GO GOLD! Inflationary Tariffs Could Supercharge the Yellow Metal

Author: Frank Holmes
Date Posted: June 1, 2018 Read time: 51 min

Ready for inflation? Just days after Treasury Secretary Steven Mnuchin reassured markets that a trade war between the U.S. and China was "on hold," the Trump administration announced this week that it would be moving forward with plans to impose 25 percent tariffs on as much as $50 billion worth of Chinese exports to the U.S. Beijing has already suggested that it will retaliate in kind.

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

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017

Ready for inflation?

Just days after Treasury Secretary Steven Mnuchin reassured markets that a trade war between the U.S. and China was “on hold,” the Trump administration announced this week that it would be moving forward with plans to impose 25 percent tariffs on as much as $50 billion worth of Chinese exports to the U.S. Beijing has already suggested that it will retaliate in kind.

The White House also reinstated tariffs on imports of steel and aluminum from Canada, Mexico and the European Union (EU) after allowing earlier exemptions to expire. Again, there’s a big chance the U.S. will see some sort of tit-for-tat response.

Steel prices are already up 45 percent from a year ago. The annual change in the price of a new vehicle in the U.S. has been dropping steadily since last summer, according to Bureau of Labor Statistics data, but with the cost of materials set to rise dramatically, we could see a price reversal sooner rather than later.

US midwest hot rolled steel price up 45 percent from last year
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Next up, the U.S. government could slap steep tariffs on imported automobiles—and possibly even ban German luxury vehicles outright, according to a report by German business news magazine WirtschaftsWoche.

These decisions, if fully implemented, will have a multitude of implications on the U.S. and world economies. What I can say with full confidence, though, is that prices will rise—for producers and consumers alike—which is good for gold but a headwind for continued economic growth.

You Can’t Suck and Blow at the Same Time

US midwest hot rolled steel price up 45 percent from last year

Let me explain. I’ve often said that middle class taxpayers elected Trump president by and large to take on entrenched bureaucrats, cut the red tape and streamline regulations. People are fed up. A study last year by the Congressional Budget Office (CBO) found that government workers not only earn more on average than private-sector workers with similar educational backgrounds, they’re also guaranteed health, retirement and other benefits. Trump responded to these concerns last week by signing an executive order that eased the firing of federal workers.

He’s kept his word in other ways. Since being in office, he’s already eliminated five federal rules on average for every new rule created, according to the Competitive Enterprise Institute (CEI). He’s weakened Obamacare and Dodd-Frank, not to mention slashed corporate taxes.

In 2017, the number of pages in the Federal Register, the official list of administrative regulations, dropped to 61,950 from 97,069 the previous year. This is especially good news for productivity. Research firm Cornerstone Macro found that Americans were more productive when there were fewer rules, less productive when there were more rules. 

productivity decreased as the number of federal rules and regulations grew
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These are all positive developments that should help boost the economy. The problem is that they could be undermined by tariffs, which are essentially regulations. We believe government policy is a precursor to change, and history suggests that rising tariffs and regulations hurt the economy.

Consider automobiles. U.S. automakers are the second largest consumer of steel following construction. In March, the Wall Street Journal estimated that the tariffs could add at least $300 to each new vehicle sold in the U.S. And speaking to Bloomberg this week, a spokeswoman for the Alliance of Automobile Manufacturers said the tariffs on steel and aluminum imports will make cars more expensive. “These tariffs will result in an increase in the price of domestically produced steel—threatening the industry’s global competitiveness and raising vehicle costs for our customers,” Gloria Bergquist said.

Do tariffs on imported vehicles threaten united states auto sales
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Higher Inflation Has Historically Meant Higher Gold Prices

The good news in all this is that higher inflation has historically been supportive of the price of gold. In the years when inflation was 3 percent or higher, annual gold returns were 15 percent on average, according to the World Gold Council (WGC).

gold has historically rallied in periods of high inflation
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When gold hit its all-time high of $1,900 an ounce in August 2011, consumer prices were up nearly 4 percent from the same time the previous year. The two-year Treasury yield, meanwhile, averaged only 0.21 percent, meaning the T-note was delivering a negative real yield and investors were paying the U.S. government to hang on to their money. This created a favorable climate for gold, as investors sought a safe haven asset that would at least beat inflation.

CIBC: Major Gold Firms to Generate Strong Free Class Flow and ROIC

gold has historically rallied in periods of high inflation

Finally, I want to draw attention to an exciting research report released this week by the Canadian Imperial Bank of Commerce (CIBC). I’m a huge admirer of the work CIBC does, especially that of Cosmos Chiu, director of precious metals equity research. Chiu and his team write that the “future looks brighter” for gold equities on improved free cash flow and return on invested capital (ROIC). Both factors are among our favorites. Just last week, I shared with you a chart that shows that, over the past 30 years, ROIC outperformed other factors by as much as one and half times.

