Are We Nearing the End of the EU Experiment?

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

Right out of the gate, I want to thank everyone who took time out of their busy schedules to tune in to our gold webcast on Wednesday. I also want to thank Aram Shishmanian, CEO of the World Gold Council, for joining me as our special guest. His deep insights into gold investing were well articulated and highly appreciated. If you happened to miss it live, I urge you to catch the replay, which we’ll be posting on usfunds.com soon. Look for it!

If you’re a serious investor—and because you’re reading this, I have to assume that you are—gold is looking more and more like a crucial trade. Only two weeks remain before United Kingdom voters decide on whether the country will continue to be a member of the European Union (EU) or become the first-ever to leave it. The “Brexit,” as it’s come to be known, is arguably the most consequential political event of 2016—perhaps even more so than the U.S. presidential election in November—with far-reaching implications.

Should the U.K. leave, it will certainly underline the question many people have about the EU’s viability. And remember, this is a group of countries that collectively has the world’s second largest gross national product (GDP), followed by China.

But whatever happens, “the European Union is not going to remain the same,” as Aram put it during the webcast. “The euro is still very unstable, and I think we could easily see an environment in which trade barriers will increase and currency wars will increase. Regrettably, we could have a weaker global economy.”

With this as the threat, “gold’s role is one of wealth protection,” Aram said.

Taking Precautions Against an Unknowable Future

Even Europeans are beginning to lose confidence in the European experiment. The Pew Research Center recently polled nearly 10,500 Europeans from 10 separate EU countries on their favorability of the 28-member bloc. Nearly half of all respondents—47 percent—had an unfavorable view.

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What this highlights is the perennial struggle between collectivism and individualism, seen last year in Scotland’s vote on whether to stay in the U.K. (they did), and now this summer’s Brexit referendum. Citizens in both cases—and, indeed, elsewhere—are angered by a small group of socialists who want to dictate many aspects of their daily lives.

Other countries are likewise expressing a need for autonomous rule. Following the attack in Brussels, Poland chose to defy the EU by refusing to accept any more Syrian refugees.

Here in the U.S., Donald Trump’s rise to become the Republican Party’s presumptive presidential nominee underscores the disenfranchisement many Americans feel toward their government and the groupthink of political correctness.

Trust in the European Central Bank (ECB) continues to falter as well. In a blistering note titled “The ECB must change course,” Deutsche Bank called out the central bank for “threatening the European project as a whole for the sake of short-term financial stability.” The ECB’s actions have “allowed politicians to sit on their hands with regard to growth-enhancing reforms.” The longer the bank persists with a negative interest rate policy, the more damage it will inflict upon Europe, Deutsche added.

Meanwhile, Frankfurt-based Commerzbank is considering stashing physical cash in pricey vaults instead of keeping it with the ECB, whose policies are cutting into bank profitability.

Speaking to the World Gold Council’s Gold Investor newsletter this month, former Governor of the Bank of England Mervyn King criticized the ECB’s negative rate policy, saying: “If you repeatedly bring down interest rates to try and persuade people to spend today rather than tomorrow, it works for a while. But they become increasingly resistant to being asked to spend their resources now rather than save for the future.”

Like Aram and others, Governor King sees gold as a likely solution. “There is clearly a need to take some precautions against an unknowable future,” he said, which is the same argument for having health insurance.

Negative rate policies are having a huge effect on bond yields, as you can see below. Over $10 trillion worth of government debt across the globe carried a negative yield as of the end of April. (In a tweet yesterday, legendary bond guru Bill Gross called it “a supernova that will explode one day.”) In Switzerland, three quarters of all government bonds right now actually charge investors interest. Real harm is being done to retirees, who have had to pick up part-time work at Walmart or become Uber drivers to offset lost interest on their savings and pensions.

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This is prompting investors to look elsewhere, including the U.S. municipal bond market, which has attracted $632 billion in assets this year alone as of June 1. Of that amount, more than $22 billion has flowed into muni mutual funds, the best start to a year since 2009. Between that year and the end of 2015, the amount of U.S. municipal debt held by foreign investors climbed 44 percent, validating its appeal as an investment with a history of little to no drama, even during times of economic turmoil and periods of rising and lowering interest rates.

$1,400 Gold this Summer?

