Gold Takes a Breather… Is this the Buying Opportunity Investors Are Looking For?

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

First it was Stan Druckenmiller, now it’s George Soros. Following billionaire former hedge fund manager Druckenmiller’s announcement that gold was his family office fund’s largest currency allocation, we learned this week that his old boss, billionaire investor George Soros, purchased a $264 million stake in Barrick Gold, the world’s largest gold producer, after liquidating $3.5 billion in U.S.-listed stocks. Additionally, he disclosed owning call options on a gold ETF.

Soros’ investment can be held up as further proof that sentiment toward gold has decidedly shifted positive, following the challenging last three years.

London-based precious metals consultancy Metals Focus just released its Gold Focus 2016 report in which the group calls an end to the gold bear market that began in late 2011, after the metal hit its all-time high of $1,900 per ounce. “We are optimistic about gold over the rest of this year and our projections see it peaking at $1,350 in the fourth quarter,” the group writes. Global negative interest rate policy fears have reawakened investors’ confidence in gold as a reliable currency and store of value.

The group adds: “In the near term, there may well be some liquidations of tactical positions.” This is to be expected, especially around the start of summer, based on historical precedent

Will Gold Follow Its Short or Long-Term Trading Pattern?

We’ve noticed that mining companies which have deleveraged their balance sheets this year have been some of the biggest gainers. Barrick, now Soros’s largest U.S.-listed allocation, started 18 months ago.

Glencore, Teck Resources and higher-risk junior producers such as Gran Colombia bounced off the canvas after being knocked down.

Gold equities always have a higher beta than bullion. Usually a ±1 percent move translates into 2 to 3 percent in gold stocks.

Regardless of it being a bull or bear market, there are still fairly predictable intra-year trends in the price of gold. Below is an updated composite chart of the metal’s historical yearly patterns over the last five, 15 and 30 years, courtesy of Moore Research.

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In all periods, gold contracted in May to early summer, then rallied in anticipation of Ramadan—this year beginning June 4—and India’s festival of lights and wedding season. India has one of the largest Muslim populations in the world, and for at least 5,000 years they’ve adhered to the tradition of giving gold as gifts during religious and other celebrations. .

Predictably so, the yellow metal has retreated somewhat this month, following its best start to a year in 30 years and its best-ever first quarter for demand. As I told Daniela Cambone during this week’s Gold Game Film, this pullback provides an attractive buying opportunity

The five-year period decoupled from the other two starting in mid-autumn, but the annual losses in 2013 (when the yellow metal fell 28 percent), 2014 and 2015 skewed the data. Metals Focus sees gold following its more typical trading pattern this year, possibly climbing to as high as $1,350 an ounce

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In the near-term, gold is threatened by a rate hike, possibly as early as next month’s Federal Open Market Committee meeting. The metal fell to a three-week low this week on hawkish Fed minutes. If the Fed ends up delaying a hike, it could give gold the chance to take off.

Analysts See a Possible 25 Percent Depreciation in China’s Currency

One of the concerns the Fed has right now is the depreciation of the Chinese renminbi. In a special report, CLSA estimates it could fall as much as 25 percent before rebounding somewhat. Because the trade volume with China is so massive, the fear is that it could affect the U.S. economy

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This would have many obvious negative consequences. For one, because China’s oil contracts with the Middle East are denominated in renminbi, not dollars, Middle East suppliers would be hurt.

CLSA points to several winners, however, including investors. The devaluation could very well “represent the best opportunity to buy Chinese assets that investors have had since the financial crisis,” the investment banking firm writes. China’s materials sector, local exporting producers and mainland gold producers should also benefit. The renminbi will “inevitably” fall, CLSA says, “irrespective of economic fundamentals, as a free market works out what it is worth.”

It’s little wonder then that, in the meantime, the country’s consumption of gold has skyrocketed in recent years as it vies to become one of the world’s key gold price makers. (Remember, China just introduced a new renminbi-denominated gold fix price.)

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In addition, it was reported earlier this week that Chinese bank ICBC Standard just purchased one of Europe’s largest gold vaults from Barclays, located in London, for $90 billion. This will help give the country greater control over gold transactions around the world, about $5 trillion of which are cleared in London every year

Should They Stay or Should They Go?

