- May 1, 2013
- A Case for Owning Commodities When No One Else Is
Sometimes following where money is being invested is a solid course of action to gain alpha; other times, a better opportunity lies in going the opposite direction, i.e., thinking contrarian.
Take commodities, energy and materials, which may be the most unappreciated areas of the market these days. According to Bank of America Merrill Lynch’s Global Fund Manager Survey of 250 participants who collectively manage $725 billion, energy, materials and commodities are extremely underowned.
As you can see below, the global asset class positioning during the first week of April compared to historical data shows that energy positions are close to 3 standard deviations below the long-term average. An allocation to materials is more than 2 standard deviations below its long-term average and commodity exposure is close to 2 standard deviations below its historical measure.
Take note of the timing, though, as it appears that it may make sense to own the most underowned areas of the market. Compare today’s portfolio weightings to the last time fund managers had such a significant underweight in these asset classes. Each bar below indicates whether allocations in energy represented a net overweight or underweight position. Most of the time since 2003, managers maintained an overweight allocation, which means they likely anticipated outperformance in energy companies during this period of time.
However, the last time they had such a big underweight in global energy for this long was at the end of 2008 and the beginning of 2009.
In materials, there were many more times that managers chose to have an underweight allocation to the sector. But again, the magnitude of today’s allocation decision matches what we saw in the 2008-2009 timeframe.
A similar picture for commodities reveals this consistent trend. Asset allocation indicating an overweighting in commodities hasn’t been this negative since 2008-2009.
Given the historical trend in late 2008 and early 2009 when managers were invested in other areas of the market, many likely missed the huge rally in natural resources stocks. From the market bottom on March 9, 2009, the Morgan Stanley Commodity Related Equity Index of commodity stocks grew 156 percent on a cumulative basis over the next two years. This is more than twice the return of the commodities futures index, the Dow Jones-UBS Commodity Index.
Don’t miss the next potential rally. In one investment, the Global Resources Fund (PSPFX) gives you exposure to all three of these underowned segments of the market. It’s a multi-faceted approach to energy and materials stocks across 10 distinct industries to aim for lower volatility and better growth potential.
We believe the commodity supercycle continues, driven by emerging countries experiencing rising urbanization, increasing wealth and healthy GDP growth rates. What’s important for investors to remember is to build a diversified basket of natural resources companies actively managed by professionals who understand the seasonal and cyclical trends of these specialized assets.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Past performance does not guarantee future results.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
The Dow Jones UBS Commodity Index is composed of futures contracts on physical commodities, and includes commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The Morgan Stanley Commodity Related Index (CRX) is an equal-dollar weighted index of 20 stocks involved in commodity related industries such as energy, non-ferrous metals, agriculture, and forest products. The index was developed with a base value of 200 as of March 15, 1996. 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. Diversification does not protect an investor from market risks and does not assure a profit.
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- April 30, 2013
- This Chart Answers a Classic Question about Gold
Since gold’s bull run began a decade ago, many people have asked me whether the metal was in a bubble, despite the fact that there were many drivers in place for gold.
Here’s another comparison that answers this classic question.
Research firm Commerzbank’s strategists recently compared the price of gold starting in 2002 to the price of Brent crude oil starting in 1998 and the NASDAQ Composite from 1990. Immediately following each index’s record highs, oil and tech stocks declined sharply. Within nine months, tech stocks had halved in price, while it took only three months for oil to lose half its price, says Commerzbank. You can see the dramatic rise and fall of each index on the chart below.
In contrast to oil and tech, gold has been level-headed over the past decade. Nearly 20 months after its peak, gold has fallen only about 25 percent, and its path remains in line with Brent and the NASDAQ after their bubbles burst.
In Commerzbank’s opinion, a comparison between the current situation in gold and the former bubbles is superfluous at best.
Download a copy of What’s Driving Gold now.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
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- April 24, 2013
- Meet the Power Couple of the East
On the “2013 TIME 100” annual list of most influential people in the world, you’ll likely recognize a few power couples who individually made the list. President Barack Obama and First Lady Michelle Obama were named two of the world’s most influential people, as were the “royal couple of culture,” Jay Z and Beyoncé.Another dynamic duo may surprise you. They are China’s new leader, President Xi Jinping, and Chinese First Lady Peng Liyuan.
Not only is Xi the president of China, but he also holds the three most powerful political titles. He is the Secretary General of the Party, the Chairman of Military Commission and President of the Nation.
His wife, Peng Liyuan, is very familiar with the limelight. She was once more famous than her husband, as she sang patriotic songs in the People’s Liberation Army.
Peng is very different from previous Chinese first ladies, who were typically invisible to the rest of the world. But given her charm and popularity, the first lady will help broaden the appeal of China, according to the Financial Times.
