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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.

“Mother of All Bubbles” Keeps Gold in Focus
July 24, 2017

global debt bubble

Today I want to discuss reports that global debt levels are at all-time highs, and what this means for your investment decisions going forward.

But first, a few comments about last week. I recently returned from the Oxford Club’s Private Wealth Seminar, held at the historic Grand Hotel on Michigan’s Mackinac Island. The hotel, which some of you might remember as the setting for the 1980 film “Somewhere in Time,” starring Christopher Reeve and Jane Seymour, took a mere 93 days to build in the 1880s—impossible by today’s standards, especially when you consider that it boasts the world’s largest front porch at 660 feet.

While there, I had the privilege of catching up with some old friends and contacts, including Alex Green, the Oxford Club’s chief investment strategist. You might have read some of his wonderful work for Investment U, the group’s educational arm.

Alex reminded me over lunch that the difference between Democrats and Republicans, in his view, is that Democrats are for personal freedom and some economic restrictions, while Republicans are for economic freedom and some personal restrictions.

I prefer to focus on policies instead of partisan politics, but Alex has a point. I’m convinced that Donald Trump, a Republican, won the presidential election because his pledge to reform the tax code and deregulate resonated with both white-collar and blue-collar Americans who felt as if the U.S. economy was no longer working for them. U.S. corporate taxes are among the highest in the Organization for Economic Cooperation and Development (OECD), spurring large multinationals to move operations overseas, and out-of-control regulations threaten to strangle business growth.

But just as Green insinuated, the Trump administration has enacted, or has hinted at enacting, policies that rankle Americans of all political stripes, precisely because they could be used to encroach upon personal liberties.

Take Attorney General Jeff Sessions’ recent decision to strengthen the government’s ability to seize private property from suspected criminals. (The operative word here is “suspected.”) Many now are arguing this directive could be abused by police and other officials. It could, in fact, violate the Fourth Amendment, which of course protects Americans against “unreasonable searches and seizures.”

This is just one among numerous policy-making decisions that have members of both political parties, as well as independents, scratching their heads. Trump was elected to reform taxes, slash regulations and generally make business and capital formation run more smoothly. It’s unclear how private-asset seizures fit into that picture.

If this administration resolved to stay on message and on course, and worked to bring fiscal relief to everyday Americans, it might receive greater support from those who voted for Trump—and perhaps even from those who didn’t.

U.S. Dollar in Bear Market, a Boon for Gold

Since the start of the year, the five-year Treasury yield, adjusted for inflation, has risen about 150 percent. Normally this would put remarkable pressure on the price of gold—higher yields raise the opportunity cost of buying gold—but over the same period, the U.S. dollar has steadily weakened and is now officially in a bear market. Because gold is priced in dollars, this has been supportive for prices. Year-to-date, the yellow metal is up more than 8 percent.

crosscurents impacting gold treasury yeild up dollar down
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As I said, the greenback’s been on the decline for most of the year so far, but it slumped to a 13-month low against the euro last week following European Central Bank (ECB) president Mario Draghi’s remark that “monetary accommodation” would continue in the European Union (EU) until at least the end of the year.

draghi ending ecb stimulus not there yet

“We need to be persistent and patient and prudent, because we’re not there yet,” Draghi said, referring to the fact that EU inflation and wage growth have been disappointingly slow, despite the bloc’s economic recovery since the financial crisis. (Indeed, the June purchasing manager’s indexes for emerging European markets were all above the key 50 mark for the first time in recent memory.)

UBS: We’re Still Constructive on Gold

That gold is still holding at its current level—despite rising rates, despite a stock market that continues to rally—is “encouraging.”

That’s one of the key takeaways from a UBS note last week, in which the Swiss financial services firm maintains its constructive view of the yellow metal. Investor demand this year has been slower than expected, but UBS analyst Joni Teves makes the case that expectations of a good monsoon season in India this summer could help push consumption in the world’s second-largest importer of gold to a new record high by the end of the year. With India having imported a phenomenal 525 metric tons in the first half of 2017 alone, Teves writes that “we expect gold demand in India this year to be around historic averages,” which would be very supportive for prices.

