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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.

Here’s What Oil Did the Last Time OPEC Cut Production
December 5, 2016
 

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Here's What Oil Did the Last Time OPEC cut Production

It finally happened. For the first time since 2008, the Organization of Petroleum Exporting Countries (OPEC) agreed to a crude oil production cut last week, renewing hope among producers and investors that prices can begin to recover in earnest after a protracted two-year slump, one of the worst in living memory.

The last three times the cartel agreed to trim output—in 2008, 2001 and 1998—oil rallied in the following weeks and months. Of course, there’s no guarantee the same will happen this time around, as other market forces are at play, but it’s helpful to look at the historical precedent.

OIl Historically Rallied in the Two Years Following OPEC's Agreement to Cut Production
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OPEC’s decision follows a strong endorsement from Goldman Sachs, which upgraded its rating on basic materials to overweight for the first time in four years. Analysts see commodities gaining 9 percent on average over the next three months, 11 percent over the next six months.

As reported by TheStreet’s Paul Whitfield, Goldman’s change of heart was prompted by “the recent acceleration in global PMIs (purchasing managers’ indexes),” which “suggests commodity markets are entering a cyclically stronger environment.” 

The JPMorgan Global Manufacturing PMI rose slightly in November to a 27-month high of 52.1, extending sector expansion for the sixth straight month—very encouraging news.

JPMorgan Global Manufacturing PMI continues upward momentum
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As I’ve shared with you many times before, our own research has shown a strong correlation between PMI performance and commodity prices three and six months out. I’m thrilled to see Wall Street and media outlets coming around to this realization as well.

In short, OPEC’s production cut is constructive for energy in the near term, while a rising PMI is good news for the long term.

$70 Oil Next Year?

Since oil collapsed in September 2014, as much as $4 billion have been wiped from oil workers’ wages in the U.S. alone, according to Bureau of Labor Statistics data. Countries that rely heavily on oil revenue—Venezuela, Colombia, Russia and Nigeria, notably—have had to stretch balance sheets. And for the first time in nearly 40 years, Alaska, where the oil industry accounts for half of all economic activity, is scheduled to impose an income tax by 2019.

Many analysts now find reason to be optimistic about a recovery in energy. Speaking to the Houston Chronicle, David Pursell of energy investment bank Tudor, Pickering, Holt & Co. predicts “2017 will be a better year for oil and gas activity than we anticipated.” Pursell sees crude possibly rallying above $70 a barrel sometime next year. 

The OPEC deal, announced last Wednesday, aims to reduce production by 1.2 million barrels a day, or about 1 percent of global output. For comparison’s sake, the cartel, which controls a third of all oil production, agreed to a reduction of 2.2 million barrels a day in 2008. Although not an OPEC member, Russia has also agreed to trim production—by about 300,000 barrels a day—the first time it’s cooperated with OPEC since 2001.

Following the announcement, West Texas Intermediate (WTI) crude surged above $50 a barrel.

Crude oil surges above $50 a barrel on OPEC production cut announcement
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Meanwhile, investors piled into oil ETFs, with inflows into one surpassing $1 billion on Thursday alone. Shares of Halliburton, Continental Resources and California Resources all saw dramatic spikes.

Oil explorers & producers jump on production cut news
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The Challenges Ahead

Some investors are understandably cautious. OPEC doesn’t have the authority to enforce compliance from its 14 member-nations, and output has typically exceeded quotas.

What’s more, it’s likely U.S. shale producers, which today operate at lower costs compared to other players, will be first to take advantage of a bump in prices. Drilling activity is already accelerating. Since May, the number of active oil rigs in North America has climbed 50 percent to 474, as of November 23.

Most low-cost oil is in U.S. Shale Reserves
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“U.S. oil production growth is all but guaranteed to return in 2017,” according to Joseph Triepke, founder of oil research firm Infill Thinking. Triepke adds that as many as 150 rigs could be reactivated next year in Texas’ Permian Basin alone.

It’s there, in the Wolfcamp formation of the Permian, that the United States Geological Survey (USGS) recently discovered 20 billion barrels of “technically recoverable” oil, the largest deposit ever to be found in the U.S. Bloomberg reports that the deposit is worth an estimated $900 billion at today’s prices.  

On the demand side, higher prices could spell trouble in emerging countries whose currencies have weakened against the U.S. dollar in recent months, especially since Donald Trump won the presidential election. Because oil is priced in dollars, it’s become more expensive in China and India, the second and third largest oil consumers following the U.S.