“From John F. Kennedy to Barack Obama, U.S. presidents have used their spouses to help improve their image at home and abroad. But the decision by the easy-going Mr. Xi to break with Chinese tradition signals his recognition that China must find new ways to make friends, as its global rise triggers fear and suspicion around the world,” says the Financial Times.
Perhaps making TIME’s list is the first step in completing the president’s goal.
See the magazine’s complete list.
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.
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- April 22, 2013
- Gold Buyers Get Physical As Coin and Jewelry Sales Surge
I was honored to be in St. Paul’s Cathedral attending Margaret Thatcher’s funeral last week. It was quite a special opportunity to pay tribute to Britain’s longest-serving prime minister in person, and the ceremony provided a reflective occasion on her influential leadership and unwavering conviction.
As her country faced an economic crisis with high inflation, high tax rates and hundreds of mining strikes, the lady’s iron courage helped her make the difficult decisions that steered the United Kingdom to a more sustainable path.A steely resolve seems to be lacking in many of our world leaders today. Maggie led the U.K. down the path of privatization, encouraging entrepreneurship and free markets because her belief was that “Socialist governments traditionally do make a financial mess. They always run out of other people’s money.”
In his recent webcast, Global Portfolio Strategist Don Coxe points out the effectiveness of this privatization path, showing the rise in the U.K.’s real GDP from the time she was elected Leader of the Opposition in 1975 through today.
Buyers Move from Gold ETFs to Physical Gold
After spending a few short days in London, I flew back to the U.S., landing in New York City to work with the International Crisis Group. U.S. Global Investors has been a strong supporter of the ICG, which works to resolve conflicts around the world and promote peace and prosperity.I also met with several business leaders while in The Big Apple. For those of us in the investment business, we all have the same question on our minds: What’s going on with gold? How can governments’ balance sheets continue to expand like we’ve never seen before in history, yet the price of the metal melt so quickly?
We noted numerous reports indicating that there’s a shift taking place in the gold market, with investors discarding the gold ETF, preferring physical gold instead. Take a look at Zero Hedge’s chart. On one day alone, April 17, buyers scooped up a record 63,500 ounces from the U.S. Mint. This is equivalent to 2 tons of gold, “more than the previous two months combined,” according to Zero Hedge. This is a drastic move compared to recent history.
The U.S. Mint is generally the last place gold shoppers buy their ounces because they have to pay “a hefty premium” for gold. It’s like going to 7-Eleven on Christmas to buy AA batteries for the electronic toy Santa left under the tree.
However, gold shops such as Apmex or Gainesville Coins aren’t closed; rather, gold customers end up buying from the U.S. Mint because “nobody else has any physical [gold] at a lower premium to spot (or any metal in inventory),” says Zero Hedge.
So, even with the gold price dropping, why are gold coins selling at a premium? It’s Economics 101: The coin supply is limited and the demand is high.
This buying trend isn’t only occurring in the U.S. In Bangkok, Thailand, for example, crowds of buyers were filling stores, eagerly waiting in multiple lines to purchase gold jewelry and coins. According to The Wall Street Journal, “Gold shops from Tokyo to Dubai have witnessed frantic buying of the coins, alongside other items such as gold wedding bracelets. The surge has been triggered by cheaper prices.”China Daily reported a similar buying enthusiasm occurring in jewelry stores in Beijing, Shanghai and Guangzhou. Shanghai’s newspaper reported that “while gold markets in the United States and Europe saw panic selling, sales of gold bars and jewelry jumped in China as buyers viewed the lower prices as an opportune moment to invest.”
To put it simply, for retail investors in the west and east, gold went on sale. A Black Friday special for the yellow metal in spring.
Moderation is Gold Investors’ Guide
We believe the yellow metal is experiencing a short-term correction during its long-term secular bull market. Compare today’s gold bull run to the spectacular gold bull market in the 1970s. From February 1975 to August 1976, gold fell 44 percent. However, those investors who held tight to their gold were rewarded: From August 1976 to January 1980, gold rose an astounding 700 percent.This time around, gold fell 28 percent over nearly the same period.
This chart holds a mixed message for investors. On the one hand, if history repeats itself, gold could fall as far as $1,050. The positive message, though, is that history teaches us that gold can withstand a 44 percent decline and rebound substantially.
As Roman philosopher, Marcus Tullius Cicero, wisely said, “Never go to excess, but let moderation be your guide.” Cicero’s advice applies to life as well as when investing in gold. What I wrote in The Goldwatcher back in 2008 remains valid today:
“We put a lot of messages into the marketplace, but the one we stress most when it comes to gold is moderation. Don’t try to get rich with gold because the corresponding risk is simply too high. Gold is a volatile asset whose daily price action can be far more dramatic than blue-chip stocks and many other asset classes.”
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.
