- January 7, 2013
- In 2013, Resolve to Follow the Money
During these first days of January, many adopt an “out with the old, in with the new,” approach to shed bad habits or extra pounds. Washington opted for its same ol’ strategy when averting the “fiscal cliff,” as the addictive nature of “can-kicking is a transatlantic sport,” according to The Economist. The magazine suggests that the deal made in the 11th hour is “disturbingly similar to the eurozone’s.” The short-term fix did “nothing to control the unsustainable path of ‘entitlement’ spending on pensions and health care … nothing to rationalize America’s hideously complex and distorted tax code... and virtually nothing to close America’s big structural budget deficit.”
In the end, politicians agreed to end the payroll tax cut and raise taxes on the top earners; altogether, tax increases will total $162 billion in 2013. According to a Bloomberg article, it’s the first time since 1990 a Republican leader agreed to a boost on tax rates. The legislation also represents the largest tax increase in two decades, says the Wall Street Journal.
One negative consequence resulting from the new bill is an immediate hit to Americans’ spending cash. International Strategy & Investment (ISI) anticipates that the impact will occur in the first quarter of this year, with real disposable personal income (income after taxes and inflation) decreasing by 3.8 percent, says ISI. In addition, “real consumer spending is likely to remain sluggish at 1.5 percent,” says ISI.
Avoiding the “fiscal cliff” initially calmed the market, with equities and gold beginning to rally before the ink was dry. On January 3, I appeared on Fox Business to discuss the impact on gold and whether the yellow metal had the strength to increase for the 13th year in a row. I said that the lack of fiscal austerity combined with monetary reflation would keep fueling gold throughout 2013.
However, the Federal Reserve poured a bucket of cold water on gold after its minutes were released, with some members documenting their wish to stop quantitative easing (QE) before the end of 2013. While this appears to be a negative for gold, keep in mind that the Fed has always been divided, but when opinions diverge, leadership prevails, says ISI’s Roberto Perli. Chairman Ben Bernanke, along with William Dudley and Janet Yellen, continue to hold the belief that more accommodation is required.
In addition, the conflicting comment was made in the context of the labor market, so if we see QE end by the middle of this year, “it will be because the economy is getting stronger, and that would be a bullish development,” says Perli.
Regardless, we are seeing developed countries’ central bankers adopting very unconventional monetary policies these days, and “the base case for investors must remain that, when the pressure is really on, the choice will be made for yet more easing and yet more bailouts,” says Christopher Wood from CLSA.
It’s likely that the latest round of easing by the Fed was because Bernanke anticipated a reduction in spending and wanted to offset the hit taken by the consumer due to the tax increases. And historically, during times of QE, money flows to riskier assets.
A few weeks ago, I showed how money was heading to emerging markets, and it’s worth repeating, as the trend has continued in the new year. Since QE3 began in September 2012, $37 billion has flowed into emerging markets. In total, during 2012, nearly $50 billion flowed into emerging markets, with three spikes occurring in January, February and December.
Back in April 2012, I suggested that if you apply the principle of mean reversion, history appeared to favor China’s H shares to land in the top half of emerging markets on an annual returns basis. With a new leadership in place and its economy improving, investors have begun to gain confidence in the Asian giant, and in response to the significant flows, equities in China began to outperform other emerging countries, ending the year as a top-half performer on the Periodic Table of Emerging Markets.
Resolve to Follow the Money
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- January 2, 2013
- Readers’ Golden Nuggets Focused on Gold, Resources and Overcoming Negativity
Last week I counted down the most popular commentaries over the past year. China, commodities and bond fund popularity were big hits; so were the Surprises in Gasoline, Oil and Resources Stock Prices. Here are the top four of 2012.
Sometimes it’s the headline that attracts readers, and this is definitely one that gained a great deal of attention. More than 7,000 Seeking Alpha readers checked out the commentary and many left some pretty energized comments—some agreeing with me, and others with a differing view.
I took on the old adage and argued that there were plenty of reasons for investors not to let their equity positions take a long summer vacation. So how did the S&P 500 Index perform? As shown in the chart below, stocks fell significantly in May, but then went on to have a fantastic summer, with June, July, August and September all remaining in positive territory.
