Here’s How Hungary Reduced Risk Without Forfeiting Returns

Author: Frank Holmes
Date Posted: October 19, 2018 Read time: 50 min

Hungary isn't known today as one of the world's top gold producing countries. There was a time, though, when it accounted for around three quarters of Europe's entire output of the yellow metal, if you can believe it. According to historian Peter Sugar's A History of Hungary, the central European country was a "veritable El Dorado" in the 14th century, and its gold pieces circulated widely across the entire continent, competing with those minted in Italy and England.

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

Heres what Hungary just did to reduce risk without hurting returns

Hungary isn’t known today as one of the world’s top gold producing countries. There was a time, though, when it accounted for around three quarters of Europe’s entire output of the yellow metal, if you can believe it. According to historian Peter Sugar’s A History of Hungary, the central European country was a “veritable El Dorado” in the 14th century, and its gold pieces circulated widely across the entire continent, competing with those minted in Italy and England.

It was this rich mining heritage that Hungary’s central bank evoked when it announced this week its decision to increase gold holdings tenfold, from 3.1 metric tons to 31.5 tons, taking gold’s share of total reserves to 4.4 percent. (Gold accounts for 73.5 percent of U.S. reserves, by comparison, the most of any country.) Hungarian central bank governor Gyorgy Matolcsy described the move as one of “economic and national strategic importance,” adding that the extra gold made the country’s reserves “safer” and “reduced risk.” This is the first time since 1986 that Hungary has increased its gold holdings.   

Hungary just boosted its gold reserves tenfold
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The country isn’t alone in its mission to diversify. Last week we learned that Poland became the first European Union (EU) member to increase its gold reserves in two decades. The Eastern European country added as much as 9 metric tons of hard assets between July and August of this year. Central banks in Russia, Turkey and Kazakhstan have also kept up their gold buying, representing close to 90 percent of the activity we’ve seen this year.

Meanwhile, the EU has continued to print paper money.

For more, watch emerging Europe analyst Joanna Sawicka’s full explanation by clicking here.

A Good Store of Value

So why should banks—or investors, for that matter—be interested in boosting their gold holdings? One reason is timing. Until last week, gold prices have been relatively affordable, trading at 52-week lows of around $1,180 an ounce in mid-August and at the end of September. Central banks’ investment was wisely made. From those lows, gold is now up more than 4 percent on stock volatility.

Check out the chart below. I think it’s fascinating to see the relationship between dramatic moves in the stock market and people’s interest in gold. Last week when stocks sold off, Google searches for “gold price” jumped to their highest in at least a month. This shows, I believe, that people recognize gold as a good store of value when market volatility reemerges.

Spike in Google searches for gold price corresponding with stock selloff
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Gold Has Helped Improve a Portfolio’s Risk-Adjusted Returns

Returning to what Hungarian central bank governor Matolcsy said about risk reduction, a certain amount of gold has been shown to improve a portfolio’s Sharpe ratio, according to the World Gold Council’s (WGC) most recent Gold Investor. The Sharpe ratio, in case you’re unaware, measures a portfolio’s risk-adjusted returns relative to its peers, based on standard deviation. The higher the ratio is over its peers, the better the risk-adjusted returns.

Performance of an institutional portfolio with or without gold
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Analysts at New Frontier Advisors found that an institutional portfolio with a 6 percent weighting in gold had a higher Sharpe ratio than one without any gold exposure. This means that volatility was reduced without hurting returns.

Although analysts were looking at Chinese portfolios in particular, the WGC’s Fred Yang believes these findings can just as easily be applied to portfolios that are invested in U.S.-, European- or U.K.-listed assets. The “research indicates,” Yang says, “that most well-balanced portfolios would benefit from a modest allocation to gold.”

I’ve often advocated for a 10 percent Golden Rule—with 5 percent in bullion, the other 5 percent in gold stocks—and so New Frontier’s research is illuminating. It also helps explain Hungary and Poland’s actions, as well as those of other net purchasers of gold.

Holding Firm Against Rising Treasury Yields

I’ve shown many times in the past that the price of gold is inversely related with real rates. The yellow metal has especially struggled when Treasury yields have outpaced inflation.

Gold price has remained strong despite a rising 2 year treasury yield
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The two-year Treasury yield, for instance, is just under 3 percent today, a more-than-10-year high. Because consumer prices are rising at 2.3 percent year-over-year, according to the latest report from the Labor Department, the two-year has a positive real yield—and this has historically weighed on gold.

You would think, then, that its price would be much lower than it is. I’m impressed with how well it’s held up.

Get more of my thoughts on gold’s performance by watching the latest Frank Talk Live! View it by clicking here!