ETPs Attracted a Record $245 Billion in the First Half of 2017

Like gold in India, exchange-traded products (ETPs) also had a knockout first half. As Deutsche Bank reports, ETPs attracted a record $245 billion in the first six months of 2017, in what has historically been the weaker half of the year. To put into perspective just how impressive this figure is, $245 billion would be the second-largest full-year record amount following 2016’s $283 billion. We could see ETP inflows climb as high as $500 billion by the end of this year, Deutsche estimates.

exchange traded porducts etps see record 245 billion in inflows in first half of year
click to enlarge

Of course, runaway demand for ETPs and other risk assets has contributed to muted interest in gold.

Having said that, though, BullionVault—the world’s number one online precious metals market—reported recently that private gold holdings among its users leaped to a record 38 metric tons, as of the beginning of July. That’s enough gold to make more than 10 million 18-carat wedding rings, BullionVault says, or to supply the microchips for 1.5 billion iPhones. The site points out that investor demand has lately been driven by lower prices, following three months of “light liquidation.”

Global Debt on Alert

All of what I’ve said so far pertains to the near-term. Gold’s medium- to long-term investment case, I believe, looks even brighter. Many unsettling risks loom on the horizon—not least of which is a record amount of global debt—that could potentially spell trouble for the investor who hasn’t adequately prepared with some allocation in a “safe haven.”

According to the highly-respected Institute of International Finance (IIF), global debt levels reached an astronomical $217 trillion in the first quarter of 2017—that’s 327 percent of world gross domestic product (GDP). Notice that before the financial crisis, global debt was “only” around $150 trillion, meaning we’ve added close to $120 trillion in as little as a decade. Much of the leveraging occurred in emerging markets, specifically China, which is spending big on international infrastructure projects.

total global debt stands at all time high
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It goes without saying that this is a huge risk. Some are calling this mountain of debt “the mother of all bubbles,” and we all remember how the last two bubbles ended, in 2000 (the tech or dotcom bubble) and 2007 (the housing bubble).

Paying down this debt will not be easy. As Scotiabank mentioned in a note last week: “Higher interest rates are going to make the burden of refinancing the debt considerably heavier, and as more money goes into servicing the debt, it means less money is available to spend on other things, which could lead to less infrastructure spending and increased austerity.”

Add to this the fact that global pension levels are also sharply on the rise, with people living longer and population growth—and therefore workforce growth—slowing in many advanced economies. In May, the World Economic Forum (WEF) estimated that by 2050, the size of the retirement savings gap—unfunded pensions, in other words—could be as much as $400 trillion, an unimaginably large number.

The U.S. alone adds about $3 trillion every year to the pension deficit. I shared with you earlier in the month that the State of Illinois’s unfunded pensions could be as high as $250 billion, putting each Illinoisan on the hook for $56,000.

Central banks’ efforts to promote economic growth through monetary easing haven’t exactly been a raging success, nor can they continue forever. Plus, near-zero interest rates are precisely what encouraged such inflated levels of borrowing in the first place.

You can probably tell where I’m headed with all of this. Another crisis could be in the works. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction.

Gold is one such asset that’s been a good store of value in such times, and gold stocks have tended to outperform the yellow metal as production costs have fallen, according to Seabridge Gold. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in gold stocks, mutual funds or ETFs.

 

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 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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the commentary were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: Seabridge Gold.

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Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?
July 17, 2017

Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?

Gold got a boost Friday on weaker-than-expected inflation and retail sales figures, casting doubt on the Federal Reserve’s ability to continue normalizing interest rates this year.

Consumer prices rose slightly in June, at their slowest pace so far this year. The consumer price index (CPI), released on Friday, showed the cost of living in America rising only 1.6 percent compared to the same month last year, significantly down from the most recent high of 2.8 percent in February and below the Fed’s target of 2 percent. Much of the decline was due to energy prices, which fell 1.6 percent from May.

consumer prices continued to expand in june yet at a slower pace
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As I’ve explained elsewhere, CPI is an important economic indicator for gold investors to track. The yellow metal has historically responded positively when inflation rises—and especially when it pushes the yield on a government bond into negative territory. Why lock your money up in a 2-year or 5-year Treasury that’s guaranteed to give you a negative yield?

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

But right now the gold Fear Trade is being supported by what some are calling turmoil in the Trump administration. Last week the Russia collusion story took a new twist, with emails surfacing showing that Donald Trump Jr.; Jared Kushner, the president’s son-in-law and now-senior advisor; and former Trump campaign manager Paul Manafort all agreed to meet with a Russian lawyer last summer under the pretext that she had dirt on Hillary Clinton.