Gold Looks Technically Oversold, Ready for a Price Reversal

As I often say, every asset class has its own DNA of volatility, which is measured by standard deviation. Specifically, standard deviation gauges the typical fluctuation of a security or asset class around its mean return over a period of time ranging from one day to 12 months or more.

This brings us to mean reversion, which is the theory that, although prices might trend up for some time (as in a bull market), or fall (as in a bear market), they tend to move back toward their historic averages eventually. Such elasticity is the basis for knowing when an asset is overbought or oversold—and when to sell or buy.

As you can see in the oscillator below, gold looks oversold right now and is nearing a “buy” signal, after which we can statistically expect it to return to its mean.

Gold 60-Day Percent Change Oscillator
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Gold’s current standard deviation for the 60-day period is about 7 percent—you can reasonably expect it to move this much over a two-month period, therefore, 68 percent of the time.

For more on standard deviation and mean reversion, I invite you to download my whitepaper, “Managing Expectations: Anticipate Before You Participate in the Market.”

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.

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.

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.

 
 

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Modi’s Demonetization Is a Cure Worse Than the Disease
December 1, 2016

overnight indian prime minister narendra modi killed 90 nations currency

Next Tuesday will mark four weeks since Indian Prime Minister Narendra Modi made his surprise demonetization announcement that has sent shockwaves throughout the South Asian country’s economy. In an effort to combat corruption, tax evasion and counterfeiting, all 500 and 1,000 rupee banknotes are no longer recognized as legal tender.

I've previously written about the possible ramifications of the “war on cash,” which is strengthening all over the globe, even here in the U.S. Many policymakers, including former Treasury Secretary Larry Summers, are in favor of axing the $100 bill. In May, the European Central Bank (ECB) said it would stop printing the 500 euro note, though it will still be recognized as legal currency. The decision to scrap the “Bin Laden” banknote, as it’s sometimes called, hinged on its association with money laundering and terror financing.

Electronic payment systems are convenient, fast and easy, but when a government imposes this decision on you, your economic liberty is debased. In a purely electronic system, every financial transaction is not only charged a fee but can also be tracked and monitored. Taxes can’t be levied on emergency cash that’s buried in the backyard. Central banks could drop rates below zero, essentially forcing you to spend your money or else watch it rapidly lose value.

Inevitably, low-income and rural households have been hardest hit by Modi’s currency reform. Barter economies have reportedly sprung up in many towns and villages. Banks have limited the amount that can be withdrawn. Scores of weddings have been called off. Indian stocks plunged below their 200-day moving average.

indian stocks tumble following modis demonetization announcement
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Demonetization has also weighed heavily on the country’s manufacturing sector. The Nikkei India Manufacturing PMI fell to 52.3 in November from October’s 54.4. Although still in expansion mode, manufacturing production growth slowed, possibly signaling further erosion in the coming months.

Indian Manufacturing Cools in December
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India Runs on Cash

The two Indian bills in question, worth $7.50 and $15, represented an estimated 86 percent of all cash in circulation by value. No two bills in the U.S. so dominate transactions quite like the Rs500 and Rs1,000 notes, but imagine if tomorrow the Treasury Department killed everything north of the $20 bill. Despite the widespread availability and acceptability of electronic payment systems, this would be devastating to many American consumers who prefer cash or who are underbanked.

Because India’s economy relies predominantly on cash, the effects will be far greater. ATMs are scarce, and few rural Indians have a credit or debit card. An estimated 600 million Indians—nearly half the country’s population—are without a bank account. Three hundred million have no government identification, necessary to open an account. By comparison, about 7 percent of Americans are unbanked, with an additional 20 percent underbanked, according to the Federal Deposit Insurance Corporation (FDIC).

In india cash is king
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This is one of the main reasons why Indians have traditionally held gold in such high demand. Many have little faith in banks and other financial institutions, preferring instead to store their wealth in something more reliable and tangible. So great is Indians’ appetite for the yellow metal that prices have historically surged in September, following the end of the monsoon season and ahead of Diwali and the wedding season, when gifts of gold jewelry are typically given.

“Gold is a need of the [Indian] people,” says Suresh Jain, owner of India’s B.J. Jain Jewellers, as quoted in the Financial Times. “It is not a luxury item. It is essential.”