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Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average gained 0.41 percent. The S&P 500 Stock Index rose 0.02 percent, while the Nasdaq Composite fell 0.64 percent. The Russell 2000 small capitalization index lost 0.30 percent this week.
  • The Hang Seng Composite lost 1.11 percent this week; while Taiwan was down 1.26 percent and the KOSPI fell 0.26 percent.
  • The 10-year Treasury bond yield rose 3 basis points to 3.195 percent.

Domestic Equity Market

SP 500 Economic Sectors weekly performance
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  • Consumer staples was the best performing sector of the week, increasing by 4.27 percent versus an overall decrease of 0.22 percent for the S&P 500.
  • Interpublic Group of Cos was the best performing stock for the week, increasing 15.03 percent.
  • A small Chinese manufacturer of eco-friendly building products surged by 950 percent after pivoting its business to gemstones. Yulong Eco-Materials soared by as much as 950 percent on Wednesday after the company announced that it had completed its $50 million acquisition of the Millennium Sapphire gemstone, which it says was recently appraised for $60 million to $90 million. Shares finished the day up 571 percent.


  • Consumer discretionary was the worst performing sector for the week, decreasing by 1.97 percent versus an overall decrease of 0.22 percent for the S&P 500.
  • United Rentals was the worst performing stock for the week, falling 15.06 percent.
  • Tesla’s vice president of manufacturing has left the company, according to a source familiar with the matter. Gilbert Passin joins a long list of high-level employees who have made their exit recently.


  • One of Canada’s largest marijuana growers, Aurora Cannabis, revealed plans to go public in the U.S. They will be listed on the New York Stock Exchange before the end of October and trade under the ticker ACB.
  • PayPal beat expectations across the board. The digital payments company outperformed on both the top and bottom lines and gave fourth-quarter earnings-per-share guidance of $0.65 to $0.67, ahead of the $0.65 that was expected.
  • Four powerful institutional Facebook investors co-filed a shareholder proposal to split Mark Zuckerberg’s dual role as CEO and chairman. New York City Comptroller Scott Stringer, Illinois State Treasurer Michael Frerichs, Rhode Island State Treasurer Seth Magaziner and Pennsylvania State Treasurer Joe Torsella are joining forces to pile the pressure on Zuckerberg.


  • Adding to fears about ongoing trade tensions between the United States and China, industrial companies posted third-quarter earnings that fell short of expectations. Textron reported a revenue miss and dimmed its outlook. Packaging company Sealed Air Corp also lowered its profit guidance, citing rising input costs.
  • eBay is suing Amazon for allegedly infiltrating eBay’s internal messaging system to poach high-value sellers.
  • New York’s attorney general is investigating whether MoviePass’ owner misled investors. The attorney general’s office is investigating whether Helios and Matheson — the parent company of MoviePass — "misled the investment community regarding the company’s financials," according to a CNBC report.

The Economy and Bond Market



  • The Conference Board’s U.S. Leading Economic Index rose 0.5 percent in September, up from the August reading of 111.8, and following a 0.4 percent increase in August and a 0.7 percent increase in July. “The U.S. LEI improved further in September, suggesting the U.S. business cycle remains on a strong growth trajectory heading into 2019,” said Ataman Ozyildirim, director and global research chair at The Conference Board.
  • In the latest sign of a tightening labor market, U.S. jobless claims fell by more than expected to record lows last week. New applications for unemployment benefits dropped by 5,000 to a seasonally adjusted 210,000, the Labor Department said, a level not seen in 45 years.
  • U.S. industrial production increased for a fourth straight month in September, boosted by gains in manufacturing and mining output, however momentum slowed sharply in the third quarter. The Federal Reserve said on Tuesday that industrial production rose 0.3 percent last month after an unrevised 0.4 percent increase in August. Expectations were for a 0.2 percent increase.


  • U.S. retail sales rose by less than forecast in September, as a broad-based increase was overshadowed by a drop in restaurant receipts, which may reflect the impact of Hurricane Florence. The value of overall sales rose 0.1 percent for a second month, compared with the median forecast of economists for a 0.6 percent gain, Commerce Department figures showed Monday.
  • U.S. homebuilding dropped by more than expected in September as construction activity in the South fell by the most in nearly three years, likely held down by Hurricane Florence. Housing starts fell 5.3 percent, to a seasonally adjusted annual rate of 1.201 million units last month, the Commerce Department said on Wednesday.
  • Sales of previously owned U.S. homes declined in September, extending a weak stretch for the housing market in a period of otherwise strong economic growth. Existing home sales fell 3.4 percent in September from the previous month to a seasonally adjusted annual rate of 5.15 million, the National Association of Realtors said on Friday. Economists surveyed by The Wall Street Journal had expected sales to register a stronger 5.29 million annual rate last month.