With gold trading near $1,300 an ounce, producers are currently posting positive margins, according to CIBC. As a result, every stock in the bank’s large-cap universe, with the exception of Kinross, is expected to generate positive free cash flow through 2019.

Go Gold! Royalty/Streaming Companies Deliver the Profits

The bank has even better news for royalty and streaming companies, particularly Franco-Nevada, Royal Gold and Wheaton Precious Metals. For one, the three big royalty names delivered combined shareholder returns of 6.2 percent between 2013 and 2017, outperforming both senior producers and physical gold.

Three largest royalty and streaming companies forecast to deliver strong return on invested capital
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Now, CIBC forecasts the royalty group will generate strong ROICs, “steadily inching higher over the next decade… to average between the 5 percent and 8 percent mark from 2018 – 2023.” ROIC measures how well a company can turn its invested capital into profits.  

Loyal readers already know we’ve long been fans of Franco-Nevada, Wheaton Precious Metals and other royalty/streaming names.


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Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.48 percent. The S&P 500 Stock Index rose 0.49 percent, while the Nasdaq Composite climbed 1.62 percent. The Russell 2000 small capitalization index gained 1.29 percent this week.
  • The Hang Seng Composite lost 0.43 percent this week; while Taiwan was up 0.06 percent and the KOSPI fell 0.89 percent.
  • The 10-year Treasury bond yield fell 3 basis points to 2.90 percent.

Domestic Equity Market

SP 500 Economic Sectors weekly performance
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  • Energy was the best performing sector of the week, increasing 2.48 percent compared to an overall increase of 0.39 percent for the S&P 500 Index.
  • Nektar Therapeutics was the best performing stock for the week, increasing 12.99 percent.
  • Microsoft surpassed Alphabet’s market cap for the first time in three years. On Tuesday, Microsoft became the world’s third-most valuable company as its market cap ended the day at $753 billion, passing Alphabet’s $739 billion.


  • Financials was the worst performing sector for the week, decreasing 1.30 percent compared to an overall increase of 0.39 percent for the S&P 500.
  • Dollar Tree was the worst performing stock for the week, falling 14.60 percent.
  • As Italy’s political upheaval spurs gyrations across the continent, $17.5 billion has been yanked this quarter from mutual funds and ETFs that invest in European stocks, according to data compiled by Sanford C. Bernstein. The portfolios are now heading for their 11th week of outflows, the longest streak since 2016.


  • BlackRock is making a big push to expand in private equity. The firm was hired by the University of California to advise on private equity deals. It has a mandate to screen and vet opportunities, as well as buy stakes on behalf of the university.
  • Johnson Controls International is drawing interest from KKR, Apollo, CVC Capital and Advent for its power solutions business that could value the unit at as much as $12 billion, people familiar with the deal said. The firms were part of a select group of financial sponsors that were invited to a gold card meeting with Johnson Controls management to assess their interest in the unit.
  • The market’s most feared short seller is bullish on Snap and says it could be bought within the next year. "Google could easily give Snap the ‘grownup’ it needs while also saving close to $100 million," the short seller who founded Citron Research, Andrew Left, said in a note sent out Thursday. "Although we now find out that SNAP has plans for profitability in the next 12 months, we still question if it will remain independent for that long." Additionally, the company’s shares spiked on Thursday after a Times of India report said the social media company had entered into a partnership with the ad-tech firm Tyroo to help it monetize its more than 9 million users in the country.


  • S&P Global downgraded Deutsche Bank’s long-term credit rating to BBB+ from A- on Friday, citing the bank’s new restructuring plans as the main motivation.
  • Europe’s strict new privacy law went into effect on Thursday, and privacy activist Max Schrems immediately filed lawsuits against Facebook and Google for contravening the new rules. Schrems said their take-it-or-leave-it approach to consent was "totally against the law."
  • The U.S. federal watchdog is investigating Intel over claims it laid off employees in 2016 based on their age. Intel made a series of cuts that resulted in around 10,000 employees losing their jobs.

In the News
May 31, 2018
Will Italy’s Rebellion Impact Gold?
May 29, 2018
Small-, Mid- or Large-Cap Stocks?
May 16, 2018
Bitcoin Mining Resembles the California Gold Rush

The Economy and Bond Market



  • The U.S. economy expanded moderately through much of April and May, a subtle upgrade from previous periods, with little indication of overheating, a Fed survey showed. The central bank’s Beige Book economic report said manufacturing showed “strong” gains, while employment and prices continued to rise “modestly” or “moderately.” “Manufacturing shifted into higher gear with more than half of the districts reporting a pickup in industrial activity and a third of the districts classifying activity as ‘strong,’” the report said.
  • The Labor Department released its official hiring and unemployment figures for May on Friday, providing the latest snapshot of the American economy. 223,000 jobs were added last month. Wall Street economists had expected an increase of about 190,000, according to Bloomberg. The unemployment rate was 3.8 percent, down from 3.9 percent in April and the lowest since early 2000.
  • Home prices in 20 U.S. cities climbed more than forecast in March, driven by rising demand and a lack of inventory, according to S&P CoreLogic Case-Shiller data released on Tuesday. All 20 cities in the index showed year-over-year gains, led by a 13 percent increase in Seattle, a 12.4 percent advance in Las Vegas and an 11.3 percent pickup in San Francisco.