Ironically, though, Modi’s demonetization scheme will likely hurt gold demand in the long run, “by dramatically reducing the stock of black money hitherto used in a large chunk of purchases,” according to the Financial Times.

In the three days following the announcement, Apple iPhone sales surged, equaling three quarters of the sales that typically happen in a month, as people tried to move their black money. Shopkeepers obliged by backdating receipts. Demand for other luxury items, such as Rolex watches, also surged.

Last year, our office was visited by the founders of MoneyOnMobile, which provides full point-of-sale services to Indians who don’t have ready access to ATMs. Think of it as the Indian version of Square. It’s likely that with demonetization wiping out so much paper currency, demand for services such as MoneyOnMobile’s will skyrocket.  

Good Intentions, Bad Execution

India is right to tackle corruption

Admittedly, high cash usage often comes with a cost. In 2013, research firm McKinsey found a strong correlation between high cash usage and the size of a country’s shadow economy. The size of India’s own shadow economy—which includes black market transactions and undeclared work—is roughly a quarter the size of gross domestic product (GDP).

Indeed, India suffers from a serious rash of corruption, which hurts honest, hard-working families. According to Transparency International, the South Asian country ranks 76 out of 168 countries in its 2015 Corruption Perceptions Index. In May, Indian government data showed that a scant 1 percent of Indians pay income taxes.

So yes, corruption is a problem. But in the case of ditching paper money altogether, the cure is worse than the disease.

In a New York Times op-ed, Indian economist and World Bank Vice-President Kaushik Basu strongly criticized the policy, rightly pointing out that it’s “mostly hurting people who aren’t its intended targets.”

“The government’s wish to tackle these problems is laudable,” Basu added, “but demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy.”

I agree. Demonetization will hurt low-income and rural families the most, while those who’ve benefited from the country’s deep shadow economy will likely find other avenues to traffic in corruption.

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 BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply the SENSEX, is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange.

The Nikkei India Manufacturing PMI is based on data compiled from monthly replied to questionnaires sent to purchasing executives in over 400 industrial companies. The panel is stratified by GDP and company workforce size. The manufacturing sector is divided into the following eight broad categories: Basic Metals, Chemicals & Plastics, Electrical & Optical, Food & Drink, Mechanical Engineering, Textiles & Clothing, Timber & Paper and Transport.

The Corruption Perception Index, developed in 1995 by Transparency International, ranks almost 200 countries on a scale of zero to 10, with zero indicating high levels of corruption and 10 indicating low levels. Developed countries typically rank higher than developing nations due to stronger regulations.

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 9/30/2016.

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What Trump’s Stunning Upset Means for Markets
November 14, 2016

Donald Trump and Hillary Clinton

Call it Brexit 2.0: American Edition.

Like their British counterparts, who voted in June to cut ties with the European Union (EU), American voters resoundingly rejected globalism last week, calling into question the United States’ involvement in military alliances such as the North Atlantic Treaty Organization (NATO)—which is 72 percent funded by U.S. tax dollars—and international trade deals, from the North American Free Trade Agreement (NAFTA) to the Trans-Pacific Partnership (TPP). Over the course of his campaign, Donald Trump sharply criticized such groups, vowing either to renegotiate the terms or pull out of them altogether. The future of the Paris climate agreement, ratified by over 100 countries as of this month, has also been thrown into uncertainty.

We all remember how Brexit was inaccurately predicted, with polls saying the referendum would fail. In a modern-day equivalent of “Dewey Defeats Truman,” U.S. polls also got the presidential election spectacularly wrong, missing the forest for the trees. Many polls, including CNN, Huffington Post and the Princeton Election Consortium, had Clinton’s chances of winning above 90 percent.

How did the media and pollsters get Election 2016 so wrong - visual capitalist

But in a reverse example of the so-called “Bradley effect,” which I shared with you before, people told pollsters one thing but did the exact opposite in the privacy of the voting booth.

U.S. voters largely repudiated political correctness, the Washington establishment and a biased media. They demanded sweeping, fundamental changes, and yet another Clinton or Bush just wasn’t the person for the job.

Zero Hedge quoted Nassim Taleb, scholar and author of “Black Swan: The Impact of the Highly Improbable” who put into words this frustration:

What we have been seeing worldwide, from India to the U.K. to the U.S., is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy League, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.