  • The record spread between 10-year U.S. Treasury yields and their German counterparts may widen further. With Federal Reserve officials in favor of further interest rate hikes, Treasury yields could climb higher. At the same time, German bund yields are likely to stay low on haven demand from Italian political risks and doubts about how willing the European Central Bank is to raise borrowing costs.

Treasury bund yield spreads widen to fresh records
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  • On Friday, investors will get their first look at U.S. growth for the third quarter. Following the robust 4.2 percent annualized expansion of the second quarter, growth is forecast to have moderated to 3.3 percent in the third quarter, which still represents above trend growth for the U.S. economy. The dollar, which against a basket of currencies has been consolidating since mid-August, could resume its uptrend if there is an upside surprise to the GDP figures.
  • Next Wednesday, the IHS Markit manufacturing PMI is expected to stay unchanged at 55.6 in October’s preliminary reading, while the services PMI is projected to rise slightly from 53.5 to 53.9.


  • The pain in bonds may just be getting started as a measure known as "real yield" edges toward troublesome territory, Jim Paulsen, the chief investment strategist at Leuthold Group, wrote in a client note.
  • Investors are worried that the Federal Reserve could raise borrowing rates at a pace that may become restrictive in attempt to keep inflation in check and the economy from overheating. The central bank signaled in minutes out on Wednesday that it was on track to gradually continue tightening, with one more hike this year and around three in 2019.
  • President Trump is pulling the U.S. out of an obscure 144-year-old treaty to take a shot at China in the ongoing trade war. He announced Thursday that the U.S. would withdraw from the Universal Postal Union, which allows Chinese producers to ship items to the U.S. at significantly lower rates compared to some U.S. domestic shipping rates.

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Gold Market

This week spot gold closed at $1,229.60, up $7.60 per ounce, or 0.62 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.54 percent. The S&P/TSX Venture Index came in off just 2.35 percent. The U.S. Trade-Weighted Dollar rose 0.49 percent.

Date Event Survey Actual Prior
Oct-16 Germany ZEW Survey Current Situation 74.4 70.1 76.0
Oct-16 Germany ZEW Survey Expectations -12.0 -24.7 -10.6
Oct-17 Eurozone CPI Core YoY 0.9% 0.9% 0.9%
Oct-17 Housing Starts 1210k 1201k 1282k
Oct-18 Initial Jobless Claims 211k 210k 214k
Oct-18 China Retail Sales YoY 9.0% 9.2% 9.0%
Oct-24 New Home Sales 625k 629k
Oct-25 Hong Kong Export YoY 13.1%
Oct-25 ECB Main Refinancing Rate 0.000% 0.000%
Oct-25 Durable Goods Orders -1.4% 4.4%
Oct-25 Initial Jobless Claims 213k 210k
Oct-26 GDP Annualized QoQ 3.4% 4.2%


  • The best performing metal this week was palladium, up 1.41 percent. Philip Newman, founding director of Metals Focus, said this week that palladium is the new market favorite and could hit an all-time record high next year. This week spot gold held near its highest level since late July as holdings of gold-backed ETFs rose to the most since early September, according to Bloomberg. ETF holdings grew each of the last seven trading sessions, marking the longest run of gains since April. On Wednesday, ETFs added 155,653 troy ounces of gold, which is the equivalent of $190.3 million in purchases. Gold is set for a third straight week of gains, the longest streak since January, as equities lose momentum and the Federal Reserve minutes showed that rate hikes will likely continue into next year.

Gold ETFs rally in longest streak since April
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  • Central banks globally are stocking up on gold. Poland continues to purchase gold and add to their reserves. The nation’s central bank started buying gold over the summer with a purchase of 9 tons over the course of July and August. Poland’s gold reserves rose to 3.75 million ounces in September, up from 3.61 million ounces a month earlier, representing a third straight month of buying. Kazakhstan also boosted their reserves in September to 10.77 million ounces, up from 10.65 million ounces the month prior. Hungary’s central bank unexpectedly boosted its gold reserves tenfold, purchasing over 28 tons and bringing total holdings to 31.5 tons, citing a need to improve its holdings’ safety.
  • Switzerland’s imports of platinum surged last month to their highest level since last December, while palladium imports also rose to a level not seen since August last year, according to Swiss customs data. Reuters writes that Switzerland is a major trading, refining and vaulting center for precious metals and increases in imports are positive for the metals. Gran Colombia Gold Corp’s third quarter gold output totaled 57,163 ounces, which is up 54 percent from the same period a year ago, reports Kitco News. For the first three quarters of this year, production was also up 33 percent from the same period last year. In M&A activity this week, Alio Gold Inc. has agreed to sell non-core assets in Nevada to Coeur Rochester, a subsidiary of Coeur Mining for $19 million in shares of Coeur stock. Alio says that it has reduced some of its debt and expects to eliminate all their debt with Macquarie Bank by the fourth quarter of this year.