  • The political uncertainty in Italy is causing turmoil in global markets. Stock markets around the world plunged on Tuesday and investors demanded higher yields in return for taking on Italian government debt. Investors are worried that political disarray in Italy could cause pain beyond the country’s borders. Italy is heading for new elections after populist politicians failed to form a government. Radical parties could gain even more ground, and investors are worried that the vote will turn into a de-facto referendum on the euro.
  • Pending home sales, which measure signed contracts to buy existing homes, fell a wider-than-expected 1.3 percent compared to March, according to the National Association of Realtors. It was the third lowest level of the past year and the fourth straight month showing an annual decline. Weakening affordability is exacerbating an already short supply, especially on the lower end of the market.
  • Euro-area manufacturing lost momentum in May as the strength of export demand eased. IHS Markit said its manufacturing PMI was 55.5, the lowest in 15 months. The 19-nation region has weakened this year after enjoying the fastest growth in years at the end of 2017. May’s survey was carried out before the bout of political turmoil in Italy in the past week that sent bond yields rising.


  • A strong fiscal boost to the U.S. economy at a time of low unemployment suggests a gradual pace of interest-rate increases remains “the appropriate path” to prevent growth from overheating, Fed Governor Lael Brainard said. “Continued gradual increases in the federal funds rate are likely to be consistent with sustaining strong labor market conditions and inflation around target,” Brainard said in a speech. “This outlook suggests a policy path that moves gradually from modestly accommodative today to neutral — and, after some time, modestly beyond neutral.”
  • The manufacturing ISM is likely to edge up in May following two successive months of declines, according to Bloomberg economists. The gauge has had a strong run in expansionary territory, but even more notable is the duration of its streak above a reading of 55 since January 2017. While the manufacturing ISM has eased back from a near 14-year high in February, the measure remains at an elevated level consistent with robust growth in the second quarter. The new orders component remained at a particularly solid level despite some softening in April. This suggests that the headline reading may be overstating any cooling signals and that underlying economic activity continues to build momentum.
  • Illinois lawmakers approved a bipartisan spending plan, leaving the state poised to enact its first on-time budget in four years and avoid a repeat of the record impasse that pushed its credit rating to the brink of junk. The state House of Representatives voted Thursday to approve the $38.5 billion spending plan for the year that starts July 1, after the Senate approved the measure late Wednesday.


  • From Italian politics to trade tensions, global markets have reasons to fret. That’s pushed the Bank of America Merrill Lynch Global Financial Stress indicator to its highest level since the February market rout. For the first time in two months, the gauge — a measure of risk across asset classes, hedging demand and investor flows — is back in positive territory, signaling that there is more anxiety in financial markets than normal.

indicator of market stress jumps to highest since february
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  • A surging dollar and a capital flight from emerging markets may lead to another “major” financial crisis, investor George Soros said, warning the EU that it’s facing an imminent existential threat. The “termination” of the nuclear deal with Iran and the “destruction” of the transatlantic alliance between the EU and the U.S. are “bound to have a negative effect on the European economy and cause other dislocations,” including a devaluing of emerging-market currencies, Soros said in a speech in Paris. “We may be heading for another major financial crisis.”
  • More than a half dozen of the biggest U.S. banks reduced their holdings of state and local government bonds by billions of dollars after the federal government slashed corporate tax rates, making the securities less valuable to one of the market’s key buyers. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo together cut their stakes by $7.8 billion during the first three months of 2018, according to quarterly filings with the SEC. State Street, Morgan Stanley and First Republic Bank also reduced their municipal-debt holdings. The figures show a significant pullback from buyers that had been steadily expanding their ownership of state and local government securities since the end of the recession, helping bolster demand. If the large banks are a guide, the quarter will mark the first time the banking industry has retreated from the $3.9 trillion market since 2009.

Gold Market

This week spot gold closed at $1,293.73 down $7.97 per ounce, or 0.61 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week unchanged. Junior-tiered stocks underperformed seniors for the week, as the S&P/TSX Venture Index came in off 1.22 percent. The U.S. Trade-Weighted Dollar reversed course this week and slipped 0.10 percent.