In an interview on NPR, Alfonso Aguilar of the Latino Partnership for Conservative Principles spoke about the somewhat surprising election results, particularly among Latino voters, who were expected to hinder Trump’s chances of winning, especially with Trump’s comments about Mexican immigrants and immigration proposals. However, Aguilar commented that the reason 29 percent of the Latino vote went to Trump was because of the same issues cited by other American voters, namely jobs and the economy.

Congratulations, Readers

America's Best Hope - The Economist

National polls and financial publications might not have gotten it right, but you did. In an October 31 Frank Talk poll, I asked who you predicted would win the election. A third of you said Hillary Clinton, the other two thirds, Donald Trump. Our readers joined some neural network models and Jeffrey Gundlach, the DoubleLine Capital CEO and a Ph.D. mathematician, as some of the few who accurately predicted the outcome, beating the mega media channels.

World markets appeared to have wagered Clinton would win, judging from the selloff that ensued after it became clear Trump could pull off an upset. The one notable exception was Russia, as hopes improved that the U.S.—led by Trump, who has expressed admiration of Vladimir Putin—would lift economic sanctions against the Eastern European country.

Domestic stocks, however, were pointing to a Trump win all along, echoing the presidential election cycle that I’ve written about many times. In the three months ended October 31, the S&P 500 Index fell about 2 percent, and even more recently, the S&P 500 closed down for eight days in a row, the longest losing streak since October eight years ago. Historically, any loss during this period has foreshadowed a victory by the non-incumbent party candidate.

Social Media: The Great Disruptor

America just endured its first presidential election in which the majority of the electorate got its news from social media, says AdAge.

America's Best Hope - The Economist

Those worried about the bias of mainstream media need not worry, as it seems a majority of voters were paying more attention to discussions being had, and news being posted, on non-unionized social media. Both candidates utilized social platforms. Trump’s Twitter account in particular gave a no-frills view of his personal thoughts throughout the entire campaign…to all of his 14 million followers.

A Reuters article explains the cost effectiveness of social media on the campaign trail, saying Trump’s win has “upended prevailing concepts about the influence of money in American politics and raised question of whether a lean, media-savvy campaign can become the new model for winning office in the United States.” In fact, Trump is approaching, or may have passed, $100 million from donors who have given “small” donations of $200 or less, reports Politco.com. This surpasses the small donations made throughout the campaigns of many Democrats before him – the most memorable, perhaps, being Barack Obama’s.

The Winners and Losers

Like the British pound following Brexit, the Mexican peso tumbled dramatically, dipping to a record low on the heightened possibility that Trump, with the cooperation of a Republican-controlled Congress, would tear up NAFTA and make good on his promise to build a “big, beautiful” wall along the nearly 2,000-mile U.S.-Mexico border. Such a wall is estimated to cost between $15 billion and $25 billion.

Mexican Peso Selloff Following the U.S. Presidential Election
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Infrastructure names such as Vulcan Materials and Caterpillar rallied last Wednesday morning. Other winners included drug makers and pharmaceuticals, driven by the apparent relief that price controls would not be imposed under a Clinton administration. Private prison stocks such as Corrections Corp. and GEO Group also surged, as did global defense firms Northrop Grumman, Lockheed Martin and Raytheon.

A Trump presidency could be good news for the financial industry. Back in August, Trump announced that, if elected, he would place a “temporary moratorium” on new financial regulations, such as the Labor Department’s fiduciary rule, which regulates how financial advisors service clients. In fact, as laid out in Trump's first 100-day plan, he wants to implement a rule that eliminates two regulations for every one new regulation. As I’ve written about previously, this is very similar to what former Canadian Prime Minister Stephen Harper proposed – Canada’s “One-for-One Rule” introduced in April 2012.

If Trump has his way, taxpayers will be winners also. Many economists agree that cutting taxes will be good for corporate earnings, and by extension, the investing public. As Deutsche Bank points out, the Republicans want to “lower the effective corporate tax rate and try to stimulate growth and hopefully this causes the tax cut to pay for itself over time.”

Reduction in the statutory U.S. tax rate

Going forward, losers could include multinational technology firms that manufacture some or all of their products in China (Apple and Microsoft, for instance) and retailers that mostly sell Chinese-made goods (Walmart). The new president-elect has expressed interest in levying tariffs on Chinese imports, which, I was surprised to learn, he could very well do through the Office of the United States Trade Representative (USTR) and Commerce Department.

This would certainly push inflation up—raising prices on everything from TVs to iPhones to shoes to houseware—which in turn could light a fire under the Fear Trade.