  • The worst performing metal this week was platinum, down 0.92 percent. As gold continues to see gains, the VanEck Vectors Gold Miners ETF saw assets rise by 1.8 percent to $9 billion on Monday, the highest level in a least a year, according to Bloomberg data. This massive one-day inflow is the largest increase since June 29 and net inflows to the fund total $2.71 billion in the past year. Although this appears to be positive news for the yellow metal, the VanEck fund is a passive ETF and this huge inflow demonstrates that investors are still content to just invest in the most popular passive gold ETF, rather than go with active management in the gold investing space.
  • India, the world’s second largest consumer of gold, might see gold jewelry sales slip in the run-up to the Diwali festival this year due to higher prices. The Indian rupee has been falling so far this year, leading to domestic gold prices hitting their highest level in more than two years. Bloomberg writes that the most auspicious day of the year to buy the yellow metal in the form of jewelry for gift-giving is Dhanteras, which falls on November 5. Chirag Sheth, an analyst with Metals Focus Ltd. in Mumbai, says that rising prices before the celebrations aren’t good for demand that that “if this trend continues, then it’s going to be a dampener.” 
  • Mine safety in South African mines is back in the spotlight, as this week it was reported that 69 workers have died so far this year on the job, with half of those occurring in gold mines. Bloomberg writes that the number of deaths this year is just one short of the 70 fatalities in 2017, a year in which the number rose for the first time in almost 10 years. Mine safety has been improving in South Africa for nearly two decades, but the trend appears to be reversing based on this years’ rate of fatalities thus far.


  • Goldman Sachs is positive on base metals and gold going into next year, reports Bloomberg. In a note received on Tuesday, the bank included a price forecast of gold prices being at $1,250 an ounce, $1,300 an ounce and $1,325 an ounce in the next three, six and 12 months, respectively. Capital Economics is also bullish on the yellow metal and said in a note this week that it is “set to shine brighter as economic storm clouds gather” and as 2018 headwinds of rising bond yields and the strong U.S. dollar “turn into tailwinds next year.” Azerbaijan’s sovereign wealth fund has been increasing its gold holdings since 2012 and has purchased 14 tons of gold so far this year, accounting for 4.3 percent of the fund’s assets.
  • Just days before gold was extending its rally last week, hedge funds made their biggest-ever bearish bet on the yellow metal, according to Bloomberg. Speculators increased their net-short positions in gold futures and options to the largest since 2006, then a few days later on last Thursday, gold began to rally. The last time that hedge funds were net short on the yellow metal for an extended period, the price rose almost 10 percent.
  • Ulf Lindahl, CEO of A.G. Bisset Associates LLC, predicts that the U.S. dollar will fall by around 40 percent against the euro by 2024, citing a 15-year cycle of losses and gains, reports Bloomberg. Lindahl hedges foreign exchange risk for pension funds and family offices in the U.S. and Europe and has helped clients pick up around 100 basis points per year on their portfolios over the last 25 years. “We could see a very substantial decline in the dollar” and “it has massive implications for all the financial markets,” said Lindahl in an interview in August. President Donald Trump criticized Fed chairman Jerome Powell for hiking interest rates even when inflation isn’t a problem, telling Fox Business this week that “my biggest threat is the Fed because the Fed is raising rates too fast.” Historically, gold performs well during times of rising inflation and moves in the opposite direction of the dollar. 


  • According to a model tracked by JPMorgan Chase & Co., the probability of a U.S. recession within one year is almost 28 percent, while there is a 60 percent chance of a recession in the next two years. Bloomberg reports that fund managers surveyed by Bank of America Merrill Lynch this month are the most bearish on global activity in 10 years, with 85 percent saying that the global economy is in late cycle. Attila Dzsubak, investment director at MKB-Pannonia Fund Manager who oversees $2.4 billion in assets, said this week that “investors have to start looking for a way out from equities now” and that “past experience shows that exits can quickly become too narrow.” According to Bloomberg, Dzsubak has started to make his portfolio more defensive by purchasing gold, gold equities and ETFs investing in precious metals.
  • Bloomberg reports that bond traders can make good money by dumping U.S. Treasuries and going abroad by entering a trade that takes the currency risk out of their euro-based returns. Traders can earn around 3.8 percent a year from ultra-low-yielding 10-year German bunds, which is more than a half-percentage point above Treasuries. Katherine Greifeld of Bloomberg writes that U.S. investors would have done better putting their money into the bonds of any developed nation this year rather than Treasuries. This underscores the longstanding narrative of the U.S. as a go-to destination for yield-seeking bond investors.
  • The disappearance and suspected killing of dissident journalist Jamal Khashoggi in Turkey is causing tension between Saudi Arabia and many nations, while others are denying the country’s role in the events. Although there is evidence of Saudi officials closely linked to the prince being at the Saudi Consulate in Istanbul on October 2, the day the journalist disappeared, Russian President Vladimir Putin has questioned Saudi Arabia’s role. Several Wall Street executives and members of western companies have backed out of the Saudi Arabia Future Investment Initiative meeting, including Treasury Secretary Steven Mnuchin, in response to the situation.