Likely to help gold this summer are geopolitical events, specifically the potential “Brexit” next month when U.K. voters decide on whether to remain members of or leave the European Union.

Various analysts have warned that such an event could trigger a crisis with both the euro and pound, which might spread to other economies. A recent Bank of America Merrill Lynch survey found, in fact, that the idea of a Brexit has risen to the top of global investors’ worries. What’s more, no consensus was reached during a meeting among G7 nations this past weekend on how to deal with fiscal policy, other than to take a “go your own way” approach.

In the past, gold has been used as a hedge against the risk of not only negative interest rates but also inflation.

High inflation might also be coming to the U.S. thanks to the Labor Department’s new regulation on overtime pay, which doubles the eligibility threshold from $23,660 a year to $47,476 a year, on condition that the worker puts in more than 40 hours a week. It’s estimated that the ruling will affect 2.2 million retail and restaurant workers, among others.

President Barack Obama’s heart is certainly in the right place by wanting to boost workers’ wages. But it’s important to be aware of the unintended consequences that have often accompanied such sweeping edicts throughout history. We could end up with rampant inflation as companies will have little choice but to raise prices to offset the increased expense. Again, having part of your portfolio invested in gold and gold stocks, as much as 10 percent, could help counterbalance inflationary pressures on your wealth.

Defense Stocks Hit All-Time Highs on Terrorism Jitters

Global fears of terrorism persist, of course, with a Cairo-bound EgyptAir flight crashing in the Mediterranean Sea this week. Although the cause of the crash is not clear at this point, officials have not ruled out terrorism. In light of this and other tragedies—the attacks in Belgium, for instance—defense and military stocks have made huge moves in recent weeks. Shares of Northrop Grumman, Raytheon and L-3 Communications all hit all-time highs last week.

In a recent call, an analyst with Cornerstone Macro predicted that a presidential victory for Donald Trump would be good for defense stocks, as he’s made promises to “rebuild” the military should he make it into the White House. It appears the market is already betting on such a win.

Finally, I want to wish all of my dear Canadian friends and family a Happy Queen Victoria Day, and a long, restful weekend! The markets have been unexciting, so I hope you can take advantage of the beautiful warm weather, enjoy some barbecue and outdoors on your day off and maybe get your boat ready for the summer months ahead.

Index Summary

• The major market indices finished mixed this week. The Dow Jones Industrial Average lost -0.20 percent. The S&P 500 Stock Index rose 0.28 percent, while the Nasdaq Composite climbed 1.10 percent. The Russell 2000 small capitalization index gained 0.89 percent this week.

• The Hang Seng Composite gained 0.42 percent this week; while Taiwan was up 0.96 percent and the KOSPI fell -0.98 percent.
• The 10-year Treasury bond yield rose 14 basis points to 1.84 percent.

Domestic Equity Market

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Strengths

• Energy was the best performing sector for the week, increasing by 1.51 percent versus an overall increase of 0.28 percent for the S&P 500.

• Applied Materials was the best performing stock for the week, increasing 15.55 percent. The chip maker guided profit for the current quarter well above the street’s projections, on strong demand for equipment used to make smartphones and memory chips. The company also unveiled better-than-expected fiscal second quarter financial results.
• Germany’s Bayer has made a bid for seed and pesticide maker Monsanto. The deal would create the world’s largest seed and pesticide company, valued at $42 billion. In another deal, FMC Technologies announced a planned merger with France’s Technip in a $13 billion transaction. The deal will build on an existing joint venture between the U.S. and French firms.

Weaknesses

• Utilities was the worst performing sector for the week, falling by -2.35 percent versus an overall increase of 0.28 percent for the S&P 500.

• Hormel Foods was the worst performing stock for the week, falling -12.63 percent. The stock had its worst decline since 2008 after narrowing margins sparked concern. The profit margin for Hormel’s refrigerated-foods shrank to 11.9 percent last quarter before interest and taxes, down from 14.4 percent in the previous three months. That shift, combined with pork industry trends, is likely to limit the company’s upside, according to analysts.
• A proposed $43 billion purchase of Syngenta by ChemChina has been delayed by additional scrutiny from the U.S. Treasury Department’s Committee on Foreign Investment in the United States (CFIUS) and the U.S. Department of Agriculture. The delay has prompted ChemChina to extend its offer period until July, pending the results of the regulatory review.

