were told.

As you might imagine, people found these notes to be much more convenient than copper plates, and their popularity soared. But there was one (huge) problem. Palmstruch had been doling out so many paper bills, that their collective value soon exceeded the amount of metal on reserve. When customers heard the news, a major bank run occurred, but Palmstruch was unable to honor the rapidly-weakening notes.

By 1664, a mere three years into his monetary experiment, the Stockholms Banco was ruined and Palmstruch was jailed—just as Bernie Madoff would be three and a half centuries later.

John Law, the Infamous Scottish Gambler Who Defrauded the French with Worthless Paper

A little over 50 years later, in the early 1700s, a similar experiment was conducted in France, with even more disastrous consequences. This time, the perpetrator was a Scottish gambler and womanizer named John Law, who as a young man had been forced to flee Britain after he killed a man in a duel over a love interest—and bribed his way out of prison. After escaping jail time, Law spent 10 years or so gallivanting about Europe and developing his economic theories, which he outlined in an academic paper.

It was the Age of Enlightenment, when great iconoclastic thinkers such as Descartes, Locke and Newton emerged, changing our understanding of consciousness, politics and physics. Baroque music was all the rage in Europe, as were composers like Bach, Handel and Vivaldi. It was also a golden age of get-rich-quick schemes, and as investors, it’s important that we be aware of the history of human behavior.

In 1715, France was insolvent. It had just lost its king, Louis XIV, and the Duke d’Orléans was named regent until the late monarch’s great-grandson came of age to rule. Familiar with Law and his unorthodox ideas, the duke established him as head of the Banque Générale in hopes that he might reduce the massive debt Louis XIV left behind.

To this end, Law began printing banknotes—lots of them—and flooding the economy with easy money. Doing so, he believed, would expand employment, boost production and increase exports.

John Law, the central banker who broke the Banque de France (and many women's hearts)

It indeed had those effects—for a time. Paris was booming. The number of millionaires multiplied.

Unlike Palmstruch, Law made no claims that the notes could be converted back into gold or any other metal. He believed that a currency, whether gold or paper, had no intrinsic value other than as a government-sanctioned medium of exchange. Instead, his notes were “secured,” vaguely, by French land, including its colonies in the Americas. There was also no limit to the amount of money that could be pumped into the French economy. Like many of today’s central bankers, Law was of the opinion that if 500 million notes were good, a billion were even better.

But to make it all work according to plan, he had to take extreme measures. Law outlawed the hoarding of money, the use of coins and the possession of more than the minimalist amount of gold and silver.

The system turned out to be untenable and the paper money became worthless. After only four short years, the currency bubble burst. Law was not only removed from office but exiled from the country. Until his death in 1729, he roamed Europe heavily in debt, making his way by his former occupation, gambling.

The incident had long-lasting effects. It sustained the country’s economic woes for years and contributed to the start of the French Revolution later in the century, as it stoked working class disenfranchisement.

Lessons Learned?

Just as we still read Locke and listen to Bach, we should remember what Palmstruch, Law and other reckless central bankers did—which was essentially pull the rug out from under their countries’ monetary systems. It would be extreme to suggest that a similar collapse in currency might one day happen in the U.S., but it’s worth repeating that the gold supply has not kept pace with the money supply.

This could have huge implications.

As James Turk points out:

Eventually people are going to understand that all of this fiat currency that is backed by nothing but IOUs is only as good as the IOUs are good. And in the current environment, the IOUs are so big, a lot of promises are going to be broken.

Should those IOUs one day become as worthless as Palmstruch’s or Law’s paper—however unlikely that might be—I suspect many readers would feel relieved to know that they had had the prudence to invest in gold.

I always advise investors to hold 10 percent of their portfolios in gold—5 percent in bullion, 5 percent in gold stocks, then rebalance every year.

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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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Net Asset Value
as of 07/27/2015

Global Resources Fund PSPFX $4.99 -0.07 Gold and Precious Metals Fund USERX $4.63 -0.08 World Precious Minerals Fund UNWPX $3.88 -0.06 China Region Fund USCOX $7.97 -0.28 Emerging Europe Fund EUROX $5.81 -0.05 All American Equity Fund GBTFX $27.52 -0.21 Holmes Macro Trends Fund MEGAX $21.17 -0.22 Near-Term Tax Free Fund NEARX $2.25 0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 0.01