Date Event Survey Actual Prior
May-28 Hong Kong Exports YoY 9.2% 8.0% 8.0%
May-29 Conf. Board Consumer Confidence 128.0 128.0 125.6
May-30 Germany CPI YoY 1.9% 2.2% 1.6%
May-30 ADP Employment Change 190k 178k 163k
May-30 GDP Annualized 2.3% 2.2% 2.3%
May-31 Eurozone CPI Core YoY 1.0% 1.1% 0.7%
May-31 Initial Jobless Claims 228k 221k 234k
May-31 Caixin China PMI Mfg. 51.2 51.1 51.1
Jun-1 Change in Nonfarm Payrolls 190k 223k 164k
Jun-1 ISM Manufacturing 58.0 58.7 57.3
Jun-4 Durable Goods Orders -1.7%
Jun-7 Initial Jobless Claims 223k 221k


  • The best performing metal this week was palladium, up 2.39 percent. In terms of gold, traders and analysts were bullish on the yellow metal this week after being split in the previous week, according to the Bloomberg weekly survey. The bullishness is driven by uncertainty over the future leadership of Italy and Spain, which could lead investors to gold. Hussein Sayed, chief market strategist at ForexTime Ltd. said to Bloomberg in regard to the Italian political uncertainty that “a re-election will lead to a stronger populist group forming, and thus, a possible referendum on the European Union.”
  • According to Reuters, sales of American Eagle gold coins in May rose by 433 percent from April to be the highest sales since 2015. U.S. Mint sales of American Eagle gold coins totaled 24,000 ounces in May, up dramatically from 4,500 in April, also the highest level since 2015.
  • Gold advanced earlier in the week on a weaker U.S. dollar and mounting global trade war fears. Ole Hansen, head of commodity strategy at Saxo Bank said “the dollar strength has paused and there’s now talk of renewed U.S. trade tariffs against both friends and foes, which is adding to support for gold prices.”  Although gold is trading just below its 200-day moving average, as seen in the chart below, the consensus is for higher prices. Such a technical breakout above the 200-day moving average will likely lead to money flow into the sector.

gold struggling to break 200-day moving average
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  • The worst performing metal this week was silver, down 0.62 percent. U.S. hiring rose more than forecast in May, payrolls increased to 223,000 and unemployment fell to 3.8 percent. Shobhana Chandra of Bloomberg writes that while wage gains are positive, they have yet to show a sustained acceleration. Although unemployment is now at its lowest since 2000, companies are launching more incentives to attract and retain employees. Walmart, one of the largest employers in the U.S., will begin offering subsidized college tuition for its 1.4 million workers, after raising its base wage to $11/hr earlier this year in an effort to woo employees. While the employment numbers were strong, the fact that wages and benefits are going higher should reinforce inflation expectations.
  • Although gold tends to perform well during times of political uncertainty, the gold price this week barely moved. Italy’s political situation and renewed trade war fears should have seen gold rise, however it did not due to the lingering effects of a U.S. dollar rally earlier in the month.
  • According to the Financial Times, the Indian rupee is the worst performing currency in Asia so far this year and has declined 5.3 percent against the dollar. A lower rupee affects the ability of India, the world’s second largest consumer of gold, to purchase gold and gold jewelry.


  • Newmont Mining announced this week that is has entered into an agreement to sell its royalty portfolio to Maverix Metals Inc., an emerging mid-tier precious metals royalty and streaming company. Maverix Metals is relatively unknown but has been making significant progress in building a royalty streaming company.  Initially, the company started with a package of royalties from Pan American Silver, thereafter added a package of royalties from Gold Fields, and then Li Ka-shing of CEF Holdings purchased a stake in the company.  Newmont is the latest to roll its royalty package into Maverix, resulting in the stock climbing 18 percent this week.
  • Mike McGlone, Bloomberg Intelligence commodity strategist, writes that gold didn’t fall as much as it usually does when the dollar rallies. Gold typically declines at 1.2 percent the rate of the dollar, but in April and May gold retreated at about half that rate. Even though a dollar rally might be masking gold right now, bullion should rise in the near future due to a spike in Italian sovereign bond yields and renewed questions over the future of the eurozone. Twice in the past decade the dollar and gold relationship flipped and instead climbed together. Both times the cause was the European sovereign-debt crisis. The last time the dollar and gold rallied in unison, the metal soared to records in euro and dollar terms, writes Eddie van der Walt of Bloomberg First World.
  • Increased risks of a global trade war, again, could be positive for bullion prices as investors tend to flock to safe haven assets such as gold in times of uncertainty. President Trump announced steel and aluminum tariffs on Canada, Mexico and the European Union, which risks a “tit-for -tat” response of tariffs on American goods.