Whether or not this meeting is “collusion” is not for me to say, but the optics of it certainly look bad, and it threatens to undermine the president’s agenda even more. For the first time last week, an article of impeachment was formally introduced on the House floor that accuses Trump of obstructing justice. The article is unlikely to go very far in the Republican-controlled House, but it adds further uncertainty to Trump’s ability to achieve some of his goals, including tax reform and infrastructure spending. I’ll have more to say on this later

A Contrarian View of China

A new report from CLSA shows that Asian markets and Europe were the top performers during the first six months of the year. Korea took the top spot, surging more than 25 percent, followed closely by China.

asia and europe are the top market drivers so far this year
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Despite persistent negative “news” about China in the mainstream media, conditions in the world’s second-largest economy are improving. Consumption is up and household income remains strong. The number of high net worth individuals (HNWIs) in China—those with at least 10 million renminbi ($1.5 million) in investable income—rose to 1.6 million last year, about nine times the number only 10 years ago. It’s estimated we could see as many as 1.87 million Chinese HNWIs by the end of 2017.

According to CLSA, global trade is robust, with emerging markets, and particularly China, driving most of the acceleration this year. In the first three months of 2017, global trade grew 4 percent compared to the same period last year, its fastest pace since 2011.

“Indeed the early months of 2017 have seen China become easily the biggest single country driver of Asian trade growth,” writes Eric Fishwick, head of economic research at CLSA.

A lot of this growth can be attributed to Beijing’s monumental One Belt, One Road infrastructure project, which I’ve highlighted many times before. But according to Alexious Lee, CLSA’s head of China industrial research, a “more nationalist America” in the first six months of the year has likely given China more leverage to assume “a larger global, and especially regional, leadership role.”

This comports with what I said back in January, in a Frank Talk titled “China Sets the Stage to Replace the U.S. as Global Trade Leader.” With President Donald Trump having already withdrawn the U.S. from the Trans-Pacific Partnership (TPP) and promising to renegotiate or tear up other trade agreements—he recently tweeted that the U.S. has “made some of the worst Trade Deals in world history”—China has emerged, amazingly, as a champion of free trade, a position of power it will likely continue to capitalize on.

The country’s overseas construction orders have continued to expand, with agreements signed since 2013 valued at more than $600 billion.

business is booming for china
click to enlarge

 

Emerging Europe Expected to Remain Strong

Another recent report, this one from Capital Economics, shows that the investment case for emerging Europe remains strong in 2017. Russia is expected to strengthen over the next 12 months, while Poland, Hungary, the Czech Republic and Slovakia are likely to remain attractive.

“Russia’s economy has pulled out of recession and growth in the coming quarters will be stronger than most anticipate,” the research firm writes, adding that its central bank’s loosening of monetary policy should support the recovery even further.

To be sure, the region faces strong headwinds, including a rapidly aging population and the loss of an estimated 20 million skilled workers to foreign markets over the past 25 years, according to a July 11 presentation from the International Monetary Fund (IMF).

But I believe that as conditions in central emerging Europe countries continue to improve, many of those workers will be returning home. Life in the region is not the same as it was 10 or 20 years ago, when good jobs might have been scarce. Firms are now growing at a healthy rate and hiring more workers. As you can see below, unemployment rates in Poland, Hungary and the Czech Republic have been falling steadily since at least 2012 and are now lower than the broader European Union.    

emerging europe countries hard at work
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This strength is reflected in emerging Europe’s capital markets. For the 12-month period as of July 12, Hungary’s Budapest Stock Exchange is up 38 percent. Poland’s WIG20 is up more than 43 percent. Meanwhile, the STOXX Europe 600 Index—which includes some of the largest Western European companies—has made gains of only 17 percent over the same period.

 

Markets Still Believe in Trump

As we all know, the mainstream media’s criticism and ire aren’t reserved for China alone. Ninety-nine percent of the media right now is against President Trump, for a number of reasons—some of them deserved, some of them not.

Markets, however, seem not to care what the media or polls have to say. The Dow Jones Industrial Average continues to hit new all-time highs. Even though it’s stalled a few times, the “Trump rally” appears to be in full-speed-ahead mode, more than eight months after the election.