Joining Aram in seeing the Brexit as further proof of impeding economic troubles is billionaire investor George Soros. After a hiatus of conducting any personal trading, the 85-year-old is back in the game—this time with some bearish investments. In the first quarter, he purchased a $264 million stake in Barrick Gold, the world’s largest gold producer, and a million shares in precious metals streaming company Silver Wheaton. It appears he’s added to both positions, indicating a bet against the broader equity market.

Now, with a Federal Reserve rate hike looking more and more unlikely this month, gold is expected to resume its bull run, according to Australia and New Zealand Bank Group (ANZ) commodity strategist Daniel Hynes. This, along with a possible Brexit, could push the yellow metal to $1,400, a price we haven’t seen in three years this month.

Paradigm Capital also sees the rally picking up where it left off in May, noting that gold’s trajectory so far this year resembles the one it took in 2002, the first full year of the last bull market, which carried the metal to $1,900 in 2011. “The resemblance is rather striking,” Paradigm writes.

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The investment dealer forecasts gold to reach nearly $1,400 by year-end after a dip in October. It also maintains its position that this particular bull run will peak at $1,800 sometime during the next three to four years.

Whether or not this turns out to be the case is beside the point. Savvy investors—not to mention central banks and governments—recognize gold’s historical role in minimizing the impact of inflation, negative rates and currency depreciation. This is what I call the Fear Trade, and I always advocate up to a 10 percent weighting in gold that includes gold stocks as well as bullion, coins and jewelry.

Catching Up with Sectors and Industries

Because we’re near the halfway mark of 2016, I thought you’d be interested to see what the top performing sectors and industries were for the year so far.

As for sectors, utilities is on top, delivering more than 15 percent so far. Jittery investors, worried about slow global growth and geopolitical threats, have moved into defensive stocks such as water and electricity providers and telecommunications companies, many of which offer steady dividends in a low-yield world. Financials, as you might imagine, have been hurt by interest rate uncertainty.

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Below I’ve highlighted the 10 best performing industries for the year, and interestingly enough, metals and mining companies, particularly those involved in the gold space, lead all others. Spot gold is up 20 percent so far, but amazingly gold miners have doubled investors’ money. Metals and mining companies have rallied more than 53 percent.

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Many of the top-performing companies this year had some of the biggest declines last year because of impaired balance sheets. To maintain their performance long-term, they will need to show earnings.

Index Summary

• The major market indices finished mixed this week. The Dow Jones Industrial Average gained 0.33 percent. The S&P 500 Stock Index finished down -0.15 percent, while the Nasdaq Composite fell -0.97 percent. The Russell 2000 small capitalization index lost -0.02 percent this week.
• The Hang Seng Composite fell -0.04 percent this week; while Taiwan was up 1.49 percent and the KOSPI rose 1.60 percent.
• The 10-year Treasury bond yield fell 6 basis points to 1.64 percent.

Domestic Equity Market

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Strengths

• Telecommunications was the best performing sector for the week, increasing by 2.78 percent vs an overall decrease of -0.15 percent for the S&P 500.
• H&R Block was the best performing stock for the week, increasing 11.87 percent. The tax-preparation firm reported adjusted quarterly profits that beat estimates, as well as a 10 percent dividend increase.
• Amazon, the online retailer and cloud services provider, announced that it will increase investment in India to $5 billion from a previously announced $2 billion. Investment in both retail and cloud operations will be expanded, the company announced.

Weaknesses

• Financials was the worst performing sector for the week, decreasing by -1.55 percent vs an overall decrease of -0.15 percent for the S&P 500.
• Biogen was the worst performing stock for the week, falling -15.19 percent. The biotech giant reported disappointing trial results with one of its more promising treatments. The phase two trial of multiple sclerosis treatment opicinumab produced data that failed to support either the primary or secondary endpoints of the study.
• After a long hiatus, George Soros has returned to trading, lured by opportunities to profit from what he sees as coming economic troubles. Worried about the outlook for the global economy and concerned that large market shifts may be at hand, the billionaire hedge-fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.

Opportunities

• The relentless decline in global bond yields argues that underinvestment and excess savings continue to suppress global GDP growth relative to its potential. As a result, demand for long duration equities and fixed income proxies should stay elevated.
• The latest FDIC Quarterly Banking Profile made for grim reading. Credit losses are on the rise and loan-loss provisions are following suit. Thus, underweighting banks could prove akin to avoiding land mines.
• Raw food prices continue to grind higher, and are likely to receive an assist from a weaker U.S. dollar now that the market is pushing out the imminence of future Fed rate hikes. That should continue to breathe life into agricultural chemicals companies.