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Blockchain and Digital Currencies



  • Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended October 19 was Simmitri, up 618.84 percent. According to Seeking Alpha, Goldman Sachs is partnering with Galaxy Digital Ventures on a $15 million funding round for cryptocurrency custodian BitGo, which provides services for more than 75 coins and has over $2 billion in assets. A Goldman Sachs spokesperson said “We believe that a custody offering is a logical precursor to digital asset market making.” This investment might be viewed as a signal that the major bank could be looking into offering its own such service.
  • Bitcoin saw a jump up at the start of the week as concerns over Tether’s backing by the U.S. dollar were put in question, reports Bloomberg, sparking a move into alternative digital currencies. As Tether broke its “historically tight link” with the greenback, bitcoin moved up as much as 8.9 percent to $6,769 on Monday.

Bitcoin jumps as tether concerns spark flight to alternatives
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  • In a Bloomberg TV interview this week, Michael Novogratz, a prominent cryptocurrency investor and CEO and founder of Galaxy Digital, said he doesn’t expect the price of bitcoin “breaking $10,000 by the end of the year” and that “everything takes a little longer than you hoped it would.” However, Novogratz predicts that in the first two quarters of next year institutional investors will start to invest more in cryptocurrencies, which should lead to a rally and see new highs.


  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended October 19 was YoloCash, down 58.76 percent.
  • On Monday, the stablecoin known as Tether, which is the most popular dollar-linked cryptocurrency, experienced an exodus, reports Bloomberg. The coin slid below $1 over traders questioning its peg to the U.S. currency, along with renewed “speculation over the financial health and banking relationships of Bitfinex, a crypto exchange that shares a CEO with Tether’s issuer,” the article continues. Tether touched 85 cents on U.S.-based Kraken on Monday.
  • An initial test of the Ethereum-development system software upgrade, Constantinople, failed to deliver expected results on Saturday, reports CoinDesk. The upgrade is meant to introduce five new improvements and alter the economics of the blockchain, but it might be delayed from its scheduled November release. Griff Green, founder of blockchain-based nonprofit Giveth, said that he expects it “to get delayed to 2019” because “the blockchain doesn’t take holidays, but developers do.”


  • Fidelity Investments announced Monday a new and separate company called Fidelity Digital Asset Services, reports CNBC. The new firm will be in charge of handling custody for cryptocurrencies like bitcoin and will execute trades on multiple exchanges for investors, the article reads, including hedge funds and family offices. “Our goal is to make digitally native assets, such as bitcoin, more accessible to investors,” Fidelity Investments Chairman and CEO Abigail Johnson says.
  • Arya Bolurfrushan, a former Goldman Sachs employee, has announced his startup, Accrete Capital Technologies, which will sell stake in itself via digital tokens and then invest those funds in “stocks, bonds, private equity, real estate and venture capital” according to Bloomberg. Using “a mishmash of Wall Street and crypto strategies,” Accrete hopes to find a middle ground between expensive asset managers and volatile cryptocurrencies. Although Bolurfrushan does not have experience in creating digital currencies, he does have a team of Goldman Sachs alumni behind him.
  • According to CME Group, bitcoin futures trading saw a 41 percent increase in the third quarter, with an average daily volume of 5,053 contracts, up from 3,577 in the second quarter. Open interest, which is the total number of unsettled contracts held by those trading in the market, also grew to 2,873 contracts, up from 1,523 in the second quarter of this year.