  • Europe has seen quite the week of political shake-ups. European commission President Jean-Claude Juncker told an audience in Brussels this week that he thinks it is time to reconnect with Russia given its size and importance. Juncker said “I am not very happy with the state of our relations.” The Spanish Prime Minister, Mariano Rajoy, was ousted by a vote in Parliament of no-confidence after being plagued by corruption revelations. Socialist leader Pedro Sanchez is set to be sworn in as the new Prime Minister in the next coming days, reports Bloomberg. Italy’s populist parties, Five Star Movement and League, are set to take power after three months of political deadlock, however there is still much risk associated with the nation’s stability.
  • At least 23 companies that announced initial public offerings (IPOs) valued at $10 million or more this year have now withdrawn or postponed, compared with five IPOs that were announced and then scratched during the same period last year, according to Bloomberg. This is in stark contrast with the news that Moscow has emerged as the number two city for fast-growing private companies, according to the Inc. 5000 Europe list. “If it weren’t for political risks, Russia could become a global startup powerhouse,” says William Courtney, a retired diplomat and executive director of the nonprofit policy firm Rand Business Leaders Form in Arlington, Virgina.
  • Bloomberg reports that Jay Wintrob, chief executive officer of Oaktree Capital Group, expects to see a flood of troubled credits topping $1 trillion, as rising interest rates overwhelm low-quality loans and bonds. Wintrob said that the supply of low-quality debt is significantly higher than prior periods and that a lack of protections makes investing in shaky creditors riskier than ever when interest rates rise.

Blockchain and Digital Currencies



  • Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended June 1 was WhaleCoin, which gained 321.70 percent. On Tuesday, a handful of cryptocurrencies bounced after a brutal few weeks for the sector, reports Seeking Alpha. The stumble in global stocks may or may not have helped push the digital currency space back up early in the week, although prices moved lower Wednesday and Thursday.
  • Despite bitcoin being down around 50 percent so far this year, an article from Bitcoinist points out that the cryptocurrency is still up around 700 percent since January 1, 2017. “If we calm the jitters caused by short-term bitcoin price fluctuations and focus on the long-term trend, we can see that the cryptocurrency continues to perform spectacularly,” the article

bitcoin is down 50% this year, but still up 700% since January 1, 2017
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  • Brad Garlinghouse, the chief executive of payment protocol with Ripple, told CNBC that the company is now signing up one financial institution per week to move money across the globe, reports MarketWatch. “The more participants the more value in joining so we are seeing that momentum build,” said Garlinghouse.


  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended June 1 was MediBloc, which lost 50.90 percent.
  • The co-founder of Wikipedia Jimmy Wales believes that bitcoin is a bubble that will eventually pop, reports MarketWatch. Wales spoke at Europe’s version of New York’s Consensus Conference, known as “Blockshow,” telling attendees that the industry is in for a rude awakening and that the sector is in need of some “real journalism.”
  • Many investors in the digital currency space, particularly those who are passionate about blockchain technology, are getting increasingly frustrated with professional risk management strategies across major ICO projects, reports Coindesk. “A lot of the projects that raise money, they’re not really reporting what they are spending it on,” said Meltem Demiorors, founder of Athena Capital and chief strategy officer at CoinShares.


  • In around two years, on May 27, 2020, the coin reward for mining new bitcoin blocks will fall from 12.5 coins to 6.25 coins, writes Billy Bambrough on Forbes. According to Bambrough, people are already wondering what this could do to the price. Since bitcoin’s creation in 2009 there have been two instances already. After the first halving event in November 2012, the bitcoin price reached “what was then an all-time high of $1,000.” And in 2016, the second instance “heralded last year’s bull run which peaked in December 2017,” the article continues.
  • U.S. cryptocurrency exchange Bittrex announced that it has forged banking agreements that will allow some customers to trade in U.S. dollars, reports Bloomberg. “The closely held firm said the pact will let corporate clients in some states buy virtual tokens using dollars – a move that could help the trading venue bring in more users,” the article continues.
  • Since rolling out bitcoin trading in November for customers of its Cash App, Square Inc.’s stock has surged almost 50 percent, adding about $8 billion in market value, reports Bloomberg. CEO Jack Dorsey repeatedly shares his enthusiasm for digital currencies, the article continues, saying earlier this month that “the Internet deserves a native currency.”