Threats

• Stock valuations are close to multi-decade highs compared to any period outside of the equity bubble in the late 1990s. Furthermore a downward adjustment should be made to the fair value of P/E multiples today due to lower quality earnings as a result of a larger percentage of non-cash based accruals.
• The S&P technology sector has been drifting lower in relative performance terms, which is notable given that the broad market has made a charge toward the top end of its trading range. The lack of leadership from this traditionally high beta sector reflects ongoing deterioration in earnings drivers.
• Continued weakness in global PMI’s is a result of inventory liquidation that are not fast enough to avoid piling up relative to shipments in many key manufacturing centers. Until demand picks up, this remains a headwind to companies in cyclically sensitive sectors.

The Economy and Bond Market

Strengths

• Bank of America’s analysis of the Census Bureau’s Quarterly Services Survey suggests that services spending was stronger than previously estimatedd.
• Economic growth in the eurozone was revised higher in the first quarter, clocking in at 0.6 percent, up from the prior 0.5 percent reading. On an annualized basis, growth grew by 1.7 percent. That’s the fastest rate in 12 months. Inflation, however, remains far below the ECB’s target of near 2 percent.
• Based on Bank of America’s aggregated card data, May retail sales ex-autos increased 0.5 percent month-over-month seasonally adjusted, continuing the strength from April.

Weaknesses

• New questions about the economic outlook have been raised by recent labor data, Federal Reserve chair Janet Yellen said in a speech on Monday, just days after a disappointing employment report. Monetary policy is not on a preset course, she said, adding that the Federal Open Market Committee will respond to new data and reassess risks to achieve its goals. Markets give a June rate hike exceptionally low odds, and a July hike is now also seen as unlikely.
• Hardly a week goes by without a major international organization cutting its global GDP forecast. This week’s downgrade comes via the World Bank, which now sees a 2016 growth rate of just 2.4 percent, down from its 2.9 percent January forecast. Its 2017 growth outlook was trimmed to 2.8 percent from 3.1 percent.
• University of Michigan consumer sentiment inched down to 94.3 in the preliminary June release, from 94.7 in May. Notably, long-run (5-10 year) inflation expectations fell back down to its historic low of 2.3 percent from 2.5 percent last month.

Opportunities

• Record low 10-year bond yields were recorded this week in Germany and Japan as the Fed backed away from an expected summer rate hike. This week saw the launch of the European Central Bank’s corporate bond-buying program, which helped push corporate yields to record lows. The average yield on European investment-grade corporate bonds is now below 1 percent while some issues trade with negative yields. This has caused foreign investors to flock to the much more attractive U.S. rates, providing a source of demand that could keep U.S. government bonds well bid.

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• U.S. retail sales data are reported on Tuesday. This will provide a gauge on consumer spending as we kickoff the summer shopping season.
• The Empire Manufacturing survey released Wednesday is expected to improve from -9 to -4. This would ease concerns about the recent slump in manufacturing data.

Threats

• Hillary Clinton secured the required delegates to assure her nomination as the Democratic candidate for U.S. president this fall. She will take on presumptive GOP nominee Donald Trump and Libertarian candidate Gary Johnson. In recent polling, Johnson is close to the 15 percent threshold required to necessitate his inclusion in debates ahead of the November election. The outcome of the U.S. election is a major source of uncertainty for market participants.
• China reports direct foreign investment, retail sales and industrial production figures on Monday. Investors are increasingly concerned about the state of the Chinese economy, especially the amount of bad loans in the system.
• The National Federation of Independent Business’s (NFIB) survey released on Tuesday could provide information on the extent of the current slowdown in job creation.

Gold Market

This week spot gold closed at $1,273.92, up $29.72 per ounce, or 2.39 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, climbed 3.55 percent. Junior miners underperformed seniors for the week as the S&P/TSX Venture Index traded up 3.15 percent. The U.S. Trade-Weighted Dollar Index clawed back some of the prior week’s losses with a 0.67 percent gain.