Back in November, I wrote about one of my favorite books, James Surowiecki’s The Wisdom of Crowds, which argues that large groups of people will nearly always be smarter and better at making predictions than an “elite” few. Surowiecki’s ideas were vindicated last year when investors accurately predicted Trump’s election, with markets turning negative between July 31 and October 31.

For the same reason, I think it’s important we pay close attention to what markets are forecasting today.

The White House is under siege on multiple fronts, which, as I said, has been positive for gold’s Fear Trade. But equity investors also seem to like the direction Trump is taking, whether it’s pushing for tax reform and deregulation or shaking up the “beltway party,” composed of deeply entrenched D.C. lobbyists and career bureaucrats. Just last week, the president made waves for firing a number of bureaucrats at the Department of Veteran Affairs (VA), long plagued by scandal and controversy. Since he took office in January, Trump has told more than 500 VA workers “You’re fired!”   

The Fundamentals of “Quantamental”

Of course, we look at so much more than government policy when making investment decisions. We take a blended approach of not only assessing fundamentals such as market share and returns on capital but also conducting quantitative analysis.

It’s this combination that some in the industry are calling “quantamental” investing. At first glance, “quantamental” might sound like nothing more than cute wordplay—not unlike “labsky,” “bullmation” and other clever names we give mixed-breed dogs—but it’s rapidly replacing traditional investment strategies at the institutional level.

Business Insider puts it in simple terms: “Quantamental managers combine the bottom-up stock-picking skills of fundamental investors with the use of computing power and big-data sets to test their hypotheses.”

See my Vancouver Investment Conference presentation, “What’s Driving Gold: The Invasion of the Quants,” to learn more about how we use quantitative analysis, machine learning and data mining.

Wall Street: The Birthplace of American Capitalism and Government

moments after closing bell june 29

The concept of quantamentals helps explain our entry into smart-factor ETFs. As most of you already know, members of my team and I visited the New York Stock Exchange (NYSE) three weeks ago to mark the launch of our latest ETF.

While there, Doug Yones, head of exchange-traded products at the NYSE, gave us a short history lesson about the exchange and surrounding area.

Most investors are aware that the NYSE, which is celebrating its 225th anniversary this year, is the epicenter of capitalism—not just in the U.S. but also globally.

moments after closing bell june 29

What many people might not realize is that on the site where the exchange now stands, Alexander Hamilton, the first U.S. treasury secretary, floated bonds to replace the debt the nascent country had incurred during the Revolutionary War.

Right next door to the NYSE is Federal Hall, where George Washington took his first oath of office in April 1789. The building today serves as a museum and memorial to the first U.S. president, whose statue now looks out over Wall Street and its passersby.

In this one single block of Wall Street, therefore, American capitalism and government were born. Here you can find the essential DNA of the American experiment, which, over the many years, has fostered our entrepreneurial spirit to form capital and to create new businesses and jobs. Growth, innovation and competition run through our veins, and that’s largely because of the events that unfolded centuries ago at the NYSE and Federal Hall.

For more insight and commentary like this, subscribe to my award-winning CEO blog, Frank Talk.

 

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 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 Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price-only performance of large, actively traded shares on the Budapest Stock Exchange. The WIG20 Index is a modified capitalization-weighted index of 20 Polish stocks which are listed on the main market. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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Commodities Halftime Report: Separating the Wheat from the Chaff
July 10, 2017

amber waves of grain wheat is the best performing commodity of 2017

Of the 14 commodities we track closely at U.S. Global Investors, wheat rose to take the top spot for the first half of 2017, returning more than 25 percent. The grain was followed closely by palladium—used primarily in the production of catalytic converters—which gained 24 percent.

seperating the wheat from the chaff
click to enlarge

To view our ever-popular, interactive Periodic Table of Commodity Returns, click here.

Between the start of the year and June 30, the Bloomberg Commodity Index contracted 4.03 percent, with energy weighing down on the mostly strong performances of precious and industrial metals and agriculturals.

Contributing to metals’ gains was U.S. dollar weakness. During the first six months, the greenback lost 7.54 percent, responding partially to President Donald Trump’s comment in April that the dollar was “getting too strong.”