  • Is trading bitcoin considered gambling? According to a Scottish hospital which has fielded inquiries all over the world about its newly launched crypto rehab unit, maybe so. As MarketWatch reports, like other forms of gambling, trading bitcoin may be dangerously addictive to some. “Cryptocurrency users can get hooked by the volatile fluctuation of prices online which creates a ‘high’ when they buy or trade a winning currency,” said Castle Craig Hospital in a press release Monday.
  • The rise of blockchain technology could threaten the Internet dominance of FANG companies (Facebook, Amazon, Netflix and Alphabet), reports IBD, as the database software technology decentralizes the web. “With blockchain, the community of users owns and pays for the servers instead of having a centralized organization like the FANGs, driving better innovation,” Oppenheimer analyst Tim Horan said.
  • Mining hardware giant Bitmain is being criticized over one of its latest mining products, the AntMiner B3, reports Coindesk. “While the AntMiner B3’s official specifications tout a computing power of 750 hashes per second, complaints from the first batch of buyers in China soon emerged, alleging that Bitmain had significantly exaggerated the product’s power capability in its marketing,” the article explains.

Energy and Natural Resources Market



  • Nickel was the best performing major commodity this week rising 2.77 percent. The commodity rallied after a steep drop in inventories ignited concern over a possible supply shortfall. Nickel also rallied on predictions that the commodity stands to benefit from growing use in the emerging electric-vehicle sector.
  • The best performing sector this week was the S&P 1500 Oil & Gas Refining & Marketing Index. The index rose 5.20 percent as the traditional demand boost from the summer driving is compounded by wider price differentials across regions due to infrastructure bottlenecks.
  • The best performing stock for the week was Evraz PLC. The Russian steelmaker rose 9.24 percent after the company announced the sale of its 15 percent stake in Delong Holdings Limited at a significant premium to market prices.


  • Iron ore was the worst performing commodity this week. The commodity dropped 6.48 percent, the worst weekly drop in at least three months, after President Trump enacted steel tariffs on the European Union, Canada and Mexico.
  • The worst performing sector this week was the Bloomberg Auto Parts & Equipment Index. The index dropped 0.47 percent after President Trump enacted new tariffs on imported steel, which market analysts believe could lead to higher input costs for the auto parts industry.
  • The worst performing stock for the week was Petrobras SA. The Brazilian integrated oil major dropped 19.94, capping a second week of heavy losses, after the nationwide truckers strike in Brazil demanding lower fuel prices extended for a second week, leading to the resignation of Petrobras CEO Pedro Parente.


  • Saudi Arabia may raise official selling prices of crude it ships to Asia in July, possibly raising its flagship Arab Light crude grade to the highest prices since February 2014. The price hike follows signs of increased demand, as refiners globally gear up for the peak summer oil consumption period.
  • President Trump is expected to launch an unprecedented intervention into U.S. energy markets by forcing grid operators to buy electricity from struggling coal and nuclear power plants. While the policy does not affect overall power demand, it reallocates demand back to coal and nuclear plants, which should support prices for both coal and uranium.
  • U.S. construction spending was up 1.8 percent to a record high in April, reflecting a surge in home building. The strength in the sector should continue to support lumber prices, as well as the entire construction materials sector.


  • Global economic growth is slowing in 2018 after a remarkable 2017. Growth dipped in all major economies in the first quarter. A widely watched survey of manufacturing, JP Morgan’s global PMI index, fell to a 10-month low in May. More importantly, the global PMI 3-month moving average dropped below the 12-month moving average, suggesting a medium-term break of the 2-year long upward trend.

Global manufacturing PMI trend turns negative
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  • Steel import duties announced by President Trump may lead to lower steel demand, according to Credit Suisse analysts. According to a research note, higher U.S. steel prices resulting from the tariffs could reduce end-product competitiveness globally, such as cars, leading to lower steel demand over time. 
  • The Trump administration sent a sudden, harsh message to its Chinese counterparts, saying the U.S. was moving forward with its threat to apply tariffs on Chinese imports. The move surprised many observers after the White House had for days detailed the outlines of a deal in which any trade war with China would be put on hold while negotiators worked on a deal.

China Region



  • China’s official PMI readings came in better than expected. The manufacturing PMI clocked in at a solid 51.9, up from April’s 51.4 and well ahead of expectations for a flat showing, while the non-manufacturing PMI reading came in at 54.9, beating expectations for a 54.8, and up from last month’s 54.8.  The Caixin manufacturing PMI also came in reasonably well with a 51.1 showing, flat from the prior month but a touch behind an anticipated 51.2 print.
  • Industrial profits in China came in at a 21.9 percent year-over-year growth rate for the April measurement period, significantly better than March’s 3.1 percent.
  • India’s year-over-year, first quarter GDP came in at a growth rate of 7.7 percent, ahead of expectations for a 7.4 percent pace. The world’s fastest-growing large economy continues its rapid growth.


  • Telecommunications was the worst performing sector in the Hang Seng Composite Index this week, falling 2.23 percent.
  • Hong Kong’s exports and imports came in a little lighter than expected. Year-over-year exports for the April period came in up 8.1 percent, better than March’s 8.0 percent but below analysts’ expectations for a 9.2 percent showing. Imports came in up 11.1 percent, once again better than the prior month’s 10.7 percent pace but below an anticipated 11.9 percent print.
  • The Nikkei South Korea Manufacturing PMI remains below 50 in contractionary territory, clocking in at 48.9 for the month of May—better than April, but certainly not great.