One of the reasons I gave for sticking with stocks is the fact that it was the year of an election, which has historically produced positive returns. Since 1972, the stock market has rallied five of the eight election years, according to J.P. Morgan, with market gains of 12 to 26 percent. Only during recession years did the S&P 500 decline.
Not only did the summer of ’12 buck the trend, but take a look at the latest presidential election cycle. The performance of the S&P over the last four years under Obama has been one of the best over the past 50 years of any president, defying the odds of what many people thought about the market.
The third-most popular commentary generated a lot of attention because of the relatively new trend that I’ve highlighted a few times in 2012: Emerging markets’ central banks are diversifying away from the U.S. dollar and buying gold.
This trend could be potentially significant in the coming years. Last October, I highlighted Franco-Nevada’s Pierre Lassonde chart showing the potential increase in gold holdings. Based on the European Central Bank’s recommendation to hold 15 percent of reserves in gold, developing countries would have to accumulate 17,000 tons of gold. At a purchase of 1,000 tons a year (or about 40 percent of today’s production), these central banks would have to buy gold for the next 17 years!
Back in May, I spoke at the Hard Assets Investment Conference in New York. Business Insider posted my slides calling them the “ULTIMATE Bullish Presentation on Gold” and since then the presentation has received 233,141 views on their site, making it our most popular presentation of the year. In case you missed it, you can view all 88 slides.
Our second-biggest story was also gold related, but this year, gold miners were top of mind for investors as gold stocks have remained undervalued compared to bullion. When I discussed the disconnect back in April I pointed out the spread between the NYSE Arca Gold Miners Index and gold bullion was at the same extreme level it was during the 2008 credit crisis despite an improving global economic outlook.
Bloomberg’s “Chart of the Day” recently displayed the same ratio of gold miners vs. gold, going back to September 1993 when the industry gauge was created. As you can see in the chart below, yesterday’s ratio of 0.75 hasn’t moved much from the year’s low of 0.70 on May 15. We see this as a buying opportunity for quality companies as shares of gold miners are a relative bargain to the metal.
One of our most popular publications of the year was the Special Gold Report: What’s Driving Gold Companies? I looked at the multiple forces squeezing the profits and earnings out of gold miners and highlighted the importance of selectively choosing companies that exhibit the best relative growth and momentum characteristics.
“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.” These wise words from Plato reflect the theme of our readers’ favorite posting of 2012. Things are not always as they appear, especially in the media. At a natural resources conference I attended last summer, GMO’s Jerry Grantham made a compelling case for investment in resources but the CNN article on his speech was titled “Our planet will truly be toast.” When I was interviewed on CNBC a host who had hyped the initial public offerings of Facebook and Groupon to viewers scoffed at investing in gold. Since their IPOs, those two high tech companies had collectively lost more in value than all the money invested in gold funds.
Many investors have been unable to recapture their lost confidence. Americans have missed out on almost $200 billion of stock gains as they pulled money from the markets in the past four years since the financial crisis, according to a story by Bloomberg. I believe this post proved popular because we could all use some good news and positive solutions. I reminded investors to look past the negativity to see the patterns and anomalies that will determine where opportunities and threats lie.
Though our political leaders have not been instilling much confidence in their dealings with the fiscal cliff and recent tragic events have broken our hearts and weigh on our minds, I believe that 2013 will bring renewed hope, optimism and opportunity.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
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- December 27, 2012
- The Year’s Surprises in Gasoline, Oil and Resources Stock Prices
On Wednesday, I talked about three of the top 10 commentaries that were popular over 2012. Here are a few more to highlight.
The news media was inundated with footage of strikes in Europe by unionized government workers and the unemployment rate among the youth skyrocketed in Spain, Greece, Portugal, Italy and Ireland. I shared an excellent quote from Ian McAvity which is worth repeating: “When times get tough, economic nationalism and protectionism tends to rise because it is always easier to blame someone else for self-inflicted problems.”
In the post, I compared the woes in the European Union to the U.S. and shared an infographic that U.S. Global created showing “How much goods costs around the world.” This infographic was one of the most shared visuals of the year on Facebook, especially because it was so surprising how much a gallon of gas costs in Europe and Brazil compared to the U.S.