More recently, the president tweeted his thoughts on gas prices, which he pointed out were “the lowest in the U.S. in over ten years” for the July Fourth holiday. “I would like to see them go even lower,” he added.

Trump Goes to Warsaw

Speaking of Trump, I feel as if he has represented the U.S. and its values admirably during his visit to Europe last week. His speech in Warsaw sought to strengthen ties between America and Poland, which the New York Times just named the “next economic powerhouse.”

ahead of the g20 meeting this week, Presidend Trump and First Lady Melania arrived in Poland, greeted by Polish President Adrezej Duda and wife Agata.

Trump drew attention to a danger that’s “invisible” yet every bit as dangerous as terrorism and extremism—namely, “the steady creep of government bureaucracy that drains the vitality and wealth of the people.”

The U.S. and Poland “became great not because of paperwork and regulations,” the president said, “but because people were allowed to chase their dreams and pursue their destinies.”

This is the Trump I believe voters elected last November. If he were only able to stay on message and give his Twitter account a rest, he might more easily help engender and inspire an environment that better reflects the vision he described to his Polish audience.

I’m also encouraged by his first one-on-one meeting with Russian President Vladimir Putin. From what I’ve read, it sounds as if the two leaders managed to make some progress on Syria, with both sides agreeing to cooperate in maintaining “safe zones.”

Oil Embroiled

Regarding lower gas prices, Trump just might get his wish. Having fallen 14.30 percent in the first six months, oil is currently underperforming its price action of the past four years.

2017 oil underperforming the past four years
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Much of the thanks for oil’s slump goes to U.S. shale producers, which were quick to reactivate dormant rigs following the Organization of Petroleum Exporting Countries’ (OPEC) December announcement that it would be cutting production. As a result, the market is awash in black gold. In May, the Energy Information Administration (EIA) estimated that domestic output should average 9.3 million barrels a day this year and nearly 10 million in 2018, a level unseen in the U.S. since 1970.

West Texas Intermediate (WTI) popped above $47 a barrel last week, however, on news that oil and gas inventories in the U.S. dropped sharply the previous week. What’s more, the number of active North American oil rigs fell by two in the week ended June 30, from 758 to 756 rigs, the first such contraction since January, according to the Baker Hughes Rig Count.

Although constructive, there’s still quite a bit of terrain to cover before oil reaches the low- to mid-$50s we saw at the start of the year.

Where’s the Wheat?

As I told you back in May, the U.S. reclaimed its longstanding title as the world’s number one wheat exporter this year, displacing Russia, whose weak currency gave the Eastern European country a competitive advantage.

We might soon slip to second place yet again, for two primary reasons: 1) low U.S. wheat plantings and 2) severe droughts and unexpectedly hot weather conditions in the Northern Plains.

According to a March report from the U.S. Department of Agriculture (USDA), American farmers just aren’t planting wheat like they used to. Not only are we seeing shrinkage in the acreage devoted to the amber grain—more and more farmers are switching to soybeans—but wheat seedings are down for a second straight year. The USDA, in fact, estimates them to be at their lowest level ever since records began nearly 100 years ago in 1919.

As to the second point, severe to extreme hot and dry weather conditions in the Northern Plains—specifically in areas of Montana and the Dakotas—are putting wheat (and corn) on the defensive. According to the U.S. Drought Monitor, parts of Montana just experienced their driest May and June in 99 years and the driest January through June since 1983. Last week alone, temperatures in the region surged into the 90s and 100s, about 15 to 20 degrees above the norm. These conditions are expected to persist for several more weeks.

drought in the northern plains has impacted spring wheat conditions
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Supply constraints have pushed the grain up 25 percent so far this year to a nearly two-year high. A bushel now costs a little over $5, but some analysts see it rising above $6 and $7.

Precious Metals Continue to Shine

Also benefiting from limited supply is silver, which climbed nearly 4.5 percent as of June 30. The Silver Institute reported in May that global silver mine production in 2016 declined for the first time in 14 years on lower-than-expected output from lead, zinc and gold projects. World supply decreased 0.6 percent year-over-year, or about 32.6 million ounces.

Meanwhile, silver’s use in solar photovoltaic (PV) cells hit a new record high last year, further boosting demand. As I shared with you in May, solar ranked as the number one source of new electric generating capacity in the U.S. in 2016, followed by natural gas and wind.