  • Congratulations are in order for China’s A-shares, roughly 230 of which officially joined the MSCI Emerging Markets Index this week.
  • Malaysian authorities announced they do expect to maintain the 2018 fiscal budget deficit target after planning to reintroduce a sales tax after scrapping the GST. 
  • After the late week drama of the prior week, the U.S.-North Korea/Trump-Kim summit looks to be back on for the original date of June 12, and U.S. Secretary of State Mike Pompeo hosted North Korea’s Kim Yong-chol in New York this week ahead of the once-again-now-upcoming meeting between the two countries’ respective leaders in Singapore. The North Korean delegation left New York and subsequently traveled to Washington to visit U.S. President Donald Trump at the White House—and hand deliver a letter to him from North Korean leader Kim Jong Un—before returning to North Korea. President Trump announced the summit to be (a) on for June 12, and (b) the “start [of] a process.”

China may scrap controversial birth limits as country faces worker shortage


  • The Trump administration announced an intention to move forward with the first $50 billion in tariffs on Chinese goods even as U.S. Secretary of Commerce Wilbur Ross headed off to Beijing this weekend for talks June 2-4. Trade talks and tariffs remain atop investors’ minds.
  • Indonesia’s central bank hiked interest rates again this week, from 4.5 to 4.75 percent, although a potentially stronger U.S. dollar and/or sustained higher energy prices will continue to loom.
  • Between trade and North Korea headlines, the market remains susceptible to headline risk and escalation of any kind, although it seems likely that the global trade issue and North Korea will each respectively be, as President Trump says ahead of the Singapore summit, “a process.”

Emerging Europe



  • Greece was the best performing country this week, gaining 2.8 percent. PMI data was released for the month of May on Friday.  Poland, Russia, Czech Republic and Turkey all recorded drops in manufacturing activity; however Hungary and Greece did not. The Greek Purchasing Manager Index spiked to 54.2 from 52.9, the largest increase, suggesting a pickup in production and stronger economic growth.
  • The Turkish lira was the best performing currency this week, gaining 1.8 percent against the dollar. It was a volatile week for the Turkish currency, but overall supported by last week’s unexpected rate hike and the announcement of rate policy simplification.
  • The industrial sector was the best performing sector among eastern European markets this week.


  • Turkey was the worst performing country this week, losing 3.9 percent, with banks underperforming. The depreciating currency and rising rates may affect the ability of companies to repay their obligations. Debt-restructuring demand is picking up.
  • The Romanian leu was the worst performing currency this week, losing 70 basis points against the dollar. According to a statement from the Ministry of Labor, the second pillar pension fund will become optional. The details of the plan are to be announced sometime this summer.
  • The real estate sector was the worst performing sector among eastern European markets this week.


  • Euro-area inflation for May was reported at 1.9 percent, above 1.6 percent forecasted by economists and up from just 1.2 percent in April.  Inflation has been stubborn in the eurozone despite strong economic expansion and the European Central Bank’s bond-buying program. With this latest pick up, CPI is moving closer to central bank’s target of 2 percent.
  • Many market watchers expect the President of Turkey, Erdogan, to win in the snap election scheduled for June 24, representing a step away from politics with checks and balances. However, for Erdogan it is critical for his AKP party to win the majority in the parliament. After Erdogan moves into executive presidency, parliament will still have the ability to amend the Constitution, or overwrite Presidential decrees by passing a different version on the same topic.
  • Per our technical indicator, the Turkish lira has reached oversold territory and may be due for a short rally. Last week’s emergency rate hike and this week’s announcement of rate policy simplification have helped the lira rebound and it may have a bit further to run over the next few weeks. Historically, the lira has suffered during periods of political uncertainty, but recently it has been supported by the central bank’s actions.


  • Last weekend, Italian President Mattarella rejected the nomination of Eurosceptic Paolo Savona as Finance Minister and appointed former IMF economist Carlo Cottarelli as Prime Minister. The Five Star Movement and the Northern League called for a new election and the market responded with a sell-off. At the beginning of the week, the yield on Italian 10 year government bonds spiked and crossed above the U.S.’s for the first time since 2014. More noise around Italian politics and its new government will likely continue.