Gold Swings on Trump Victory

Gold had a phenomenally volatile day last Wednesday, the biggest since Brexit. It rose as much as $60, breaching $1,300 an ounce, before ending the day down after U.S. equities rose and the dollar strengthened.

Gold ended down on Wednesday after an extremely volatile day.

Now that the initial shock of Trump’s win is over, the next big test for the yellow metal’s movement is the possibility of a December rate hike. Although gold continues to find support from low to negative government bond yields, we can likely expect the metal to remain relatively flat, at least until we know what the Federal Reserve’s next move will be.

As I shared with you in a recent Investor Alert, HSBC analysts predict a Trump win will be extremely bullish for gold. According to analyst James Steel, Trump’s “protectionist” policies could have a negative impact on global trade and increase federal deficits, which would be supportive of gold. The bank sees gold rising to as high as $1,500 an ounce by year-end.

In events reminiscent of 1997 and 2006, we are seeing an unwinding of the carry trade, which is putting pressure on gold. Investors have been buying Japanese debt at 0 percent interest rates, to buy gold and emerging markets. But now Japan is calling in its debts, causing investors to sell their gold and emerging markets investments.

In this environment, investors can keep in mind that short- term municipal bonds have been much more stable than two-year and five-year government bond yields, especially with the probability that the Fed will raise rates next month.

I invite you to join our upcoming webcast on gold, taking place this Thursday, November 17, at 3:30pm CT. I hope to share further insight into the world of gold and how the landscape is evolving – from the presidential election, to political events around the world, to the rise of complex algorithms influencing our daily lives. We believe that gold remains attractive for investors worldwide and hope that you’ll join in.

Recognizing Other Leaders

Last week, while I was in Melbourne to present a keynote address during the International Mining and Resources Conference, I also had the pleasure of presenting Mines and Money’s 2016 Legend in Mining award to Jake Klein, Executive Chairman of Evolution Mining. Jake, who formerly worked in the commodities division of Macquarie Group, got his start in the mining industry after making several visits to mines and smelters in China. He and two of his colleagues started the company called Sino Mining in 1995, where he was president and CEO. The company grew and was later sold for more than AU$2 billion. After this, he joined Conquest Mining, a small Australian company, which later became Evolution Mining, one of Australia’s rapidly growing gold mining companies.

Frank Holmes presents Jake Klein, executive chairman of evolution mining with legend in mining award this week at IMARC.

Jake was nominated by previous winners of the award as well as by members of the Australian investment community. Congratulations again!

 

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 links above, you will be directed to  third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 09/30/2016: Evolution Mining Ltd., Lockheed Martin Corp., Northrop Grumman, Raytheon Co.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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Manufacturing Activity in China Just Shifted into Overdrive
November 7, 2016

Nanpu Bridge  

A wave of positive economic data suggests the Chinese economy is stabilizing and that business confidence is improving. The country’s purchasing managers’ index (PMI), which measures the health of its manufacturing industry, rose to 51.2 in October, handily beating economists’ estimates of 50.3.

Chinese Manufacturing Beats Expectations
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Expanding at its fastest pace since July 2014, the industry was stimulated by a strong rebound in new orders and higher commodity prices. Output rose to an incredible five-and-a-half-year high. And with backlogs of work beginning to pile up, manufacturers trimmed employees at the slowest pace in 17 months.

I’ve previously written about the importance of tracking the PMI, which you can read here.

Also encouraging is the country’s third-quarter gross domestic product growth, which came in at 6.7 percent for the third straight quarter, all but assuring investors that the economy can achieve the government’s earlier guidance of between 6.5 percent and 7 percent. Higher business confidence helped maintain steady growth, “as proved by the rebound of medium to long-term corporate loans and reacceleration of private investment growth,” according to Singapore-based OCBC Bank.

Consumer spending appears to be robust. In the first nine months of the year, consumption contributed nearly 60 percent to GDP growth, with significant demand gains made in health care, education, financial products and entertainment.

Automobile sales jumped a phenomenal 32 percent year-over-year in September, the fourth straight month of growth exceeding 20 percent. Sales have been so robust—reflecting a rush to purchase new cars before the government’s reduction in sales tax on small vehicles expires at year-end—that new vehicle purchases in China are expected to surpass sales in North America for the first time ever this year.