Strengths

• The best performing precious metal for the week was silver with a strong lift of 5.57 percent. Silver holdings in exchange traded funds are edging toward a record high, sending the metal for its biggest weekly gain since April, reports Bloomberg. Silver buying also increased to an 11-month high, according to BullionVault’s Gold Investor Index which measures a balance of client buyers against sellers. Gold buying rose to a three-month high, with its buyer/seller balance rising to 55.8 in May versus 53.5 in April.
• Citizens in the United Kingdom will now be able to buy Royal Mint gold bullion to hold in pension funds, reports Chris Howard, the Royal Mint’s director of bullion this week. Products offered include 100g, 1kg bars, along with a service that allows customers to buy a share of 400 ounce gold bars.
• Billionaire George Soros’ bet on gold miners during the first quarter have played out well, reports Bloomberg. Soros Fund Management cut its U.S. stock holdings by 37 percent in the first quarter and bought shares of gold miners along with an ETF tracking the price of gold. Soros made the move in anticipation of weakness in various global markets

Weaknesses

• The worst performing precious metal for the week was palladium, suffering a loss of 1.78 percent with the majority of the losses coming late in the week. Bloomberg’s industry analyst Eily Ong noted that Norilsk, Russia’s largest nickel and palladium producer, is boosting capital spending by 21 percent in 2016 to accelerate higher production volumes for these metals.
• India’s inbound shipments of gold during the month of May are said to have dropped 51 percent from a year earlier. The provisional import numbers show that May shipments declined to around 31 metric tons from 63 metric tons during the prior year. According to a Bloomberg article, gold imports tumbled for a fourth-straight month “as a 16 percent increase in domestic prices since the start of the year kept buyers away.”
• Chinese jeweler Chow Tai Fook saw its profit for fiscal year 2016 dive 46 percent, reports Bloomberg. However, as spot gold reached a new high earlier in the week, the company’s shares rose as much as 7 percent to December highs. According to Bloomberg Intelligence analyst Catherine Lim, higher gold prices can help reduce the company’s hedging losses, helping to narrow net income declines this year. She added that margins likely reached new lows in fiscal year 2016 given the rise of less-profitable gold jewelry sales and hedging losses.

Opportunities

• ANZ Research believes that gold is set to resume its bull cycle, citing last week’s weak jobs data, a subsequent cautious tone by Janet Yellen, along with Brexit worries. Paul Crone, founder of Citrine Capital Management, agrees. “We’re bullish overall on gold because the global economy is pretty poor with China as an issue,” Crone said. “Gold could go as high as $1,400 an ounce.” Lastly, the ECB is also said to be driving gold higher, according to Tai Wong of BMO Capital Markets. “The ECB’s monetary amphetamine has driven gold above the key $1,250 level,” Wong said. “Draghi’s determination to drive rates ever lower fires up investors’ appetite for gold.”.

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• According to a survey done by Macquarie, mining M&A is set to pick up, with a focus on producing copper assets and pre-production projects in gold, reports Bloomberg. The survey points to organic growth and debt reduction as the sector’s top capital allocation priorities.
• Jaguar Mining is the focus of a recent report from PI Financial, which reviews the company’s turnaround since a spiraling downfall forced it into bankruptcy protection in 2013. As the report points out, Jaguar is now under new management, with Rodney Lamond, who has a track record in turning around troubled assets, stepping in as the new CEO earlier in the year. Jaguar is having some very promising exploration results that should help to drive down cost. The company is trading at just 3.6x 2016 Price/Free Cash Flow while compared to its peer average of 12.2x, the company is set up for a significant rerate.

Threats

• Following a surge in the gold price, China took a breather from adding to its gold reserves in May, reports Bloomberg. The People’s Bank of China (PBOC) kept assets unchanged after adding to them for 10 straight months. Last week gold traders cut their gold net long positions by a third, missing out on last Friday’s spike in the metal. In a similar note for gold, the Managing Director at Goldman Sachs has come out saying, “With the S&P 500 close to all-time highs, stretched valuations and a lack of growth, drawdown risk appears elevated.”
• Philippines’ new president-elect Rodrigo Duerte has come out warning mining companies to “shape up,” reports Business Insider. Duerte stated that his incoming government might rewrite laws to limit environmental degradation as a result of mining, continues the article. “I have a big problem with mining companies,” he said. “They are destroying the soil of our country.
• This week Centerra Gold provided an update regarding its legal proceedings within the Kyrgyz Republic, reporting that its Kumtor gold mine subsidiary is now part of a lengthy criminal investigation. With instruction from the Kyrgyz, several of Kumtor’s senior managers have been advised that they will not be allowed to leave the country. In a statement from Centerra, the company says a Kyrgyz agency for environmental protection has alleged that Kumtor owes an additional $220 million in fees. Both Centerra and Kumtor Gold “strongly dispute” that any actions from their senior management were improper. The positive highlight is that Centerra has three other projects outside of the region which should be funded internally from cash and will potentially double their production.