Opportunities

• Gold has been range-bound between $1,200-1,300 an ounce for the past three months. It reached $1,300 an ounce on May 2, a key technical resistance level, which it has yet to surpass. A clean break of $1,300 an ounce should lead to another wave of technically driven speculative buying. Ahead of this expected push, BCA’s commodity strategists are upgrading their gold view to tactically bullish. This would provide another leg up to gold mining companies.

• Walmart’s positive earnings results suggest upside for the megastores space. There is tentative evidence that the industry’s investments in store improvements and marketing are paying off. Hypermarket sales are rising in absolute terms, and are finally gaining ground on overall retail sales. At the same time, costs are under control, as measured by the deflation in imported consumer goods prices and ongoing deflationary pressures from major producing countries. This could lead to continued upside profit surprises.
• Drug prices are a hot political issue, but rising prices have yet to undermine consumption, underscoring that pharmaceutical profits are likely to remain on an outperformance path.

Threats

• Cash flow generation at U.S. companies is weakening, but companies have continued to add leverage on the view that interest rates will stay low forever. The funds have not been used for productive investment, but rather to retire stock. While this dynamic has been a large support for earnings per share, it cannot continue forever amid the rapid decline in the quality of corporate sector balance sheets. High leverage will become much more problematic should economic growth slow from already anemic rates.

• Credit concerns likely explain the inability of banks to participate in the latest equity rally. In fact, bank relative performance tends to lead overall debt servicing deterioration. In past cycles, the inability of bank stocks to participate has been a warning for the broad market, implying that the latest downturn should not be lightly dismissed.
• The persistent bid under defensive equities suggests a peaking process for the broad market rather than a breakout. Relative performance, breadth and momentum are strongest in non-cyclical sectors, and comparatively weak in the cyclical and interest rate-sensitive sectors.

The Economy and Bond Market

Strengths

• The Consumer Price Index rose 0.4 percent, the strongest monthly reading in more than three years.
• U.S. industrial production rose a robust 0.7 percent in April, led by utilities output.
• Housing starts rose at a stronger-than-expected rate of 6.6 percent in April, while building permits rose 3.6 percent from the previous month.

Weaknesses

• According to the minutes of the April Federal Open Market Committee (FOMC) meeting, the Fed is seriously considering an interest rate hike in mid-June. As a result, there was an immediate and sharp repricing in the outlook for Fed policy. The market probability of a June rate hike jumped from near zero earlier this week to 35 percent. This caused a selloff in the bond market, with the U.S. 10-year yield jumping from 1.76 to 1.88.

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• China reported somewhat weaker than expected economic data this week. Industrial production, retail sales and fixed asset investment were all below economists’ forecasts. China’s highly indebted economy continues to struggle amid slowing growth as it transitions from an investment-driven to a consumer-led economy.
• Factory activity in New York shrank in May after expanding for two months, as manufacturers received fewer orders and shipments fell. The Federal Reserve Bank of New York said that its Empire State manufacturing index slumped to minus 9 in May, after reaching 9.6 the previous month.

Opportunities

• The U.S. Department of the Treasury and Republicans in the U.S. House of Representatives have reached a tentative deal to set up a financial control board to take charge of Puerto Rico’s debt crisis. The board would manage financial obligations and oversee some debt restructuring. No U.S. federal funds are being committed as part of the package.

• The International Monetary Fund (IMF) proposed a debt relief package for Greece in advance of a European summit to tackle Greek finances on 24 May. The IMF proposal includes provisions that payments of principal and interest would be skipped until 2040 and some loans would extend their maturities out to 2080. Germany is said to see the IMF proposal as an opening bid in a negotiation that EU leaders would like to conclude next week. The hope is for a quick agreement on a debt deal so as to avoid a messy intra-EU battle in the run up to the Brexit referendum on June 23.
• The G7 leaders’ summit will be held May 26-27. Japan has sought to use the G7 to promote coordination on fiscal, monetary and currency policies.