In the first half of 2017, palladium, the silvery-white metal used in the production of catalytic converters, has surged to a 16-year high on speculative demand.

palladium price closing in on 16 year high
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At first blush, this trade might seem counterintuitive. After all, gas-powered vehicles, which use catalytic converters to control emissions, are expected to be surpassed in sales by electric vehicles, which do not require palladium, as early as 2040. Volvo just announced that it would completely phase out gas-only vehicles by 2019. Meanwhile, Tesla’s first mass-market battery electric vehicle (BEV) finally hit production last week.

Driving palladium’s rally this year, though, are bets that European car buyers will soon be switching from diesel-burning to gas-burning cars because of emissions concerns.

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

Palladium—one of the rarest elements on earth and mined almost exclusively in Russia and South Africa—is the smallest precious metals market, making its prices particularly vulnerable to such speculative trading. It’s achieved near-price parity with its sister metal, platinum, for the first time in two decades.  

On the other end of the spectrum is gold, whose market is larger than many major global stock and bond markets. Those include U.K. gilts, German bunds, the FTSE 100 Index, the Hang Seng Index and others.

Up 7.75 percent in the first six months, gold was supported largely by strong demand in India as consumers made their purchases ahead of the government’s Goods and Services Tax (GST), in effect since July 1, which levies a 3 percent tax on gold.

The impact of the country’s demonetization in December is also still being felt, with Indians’ confidence in fiat currencies tested. I believe Prime Minister Narendra Modi’s scheme to combat black money and public corruption, while admirable, has only reinforced Indians’ faith in the yellow metal as a store of value.

With consumer prices in the U.S. possibly set to begin rising on President Trump’s more protectionist policies—once he can get them enacted—gold priced in dollars could also be headed higher.

The Road Ahead

There’s a lot we’ll be keeping our eyes on in the second half of the year. For one, look to India’s upcoming Diwali holiday and fourth-quarter wedding season, during which gold gift-giving is considered auspicious.

Earlier in the year, I was excited about Trump’s ambitious infrastructure agenda, which would have greatly boosted domestic demand for base metals and energy. But with the Senate still locked in negotiations over what to do about Obamacare, an infrastructure deal looks as if it’s months if not years away.

Finally, I think with Tesla firing up its Nevada-based Gigafactory, investors would be prudent to keep their eyes on aluminum, cobalt, nickel and especially copper, as electric vehicles use around three times as much of the red metal as conventional vehicles. Lithium, which I featured back in March, is also expected to be a beneficiary of the move to BEVs.

 

 

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 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.
The FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong.

The Baker Hughes North American rig count is released weekly at noon central time on the last day of the work week. 

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2017.

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The Top Six Things You Should Know About Royalty Companies Now
July 3, 2017

franco nevada royalty companies big truck

This past week was an exciting one for U.S. Global Investors. If you haven’t heard, my team and I had the distinct honor of ringing the closing bell at the New York Stock Exchange on Thursday to mark the launch of our latest ETF.

While in New York last week, I had the privilege of seeing many colleagues face-to-face. It’s always a pleasure for me to be able to talk gold with industry friends and experts. One stop during my trip that I thoroughly enjoyed was to chat with Pimm Fox and Lisa Abramowicz on Bloomberg Radio. Our discussion was dynamic as always and I shared with them my outlook for gold in the second half of the year, along with the opportunities I continue to see with royalty names.

discussing gold with lisa abramowicz and pimm fox at bloomberg radio

I still find it curious that many investors don’t realize what a significant role royalty and streaming companies play in the mining business.

Last year I wrote about some of my favorite royalty names, and how I came to know about this business model in the gold mining industry early in my career. If you haven’t read that blog post, I encourage you to go back and explore the groundbreaking work done by Seymour Schulich and Pierre Lassonde, the two founders of Franco-Nevada.

I think that now is a good time to take another look at royalty companies. Here are the top six things I believe investors should know about this specialized sector.

1. What Is a Royalty Company?

Royalty companies, sometimes called streaming companies, serve a special role in the mining industry. Developing a mine property to start producing gold or other precious metal is an expensive, often time-consuming process. Infrastructure needs to be built out, permits applied for, laborers hired and more.