Energy and Natural Resources Market

Strengths

• Commodities break into a bull market, according to ISI Strategist Ed Hyman. The Goldman Sachs Commodity Index is up about 39 percent from its low, while the CRB Index is up about 21 percent. Similarly, the Bloomberg Commodity Index is up about 20 percent, a dynamic not seen since the rebound of 2009 and 2010.
• The best performing sector for the week was the Philadelphia Oil Services Sector Index. The index of service companies rose 6.1 percent for the week as the U.S. oil rig count rose for the first time in 3-months, suggesting that demand for service companies is recovering.
• Newcrest Mining, an Australian major gold producer, was the best performing stock in the broader natural resource space after rallying 13.6 percent for the week. The stock benefited from a strong rally in gold prices, leading it to post a fresh 52-week high by the end of the week.

Weaknesses

• Moody’s downgraded 31 of the 58 mining companies placed on review while upgrading only one. A total $165 billion of mining bonds were downgraded, which mainly affected major companies such as BHP, Rio Tinto, Vale, Anglo American and Freeport-McMoRan. Vale, Anglo and Freeport were downgraded to junk.
• The worst performing sector for the week was the S&P 500 Supercomposite Trucking Sub Index. The index dropped 2.1 percent for the week as reports showed that truck orders have collapsed to a six-year low, suggesting the activity decline may be worse than feared.
• The worst performing stock for the week in the S&P Global Natural Resources Index was Sasol LTD. The South African integrated oil producer dropped 14.4 percent for the week after warning that full year profits may drop by as much as 30 percent, and disclosing impairments for about $770 million.

Opportunities

• Plains All American, a leading MLP, reiterated its call for stronger oil prices. A year ago the company called for significant near term risk to crude prices, which materialized through the second half of the year. In Plains’ view, U.S. oil inventories will disappear by year end 2016, allowing for a meaningful recovery in crude oil prices in the second half of this year.
• Gold’s rally appears set to continue as Negative Interest Rate Policies (NIRP) backfire. A Reuters report showed that Commerzbank, one of Germany’s largest banks, is considering the possibility of storing billions of euros in vaults, as negative interest rates erode the value of their reserves. The move may be followed by other banks and pensions funds that may seek refuge in gold from the growing NIRP environment in Japan and Europe.
• Tom Lee, former Chief Equity Strategist at JP Morgan, thinks oil prices will continue to rise. In a TV interview earlier in the week, Lee argued that the wide spot discount to the futures market of oil at the bottom in February suggests we are entering a long period of recovery that should continue even after the near-doubling of WTI prices.

Threats

• China is sick and the massive rise of copper inventories is the symptom. This week, the London Metals Exchange warehouses in Asia saw an unprecedented surge in copper inventories, likely as a result of China’s fading appetite for the metal. With China’s Caixin Manufacturing PMI remaining in contraction for the 15th month in May, it is becoming evident that the fiscal and monetary stimulus continues to fall short of expectations.

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• The performance of commodities may deteriorate as China continues to reduce its stimulus. Total Social Financing in China declined to RMB756 billion in April, from RMB1781 billion in March and consensus forecasts a further decline to RMB300-350 billion in May, according to Deutsche Bank. As monetary policy transitions from loosening to neutral, it is likely that demand for commodities will continue to suffer.
• Negative sentiment in China is also becoming visible in the steel market, according to BMO analysts. The most widely used sentiment gauge has collapsed to a 16-month low, with most market participants expecting new steel orders and prices to weaken further over the next month, according to the latest Platts China Steel Sentiment Index (CSSI). The most recent June reading showed a headline of just 15.92 out of a possible 100 points, having dropped by 31.06 points from May, and posting the weakest reading since February 2015.