Threats

• The April U.S. durable goods orders report, an important leading indicator of the economy and equity market, is scheduled for Thursday. Core capital goods orders have been trending lower since peaking in September 2014.
• Yield curves are flattening both in the U.S. and in the G10 as a whole. This usually heralds weaker growth. The hawkish tilt by the Fed in the latest release of its minutes will likely exacerbate this flattening trend.
• The Chinese renminbi is weakening again. The sharp setbacks in U.S. equities last summer and earlier this year were preceded by a weaker renminbi. The optimism that China is experiencing a mini reflation cycle is being tested by the latest economic data.

Gold Market

This week spot gold closed at $1,252.71, off $20.36 per ounce, or 1.60 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 3.05 percent. Junior miners outperformed seniors for the week as the S&P/TSX Venture Index traded up 0.95 percent. The U.S. Trade-Weighted Dollar Index remained in recovery mode with a 0.75 percent gain for the week.

Strengths

• The best performing precious metal for the week was gold, down -1.60 percent. Bloomberg reports that the “great gold rush of 2016 is gathering pace,” as holdings in exchange-traded funds have now surged 25 percent. Over the past two weeks, even as prices lost around 1.61 percent, ETFs swelled 63.2 tons and are rising every day, continues the article.
• ICBC Standard, China’s biggest bank, has agreed to buy one of Europe’s largest gold vaults from Barclays Plc., reports Bloomberg. Just last week the bank won classification as a market maker by the London Bullion Market Association. “This enables us to better execute on our strategy to become one of the largest Chinese banks in the precious metals market,” Mark Buncombe, head of commodities at ICBC, said.
• Ken Hoffman, senior metals analyst at Bloomberg Intelligence, said at a BI forum in London this week that more hedge fund managers “are seeing gold as a currency,” reports Bloomberg. Hoffman continued that those who are worried about central banks’ consequences “think of gold as the alternative.” Investec Wealth agrees – the group favors gold over bonds, mainly to hedge against U.S. political risk, continues Bloomberg.

Weaknesses

• The worst performing precious metal for the week was palladium, down 5.86 percent. A news story from the prior week highlighted that electric vehicles could have a large impact on reduced demand from platinum group metals. Norilsk Nickel, Russia’s largest palladium producer, commented that it has begun buying palladium in the market, via its Global Palladium Fund, in a move the company claims could reduce its volatility. Norilsk noted it will look to invest as much as $200 million to the fund for purchases of palladium.
• This week the Federal Reserve pointed to a possible interest rate hike in June, sending gold to a three-week low. Gold fell 1.6 percent on Wednesday, reports Bloomberg, as the dollar strengthened. In addition, gold traders and analysts turned bearish for the first week in five weeks following the Fed’s April meeting minutes. Bloomberg reports that this ended the longest run of predicting stable or higher prices since mid-February.
• India’s gold monetization scheme has been met with little success, reports the Financial Express. The government has tweaked a number of the scheme’s parameters in response, with hopes of bettering the public’s reaction moving forward.

Opportunities

• In BCA’s weekly report, the research group writes “Investors are making a huge mistake in thinking that central banks are out of bullets…helicopter money is coming.” They go on to explain that once deployed, this policy will be more successful than people imagine.

• As you can see in the chart below, BCA points out that “many people forget the Federal Reserve suppressed interest rates during WWII and the years that followed, leading to a 70 percent increase in the level of consumer prices between 1939 and 1948.” This led to significant erosion in real debt levels. BCA notes that banks have already moved very close to adopting helicopter money policies. The only difference between helicopter money and QE (quantitative easing) is that the latter entails a temporary increase in bank reserves, while the former entails a permanent increase.

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• In its Precious Metals Outlook, TD Securities reviews year-end reserve updates, pointing out a 9 percent year-over-year decline in 2015 gold reserve ounces for large/mid-cap producers. Although this marks the fourth straight year of declining reserves, the group points out that this should drive a renewed focus on exploration and acquisitions within this space.
• UBS raised its short-term gold outlook following the Fed outlook, reports Bloomberg. According to a report received Monday, UBS’s outlook increased to $1,150 – $1,350 an ounce, from a previous outlook of $1,100 – $1,310 an ounce. Ole Hansen of Saxo Bank believes that risks from the U.K.’s Brexit vote next month could also move the precious metal higher. Hansen predicts bullion could jump to $1,400 an ounce this year.