A royalty company serves as a specialized financier that helps fund exploration and production projects for cash-strapped mining companies. In return, it receives royalties on whatever the project produces, or rights to a “stream,” an agreed-upon amount of gold, silver or other precious metal.

bhow does the royalty and streaming financial work
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2. Many Gold Royalty Companies Have Still Been Outperforming Gold

When looking over the last 12 months, many of the royalty companies have outperformed gold. While this is indeed remarkable, it is important to remember that royalty companies do have a robust business model. Their ability to generate revenue in times when the gold (or other precious metal) price is both rising and falling is what makes them attractive.

royalty companies outperformed gold
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3. Remember Real Interest Rates

There’s no question that the gold price is volatile, and in any given 12-month rolling period, historically it’s not unusual for the price of the yellow metal to fluctuate up or down by 20 percent. It’s important for investors to remember that gold historically shares a strong inverse relationship with real interest rates. You can see in the chart that as rates rise, the price of gold falls, and vice versa.

gold historically shares an inverse relationship with real rates
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This is another reason why I like the royalty model. Since royalty companies set fixed, lower-than-market prices for mining output, they can better manage the volatility that is inherent in the gold market. For example, Wheaton Precious Metals’ 19 agreements in 2016 entitled the company to buy silver at an average price of $4.42 an ounce and gold at $391 an ounce.

4. Speaking of Revenue

Last time I wrote about these companies, I shared with you that the three big royalty names boast impressive sales per employee. This is still true. Take a look at the 12-month revenue per employee of Franco-Nevada, Royal Gold and Wheaton Precious Metals. Wheaton has only around 30 employees, but has one of the highest rates in the world, generating $25.8 million per employee. By comparison, Newmont, which employs around 30,000 people, generated $310,000 per employee during the same period. Barrick also falls short by comparison.

royalty companies have greater revenue per employee model than procedures
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5. Friendly to Shareholders

Paying dividends is important to investors, as it reflects the health of a company in terms of its cash flow and profits. Even more favorable in the eyes of investors is a company that is growing its dividends. Between 2012 and 2017, royalty companies had a combined annual dividend growth rate of 17 percent. Compare that to 11 percent growth for the S&P 500 Index, and as low as negative 23 and negative 32 percent for global and North American precious metal miners.

royalty companies dividend rates have been growing
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In fact, 2017 marks Franco-Nevada’s 10th straight year of dividend increases since the company went public in 2007.

6. Less Reliance on Debt

Royalty companies are better allocators of capital than some of the biggest gold miners. Take a look at Newmont Mining, which has a 43 percent debt-to-equity ratio, and Barrick has a massive 91 percent. By comparison, many of the royalty companies have much lower debt, and Franco-Nevada has zero debt. This history of profitability and fiscal discipline is one of the main reasons I find royalty companies so attractive.

royalty companies have less debt
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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.

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 03/31/2017: Barrick Gold Corp, Franco-Nevada, Newmont Mining, Osisko Gold Royalties Ltd., Royal Gold, Inc., Sandstorm Gold Ltd., Wheaton Precious Metals Corp.

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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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 S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.

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Small-Cap Mining Stocks, Big-Time Opportunity
June 19, 2017

wesdome eagle river complex

Last month I told you about the upcoming rebalance of the hugely popular VanEck Vectors Junior Gold Miners ETF (GDXJ), and how it would distress shares of junior, small-cap mining stocks. I said then that the rebalance could create some excellent opportunities for astute investors to accumulate high-quality, well-managed producers at discount prices.

That day has finally arrived, bringing with it a tsunami in the junior resource space, as I told Collin Kettell on Palisade Radio the week before. It’s a buyer’s market—if you know what you’re looking for. The last time the GDXJ underwent a rebalance of this magnitude was in December 2014, so I see this as a rare event savvy investors shouldn’t miss out on.

But first a reminder of what’s been happening with the GDXJ. Basically, it had become too massive for its underlying index—composed mostly of Canadian junior gold producers—with assets rising close to $5.5 billion earlier this year, up from $1 billion only last year.

Mo Money Mo Problems

Normally this wouldn’t be such a concern. But the GDXJ was getting precariously close to owning a 20 percent share of several names in its index, which would have triggered all sorts of regulatory and tax conundrums in Canada and the U.S.