  • Regulators’ crackdowns on cryptocurrency businesses in India are forcing startups to experiment with stablecoins and ATMs to be able to receive fiat deposits from customers. One such company, Unocoin, told CoinDesk that it hasn’t been able to transact through regular banking channels with its 1.3 million customers for several months after the Reserve Bank of India prohibited banks from working with crypto or crypto companies in April. “The crypto community is suffering from this ban as there have been instances where the bank accounts of individuals have been closed who were found to be dealing in cryptocurrencies, ” said Kashif Raza, co-founder of Indian regulatory news startup Crypto Kanoon.
  • According to a newly released report from cybersecurity company Malwarebytes Lab, cryptocurrency mining malware fell 26 percent for businesses in the third quarter compared to the second quarter; however, the group detected an 88 percent increase of crypto ransomware incidents. Cryptojacking also fell in the past quarter, but it continued to be a serious issue with several large attacks such as the MikroTik routers in Brazil, writes Cryptovest.
  • Eighty-five percent of crypto assets allow development teams to alter their platforms, according to a report published this week by CryptoCompare, a cryptocurrency tracking resource. The report was created by reviewing crypto and blockchain projects with experts detecting a tendency toward centralization set by utility tokens that are running on controlled servers, writes CoinTelegraph. The report also revealed that 55 percent of existing crypto assets are actually centralized, while only 16 percent of all existing assets are considered to be a fully decentralized ecosystem.

Energy and Natural Resources Market



  • Coal was the best performing major commodity this week rising 3.8 percent. The commodity rallied after Chinese data showed the Asian nation produced a record 2.7 million metric tons of steel a day in September, implying higher than expected demand for steelmaking coal inputs.
  • The best performing sector this week was the NYSE Arca Gold Miners Index. The index rose 1.61 percent as the global equity sell-off spurred a third consecutive weekly advance for gold prices.
  • The best performing stock for the week was Alcoa Corp. The aluminum producer rose 8.83 percent after the company reported third-quarter earnings that were double estimates and announced a share buyback.


  • Zinc was the worst performing commodity this week. The commodity dropped 6.44 percent after Mitsui, Japan’s top zinc smelter, warned prices will probably hold around current levels after slumping this year on concerns over the U.S.-China trade war and prospects for a return to surplus next year.
  • The worst performing sector this week was the S&P 1500 Oil & Gas Refining and Marketing Index. The index dropped 8.88 percent after news came out that the Trump administration is aiming to slow the rollout of new international rules (IMO 2020) to power vessels with low-sulfur fuels. This would drive up costs for businesses, but would likely also result in higher profitability for refiners.
  • The worst performing stock for the week was Valero Energy Corp. The major Texas refiner dropped 14.42 percent after receiving numerous analyst downgrades in response to the company’s proposed acquisition of the minority shareholders of its listed MLP Valero Energy Partners in a transaction that is expected to be worth $950 million.


  • Natural gas prices are headed for their fifth straight weekly gain as unusually cool weather stokes demand for the heating fuel. Falling temperatures will help cap gains in inventories that are already at the lowest level for this time of year in more than a dozen years, according to Bloomberg data.

Natural gas headed for fifth week of gains
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  • Chinese President Xi Jinping and his U.S. counterpart Donald Trump have tentatively agreed to meet on the sidelines of the G20 leaders’ summit in Buenos Aires next month. If confirmed, it would be the first face-to-face meeting between the two leaders in nearly a year and suggest both Washington and Beijing were ready to de-escalate the trade tensions.
  • Sentiment for metals in China may have shifted positive after Shanghai Futures Exchange brokers reduced net bearish positions on copper, and moved to net-long on most-traded zinc contracts, according to data from bourse. In addition to the swings in the futures market, spot contracts in Shanghai have also seen renewed interest as spot inventories continue to dwindle amid near record physical redemptions.


  • China’s economic growth cooled to its weakest pace since the global financial crisis in the third quarter, raising pressure on Beijing to step up policy support as the trade war with the U.S. begins to bite. The economy grew 6.5 percent, lower than economists’ expectations for a 6.6 percent advance. The measure was dragged lower by weaker factory output and weaker infrastructure investments.
  • U.S. housing starts fell last month. U.S. home construction also fell 5.3 percent in September, a sign that recent hurricanes and rising mortgage rates may be weighing on the market. After the Commerce Department released the report, shares in home builders, building materials retailers, and paper and forest producers dropped in New York trading.
  • Crude prices fell after the U.S. Energy Information Administration on Wednesday reported crude oil stockpiles had risen by 6.5 million barrels last week, compared to expectations of a 1.5 million barrel rise. Prices have come under pressure over the past week, with both the International Energy Agency and OPEC last week lowering their oil demand growth forecasts for this year and next.

China Region



  • Both the Philippines and Indonesia enjoyed a bit of respite this week, as the Philippines Stock Exchange Composite Index gained 2.10 percent and Indonesia’s Jakarta Composite rose 1.40 percent.
  • Utilities was the top-performing sector in the Hang Seng Composite Index for the week.
  • The Philippine peso, Thai baht, Indian rupee and Indonesian rupiah all gained for the week.