China Region

Strengths

• Korea’s KOSPI Index was a top performer for the week, rising 1.49 percent.
• China passenger vehicle retail sales numbers came in strongly this week, up 14.5 percent year-over-year, up from gains of only 8.1 percent in the April period.
• Relatedly, Chinese trade data were slightly better than expected, with exports down 4.1 percent year-over-year (but better than anticipated given the weaker yuan in May), while imports were down only 0.4 percent year-over-year, perhaps signaling improving demand,

Weaknesses

• Industrials and services names were some of the weakest in the Hang Seng Composite Index over the last week.
• Unemployment in the Philippines, which recently held presidential elections, ticked up slightly for the April period to 6.1 percent from 5.8 percent in March, though it remains near multi-year lows.
• Industrial Production in Malaysia came in weaker year-over-year than analysts’ expectations, rising only 3.0 percent rather than 3.5 percent.

Opportunities

• The Bank of Korea surprised this week with a 25 basis point rate cut, bringing the benchmark rate down to 1.25 percent, as Central Bank Governor Lee Ju-Yeol suggested that additional cuts may be possible if necessary.
• This week the Hang Seng Composite Index rose to its 200-day moving average for the first time since last summer’s selloff, though the index has yet to surpass its recent multi-month highs set in April.

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• After mainland China’s holiday closure this week (Wednesday, Thursday, and Friday) for the Dragon Boat Festival, we get a slew of data from the Asian nation, including FDI, Money Supply, Aggregate Financing and New Yuan Loans in addition to Industrial Production numbers, Retail Sales, Fixed Assets Investment, and May Property Prices, providing investors with more information and insight to the Chinese economy. We’ll also hear next week on the MSCI decision with respect to A-share inclusion in its global emerging market index.

Threats

• The bilateral U.S.-China Strategic and Economic Dialogue summit in Beijing earlier this week continued a now-annual summit first begun under the George W. Bush administration. On a positive note China’s President Xi Jinping opened the talks by stressing extensive common interests, though he acknowledged unnamed “disagreements” that should not lead to “confrontation,” surely referring at least in part to ongoing debate over the South China Sea.
• Fears about global growth and politics, including the so-called Brexit and Grexit scenarios and their varying implications, may continue to play outsized roles in global equities markets in coming weeks.
• At a press briefing during this week’s U.S.-China Strategive and Economic Dialogue summit in Beijing, China’s finance minister Lou Jiwei made the case that the state can only do so much to confront obvious overcapacity in industrial areas like steel and coal production, since some 52 percent of the steel sector, for example, are private companies.

Emerging Europe

Strengths

• Russia was the best performing country this week, gaining 90 basis points. Brent crude oil gained 1.6 percent and closed above $50 per barrel. Central Bank of Russia cut its main interest rate from 11 percent to 10.5 percent. The decision could mark the start of the new policy easing cycle if annual inflation keeps declining in line with forecasts (5-6 percent by the end of 2016; below 5 percent by May 2017; 4 percent by the end of 2017).
• The Russian ruble was the best performing currency this week, gaining 60 basis points against the U.S. dollar. Credit Suisse economist Alexy Pogorelov upgraded Russia’s GDP outlook for the next few years on the back of higher oil prices. He revised the full year GDP forecast for 2016 to -0.3 percent from -1.5 percent, and 2017 GDP was revised up from 1 percent to 1.7 percent.
• Energy sector was the best performing sector among Eastern European markets this week.

Weaknesses

• Greece was the worst performing market this week, losing 4.6 percent. Germany failed to recommend the release of the next loan tranche to Greece. Committee Chairman Eckhardt Rehberg said that the next payment was not disbursed due to outstanding measures that need to be applied by Greece. The disbursement will be discussed again next week.
• The euro was the worst performing currency this week, losing 1 percent against the U.S. dollar. Brexit talks are intensifying as the U.K. prepares to vote on June 23. Polls suggest the outcome of the referendum is too close to call, but if U.K. votes to exit the eurozone, other countries may follow.
• The health care sector was the worst performing sector among Eastern European markets this week.

Opportunities

• Commodities entered a bull market this week as oil traded near its highest close in 10 months. The commodities rally has given a boost to investor sentiment and emerging markets could continue their climb higher with commodities.