Italys 10 year government yield spikes above the US treasury yield
click to enlarge

  • According to Emerging Europe Economics, a significant escalation of the Italian crisis would cause the most problems for Croatia, Slovakia and Romania, among countries in the emerging Europe region. Firstly, Italy is a main importer of goods from emerging Europe, with Slovakia and Bulgaria exporting most to the nation. Secondly, around one-third of banking assets in Croatia and one-fifth of banking assets in Slovakia are owned by Italian parents and funding may become more expensive. Lastly, negative sentiment may put pressure on capital flows to emerging economies. Economies with larger current account deficits, such as Turkey, Ukraine and Romania, would be hit hard if the Italian crisis escalates and disturbs capital flows.
  • Europe, along with Canada and Mexico, had been granted exemption from steel and aluminum tariffs, but the exemption expired on June 1. President Trumps’ administration decided to impose tariffs on steel and aluminum producers. The president of the European commission, Jean-Claude Juncker, promised immediate retaliation after the U.S. commerce secretary, Wilbur Ross, said European Union companies would face a 25 percent duty on steel and a 10 percent duty on aluminum.

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Leaders and Laggards

Weekly Performance
Index Close Weekly
Russell 2000 1,647.98 +21.05 +1.29%
S&P Basic Materials 368.82 -0.20 -0.05%
Nasdaq 7,554.33 +120.48 +1.62%
Hang Seng Composite Index 4,232.08 -18.36 -0.43%
S&P 500 2,734.62 +13.29 +0.49%
Gold Futures 1,297.40 -11.60 -0.89%
Korean KOSPI Index 2,438.96 -21.84 -0.89%
DJIA 24,635.21 -117.88 -0.48%
S&P/TSX Global Gold Index 189.11 -0.86 -0.45%
SS&P/TSX Venture Index 765.94 -9.47 -1.22%
XAU 83.04 -0.44 -0.53%
S&P Energy 561.37 +13.60 +2.48%
Oil Futures 65.68 -2.20 -3.24%
10-Yr Treasury Bond 2.90 -0.03 -1.06%
Natural Gas Futures 2.97 +0.03 +1.09%


Monthly Performance
Index Close Monthly
Korean KOSPI Index 2,438.96 -66.65 -2.66%
Hang Seng Composite Index 4,232.08 +6.15 +0.15%
Nasdaq 7,554.33 +453.44 +6.39%
XAU 83.04 +1.12 +1.37%
S&P/TSX Global Gold Index 189.11 -0.73 -0.38%
Gold Futures 1,297.40 -14.40 -1.10%
S&P 500 2,734.62 +98.95 +3.75%
S&P Basic Materials 368.82 +13.00 +3.65%
DJIA 24,635.21 +710.23 +2.97%
Russell 2000 1,647.98 +93.07 +5.99%
SS&P/TSX Venture Index 765.94 -6.17 -0.80%
Oil Futures 65.68 -2.25 -3.31%
S&P Energy 561.37 +17.69 +3.25%
Natural Gas Futures 2.97 +0.22 +7.88%
10-Yr Treasury Bond 2.90 -0.07 -2.22%


Quarterly Performance
Index Close Quarterly
Korean KOSPI Index 2,438.96 +36.80 +1.53%
Hang Seng Composite Index 4,232.08 -2.40 -0.06%
Nasdaq 7,554.33 +296.47 +4.08%
Natural Gas Futures 2.97 +0.28 +10.24%
Gold Futures 1,297.40 -37.80 -2.83%
S&P 500 2,734.62 +43.37 +1.61%
S&P Basic Materials 368.82 +0.71 +0.19%
S&P/TSX Global Gold Index 189.11 +7.70 +4.24%
XAU 83.04 +4.29 +5.45%
DJIA 24,635.21 +97.15 +0.40%
Russell 2000 1,647.98 +114.81 +7.49%
SS&P/TSX Venture Index 765.94 -60.08 -7.27%
S&P Energy 561.37 +69.51 +14.13%
Oil Futures 65.68 +4.43 +7.23%
10-Yr Treasury Bond 2.90 +0.04 +1.26%


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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.

Some links above may 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.

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 (03/31/2018):

Evraz PLC
Citigroup Inc.
Kinross Gold Corp.
Franco-Nevada Corp.
Royal Gold Inc.
Wheaton Precious Metals Corp.
S&P Global Inc.
Newmont Mining Corp.
Maverix Metals Inc.
Pan American Silver Corp.
Gold Fields Ltd.

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
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.

The S&P 1500 Oil & Gas Refining & Marketing Index is a capitalization-weighted index.

The S&P BSE Auto index comprises constituents of the S&P BSE 500 that are classified as members of the transportation equipment sector as defined by the BSE industry classification system.

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute for Supply Management (ISM) and monitors employment, production, inventories, new orders and supplier deliveries.

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow or FCF is the cash left over after a company pays for its operating expenses and capital expenditures or CAPEX.

Return on invested capital (ROIC) is a profitability ratio. It measures the return that an investment generates for those who have provided capital, i.e. bondholders and stockholders. ROIC tells us how good a company is at turning capital into profits.

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.