So the fund made several adjustments to its methodology, including raising the market cap threshold of allowable companies to $2.9 billion, up sharply from $1.6 billion. This means it can now hold large producers that don’t appear in its index, the MVIS Global Junior Gold Miners Index. It also means that a number of smaller constituents were down-weighted or divested altogether, giving investors less exposure to junior miners than what the fund’s name implies.

Before any of this took effect, though, many investors, hedge funds and other market participants acted on the rebalance news by indiscriminately selling down their junior mining assets. This introduced fresh volatility to underlying stocks and depreciated prices.

The selloff, I might add, was done mostly without regard for the phenomenal fundamentals and growth profiles some of these companies reported.

These Miners Get High Grades

Take one of our favorite names, Wesdome Gold Mines. The Toronto-based producer has been operating in Canada for 30 straight years as of 2017 and currently carries no debt. Two of its mines, Eagle River and Mishi, are among Canada’s highest-grade gold mines. Last summer, the company made headlines when it discovered gold at its Kiena property in Quebec, sending its stock up an amazing 49 percent to $2.24 on August 25.

wesdome eagle river complex

When Wesdome was added to the GDXJ in March, it cast newfound attention on the $417 million company. Only a month later, the rebalance was announced, and since then, its stock has eased about 19 percent.

GDXJ rebalance has created a buying opportunity for distressed smallcap mining stocks
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I see this as a can’t-miss opportunity for retail and institutional investors to start nibbling on Wesdome and other junior miners that have been similarly knocked down only because of fund flows.

That includes Gran Colombia Gold, the largest gold and silver producer in Colombia, and Klondex Mines, whose Fire Creek Mine in Nevada was estimated to be the highest-grade underground gold mine in the world. (According to IntelligenceMine, Fire Creek averaged 44.1 grams per metric ton (g/t) in 2015, double the ore grade of the world’s number two project, Kirkland Lake Gold’s Macassa Mine, at 22.2 g/t.)

Gran Colombia announced last week that it produced 15,444 ounces of gold in May, representing a new monthly record for the company. This brings the total amount for the first five months of the year to 68,783 ounces, an impressive 21 percent increase over the same period last year. The Canadian-based producer has a very attractive convertible bond that pays monthly.

I’ve frequently praised Klondex for its frugality, strong revenue growth and exceptional management team. The last time I visited Vancouver, I had the opportunity to chat one-on-one with its president and CEO, Paul Andre Hurt, who has 30 years of experience in high-grade mining. Not only is Paul a highly-respected chief executive in the mining space, he’s also a devoted father of five.

A Golden Opportunity

The GDXJ rebalance represents a rare opportunity to accumulate high-quality junior producers at discount prices. I always recommend a 10 percent weighting in gold—5 percent in gold stocks or mutual funds, 5 percent in bars, coins and jewelry.

Commodity prices have lately underperformed equities mostly on subdued oil demand growth, with the S&P GSCI commodity index falling about 4 percent over the last month. If we separate the index components, however, we see that precious metals have posted positive gains year-to-date along with industrial metals.  

Precious metals have outperformed so far this year
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As I mentioned recently, gold imports in China and India, the world’s top two consumers of the yellow metal, have advanced strongly this year on safe haven demand. China boosted its gold purchases from Hong Kong as much as 50 percent this year to 1,000 metric tons, the most since 2013. India’s imports rose fourfold in May compared to the same month last year as traders fear a higher tax rate on jewelry.

With the GDXJ down-weighting junior producers, investors might wonder how they can get broad exposure to small-cap mining stocks.

 

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 serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.

The MVIS Global Junior Gold Miners Index tracks the performance of the most liquid junior companies in the global gold and silver mining industry.

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 3/31/2017: VanEck Vectors Junior Gold Miners ETF, Wesdome Gold Mines Ltd., Gran Colombia Gold Corp., Kirkland Lake Gold Ltd., Klondex Mines Ltd.

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Net Asset Value
as of 07/26/2017

Global Resources Fund PSPFX $5.70 0.03 Gold and Precious Metals Fund USERX $7.20 0.13 World Precious Minerals Fund UNWPX $6.52 0.15 China Region Fund USCOX $10.09 -0.06 Emerging Europe Fund EUROX $6.68 0.08 All American Equity Fund GBTFX $24.60 -0.04 Holmes Macro Trends Fund MEGAX $20.10 -0.12 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change