This very recent commentary wasn’t showcasing a brand new trend, but was popular in that it highlighted the important contribution the U.S. was making to the commodity space because of shale growth. Our headquarters sits right smack in the middle of one major area of shale activity and earlier this year I wrote two stories that highlight the benefits that Texas has received because of it. See Texas Ranked Best for Business (Again) and Bright Economic Lights of Texas.
Over the past year, resources companies had been significantly underperforming their underlying commodities. I identified the disparity as an opportunity in April, as my experience tells me that stocks generally revert to their means. I only had to wait a few months before news came out that state-owned companies in Asia sought to take advantage of this discrepancy. China’s oil giant CNOOC announced its purchase of Nexen and Malaysian company Petronas announced its takeout of Progress.
Did you miss Wednesday’s blog post where we listed the three of the top 10? Go there now. On Friday, I’ll conclude with the remaining four. Here’s a hint: They are the golden nuggets of the year.
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- December 26, 2012
- Reader Favorites: A Countdown
The days between Christmas and New Year’s are ideal times to reflect on the topics that captured your interest the most over the past year. To help uncover the top commentaries that were discussed, shared and read, we went data mining across news and social media sources. Over the next few days, I’ll be counting down the top 10, concluding with the Investor Alert on Friday.
(If you aren’t currently receiving the free weekly Investor Alert, click here to sign up today so you don’t miss the next issue).
Bonds as an investment vehicle were about as popular as Canadian singer Carly Rae Jepsen’s “Call Me Maybe” song, with investors pouring more than $300 billion flowing into bond mutual funds while nearly $135 billion exited equity mutual funds as of mid-December, according to data from Investment Company Institute.
With the increased popularity in U.S. Global’s bond funds, I asked John Derrick to give an update on the municipal bond environment and the fiscal challenges affecting municipalities. One particular comment struck a cord with the Wall Street Journal. In “Meredith Whitney Blew a Call—And Then Some,” writer David Weidner mentioned the fact that we were skeptical of the prediction, as Whitney’s prediction hadn’t come to pass. In fact, we indicated that municipal bonds were as resilient as ever.
I wrote this commentary on January 30, following a debate I had with one of the most notorious China bears at the Cambridge House’s Vancouver Resource Investment Conference. This debate came on the heels of a year when the level of articles questioning the possibility of a “China crash” went through the roof.
I was clearly in the minority camp with my bullish opinion on China, and the cloud of negative sentiment hung around for most of the year. Beginning with this post in January, I have encouraged investors to not be distracted by headlines or short-term news as I believed the government had great determination along with a long-term focus on building the necessary infrastructure and a robust urban labor market.
Many of these ideas were featured in my presentation for Cambridge House, which was subsequently picked up and posted by Business Insider. My “EPIC” presentation invoked an “epic” response, as it garnered more than 90,000 page views.
Surprisingly, just recently, people have become more bullish on China, as economic and manufacturing data shows improvement. With the new leadership and many reforms underway, I expect to continue the conversation on what the future holds for China and what effect this will have on commodities over the course of 2013.
Speaking of China and commodities, it’s no surprise that this commentary made the top 10, as our long-time readers look forward to our updated periodic table of commodities. Sports buffs can’t get enough of players’ stats; commodity investors love to see how each resource rank from year to year.
Check back at our site tomorrow to see what surprises 2012 had in store for gasoline, oil and stock prices around the world. Or get it right in your in box by clicking here.
Come January, we’ll be talking about what 2013 holds for natural resources, gold and the companies that mine these treasures in our Outlook Webcast. Don’t miss it. Sign up today to join us on January 9, 2012.
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- December 24, 2012
- Light at the End of the Tunnel for Gold
Intuition was telling me something was going on these past few days in the gold market. Our investment team was watching gold and gold stocks take a tumble for no obvious reason. It wasn’t only us who felt this way: many analysts were caught off-guard. One comment from Barclays Research indicated that the week was unusually “brutal … with quite a few confused participants with some seemingly positive aspects of the market not having an impact.”
My hunch was realized only days later when Zero Hedge posted that Morgan Stanley Wealth Management recommended that its clients dump two of John Paulson’s funds. As MS clients redeemed their shares, the hedge fund giant became a forced seller of gold and gold stocks.