China Expected Surpass North America Automobile Sales
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Such a great number of cars on the road has resulted in famously massive traffic jams that turned miles of highways into parking lots. Some as many as 50 lanes wide, the very worst incidents in Beijing found hundreds of drivers stuck in lines for days. Beijing officials have recently proposed stopgap measures, but the nightmare congestion underscores the need for greater capacity, which will require even more investment from the Chinese government, not to mention untold amounts of cement, asphalt, steel and other materials.

But really, these are traffic jams you have to see to believe.

China Attracting Assets

The market seems to like what it sees. The Shanghai Composite Index is back up to levels last seen in January, fueled by not only encouraging manufacturing data but also hopes the government will make good on its promises to support infrastructure spending and restructure state-run enterprises. Stocks recently signaled a bullish “golden cross,” when the shorter-term moving average crosses above the longer-term average. 

Chinas Golden Cross
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In a note last week, Goldman Sachs analysts reported they expect reforms to accelerate in the next few years as China transitions from a middle-income country to an advanced economy. Reforms include efforts to restructure or eliminate “zombie” state-owned enterprises and remove marginal capacity. New policies on how to address public corruption have also been floated.

Among ETFs focused on a single emerging market, China funds attracted the largest inflows in the month of October, with new money totaling $275 million, according to Citi Research data.

Inflows into Mexico-focused ETFs were a distant second, at $133 million, indicating a surplus of bets on a Hillary Clinton presidential win this week.

Who Will Lead the SEC in a Clinton Administration?

SEC Chair Elizabeth Warren

SEC Chair Elizabeth Warren
Photo by Tim Pierce / CC-BY

While I’m on the topic of the election, I find it worth sharing that a shake-up at the very top of the Securities and Exchange Commission (SEC) could be unfolding in front of our eyes—with some potentially serious ramifications.

Massachusetts Sen. Elizabeth Warren, one of the most outspoken critics of Wall Street serving in Congress today, recently urged President Barack Obama to remove Mary Jo White as head of the SEC for, among other things, failure to fully implement the Dodd-Frank financial reforms.

The White House flatly rejected Warren’s request, but it raises a few questions: Is she positioning herself to run the SEC herself? Could Sen. Warren, a strong supporter of Clinton, be appointed as the new SEC chair if Clinton were to win? What effect would that have on capital markets?

Although pure speculation, the scenario is worth pondering.

Another Infrastructure Boom Ahead?

Much has been made of the Chinese economy’s transition from one driven by industrial production to one supported by consumption and services. While this shift is indeed taking place, China still remains the world’s largest engine for energy and materials demand, with support from a growing population and rising household income.

The country imported a record amount of crude oil in September, up 18 percent year-over-year, surpassing the U.S. for the second time in 2016. Averaging 8 million barrels a day, imports came close to the 8.6 million daily barrels the U.S. produces on average.

China Imported Record Volumes Crude September
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I also would like to point out that China remains the world’s number one generator of electricity. The chart below shows just how dramatic capacity growth was in the first decade of the century. In 1990, the country’s electricity needs were equivalent to Latin America’s, but as its government pushed ahead with fiscal spending for huge infrastructure projects, demand blew past the continents of Europe and North America.

China Leads World Electricity Generation
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Although infrastructure investment has declined overall from this period, there’s still plenty to get excited about. In the first eight months of 2016, infrastructure spending rose an impressive 19.7 percent over the same period last year, and in May, the government announced it would be pumping more than $721 billion into as many as 303 transportation projects over the next three years.

Two projects in particular are worth noting here. Construction on what will eventually be the world’s largest airport by surface area is currently underway in Beijing. Upon completion in 2019, the $12 billion airport, to be called Beijing Daxing International Airport, will serve as many as 100 million passengers a year, roughly in line with the world’s busiest airport, Hartsfield-Jackson Atlanta International Airport.

Then there’s the ongoing Belt and Road Initiative (BRI), one of the most ambitious undertakings in human history. With total infrastructure costs estimated at $5 trillion, the biblical-size trading endeavor—a sort of 21st century Silk Road—will cost 12 times as much as what the U.S. spent on the Marshall Plan to rebuild Europe following World War II. The initiative has the participation of 65 countries from Asia, Africa and Europe, and is poised to raise the living standards for more than half of the world’s population.