Threats

• After holding on to a bullish view of stocks, Goldman Sachs has changed its mind and is warning investors of a “large drop” in the market, writes ZeroHedge. Goldman strategist David Kostin told CNBC on Thursday that based on the threat of margin collapse and record-high stock valuations this year, it’s time to play defense in a tough market, the article continues
• Although Canadian raw materials stocks (companies including gold, copper, lumber and fertilizer producers) are having their best start to the year in roughly three decades, reports Bloomberg, some say this rally is missing a fundamental underpinning – economic growth. “I’ve got three words for you: Dead. Cat. Bounce,” David Rosenberg of Gluskin Sheff said. “There is no fundamental, long-lasting recovery in the commodity space without global demand growth shifting course and accelerating,” he continued
• Millions of U.S. workers will soon become eligible for overtime pay under a new rule issued by the Obama administration on Wednesday. According to an AP wire story on the matter, the annual salary threshold at which companies can deny overtime pay will double from $23,660 to $47,500. “With the stroke of a pen, the Labor Department is demoting millions of workers,” David French, senior VP for the National Retail Federation said. “Most of the people impacted by this change will not see any additional pay.”

Energy and Natural Resources Market

Strengths

• Gasoline demand in the U.S. is growing at the highest rate in 25 years. According to VTB analysts, gasoline demand is up 5.7 percent year-over-year in the past four weeks, maintaining the strong growth trend of the past two to three months. Energy Information Administration (EIA) data showed gasoline stocks fell 2.5 million barrels last week to their lowest levels since the start of the year, with the declining trend expected to continue in the run-up to the summer driving season.
• The best performing sector for the week were MLPs. The Alerian MLP Index rose 4.4 percent for the week supported by a second consecutive week of rising oil prices, as well as an increasing appeal for MLP distribution yields amid weaker market fundamentals.
• Fibria Celulose SA, a Brazilian paper and pulp producer, rose 7.8 percent for the week after rising orders and mill downtime led to a rebound in pulp prices globally. Prices have also stabilized after pulp inventories posted declines from January’s peaks.

Weaknesses

• Hedge funds are not buying into energy stocks. Following the 13-F reporting season for the first quarter, hedge funds reduced their overall exposure to the energy sector by $10 billion. The main outflows were borne by Schlumberger NV and Halliburton, followed by Pioneer Natural Resources, and ExxonMobil.
• The worst performing sector for the week was the S&P 500 Packaged Foods Index. The index dropped 3.6 percent for the week, led lower by Hormel Foods, which slumped 12.6 percent for the week. Hormel dropped on news that it had agreed to acquire a competitor, despite also announcing a strong earnings’ beat, and upping full year guidance.
• The worst performing stock for the week in the S&P Global Natural Resources Index was Israel Chemicals Ltd. The Tel Aviv-based fertilizer company dropped 10.6 percent for the week after missing earnings estimates.

Opportunities

• Goldman Sachs’ strategists have upgraded their view on crude oil and raised their price forecast to $50 from $45. The magnitude of supply disruptions–from Canada’s oil sands fire, to Nigeria’s pipeline disruptions–are forcing a supply demand rebalancing to occur ahead of expectations.
• We may see a pickup in mergers and acquisitions (M&A) in the oil services sector. According to RBC Capital Markets, M&A in the space makes strategic sense, especially in an oil market where service companies are looking for any edge to help operators lower upfront costs and increase recovery rates. With a major transaction announced this week (FMC Technologies and Technip), more companies in the sector will look to reduce costs through a combination of equipment standardization and streamlined engineering.
• The U.S. energy market is showing signs of stabilization as the oil rig count stops dropping. Oil services companies, together with MLPs could benefit from a rebound in drilling and processing activity. With crude prices nearly doubling from this year’s trough, U.S. activity may begin to stabilize, leading to re-contracting of idle equipment

Threats

• The Fed has opened the possibility for a June rate hike. A higher rate will likely lead the U.S. dollar higher, which generally leads to weaker commodity prices. Goldman Sachs’ economists believe the divergent growth trajectories of the U.S., China and emerging markets will lead to a further 13 percent appreciation of the U.S. dollar. Such a move could be a major headwind for commodity prices.

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• Chinese steel inventories have stopped falling, delivering a blow to the industry’s momentum. Macquarie reports that end-user demand has remained strong, but has stopped to show sequential improvement, a worrying turn for a market that is quickly turning from deficit to surplus. As a result, market expectations have declined for the first time since last November.