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• The euro-area economy grew faster than previously estimated at the start of the year, driven by investment and a pickup in consumer spending. GDP rose 0.6 percent in the first quarter, slightly higher than the 0.5 percent previously announced. Year-over-year GDP rose 1.7 percent. European Central Bank (ECB) officials have signaled that the bank likely will not need to boost its EUR1.8 trillion stimulus again, despite forecasts showing it would miss its inflation target for at least two years.
• Eurozone industrial production (IP) will be released next week and most Bloomberg analysts predict a stronger reading, suggesting a pick up in the industrial sector of the economy. IP is an important tool for forecasting GDP and economic performance.

Threats

• A survey of more than 10,000 people across Europe shows that more voters are losing faith in the eurozone, suggesting that anti-European Union (EU) sentiment is much wider than Britain. In France, the proportion of people with a favorable view of the EU has plummeted to 38 percent this year, from 69 percent in 2004. A similar drop has been observed in Spain, with the support for EU falling to 47 percent from 80 percent. Countries are dissatisfied with the bloc’s handling of the migration crisis. In Greece, 94 percent of citizens disapprove of the EU’s management of the refugee crisis. Sweden has an 88 percent disapproval rate and Hungary has a 70 percent disapproval rate.
• Yields on the 10-year government debt of Germany and the U.K. have hit an all-time low, with the German yield closing at .049 percent on Tuesday and the U.K. yield closing at 1.263 percent. German lender Commerzbank estimates that almost two-thirds of all German sovereign debt outstanding now yields below -0.4 percent, making it ineligible for central bank purchases. As the world’s debt falls into negative territory investors have been pushed into markets that still offer positive returns… U.S. Treasuries.

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• Poland’s new FX loan plan to tackle issues with the country’s Swiss franc loan problem left bank investors concerned on the potential impact to the financial sector. The new plan estimates banks’ cost to stand at 30 billion zloty in the next 30 years, capping the annual cost at 1 billion per year. An earlier proposal would have cost the industry between 44.6 billion zloty to 67.2 billion zloty, but even with the lower cost (and spreading it over the next 30 years) bank lending could be negatively affected. Most Swiss franc loans opened in 2008 when the zloty was stronger and the Swiss franc was weaker, as the chart below illustrates.

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June 6, 2016 Is India the New China?	June 1, 2016 Here Are the World’s Top 10 Gold Producing Mines	May 31, 2016 Can the TPP Save the Global Economy?

Leaders and Laggards

U.S. Global Investors, Inc. is an investment adviser registered with the Securities and Exchange Commission ("SEC"). This does not mean that we are sponsored, recommended, or approved by the SEC, or that our abilities or qualifications in any respect have been passed upon by the SEC or any officer of the SEC.

This commentary should not be considered a solicitation or offering of any investment product.

Certain materials in this commentary may contain dated information. The information provided was current at the time of publication.

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 03/31/2016:
Barrick Gold
BHP Billiton
Centerra Gold Inc.
Jaguar Mining Inc.
Silver Wheaton

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The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
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 Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The 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.
The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Thomson Reuters Core Commodity CRB Index is designed to provide timely and accurate representation of a long-only, broadly diversified investment in commodities through a transparent and disciplined calculation methodology. The Hang Seng Composite Index is a market-cap weighted index that covers about 95% of the total market capitalization of companies listed on the Main Board of the Hong Kong Stock Exchange.
The BullionVault Gold Investor Index tracks monthly private-investor sentiment towards physical gold based on actual trading on BullionVault.
The University of Michigan Confidence Index is a survey of consumer confidence conducted by the University of Michigan. The report, released on the tenth of each month, gives a snapshot of whether or not consumers are willing to spend money.
The Empire State Manufacturing Index is an index based on the monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. The index summarizes general business conditions in New York State.
The National Federation of Independent Business’s (NFIB) Index of business optimism is based on responses from 1221 member firms.
The Goldman Sachs Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.
The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.
The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
The Philadelphia Oil Service Sector Index (OSX) is price-weighted index composed of 15 companies that provide oil drilling and production services, oil field equipment, support services and geophysical/reservoir services. The OSX Index was set to an initial value of 75 on December 31, 1996.
The S&P Supercomposite Trucking Index is a capitalization-weighted index. The index is comprised of the stocks in the trucking sub-industry.
The S&P Global Natural Resources Index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across 3 primary commodity-related sectors: Agribusiness, Energy, and Metals & Mining.
The monthly Platts China Steel Sentiment Index is based on a survey, conducted during the last full working week of each month, of approximately 50 to 75 China-based market participants including traders, stockists and steel mill operators.