Chinas multi trillion dollar belt and road initiative
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“Though China’s pace of expansion has slowed from the double-digit rates seen in the first decade of the century,” writes HSBC’s Noel Quinn, Chief Executive of Global Commercial Banking, “its global influence—as the world’s second-largest economy and a trading powerhouse—is far greater than 10 or even five years ago. The country’s overseas investments are only likely to increase, further underlining its pivotal role.”

HSBC: Your Candidate’s Win Could Reward Gold Investors

With the U.S. presidential election upon us, London-based HSBC says gold investors should see a significant bump in price no matter who wins.

The bank sees a Trump victory more supportive of gold as a potential “protection against protectionism”—the New York businessman has been very critical of trade deals, including the North American Free Trade Agreement (NAFTA) and the proposed Trans-Pacific Partnership (TPP)—but a Clinton win could also help boost prices to as high as $1,400 by year end, HSBC says.

As always, I recommend a 10 percent weighting in gold—5 percent in bullion and coins, 5 percent in gold stocks. Rebalance every year.

 

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

The Caixin China Report on General Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 420 manufacturing companies. The panel is stratified by company size and Standard Industrial Classification (SIC) group, based on industry contribution to Chinese GDP. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month.

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.

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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Indian Gold Jewelry Sales Set to Hit a Four-Year High
October 17, 2016

Indian households have the world's largest private gold holdings at 23,000 tonnes

Just as April showers bring May flowers, plentiful monsoon rains in India tend to drive up demand for gold jewelry among rural, income-flush farmers, who make up a third of the country’s consumption of the yellow metal.

It’s a relief to hear, then, that India just had its best monsoon season in three years, with heavy rains washing away people’s fears of yet another drought.

Add to that the fact that the yellow metal is now trading in the affordable $1,250 to $1,260 range—a sizeable discount from only a month ago—and gold jewelry sales are expected to surge as much as 60 percent over last year, according to the India Bullion and Jewellers Association.

That would take sales to a four-year high as we near Diwali—traditionally a time when gold-buying is considered auspicious—which would help support prices.

Following Diwali comes the important Indian wedding season. It’s almost impossible to exaggerate how massive this industry is, with one India-based research firm expecting it to hit 1.6 trillion rupees ($24 billion) by 2020.

I’ve shared with you before that between 35 percent and 40 percent of a typical Indian wedding’s expenses is devoted to gold jewelry. If we use the higher estimate, that means close to $10 billion could be spent on gold alone.

But for spending like this to happen, a strong monsoon is needed, which farmers in many parts of India got this year.

A Longstanding History of Driving the World Gold Market

For millennia, gold has played a key role in Indian culture, valued not only for its beauty and durability but also as financial security. That’s no less true today. A 2013 survey conducted by the Federation of Indian Chambers of Commerce & Industry (FICCI) found that more than three quarters of Indians view the precious metal as a “safe investment.”

The same FICCI study also found that gold is a regular line item in most Indian households’ budgets, comparable to what they spend every year on medical expenses and clothing.

Gold is Among Indian Households Regular Expenditures
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It should come as little surprise, then, that Indian households have the largest private gold holdings in the world. Standing at an estimated 23,000 tonnes, and worth close to a whopping $1 trillion, the amount surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

Analysts: Gold Is Setting Up for a Big Comeback

After logging its best first half of the year in 40 years, gold is now trading range-bound while we await the Federal Reserve’s decision to raise rates in December. Most, but certainly not all, of the recent economic data seems to be pointing in this direction, with initial jobless claims at a four-decade low, voluntary quits at pre-recession levels and household income finally on the rise.

The week before last was especially brutal. With markets in China, the world’s largest consumer, closed in observance of Golden Week, the short sellers had free rein, driving the price down more than 3 percent on Tuesday alone.

Despite the weakness, inflows into gold ETFs continue to pour in, as savvy investors recognize that real, or inflation-adjusted, Treasury yields are still in negative territory. I use the 2-year yield here because it’s what many currency traders look at.

Low to Negative Treasury Yields Have Helped Drive Up Gold
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But now some analysts see gold ready to turn again, perhaps prefacing a rally that could carry the metal to an all-time high.

In a note last week, UBS said that as long as the Fed doesn’t hike rates too quickly, gold should resume its upward momentum. And remember, the bull market was triggered last December after the Fed raised rates for the first time in nearly a decade.

Gold Performance Around September FOMC Meetings, 2015 and 2016
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Meanwhile, London-based investment firm Incrementum suggested last week that gold could reach a new record within the next two years, supported by higher consumer prices, low to negative government bond yields and a lack of confidence in central bank policy.