• Refiners’ buybacks may be at risk after Tudor Pickering Holt (TPH) forecasts weaker earnings. Analysts for TPH downgraded their view on refiners as crack spreads have not shown the same relative strength of 2015, suggesting earnings at the major refiners will come in slightly below last year’s. As a result of lower earnings, the refiners may be forced to cut back their stock buybacks.

China Region

Strengths

• Philippine first-quarter GDP clocked in at a 6.9 percent year-over-year growth, in line with analysts’ expectations but nonetheless ahead of GDP growth rates for most international peers within the region, including China. The new Philippine president-elect Rodrigo Duterte will take the reigns of a healthy economy, and he has already signaled a focus upon continuing many of the economic priorities of the outgoing administration.

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• Thailand’s first-quarter GDP data beat expectations. Quarter-over-quarter, first-quarter GDP came in at a gain of 0.9 percent, ahead of expectations for a rise of only 0.6 percent, while the year-over-year number—a growth rate of 3.2 percent—beat expectations for a year-over-year rise of only 2.8 percent
• Chinese new home prices rose in the most cities in more than two years during the April period. Notably, prices in second-tier cities outpaced the gains of those in first-tier cities, while the average new home price in April rose some 1.03 percent month-over-month.

Weaknesses

• Chinese data disappointed last weekend, as Industrial Production (IP), Retail Sales, and Fixed Assets Investment (FAI) all missed their respective expectations. IP came in at 6.0 percent for the April period, short of an expected 6.5 percent gain; year-over-year Retail Sales for April came in at 10.1 percent, shy of an expected 10.6 percent; and FAI came in at 10.5 percent, missing analysts’ expectations for a gain of 11.0 percent for the April period
• The Philippines Composite Index (PCOMP Index) declined 1.85 percent for the week, giving up some of its recent, rapid post-election gains. Indonesia’s Jakarta Composite Index declined just over 1 percent for the week, but more than 3 percent when adjusted for currency.
• The Indonesian rupiah was the weakest-performing currency in the region this week, falling more than 2 percent following the U.S. FOMC minutes, the Bank of Indonesia’s decision to hold rates steady, and the Bank of Indonesia’s lowering of 2016 GDP estimates to a range of 5-5.4 percent year-over-year.

Opportunities

• Newly-elected President Tsai Ing-wen took power today in Taipei after winning Taiwan’s presidential elections in January; she is the first female president of Taiwan. While Tsai’s inauguration speech is seen by some as casting a frosty glance toward the mainland People’s Republic of China, others praised the speech as relatively pragmatic, holding to a middle ground and seeking to stabilize cross-strait relations. Tsai, of the independence-leaning Democratic Progressive Party, vowed to safeguard democracy and freedom, but will in all likelihood remain focused primarily upon promised efforts to revive Taiwan’s flagging economy.
• Indonesia announced this week that it is considering a potential investment holding company that may be modeled on Singapore’s very-successful Temasek. The Indonesian government says that the fund may focus domestically first before venturing overseas in time.
• Singapore’s GDP data come out next week. Expectations are for a meager growth rate of 1.9 percent year-over-year and a rise of 0.4 percent quarter-over-quarter.

Threats

• Bank of China Ltd. plans on selling up to 300 million yuan in debt backed by non-performing assets, the bank’s first “bad loan” securitization since 2008. As China’s non-performing assets continue to creep higher, investors are left speculating as to the scope of the issue.
• The Chinese government expressed disappointment with Taiwanese President Tsai’s glaring omission of any sort of reunification or “one China” references
• U.S. Federal Reserve policy, Chinese monetary policy, and Japanese monetary policy may pose ongoing wildcard risks to regional equity markets and volatility.

Emerging Europe

Strengths

• Greece was the best performing country this week, gaining 2.7 percent. The Greek government is moving forward with reforms, creating positive sentiment among investors.
• The Ukrainian hryvnia was the best performing currency this week, gaining 1.8 percent against the U.S. dollar. A preliminary agreement has been made to release the third tranche of financial aid to Ukraine from the IMF (which has been held up for eight months), due to Ukraine’s slow progress with its promised reforms. The next payment of $1.7 billion from the $17.5 billion IMF bailout program could be released at the end of June.
• The materials sector was the best performing sector among Eastern European markets this week.