  • China’s Shanghai Composite fell 2.17 percent for the week, even after a solid 2.58 percent gain on Friday. 
  • Information technology fell 2.63 percent for the week, the worst-performing sector in Hong Kong’s Hang Seng Composite Index.
  • China’s third quarter GDP came in slightly below estimates, at 6.5 percent rather than the 6.6 percent generally anticipated by analysts, and down from the second quarter’s 6.7 percent.


  • The flipside of every bear market and selloff is that the very same shares of existing businesses can now be had at relatively cheaper valuations, all else equal. The price-to-earnings ratio on Hong Kong’s blue-chip Hang Seng Index, for example, is now under 10. Or how about Singapore’s Straits Times Total Return Index? Under 11, per Bloomberg at the moment. What’s your time horizon? 
  • Investor Alert has taken care to remind regular readers that, while certainly not unimportant, China’s trade with the United States represents a relatively minor portion of its overall GDP. Note this recent chart from CLSA regarding Asian GDP growth correlation with overall world trade growth, and consider again the amazing scope of growth China still enjoys after today’s GDP—6.5 percent—even as the country’s economy and technology continue to develop and its ranks of middle class consumers continue to grow. Headlines will be headlines, but do maintain some perspective.

Asian GDP growth correlationwith worth trade growth
click to enlarge

  • The latest report, coming from Reuters, now suggests the next summit between President Donald Trump and North Korea’s Kim Jong Un will come sometime after the first of the new year. While more and quick progress is always good, a later date for a summit may well help smooth things in the meantime and provide more opportunity for somewhat-less-public talks and advances in the interim. Note that the U.S. and South Korea have suspended the latest round of military exercises in order to advance talks with North Korea, and that this week the United Nations, North Korea and South Korea held talks about potentially scaling down armaments, mines and tension along certain portions of the longstanding demilitarized zone (DMZ), initially focused on the border village of Panmunjom, where the leaders of North and South Korea held their historic first meeting in April.


  • Trade war concerns continue to remain relatively central as the U.S.-China spat drags on (as indeed it may for some time). While U.S. Secretary of Commerce Wilbur Ross did indicate this week that U.S.-China trade talks are “in something of a hiatus now,” President Trump and Chinese President Xi Jinping are reportedly scheduled to meet in late November at the G20, after the U.S. midterm elections. 
  • The Chinese yuan remains right around 52 week lows (highs) of just under 6.93.
  • The U.S. dollar remains relatively strong, which may continue to weigh on sentiment toward emerging market foreign exchange.

Emerging Europe



  • Hungary was the best performing country this week, gaining 2.5 percent. The country’s central bank kept its main rate unchanged at 90 basis points and left its dovish policy in place.
  • The Turkish lira was the best performing currency this week, gaining 3.75 percent against the dollar. The currency rebounded after the American pastor held in Turkey for the past two years was released from house arrest and permitted to leave the country. Investors speculate that the U.S.-Turkey relationship may improve and lead to the removal of sanctions.
  • Real estate was the best performing sector among eastern European markets this week.


  • Russia was the worst performing country this week, losing 2.4 percent. Russia’s domestic outlook appears stable with the country expected to grow 1.9 percent this year and 1.4 percent in 2019, according to Renaissance Capital. However, the threat of additional sanctions is pushing equites lower.
  • The Czech koruna was the worst performing currency this week, losing 72 basis points against the U.S. dollar. The Czech Republic has a strong budget surplus, one of the strongest in Europe, and its finance minister announced an increase in government spending on retirement benefits, public-sector wages and infrastructure projects.
  • Information technology was the worst performing sector among eastern European markets this week. 


  • JPMorgan expects the Russian ruble to outperform other emerging market peers in the region such as the Turkish lira and the South African rand in the coming months. The bank sees the ruble broadly steady through March, while it forecast losses of 30 percent and 8 percent for the lira and the rand, respectively. The outperformance of the ruble is due to an oil rally and Russia’s central bank halting foreign currency.
  • In Turkey, unconsolidated non-financial companies are required to report their third quarter results by October 30. QNB FinansInvest’s Research Team believes that the glass, auto parts and steel sectors will emerge as the best performers in the last three months. The depreciation of the Turkish lira has lowered the cost of production and increased international sales volumes.
  • Carry traders should love Tukey and Russia, which offer much higher real rates than in the United States. Bond investors can find a yield of 6 percent in Turkey and 4.6 percent in Russia, but only 60 basis points in the U.S. 