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- April 18, 2013
- Four Important Facts to Remember About Gold
When volatility prevails in the gold market, I love seeing so many different opinions because it promotes critical thinking and healthy markets. But because gold is unlike any other commodity, many perspectives can be extreme, such as “goldenfreudes” who take pleasure in gold bugs’ pain.
I continue to persuade readers to take a balanced and thoughtful approach to the yellow metal. With this in mind, here are four facts to remember about gold that should help neutralize those extreme bullish and bearish views.
1. You can’t print more gold
The Federal Reserve continues to print fresh, crisp stacks of U.S. dollars amounting to $85 billion every month, driving up the balance sheet to almost $3 trillion dollars. If Ben Bernanke continues churning out dollars at this rate, by 2016, the balance sheet will more than double to $7 trillion dollars.
And research has found that the price of gold moves in near-lockstep to each increase in the Fed’s balance sheet.
Even with the incredible two-day drop in gold prices, U.S. Global portfolio manager Ralph Aldis calculated that the correlation between the rise in gold and the U.S. balance sheet is 0.96. Perfect correlations of 1 are extremely rare in markets, but gold and the balance sheet have moved in sync with each other since 1999, before gold’s bull run began.
2. Gold is viewed as a currency by central bankers
As gold was falling on April 15, Carl Quintanilla from CNBC asked me what I thought about how investors viewed currencies. I feel investors should look at how central banks around the world are viewing their own reserves. Although Cyprus and Italy were possibly forced to sell their gold holdings to pay down debts, take a look at the actions of emerging countries central bankers who are scooping up gold.
The World Gold Council (WGC) reported that in 2012, central banks purchased 535 tons when only a few years ago central banks were net sellers of gold. And it’s important to keep in mind that these central banks love these corrections, as they can purchase gold at cheaper prices.
Russia bought 75 tons, bringing its gold holdings to the seventh largest in the world, with about 1,000 tons. Last year, Brazil, Paraguay and Mexico purchased gold, as did South Korea, the Philippines and Iraq.
Turkey is another country that has been building reserves, though not from purchases. Rather the WGC says its growing gold reserves “reflect the increasing role that gold plays more broadly in the Turkish financial system as these reserves are substantially pledged from commercial banks as part of their required reserves.”
While the tonnage is only a fraction of the overall gold market, it is widely acknowledged that central banks are building their supplies of gold as a means to diversify their holdings away from the U.S. dollar and the euro. As a percent of total reserves, many of these emerging countries mentioned above own very little gold. In fact, Pierre Lassonde, chairman of Franco-Nevada, has noted that even if emerging market central banks wanted to increase their gold reserves to 15 percent of total reserves, they’d have to buy 1,000 tons every year for the next 17 years!
3. A lack of love from the Love Trade is affecting fundamentals
Too many people focus on the Fear Trade, which is when investors buy gold coins or a gold ETF out of a fear of the fallout that may result from governments’ rising debt levels and weakening currencies.
The Love Trade, on the other hand, is the buying of gold out of an enduring love for gold. Two emerging countries that make up almost half of gold demand—China and India—have had a long relationship with the precious metal that is intertwined with their culture, religion and economy. With half of the world’s population buying gold for their friends and family, it’s important to put into context what is happening in their countries.
It was announced this week that China’s income growth slowed in the first quarter of 2013, with urban household disposable income rising only 6.7 percent on a year-over-year basis. This is down from 9.8 percent in the first quarter of 2012, and “the slowest pace since 2001,” says Sinology’s Andy Rothman.
This is very important to gold, as China’s income growth has been shown to be highly correlated to the price of the precious metal over the past decade.
China’s weaker GDP also disappointed gold investors, but I believe this is only a temporary setback. It’s only a matter of how fast China will move to stimulate the economy, since this is a key to global growth.
In India, gold consumption has been hurt by both a weak rupee and government taxes on imports. In the first quarter of 2013 alone, gold imports declined 24 percent, according to Mineweb.
4. Corrections happen, but have historically offered buying opportunities
As of the end of April 15, the gold price on a year-over-year percentage change basis registered a -2.6 standard deviation. While minor corrections in the gold price happen frequently, a move this severe has never occurred before over the previous 2,610 trading days.
With gold’s standard deviation drastically below the “buy signal” blue band, we consider the yellow metal to be in an extremely oversold position on a 12-month basis. The probability that gold will move higher over the next several months is high.
Be Curious to Learn More About Gold
Gold is clearly unlike any other commodity on the periodic table. Its climb year-after-year has enraptured investors to learn more about what’s driving gold.
Watch my discussion with Carl Quintanilla from CNBC
See my interview with Daniela Cambone from Kitco
See the U.S. Global slideshow featured on Business Insider on the Many Amazing Uses of GoldAll opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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. 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 were held by one or more of U.S. Global Investors Funds as of 3/31/13: Franco-Nevada
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