Weaknesses

• Turkey was the worst performing market this week, losing 1.9 percent. Turkey’s law has historically granted members of Parliament full immunity from prosecution, but on Friday, the Turkish Parliament passed a bill to strip all politicians of immunity. Not only is this bill a step forward in prosecuting Kurdish political leaders from the pro-Kurdish Peoples’ Democratic Party (HDP), but is also a step to give more power to President Erdogan. Rising political risk in Turkey puts pressure on equities and the country’s currency
• The Russian ruble was the worst performing currency this week, losing 1.9 percent against the U.S. dollar. Federica Mogherini, the eurozone’s foreign policy chief, said in an interview with German newspaper Die Welt that economic sanctions against Russia look set to be extended beyond July due to continuing conflict in Ukraine. The sanctions, which expire in late July, include restrictions on defense and energy business ties. They also prevent state-owned banks, energy and defense companies from raising money in European financial markets and United States
• The utility sector was the worst performing sector among Eastern European markets this week.

Opportunities

• A recent poll conducted by the Evening Standard and Ipsos Mori, shows that a strong majority of the British population believe that the U.K. should remain part of the European Union. The poll gave an 18-point lead to those planning to vote against the Brexit. Following the release of the poll, the pound gained against the U.S. dollar. The U.K. referendum on the Brexit is scheduled for June 23.
• This week the Greek government submitted a new austerity bill to Parliament, with a vote scheduled to take place on May 22. The expectation is that the government will have no issue in passing the reform. Greece is pushing forward with reforms and is getting closer to receiving additional monetary aid from the euro-region, which will be much needed this summer when large bonds fall due. The chart below shows Greece’s debt payment schedule: 10 billion euros are due this summer, with the next large bond payment due in July of next year.

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• Preliminary eurozone PMI data for May will be released next week. Bloomberg analysts predict a slight uptick in Services, Manufacturing and Composite PMI readings.

Threats

• Turkey’s ruling Justice and Development Party (AKP) appointed Transport Minister Binali Yildirim as its chairman and the country’s new prime minister. He is a close ally of President Erdogan and some speculate that his main task will be to transform Turkey from a parliamentary to a presidential system.
• The European Commission raised pressure on Poland’s government to resolve a months-long constitutional stand-off, saying it may extend investigation into the country’s democratic standards. The EU has opened its first ever probe into a member country’s rule of law over concerns that an overhaul of Poland’s Constitutional Tribune presents a threat to democracy. If there is no satisfactory resolution within a reasonable time, the EU could propose stripping Poland of its voting powers, although such a proposal would have to be approved by all members. Hungarian Prime Minister Viktor Orban, and a friend of Jaroslaw Kaczynski, leader of current ruling party in Poland, says he will never let that happen.
• The dollar appreciated and emerging market currencies underperformed this week after the Federal Reserve released minutes from its April meeting. Most Fed officials say that an interest rate hike will be appropriate in June if the U.S. economy continues to improve. If the dollar keeps climbing higher in anticipation of a rate hike, emerging Europe currencies will depreciated against U.S. currency.

Leaders and Laggards

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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:
Apple Inc.
Barrick Gold Corp.
Hormel Foods Corp.
Syngenta AG
MMC Norilsk Nickel PJSC
Gran Colombia Gold Corp.
Northrop Grumman Corp.
ExxonMobil
Fibria Celulose SA

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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 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 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 Philippine Stock Exchange PSEi Index is composed of stocks representative of the industrial, properties, services, holding firms, financial and mining & oil sectors of the Philippines Stock Exchange. The Jakarta Stock Price Index is a modified capitalization-weighted index of all stocks listed on the regular board of the Indonesia Stock Exchange. The Alerian MLP Infrastructure Index, comprised of 25 energy infrastructure Master Limited Partnerships, is a liquid, midstream-focused subset of the Alerian MLP Index (NYSE: AMZ). The index, whose constituents earn the majority of their cash flow from the transportation, storage, and processing of energy commodities, provides investors with an unbiased benchmark for the infrastructure component of this emerging asset class. 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 S&P Supercomposite Packaged Foods Index is a capitalization-weighted index.