“In this uncharted territory, with big monetary experiments going on, it just makes sense” to hold bullion, Ronald Stoeferle, a managing director at Incrementum, told Bloomberg.

Peak Platinum and Palladium Demand?

Consensus suggests gold has a positive long-term outlook, but platinum and palladium might be looking at an uncertain future.

Platinum and Palladium Under Pressure
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As you probably know, the platinum-group metals (PGM) are used predominantly in the fabrication of automobile catalytic converters, which are responsible for reducing emissions. Platinum is used in diesel-powered engines, palladium in gasoline-powered engines.

With vehicle sales in China rising rapidly, demand for PGMs is still strong. In fact, demand for palladium rose 3 percent this year, hitting a fresh all-time high, according to CPM Group.

Pallladium Usage on a Global Scale

But trouble could be brewing as more and more automakers deepen their shift toward battery-electric vehicles (BEVs) in an effort to comply with international environmental regulations and meet growing consumer demand. Since these vehicles don’t have an internal combustion engine, there are no emissions, meaning PGMs are not needed.

Government policy has largely driven the emphasis on BEVs, with a few nations around the world committed to banning internal combustion engines from roads within the next 10 to 20 years.

Norway was the first, pledging to eliminate them by 2025, less than 10 years from now. The Netherlands is considering a similar ban, effective the same year. And India wants to be the first “100 percent electric vehicle nation” by 2030.

Last week, Germany—the world’s fourth-largest automobile manufacturer, home to Audi, BMW, Mercedes-Benz, Porsche and Volkswagen—voted to do away with all fossil fuel-powered vehicles within 15 years.

Pallladium Usage on a Global Scale

In its platinum and palladium outlook, Metals Focus writes that “for every additional 1 percent of global passenger car production that BEVs claim in 2020, our model suggests a loss of more than 100,000 ounces (3 tonnes) of combined PGMs offtake that year.”

All in all, not good for PGMs.  

However, it is good for copper. As I’ve pointed out before, BEVs use about three times as much copper wiring as traditional combustion engines vehicles.

It’s important to recognize that disruptive technologies have always changed markets. Right now, one of them is battery-electric vehicles. Embrace them or not, the decision is yours. But as investors, we must acknowledge which way the wind is blowing, and adapt—or be left behind.

Don’t Forget to Register for MoneyShow Dallas!

Speaking of disruptive technologies, virtual reality is quickly going mainstream, with Facebook’s Oculus Rift and other VR headsets likely to become one of the next must-have consumer items.

You don’t need one of these pricey rigs to enjoy the MoneyShow Dallas virtual event, though—just an internet connection. This week I’ll be at the MoneyShow, where I’ll be presenting and learning. And if you can’t be there physically, you can always be there virtually to hear from leading economists, premier money managers and top analysts, who will share their best insights, perspectives and strategies to grow your portfolio.

I hope you’ll join me!

 

The French Are at It Again

One final note: Last month, I shared with you the story that European regulators were going after big Americans companies such as Netflix, Facebook, Amazon and more. Their envy policies demand that, if they can’t build their own companies that are just as successful, they’ll tax and regulate them into non-competitiveness.

This socialist mindset is now taking aim at internet content providers.

Last week, according to Zero Hedge, the French parliament introduced a bill that, if enacted, would levy a 2 percent tax on all ad-generated revenue on sites that distribute free content—sites such as YouTube and Dailymotion (a France-based video-sharing site).

This is just the latest example of how Europe is undermining American companies. Why hasn’t Europe created its own Netflix or Facebook? Where’s its Silicon Valley? The continent’s miles of red tape and envy policies have essentially prohibited entrepreneurism and innovation. And instead of relaxing regulations, it chooses to punish U.S. firms for their success.

 

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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 6/30/2016.

Share “Indian Gold Jewelry Sales Set to Hit a Four-Year High”

Net Asset Value
as of 12/09/2016

Global Resources Fund PSPFX $5.59 -0.01 Gold and Precious Metals Fund USERX $7.39 -0.15 World Precious Minerals Fund UNWPX $6.59 -0.11 China Region Fund USCOX $7.80 -0.06 Emerging Europe Fund EUROX $5.78 -0.03 All American Equity Fund GBTFX $23.94 0.08 Holmes Macro Trends Fund MEGAX $20.40 0.02 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change