Real interest rates in Turkey and Russia are much higher than US
click to enlarge


  • Next week, preliminary October PMI data and consumer confidence data will be released for the Eurozone, with Bloomberg forecasting weaker readings. Manufacturing PMI will most likely drop to 53 from 53.2 in September and consumer confidence will decline by 3 percent, according to the Bloomberg’s survey. Growing concern over the effects of the global trade war, Italian politics and a lack of progress in Brexit negotiations could slow down economic activity in the euro area.
  • According to a report released by the World Economic Forum, the Greek government is heading into the future without direction or program. In the report’s subcategory – Future Orientation of Government – one of many in the report, but which is of major significance for a country seeking its path toward growth – Greece ranks 135th among 140 countries, sharing the bottom spot on the list with the governments of Brazil and Venezuela.
  • According to Bloomberg’s Billionaires Index, the top ten wealthiest people in Russia increased their wealth by 10.8 percent year-to-date. They are the biggest winners globally, despite sanctions imposed by the United States and Europe. Russia is currently benefiting from higher oil prices. However, the richest Russians may lose some of their earned wealth quickly once more severe sanctions are imposed. Shares of Rusal, an aluminum producer, dropped 40 percent in two days after more severe sanctions were imposed back in April.

Richest Americans compete with Russians for the worlds fastest growing fortunes
click to enlarge

10 of the most beautiful Eastern European cities in

Leaders and Laggards

Weekly Performance
Index Close Weekly
S&P/TSX Global Gold Index 171.67 +3.15 +1.87%
Gold Futures 1,229.60 +7.60 +0.62%
Natural Gas Futures 3.24 +0.08 +2.40%
S&P/TSX VENTURE COMP IDX 682.16 -16.44 -2.35%
10-Yr Treasury Bond 3.20 +0.03 +1.04%
Nasdaq 7,449.03 -47.87 -0.64%
Oil Futures 69.27 -2.07 -2.90%
Hang Seng Composite Index 3,419.92 -38.44 -1.11%
S&P 500 2,767.78 +0.65 +0.02%
DJIA 25,444.34 +104.35 +0.41%
Korean KOSPI Index 2,156.26 -5.59 -0.26%
Russell 2000 1,542.04 -4.64 -0.30%
S&P Energy 530.02 -10.49 -1.94%
S&P Basic Materials 332.92 -4.54 -1.35%
XAU 70.08 +0.80 +1.15%


Monthly Performance
Index Close Monthly
Natural Gas Futures 3.24 +0.33 +11.31%
S&P/TSX Global Gold Index 171.67 +14.06 +8.92%
10-Yr Treasury Bond 3.20 +0.13 +4.28%
Oil Futures 69.27 -1.85 -2.60%
Gold Futures 1,229.60 +21.30 +1.76%
S&P 500 2,767.78 -6.24 -0.22%
S&P Energy 530.02 -22.66 -4.10%
Hang Seng Composite Index 3,419.92 -290.55 -7.83%
DJIA 25,444.34 -961.42 -3.64%
Korean KOSPI Index 2,156.26 -152.20 -6.59%
Nasdaq 7,449.03 -501.01 -6.30%
S&P Basic Materials 332.92 -44.14 -11.71%
Russell 2000 1,542.04 -160.89 -9.45%
S&P/TSX VENTURE COMP IDX 682.16 -32.29 -4.52%
XAU 70.08 +3.39 +5.08%


Quarterly Performance
Index Close Quarterly
Natural Gas Futures 3.24 +0.47 +16.90%
10-Yr Treasury Bond 3.20 +0.36 +12.54%
DJIA 25,444.34 +379.84 +1.52%
Oil Futures 69.27 -0.19 -0.27%
S&P 500 2,767.78 -36.71 -1.31%
Gold Futures 1,229.60 -4.40 -0.36%
S&P Energy 530.02 -25.35 -4.56%
Nasdaq 7,449.03 -376.27 -4.81%
Korean KOSPI Index 2,156.26 -126.03 -5.52%
S&P Basic Materials 332.92 -33.83 -9.22%
Russell 2000 1,542.04 -159.27 -9.36%
Hang Seng Composite Index 3,419.92 -431.97 -11.21%
S&P/TSX Global Gold Index 171.67 -17.87 -9.43%
S&P/TSX VENTURE COMP IDX 682.16 -31.01 -4.35%
XAU 70.08 -8.92 -11.29%


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.

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 (09/30/2018):
Gran Colombia Gold Corp
Alio Gold Inc
Textron Inc.


*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.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

The Bloomberg Billionaires Index is a daily ranking of the world’s richest people based on net worth.
The S&P Supercomposite Oil & Gas Refining & Marketing Index is a capitalization-weighted index.
Diversification does not protect an investor from market risks and does not assure a profit.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.
A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).
The Shanghai Stock Exchange Composite Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai 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 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 Straits Times Index is a modified market capitalization-weighted index comprised of the most heavily weighted and active stocks traded on the Stock Exchange of Singapore.