What complicates the gold market is the fact that Paulson is such a big fan of the yellow metal that he offers a “gold share class” to investors, meaning shares are denominated in physical gold. The drawback is when an investor redeems shares, his firm has to convert from gold back to dollars, which forces him to sell his hedged position in the SPDR Gold Shares ETF (GLD). The unfortunate consequence of his actions is a short-term decline in the gold price as the market adjusts.
The chart below highlights how gold, the S&P 500 Index and the 10-Year Treasury yield were plodding along together, until December 12, when the metal dramatically dropped off. This is possibly the day “Paulson may have gotten the redemption fax,” says Zero Hedge.
Paulson is only one high-profile example of a stream of hedge fund managers who have suffered liquidations this year. Much to our chagrin, gold and the gold mining industry have been on the wrong side of these trades.
The metal also took a hit recently when a large investor, or a group of investors, made a negative bet on gold futures, with a speculative put position from January to February nearly doubling in size. Credit Suisse suggests it may be the action of a hedge fund.
Paulson’s loss can be your gain. At U.S. Global Investors, we study probability and statistical models to help us improve our odds in the market. It’s like counting cards in Vegas—there’s no guarantee you’ll hit the jackpot, but you usually improve your odds if you understand the math of probabilities and place your bets accordingly.
One of our favorite charts is the oscillator which shows the probability of gold returning to its mean after a dramatic rise or fall. We believe it helps investors put the current correction in context with historical moves and determines potential buying and selling opportunities.
Based on the last 10 years of data, gold seems to be approaching an oversold position after this latest correction. In standard deviation terms, the percentage change in year-over-year rolling returns, gold has made a downward move of 1.2 standard deviations. An event like this only happens about 10 percent of the time, with high odds favoring a reversion to the mean.
Life is about managing expectations. With gold and gold stocks, there will be short-term anomalies, such as hedge funds’ liquidation. Another historical difference for gold stocks relates to the presidential election year cycle. As we have mentioned before, gold miners tend to perform poorly in the year of a U.S. presidential election. Regardless of which party is in the White House and which party wants to take it back, going back to 1984, the Philadelphia Stock Exchange Gold and Silver Index (XAU) has declined an average of 18.4 percent in the year Americans are busy thinking about voting for a leader.
It’s not the end of the world for gold and gold stocks. Take a look at what happens the year following a U.S. presidential election: Going back to 1985, the XAU historically has increased substantially in post-election federal years, rising 23.4 percent, on average.
With governments lacking courage for fiscal discipline, I expect that interest rates will remain in negative territory for a long time. Central bankers will continue to keep the printing presses warm as policies aren’t expected to change. I believe this will keep the Fear Trade buying gold throughout 2013.
In addition, emerging market central banks have been diversifying into gold. Net official sector purchases of 425 tons year-to-date is a drastic difference compared to only a few years ago when central banks were net sellers of the precious metal. Only recently, UBS reported that in November, Russia purchased nearly 3 tons of gold and Brazil bought almost 15 tons. Iraq—a notable new buyer—bought 25 tons from August through October. Given that this is the country’s first increase since the early 2000s, “having a new buyer in the central bank space and especially from a new region is an important development,” says UBS.
While the Love Trade has been subdued this year, we see light at the end of the tunnel, not a train. One recent development is the increase in mutual fund flows of $32 billion into emerging markets since the announcement of the third round of quantitative easing (QE) in the U.S. This appears to be a powerful precursor for a stronger 2013, which would reignite the Love Trade in China and India.
As we head into the final days of the year, I’d like to take this opportunity to thank our faithful readers for following, reading and sharing our thoughts on the markets. We appreciate your confidence and trust and look forward to a prosperous new year.
Here’s wishing you and your loved ones a very safe and joyful holiday season!
U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.
Sign up today for our 2013 Outlook webcast at 3 p.m. CT on January 9, 2013. For more on global investing from Frank and the rest of the U.S. Global Investors team, subscribe to the Frank Talk blog, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Philadelphia Stock Exchange Gold and Silver Index is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. 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 link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
The following security mentioned was held by one or more of U.S. Global Investors Funds as of 9/30/12: SPDR Gold Shares
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