First Quarter 2018

For the quarter ended March 31, 2018, the World Precious Minerals Fund fell 8.32 percent, underperforming the fund’s benchmark, the NYSE Arca Gold Miners Index, which lost 5.50 percent. The Gold and Precious Metals Fund fell 9.55 percent, underperforming its benchmark, the FTSE Gold Mines Index, which slipped 6.08 percent. See complete fund performance here.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

Strengths

  • Gold is on its best run since 2011 as it wraps up a third consecutive quarter of gains adding 1.68 percent. Exchange-traded funds (ETFs) backed by bullion are also near their highest in five years. According to Haywood Cheung Tak-hay, president of the Chinese Gold & Silver Exchange Society, China is in talks with Singapore, Myanmar and Dubai to set up a gold commodity corridor to promote gold trading using yuan as the main currency. This is part of Beijing’s “One Belt, One Road Initiative” and would use Hong Kong as a base for the exchange. Australia will be opening its first gold-backed ETF, the Perth Mint Gold ETF Trust, which seeks to be listed on the New York Stock Exchange (NYSE), according to a U.S. government filing.
  • Gold consumption in China rose 9.4 percent in 2017, a big hike from a 6.7 percent slump the previous year. Jewelry demand was also strong at 10.4 percent, up from the 19 percent drop in 2016. The rise in consumption is in part due to lower-tier cities accumulating income and using it to buy gold products. China’s gold production, on the other hand, dropped 6 percent in 2017, the first major drop since 2000, reports Bloomberg. The reduced production is due to environmental protection taxes, resources taxes and the closure of some mines. The government of India is presenting a policy to develop gold as an asset class and establish a trade-efficient system of regulated gold exchanges. This would allow bank customers to deposit their gold holdings for a fixed period of time in return for a 2.25 percent to 2.50 percent interest rate.
  • Hecla Mining announced it will acquire Klondex Mines for $462 million. Klondex shareholders will receive $2.47 per share in cash or shares of Hecla. This is a 59 percent premium to Klondex’s 30-day average price. Another takeout happened shortly after Klondex with Alio Gold entering an agreement to buy all the remaining shares of Rye Patch Gold. Both Klondex and Rye Patch’s assets are located in Nevada and were held in both of our gold funds. We did not own any Hecla or Alio shares. Following these two takeover announcements, Goldfields entered into an agreement to purchase a 50 percent stake in Asanko Gold Ghana’s interest in Asanko Gold Mine for an upfront payment of $165 million. This is the second acquisition whereby Gold Fields has elected to purchase at the project level and not taken over the company.

Weaknesses

  • The government of Mali is looking to revise its mining code, just as other African nations have done recently, which could negatively impact mining companies such as B2Gold, which has 40 percent of its production located at its Fekola mine in Mali. Zambia will be conducting a tax audit of mining companies that have been operating in the nation in the past six years after uncovering that First Quantum Minerals underpaid import taxes on mining equipment. The company revealed that Zambia is demanding $8 billion in interest, penalties and reassessment charges, reports Bloomberg. Africa’s largest copper producer, the Democratic Republic of Congo, canceled contracts last minute that guaranteed some producers would be exempt from a royalty increase. Congo is also the world’s biggest source of cobalt and could implement a royalty of 10 percent on the metal, up from 2 percent. These new regulations significantly increase the cost of doing business in the mineral-rich African nation.
  • The top three North American gold producers—Barrick Gold, Newmont Mining and Goldcorp—have all seen their bondholders reap greater rewards for less risk than their equity investors, according to Bloomberg. Share performance of the three companies has been mixed for a year with their bonds outperforming their stocks. Torex Gold announced it has regained access to the El Limon-Guajes Mexico mine after worker strikes prevented production for several months. Tahoe Resources announced that its Guatemalan mine will be required to undergo further environmental and anthropological testing, resulting in additional delays to the restart of production. Money continues to plow into the gold miners ETFs. All this money is chasing gold beta and not focusing on what the risks and valuation metrics are for the index members. Investors are buying ETFs without regard to the fundamentals of the companies they own.
  • Recent results of the New York Fed’s Survey of Consumer Expectations showed that consumers expected to see the fastest wage growth in years. According to Bloomberg, last month was only the third month in the survey’s 56-month history where expected wage growth of 2.73 percent exceeded consumer price inflation at 2.71 percent. Historical data shows that market corrections since 2009 have taken an average of 200 days to fully recover and have lopped 14 percent from the S&P 500 Index. If the market is entering a correction phase now, it might take until August to fully correct.

Opportunities

  • Pandion Mine Finance, an investment fund backed by prominent commodities investors, raised $175 million to finance small precious and base metals miners. Many banks have left the sector of funding smaller mining projects, leaving an opening for less traditional sources of capital for raising money. RBC Capital Markets reports that of the approximately $925 million raised by junior precious metals companies so far in 2018, only 14 percent has come from traditional equity sources with the rest from alternative lenders, streamers/royalties, and others. The shift in funding has largely been driven by investors blindly buying gold mining stock ETFs for the exposure to gold’s beta, and not conducting any due diligence on the merits of the underlying securities. The net result is there appear to be lots of cheap non-index companies that may see the first benefits of industry consolidation as the seniors scramble to replace their depleting resource base and falling production profile.
  • Steven Englander, writing for Bloomberg, noted that the Treasury is flooding the market with short-term debt that investors are not interested in buying. Englander reports that since August 2017, Treasury bills maturing in one year or less make up 63 percent of the increase in bills, notes, and bonds, which is a massive skew. He says this is stealth intervention, where the U.S. dollar would need to weaken to create demand for the low-yield debt that is currently being issued with effectively negative interest rates. Bloomberg reported that the U.S. brokered a side deal with South Korea to avoid competitive devaluations as part of its exemption from tariffs. The bigger signal is that the U.S. is using the tariff card to extract certain policy objectives, such as the U.S. doesn’t want South Korea to devalue its currency relative to the dollar. This seems to support the notion that the U.S. does not want to see a strong dollar and it’s extracting agreements to make that a certainty. BCA also added that if the dollar continues to be used by the White House to shrink the deficit through protectionist trade policy, it would make dollar-based financial systems more unstable and dangerous. Chief Investment Officer of DoubleLine Capital, Jeffrey Gundlach, said during a webcast for his $51.8 billion bond fund that “the odds are good that the next big move in the dollar is lower.”
  • Goldman Sachs raised its price outlook for gold to $1,350 per ounce in three months and $1,450 in 12 months, up from $1,225 and $1,255, respectively. With inflation set to return, gold might see a boost as the yellow metal generally performs well during times of rising interest rates. High inflation has historically been positive for gold and the currently plunging dollar could set the stage for a new gold bull market. According to Pimco global economic advisor Joachim Fels, a widening trade deficit will foster a continued American interest in a weaker dollar. Bank Credit Analysts released a report showing that the dollar has oscillated between bear markets lasting 10 years and bull markets lasting five years. If this holds true, the dollar’s five-year bull market from 2011 to 2016 fits the pattern of the dollar entering a bear market now for the next 10 or so years. Scotiabank reports that exposure to gold equities in general active portfolios is at the lowest since 2000, which presents an opportunity for buying of shares to match benchmarks.

Threats

  • The world’s major gold producers have cut back on mergers and acquisitions, with industry transactions totaling just $8.95 billion in 2017, tumbling by a third from the previous year, according to Bloomberg. In a rush to boost output in 2011 when gold was at an all-time high of $1,921.17 an ounce, companies spent a record $38.7 billion on acquisitions. The lack of takeovers may signify that the gold market is nowhere near a top at this point. The University of Texas Management Co. (Utimco), which manages the largest public university endowment in the U.S., will examine its $1 billion gold position in the portfolio, reports Bloomberg. The gold position is around 3 percent of the total portfolio, and Utimco CEO Britt Harris said, referring to the position, “We’re in no rush to sell, but it may not be a long-term strategic hold.”
  • The Conference Board survey of U.S. consumer sentiment in March shows that retail investors are at their least enthusiastic for stocks since President Donald Trump was elected in November 2016. Bloomberg reports that only 6 percent of those surveyed believe that equities will be higher than they currently are in one year’s time. Another sign of potential disarray in the market is General Electric plummeting share price performance. GE was the biggest loser in the Dow Jones Industrial Average last year, as it struggled with weak demand for its industrial products. As a bellwether American company that produces products that span across a number of industries, it’s a bit disconcerting that the outlook for stock markets is so positive.
  • Wells Fargo analysts are warning of a commodities bear market and said they doubt a weakening dollar will result in commodity performance rising. They released a report saying, “We expect bear market dynamics (over-supply and range bound prices) to dominate commodities for the next five to 10 years.” The U.S. trade deficit hit its highest level in almost six years with an increase in imports exceeding a gain in shipments. This could keep the gross domestic product (GDP) from advancing at least 3 percent, according to Bloomberg’s Andrew Mayeda. Automakers saw their first annual U.S. sales decline since 2009 and projections for 2018 are down due to expectations of interest rate hikes. 

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.  The index benchmark value was 500.0 at the close of trading on December 20, 2002. The FTSE Gold Mines Index encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally leaders in their industry.

The New York Fed’s Survey of Consumer Expectations is a monthly online survey of a rotating panel of household heads. The survey collects timely information on respondents’ expectations and decisions on a broad variety of topics, including inflation, household finance, the labor market, and the housing market. It has three main goals: (1) measuring consumer expectations at a high frequency, (2) understanding how these expectations are formed, and (3) investigating the link between expectations and behavior.

The monthly Consumer Confidence Survey, based on a probability-design random sample, is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund and the World Precious Minerals Fund as a percentage of net assets as of 3/31/2018: Hecla Mining Co. 0.00%; Klondex Mines Ltd. 13.59% in Gold and Precious Metals Fund, 14.09% in World Precious Minerals Fund; Alio Gold Inc. 0.00%; Rye Patch Gold Corp. 2.52% in Gold and Precious Metals Fund, 1.37% in World Precious Minerals Fund; Asanko Gold Inc. 0.00%; Gold Fields Ltd. 0.00%; B2Gold Corp. 0.00%; First Quantum Minerals Ltd. 0.00%; Barrick Gold Corp. 2.13% in Gold and Precious Metals Fund, 0.00% in World Precious Minerals Fund; Newmont Mining Corp. 2.23% in Gold and Precious Metals Fund, 0.00% in World Precious Minerals Fund; Goldcorp Inc. 0.00%; Torex Gold Resources Inc. 0.00%; Tahoe Resources Inc. 0.00%; General Electric Co. 0.00%.

Standard Disclosure

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. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

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

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

 

Net Asset Value
as of 10/19/2018

Global Resources Fund PSPFX $5.03 0.01 Gold and Precious Metals Fund USERX $6.95 0.07 World Precious Minerals Fund UNWPX $3.51 0.01 China Region Fund USCOX $8.08 0.12 Emerging Europe Fund EUROX $6.32 -0.01 All American Equity Fund GBTFX $25.37 -0.09 Holmes Macro Trends Fund MEGAX $18.05 -0.07 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change